Blair Christie - IR John Chambers - President, CEO Betsy Rafael - Corp. Controller, Principal Accounting Officer Charlie Giancarlo - Chief Development Officer Rick Justice - SVP, Worldwide Field Ops.

John Marchetti - Morgan Stanley Tim Long - Banc of America Brantley Thompson - Goldman Sachs Nikos Theodosopoulos - UBS Jeff Evenson - Stanford Bernstein Alex Henderson - Citigroup Mark Sue - RBC Capital Markets Tal Liani - Merrill Lynch Jiong Shao - Lehman Brothers Paul Silverstein - Credit Suisse Ehud Gelblum - J.P. Morgan Tim Daubenspeck - Pacific Crest Securities Jason Ader - Thomas Weisel Partners Cobb Sadler - Deutsche Bank Inder Singh - Prudential Ari Bensinger - Standard & Poor's

Welcome to Cisco Systems' third 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. Now I would like to introduce Ms. Blair Christie, Vice President of Investor Relations for Cisco Systems. Ma'am, you may begin when ready.

Thank you and good afternoon everyone. Welcome to our 65th quarterly conference call. This is Blair Christie and I'm joined by John Chambers, our President and CEO; Betsy Rafael, Corporate Controller and Principal Accounting Officer; Rick Justice, Senior Vice President of Worldwide Field Operations and Charlie Giancarlo, Chief Development Officer. Dennis Powell, our Chief Financial Officer, is not able to join us today due to the fact that he recently had back surgery and is home recuperating. As you can imagine, John was adamant that Dennis focus on his recovery rather than join us for today's call and we feel confident that our investors would understand. Dennis, we have no doubt that you're listing to the call today, so please know that we all wish you the best in your recovery and are looking forward to your return in a few weeks. The third quarter of fiscal year 2006 press releases on First Call, First National Business Wire, European Business and Technical Wire and on the Cisco web site at www.Cisco.com. If you would like a fax of the press release, please call 408-526-8890 and follow the instructions. A corresponding webcast with slides and additional information regarding Cisco's financial statements can be found our web site 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 and non-GAAP financial results. Our non-GAAP financial results were previously referred to as pro forma in our prior conference calls. Please note we have provided complete GAAP reconciliation information on our web site in the investor relations section. Additionally, we have provided information relating to both our GAAP financial results and our non-GAAP financial results, along with a reconciliation table between our GAAP and non-GAAP financial statements in our press release. Throughout our call today, we will provide both Cisco and Scientific-Atlanta financial information in order to illustrate the impact of this acquisition on our overall Q3 results. 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 and our documents filed with the SEC, specifically the most recent reports on Forms 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 3:00 PM. I will now turn it over to John for his commentary on the quarter.

Thank you, Blair. I would summarize the quarter as a strong quarter from an orders, revenue and earnings per share perspective. There were a number of major highlights in Q3 which we will cover throughout the conference call, but at the very top of the highlights was our balanced performance from a geographic perspective, especially in the U.S. and emerging markets; our strong product order growth rate, our continued strength in the commercial market segment and in advanced technologies, the balanced performance across almost all of our key product categories and continued strong financial results. This balanced approach to the market in terms of our four customers segments -- core and advanced technologies, business and technology architecture -- combined with our five key geographic theatres continues to work very well. These strong results indicate that both our vision of how the industry is going to evolve, as well as our strategy has positioned Cisco for continued leadership in the industry. In very general terms, as intelligence moves throughout the network, the network is becoming the primary driver of not only IT, but also all forms of communications. If this is the way the market evolves, and we believe it will, Cisco is very uniquely positioned to lead in both communication and IP-enabled by the network. Throughout our call today, we will be covering Cisco's total results and Cisco without our recent acquisition of Scientific-Atlanta's contribution to these results so as to allow for comparisons to prior quarters and prior years. Cisco's record total revenue of $7.3 billion resulted in 18% growth year-over-year and was up 10% relative to Q2. Cisco's revenue growth without the $407 million added from Scientific-Atlanta was 12% year-over-year and up 4% sequentially, which is at the very high end of our guidance that we provided for Q3 in last quarter's conference call. Product book-to-bill was greater than one. Product orders grew year-over-year faster than revenues. Product orders not including Scientific-Atlanta also grew at the high end of our guidance for Q3 of 10% to 15%. GAAP net income was $1.4 billion and GAAP earnings per share were $0.22 which includes a charge from stock option expensing of $0.03 per share and a charge of $0.06 per share from acquisition-related charges, offset by a one-time favorable foreign tax settlement equivalent to approximately $0.02 per share. It was a record quarter for Cisco from a non-GAAP, net income and earnings per share perspective with non-GAAP net income of $1.8 billion and earnings per share of $0.29. The $0.29 non-GAAP earnings per share also included a favorable foreign tax settlement that was equivalent to approximately $0.02 per share. Scientific-Atlanta's net contributions to earnings per share -- that is, profit contribution minus the debt interest expense -- was less than one-half of one cent. Total non-GAAP gross margins, including Scientific-Atlanta, were 65.7%. Non-GAAP product gross margins were 65.3%. Total non-GAAP gross margins for Cisco without Scientific-Atlanta were approximately 67.5% with product gross margins at 67.4% and service gross margins at 68.1%. Cash flow from operations was a solid $2.3 billion. During the quarter, we repurchased approximately $1.2 billion of common stock. We exited the quarter with approximately $18.2 billion in cash and cash equivalents and investments, up from $15 billion in Q2. Q3 non-GAAP operating expenses were 36% of revenue. Or total net head count increased to 48,296 an increase of 8,631 of which over 7,900 were from acquisitions. Staying with the same theme from last quarter's conference call, there were a number of key takeaways from the quarter, primarily relating to directly or indirectly to our advantages from a balanced opportunity perspective and additional resource and management focus committed to the five key areas for fiscal 2006. While there are a number of highlights in Q3 from a geographic perspective, it was probably the quarter of positive extremes between our largest theater and our new emerging market theater. Our largest theater, U.S., which represents approximately 49% of our total product business, experienced an extremely strong quarter with year-over-year growth (excluding Scientific-Atlanta) of almost 20% in terms of orders. This continued the very strong growth momentum we experienced in Q2 in the U.S. While our emerging market theater, also not including Scientific-Atlanta, represents only about 10% of over total product business today, we experienced a year-over-year order growth rate of approximately 40%. This is the strongest rate we have seen since the formation of our emerging markets focus. Rich, that's a tremendously nice job by you and Paul and the whole team. In the spring of last calendar year, our senior leadership team determined what were the key incremental resource and management attention focus areas for fiscal 2006. We decided on five critical areas for additional growth and differentiation within our overall corporate strategy. These five areas include: the emerging markets, which we have just discussed; the commercial market; additional sales coverage; advanced technologies and new ATs in emerging technologies; and fifth, our evolving support model. The first area of incremental growth I'd like to address is the commercial marketplace. The investments and all major functions to focus on this market continue to pay solid dividends with the commercial market segment order growth continuing in the low 20s in Q3 from a year-over-year perspective. The balance across our three major customer segments -- that of enterprise, service provider and commercial -- was again very solid. This quarter, it was actually the service provider segment that produced even more positive momentum than many expected, with an order growth rate in the mid to upper teens year-over-year. Second, as we shared with you in prior calls, we made a decision to expand our sales coverage, especially in the commercial, low-end of enterprise and the emerging markets areas and disappears, as you can see from the results, as they pay it off as we had hoped. Third, the advanced technologies continue to experience solid growth in terms of orders with year-over-year growth rates of approximately 20%, not including Scientific-Atlanta. While it is difficult to do year-over-year comparisons for Scientific-Atlanta because it was part of our organization for only two months, it would probably be fair from a comparison point of view to estimate that the order growth rate in Q3 was at the high end of our 10% to 12% guidance provided at that time of the Scientific-Atlanta acquisition for their business. While it is still very early to characterize the acquisition as a major success, we are very pleased with the progress of the combined entities from an internal, financial and most important, customer perspective. Finally, our evolving support model, designed to help our customers integrate both from a technology and a business architecture perspective at a faster speed and with lower risk continues to build upon its 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. Our product order balance was very strong. Orders from our core routing and switching grew in the mid-teens year-over-year. From a financial perspective, we were obviously pleased with our record revenue, $2.3 billion of cash generated from operations and strong earnings per share. In summary, we viewed Q3 in total as a strong quarter, especially given the slower growth that some of our larger peers have been experiencing. Betsy will cover some of these items in more detail later in her 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 and areas where we can improve; and finally, our industry guidance moving forward. Now I will turn it over to Betsy for a more detailed report on our financial results for the quarter. Betsy, welcome.

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 FAS-123R charges for expensing of stock options. Our financial statements for prior period have not been restated for the effect of FAS-123R. However, we have provided a table in our press release and on our website for your reference in comparing Q3 of FY06 net income with prior periods. As a result of closing our acquisition of Scientific-Atlanta on February 24, Cisco's fiscal Q3 FY06 financial statements include two months of Scientific-Atlanta's financial results. We will continue to provide some additional information regarding the impact of Scientific-Atlanta for the next few quarters an order to facilitate year-over-year comparisons. For information purposes only, Scientific-Atlanta revenue for February 2006, which was not included in Cisco's Q3 results, was $163 million. Total revenue for the third quarter was $7.3 billion, an increase of 18% year-over-year. Of the total, as John mentioned, Scientific-Atlanta contributed $407 million in revenue. Without the Scientific-Atlanta contributions, total revenue grew 12% year-over-year. We have categorized the Scientific-Atlanta product revenue into the following Cisco product revenue segments: approximately 75% to video systems, 10% to home networking, 5% to optical and 5% to other. In addition, approximately 5% of Scientific-Atlanta's revenue is service-related, and therefore, is included in Cisco's service revenue lines. These percentages are merely provided as a benchmark for future reference. Video systems, introduced last quarter as digital video, our newest advanced technology, is a new category in our advanced technologies product segment which will include solutions and systems dedicated to enable video-specific systems, including both transmission and subscriber equipment, sold directly to service providers. Of the $7.3 billion in total revenue, $6.15 billion related to product revenue and $1.17 billion related to service revenue. Service revenue, as a reminder, includes technical support and advanced services. Routing revenues for the quarter totaled $1.52 billion, up 5% year-over-year, largely attributable to the strength at our ISR and 7600 product lines. Switching revenues were $2.69 billion, an increase of 13% year-over-year due to strengths in fixed and modular switching. Advanced technology revenue totaled $1.69 billion, up 42% year-over-year. Without the Scientific-Atlanta contribution, Advanced technology year-over-year revenue growth would have been 12%, largely due to continued strength and enterprise IP communications, wireless LAN and storage. As a reminder, beginning in Q1 FY07, optical will no longer be included in our Advanced Technology category. Other revenue was $257 million, up 49% year-over-year. Without the Scientific-Atlanta contribution, other year-over-year revenue growth would have been 35%, primarily due to strength in sales of our cable solutions to service providers. Service revenue was $1.17 billion, up 17% year-over-year due to growth both in our technical support and advanced service businesses. Q3 total non-GAAP gross margin was 65.7%. That is down from 66.8% in the same period last fiscal year and down from 68% last quarter. On a GAAP basis, total gross margin was 64.5%. So product-only non-GAAP gross margin for the third quarter was 65.3%, down from 67.3% in Q3 FY '05 and down from 68.2% last quarter. The change from Q2 reflects the impact of Scientific-Atlanta and a slightly higher inventory provision. These were offset by continued cost savings and volume. Specifically, the impact of Scientific-Atlanta was around 2 percentage points, consistent with our expectations and also including some very minor adjustments to conform to our accounting policies. GAAP product gross margin for the third quarter was 64.4%. Our service margins on a non-GAAP basis for the third quarter were 67.9%, up from 64.4% in Q3 of last year and up from 67% last quarter. On a GAAP basis, service margins were 65.5%. Service margins, as you know, will typically experience some variability over time due to various factors, such as the changes in mix between technical support services and advanced services, as well as timing of support contract initiations and renewals. In Q3, service margins improved due to increased revenues on a relatively stable cost base. Our total non-GAAP operating expenses for Q3 were $2.6 billion compared with $2.2 billion in the same quarter of last year and compared to $2.4 billion for last quarter. The change quarter-over-quarter as well as year-over-year was primarily due to continued investment in our sales and engineering head count and approximately $75 million from Scientific-Atlanta operating expenses. Non-GAAP operating expenses as a percentage of revenue were 36% in Q3, the same as Q3 FY05 when compared to 37% for last quarter. On a GAAP basis with the effect of FAS 123R, operating expenses for Q3 were $3.1 billion. Our Q3 FY06 tax provision rate for the non-GAAP as well as the GAAP results was 22.7% due to a favorable foreign tax settlement of approximately $124 million, which translates into an estimated $0.02 per share increase to EPS. Non-GAAP net income for the third quarter was $1.8 billion compared to $1.5 billion in the third quarter of fiscal 2005, representing a 21% increase year-over-year. Non-GAAP earnings per share on a fully diluted basis for Q3 were $0.29 per share, up from $0.23 per share in the same quarter of fiscal 2005, which represents a 26% increase year-over-year. The increase reflects the $0.02 per share tax benefit previously mentioned and the net contribution from Scientific-Atlanta of a little less than half a penny. GAAP net income for the third quarter was $1.4 billion, and if we had included the FAS 123R expense previously disclosed in our footnotes, Q305 net income would have been approximately $1.2 billion, representing a 19% increase in GAAP net income year-over-year. GAAP earnings per share on a fully diluted basis for the third quarter were $0.22 per share. If we had included the FAS 123 expense previously disclosed in our footnotes, Q3 '05 earnings per share would have been $0.18 per share, representing a 22% increase year-over-year, again, including the tax benefit previously mentioned. As we said earlier, product book-to-bill for the quarter was above 1. Moving onto the balance sheet, we will be filing a Form 8-K(A) in the next several days which will provide full details of the purchase accounting and the overall impact on our balance sheet related to the acquisition of Scientific-Atlanta. The total of cash and cash equivalents and investments was approximately $18.2 billion, up from $15 billion last quarter. The $3.2 billion increase was due to strong cash flow from operations, proceeds from the debt offering completed during the quarter, offset by the net purchase price of Scientific-Atlanta. During Q3, we generated approximately $2.3 billion in cash flow from operations, compared to $1.9 billion last quarter and $1.9 billion in Q305. The sequential increase in cash flow was largely due to lower tax payments. During the quarter, we repurchased $1.2 billion, or 60 million shares of our stock at an average price of $20.34 per share. Repurchases year-to-date were $5.5 billion, or 296 million shares, at an average purchase price of $18.48 per share. The remaining approved amount for stock repurchase under this program is approximately $2.4 billion. Since the inception of our repurchase program, the weighted average diluted shares outstanding, including stock option activity and shares issued in acquisitions, have decreased 16%. Moving onto accounts receivable, we ended the quarter at $3 billion, up from $2.5 billion in the previous quarter, and that increase was due to higher revenues as well as the impact of Scientific-Atlanta. At the end of Q306, our DSO, or day sales outstanding, was 36 days compared with 35 days at the end of Q2. Total inventory at the end of the quarter was $1.3 billion, approximately the same as Q206. Non-GAAP inventory turns were 7.4, up from 6.4 last quarter and 6.5 in Q3 FY05. The increase in turns was due largely to the first phase of our transition to lean manufacturing discussed in the last call and a slight increase from Scientific-Atlanta. A breakdown of our inventory can be found in the slides that accompany this call. Our inventory purchase commitments for Q3 were $1.7 billion as compared with $1.2 billion for Q2 and $945 million for Q3 of the prior fiscal year. The sequential rise in purchase commitments is due to the lean manufacturing implementation as well as volume and also the acquisition of Scientific-Atlanta. Total deferred revenue for Q3 '06 was approximately $5.5 billion, up from $5.1 billion in Q2. Of the total, deferred product revenue was $1.6 billion and deferred service revenue was $3.9 billion. Total product deferred revenue increased just over $230 million from Q2 primarily due to the timing of two cash collections as well as the small amount from the acquisition of Scientific-Atlanta. As most of you know, we completed a debt offering in February and the net amount of $6.3 billion is reflected on our balance sheet. Our total Q3 FY06 reported headcount ended at 48,296, a net increase of 8,631 from Q2, and an increase of 11,246 on a year-over-year basis. This sequential increase includes 7,924 additions related to the acquisitions completed in the quarter. In conclusion, we have continued to execute well on our profitable growth objectives. In Q3, we achieved 12% revenue growth year-over-year, excluding Scientific-Atlanta, and non-GAAP profit of 25% of revenue. Second, we're pleased with our continued strength in operating cash flow which illustrates the quality of our earnings. Lastly, we would like to congratulate the Scientific-Atlanta and Cisco teams on a successful combined first quarter of operations. This is a great start to our ongoing future success. And now I will turn it over to John.

Betsy, nice job. Thanks very much. Now moving on to our quarterly overview. In this section, we will highlight information from our geographies and customer markets. Starting 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 a theater breakout for Q3 in terms of total product orders, including Scientific-Atlanta, unless otherwise specified or indicated. As we said in our prior quarterly calls, we will present the data in our new theater organization structure. U.S. and Canada represented 52% of our business; Europe, 23%; emerging markets, 10%; Japan, 4%; Asia-Pacific, 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 segments and product discussion will relate to year-over-year 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've been able to achieve in our geographies, market segments, architectural evolutions and product families. There was very good balance across all three of our major customer market segments. As we said earlier, the commercial market segment grew in the low 20s on a global basis. The enterprise market segment grew in the low teens and the service provider segment grew in the mid to upper teens. As a reminder, over the last 11 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 year-over-year product order growth rate once again in the mid-teens, not including Scientific-Atlanta. Now moving onto the U.S. and Canada theater, which represents 52% of our business. The following five points relating to the U.S. exclude Scientific-Atlanta's contribution. First, from a commercial market segment perspective, balance was good among the four U.S. commercial areas. Year-over-year growth was in the high teens with good balance among all four commercial areas showing growth in the range of 15% to 25% year-over-year. Second, from an enterprise perspective, our U.S. enterprise areas grew approximately 20% year-over-year with four of the five operations in the 15% to 30% range. Third, U.S. federal business order growth rate was up slightly year-over-year due in part to a slow budget rollout. Fourth, from a U.S. service provider perspective, Q3 year-over-year growth was excellent, growing in the high 20s. Canada had another excellent quarter with year-over-year order growth rate in low 20s. Now moving on to Asia-Pacific, which represents 11% of our total orders. The year-over-year order growth rate was approximately 20% for the theater. We saw solid year-over-year growth in a number of countries in Asia-Pacific, with India growing approximately 40% year-over-year and Australia and New Zealand growing approximately 30%, while China and Korea grew in the mid-single digits. Moving on to our European theater, which represents 23% of our business in Q3, orders in total grew in the high-single digits year-over-year. Our three largest countries -- the UK, Germany and France -- all grew year-over-year in the low-double digits. Moving on to Japan, which represents 4% of our business. As you probably expected, and as is continuously heard from some of our industry peers, the weakness in IT spend that we've shared with you in prior quarters is continuing. Year-over-year growth was down in the mid-teens, while on a positive note, however, we saw meaningful sequential quarter improvement in orders for the first time in two years, up sequentially approximately 10%. Moving on to our emerging markets, which represents 10% of our business. There are four major geographies in our emerging market theatres: Eastern Europe, Latin America, Middle East and Africa, and fourth, Russia and CIS. Q3 continued our stream of seven consecutive quarters with growth rates above 30% year-over-year with very strong Q3 growth of approximately 40%. We're off to a good start with the emerging markets concepts and commonality of opportunities and issues. The Latin American and Russian areas grew approximately 40% year-over-year, Eastern Europe grew in the upper teens year-over-year while the Middle East and Africa grew over 70% year-over-year. Our success in the emerging markets is exceeding even our own optimistic expectations. Our strategy and vision in terms of how these markets are evolving appears to be very effective. In summary, there was good balance across our four largest theaters and across three major customer segments. Now moving on to our usual summary of what went well and areas for improvement. Starting with what went well, again discussing this in terms of orders and the balance of geographic product and customer segments, as discussed earlier. From a geographic point a view, the first highlight was the continued strengthen and balance in the U.S. across all three major customer market segments. The U.S. order growth was approximately 20% year-over-year for the second quarter in a row with Q2 and Q3 growth being better than any U.S. quarterly growth achieved in fiscal year '05. When your largest geography representing almost half of your business is doing well, the results are obvious. Second, the emerging markets vision and strategy appears to be working even above our optimistic expectations and we appear to be able to continue to replicate and scale these opportunities. Third, with our relatively good balance of solid order growth in our other two large geographies, with Asia-Pacific growing approximately 20% and Europe, as we said earlier, in the high-single digits. Fourth, it was our second quarter in a row with very good year-over-year customer segment balance order growth, achieving at least in the teens from each of our three major customer segments, which again was the best balance we have had in the last four or five quarters. Fifth, there was even better than normal balance in terms of our product families this quarter. Our switching and router orders grew in the mid-teens year-over-year. All of our advanced technologies grew in double-digits in terms of orders with enterprise IT communications again leading the way with growth of approximately 40% and our storage area network business showing year-over-year growth in the low 20s. The total advanced technologies, minus the Scientific-Atlanta contributions, grew approximately 20% in terms of orders year-over-year. With regard to enterprise IP communications, in Q3, we reached another milestone and shipped our 8 millionth phone. Reminding everyone that advanced technology orders tend to be very lumpy and revenues even more lumpy, many of you have asked for our revenue growth numbers in terms of your ability to understand market share evolution. This quarter in terms of year-over-year revenue growth excluding Scientific-Atlanta is the following: The enterprise IP Communication and Wireless both grew in the low to mid 30s; Storage in the mid 20s, Security and Network Home in the high-single digits and Optical was down approximately 20%. In terms of our core business, high-end routers experienced strong order growth rate in the mid 20s year-over-year with the number of CRS-1 customers now exceeding 50. We also had our because European IPTV win in partnership with Microsoft at Deutsche Telekom. An example of a transaction in both emerging markets and with countries positioning their infrastructure over the future would be a recent win at Saudi Telecom for over $25 million and over 15 million of CRS-1s. As this customer's strategic vendor, we will continue to provide a broad portfolio of Cisco NGN solutions to address broadband and IP service demands in that emerging country. The Catalyst 6500 passed the largest revenue mark in data networking history, achieving more than $20 billion in revenues since its inception. Wireless LAN access points topped 3 million and our millionth ISR router shipped during Q3. Sixth was our initial success from a customer, the industry leadership and integration perspective with Scientific-Atlanta during the first two months since the acquisition closed. Our guidance of 10% to 12% order growth rate from Scientific-Atlanta continues to look reasonable. We are also starting to develop opportunities that neither Scientific-Atlanta nor Cisco in its prior form had the opportunity to address both in North America, but especially outside throughout the rest of the world. The feedback from many of our global customers continues to be very positive regarding Scientific-Atlanta/Cisco combination with many of these customers saying that Cisco is very well positioned in data, voice and mobility coverage and now we're bringing the final piece of 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 has both the track record and the skillsets that we believe make the promise of IP video work in these large implementations. Seventh was our continued strong financial performance, generating over $2.3 billion in cash from operations, non-GAAP inventory turns at 7.4 and DSOs of 36 days. As we said on last quarter's conference call, an area that went well and perhaps the most interesting for Q3 and Q4 revenue was the continued year-over-year business patterns in Q3. To reiterate what we have said in previous quarters, our seasonality continues to show the building of momentum each quarter with the primary focus being on year-over-year comparisons. In Q3, we continued to see seasonality that we discussed in prior conference calls where our order momentum builds throughout the year, beginning in Q1, and then increasing each quarter throughout the year. We expect the revenue momentum will follow the same seasonality and will increase over the course of the fiscal year with our strongest quarter being Q4; and then a natural reset in the Q1 quarter. As we indicated in last quarter's conference call, in each of the prior fiscal years, orders for Q1 have decreased versus Q4, usually in the mid-single digit range. This is normal order seasonality and I would expect to see it in future Q1s. This normal seasonality should in no way be interpreted in terms of our confidence at business momentum, which as we said multiple times in this call, is very positive. Our forecast going into Q3 assume a strong service provider spend quarter, even though many of our peers have not traditionally seen that in the same time period. Therefore, we were obviously pleased with the strength in service provider business in Q3 with orders growing in the mid-teens. We believe that our strong product cycle and end-to-end portfolio continue to pay dividends in the segment. Now moving onto concerns, reminding those of you who have had a limited exposure to our prior conference calls, we try to give equal balance of both what went well and our concerns. Given our normal sense of healthy paranoia, we have a number of general concerns. First, we continue to see swings in global economic activity and capital spending. While we're heartened by the improvements in our businesses in Germany, France and the UK, there are some concerns about the total European economic growth. Similarly, while we've been extremely pleased with our order momentum, both in terms of share of wallet spend and market share gains, there is a concern about some of our industry peers' challenges and guidance announced in their most recent quarters. 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 competitors from Asia. However, this is the competition we have been anticipating for a very long time and believe we're well positioned from the total cost of ownership and a leading architecture perspective. Third, we continue to see the opportunity to move into new advanced technology markets. We also continue to see a shorter term payback for hiring additional salespeople. With regard to the incremental engineering resources, it is usually several years before you see any measurable business payback. The second point is on sales coverage and speaks to some of the market elasticity and coverage tissues we think are opportunities for us. Therefore, we will continue to hire additional salespeople as long as we anticipate a reasonable return. If the market develops the way we anticipate, most of these resource commitments in engineering -- which are longer-term payback, and in sales which are shorter term -- present key opportunities from the revenue growth and market share perspective. As you would expect there is a natural lag 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 executed right and the elasticity continues to be reasonably broad, it will have substantial benefits in the longer run. Having said that, our experience in Q1, Q2 and Q3 for example indicate that 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 about Cisco. Fourth, we continue to identify potential advanced and emerging technologies. These require major investments of resources, often two to three years before we've seen any significant results, and by definition some of these investments will not be successful. The same is true in terms of our investments in emerging markets where we will continue to invest heavily. Fifth, we have been a little concern as many of our large IT peers, IT and communication industry peers, have turned more cautious in their guidance. While we are not going to do that, there is always the chance that they are experiencing something that we could be affected by later. Having said that, at the present time, our business momentum is actually increasing. And finally in terms of concerns -- at the risk of repeating the obvious -- as we said in each of the conference calls for over a decade, wherever 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 and 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 major market transitions now and in the future. Now moving onto guidance. In very simple terms, we continue to focus our strategy for both technology and business architectural differentiation. The momentum we are seeing in orders and anticipating with the appropriate caveat to see in our future makes us comfortable that we're not only winning versus most of our competitors in the marketplace, but also anticipating and positioning our customers effectively for market transitions. Whether it's the convergence of data, voice, video and mobility, architectural evolutions or intelligence throughout the network, we believe Cisco is uniquely positioned to enable the future of IT in communications. Simply put, with intelligence moving throughout the network, the network, in our opinion, is becoming the primary driver of not only IT, but also all forms of communications. As we have said on many occasions, and our view has not changed, we believe that the market in which we participate according to the view of a number of industry resources will support revenue growth over the coming years in the 10% to 15% annual range. Q3 was a very strong quarter and we are forecasting a strong Q4 from a year-over-year order perspective. We also believe that the additional focus on the commercial marketplace, 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 in many of our products and customer segments. In Q4 FY06, we would anticipate product order growth in terms of year-over-year to be in the range of 10% to 15%. Our overall revenue guidance for Q4 will be first based on Cisco's traditional business, and then we will add in Scientific-Atlanta's contribution. Our guidance for Cisco's business excluding Scientific-Atlanta for Q4 is for year-over-year revenue growth in the 10% to 12.5% range. We would anticipate Scientific-Atlanta's Q4 revenue contribution to be approximately in the mid $500 million range. We would expect that the combination of both our traditional business and the Scientific-Atlanta business would result in year-over-year growth in the 18% to 21% range versus Cisco's revenue of Q4 of last fiscal year. In anticipation of your possible questions regarding our level of confidence and optimism, I would summarize our position in the following terms: There is solid business optimism among almost all of the leaders that I've talked with around the world in the last quarter. Our vision and strategy of how the market is evolving is being very well-received by our customers and by our partners. While we are concerned by recent cautious outlooks for many of our large peers, at this point in time, we have not experienced this concern. While we are clearly not immune from industry slowdowns, we believe that we're very uniquely positioned in this market. Time will tell if this is right or wrong, although right now our momentum and customer mind share is clearly increasing on a global basis. Therefore, we have and will continue to add resources aggressively to pursue these opportunities. In summary, I'm even more optimistic about Cisco's future opportunities than I was a quarter ago. Cisco will continue to follow our shareholders' advice as it relates to carrying our fair share of the risk, not just the reward. We are truly committed to a partnership with our shareholders. As always, I want to thank our shareholders, our customers, the Cisco family and our partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transitions and challenging economic times. Now I would like to turn back to you, Betsy.

Thanks a lot, 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. Also, we're providing guidance on a non-GAAP basis with a reconciliation to GAAP. I will be providing guidance for Cisco on a combined basis, including the effect of Scientific-Atlanta. You will also find the details of this discussion in the slides on the webcast. We continue to believe that for next few years, Cisco's long-term annual revenue growth rate should be in the 10% to 15% range, given the normal caveats as discussed many times before. We realize that many factors, including our own execution, will impact whether we will be at the high end or the low end of this range. Additionally, we could possibly be above or below this range. For the full fiscal year 2006, we anticipate that our annual revenue will be just over $28 billion, an increase of approximately 14%; again, including the effect of Scientific-Atlanta. This guidance reflects our previous expectations of annual revenue growth in the 10% to 12% range for Cisco before the effect of the acquisition. We anticipate revenue for the fourth quarter to be in the range of 18% to 21% year-over-year growth. This includes, as John said, revenue in the mid-$500 million range from Scientific-Atlanta. Translating, the guidance for Q4 revenue is $7.8 to $7.95 billion. Regarding gross margins, forecasting gross margins has always been challenging due to various factors, such as shipping, volume, product mix, variable component costs, customers and channel mix and competitive pricing pressures. We believe total gross margin on a non-GAAP basis will be approximately 65% for 4Q06, meaning it could be slightly above or below this level. This reflects the consistency of core Cisco and Scientific-Atlanta gross margins. With the continued investment in our field and engineering organizations that we discussed earlier, the full quarter effect of the salary increases that occurred in Q3 as well as the full quarter impact of Scientific-Atlanta's expenses, we believe Q4 operating expenses will increase by 7% to 8% on a sequential basis. We expect interest and other income to be approximately $120 million in the fourth quarter. While we certainly expect to continue our share repurchase program, it is difficult to predict the exact weighted average shares outstanding. Given the recent movements in our share price, we are modeling a 30 to 50 million share increase in weighted average shares outstanding for EPS purposes. There could be increased volatility in the share count due to potential changes in the stock price. Our non-GAAP tax provision rate is expected to be approximately 28% for Q4. Regarding cash flow from operations, we would expect $400 million to $600 million per month at these revenue levels. For our Q4 FY'06 GAAP earnings, we anticipate that GAAP EPS will be $0.04 to $0.07 per share lower than non-GAAP EPS primarily due to acquisition-related charges as well as stock option expenses. For the full fiscal year, this would result in a reduction of between $0.20 and $0.23 per share to our GAAP EPS compared to our non-GAAP EPS. And also, please see the slides on our webcast for more details. Other than those items noted above, there are no other significant differences between GAAP and our non-GAAP guidance. This does assume no additional acquisitions, asset impairments, restructuring or other events which may or may not be significant. Regarding fiscal 2007 as we referenced earlier, we do expect the same revenue seasonality we've seen in previous years. We expect revenue momentum will increase over the course of the fiscal year with our strongest quarter being Q4, which means that there will be a shift in momentum from Q4 to Q1 again; and Q1 revenue before the effect of Scientific-Atlanta will likely be at the lower end of the 10% to 15% year-over-year range, consistent with our anticipated seasonality. We plan on giving more detailed guidance on fiscal 2007 in our Q4 conference call. Now I will turn the call back over to Blair.

Thank you, Betsey. We will now open the floor to Q&A and we still request that sell side analysts please ask only one question. As a reminder, we will end the call at 3 p.m. Pacific Time. Can you please open the conference call to questions?

Our first question comes from John Marchetti, Morgan Stanley. John Marchetti - Morgan Stanley: Just a quick question on the guidance here. You guys sound [Inaudible - technical difficulty] Hi, can you guys hear me okay? Hello? Can you guys hear me okay?

Yes we can. John Marchetti - Morgan Stanley: Sorry about that. John Chambers: Go ahead, please. John Marchetti - Morgan Stanley: John, you sounded very, very bullish on the call, and then the guidance seemed to imply just over $28 billion; it seems a bit conservative given a lot of the ramp that you saw in the business going through Q3. Can we get a little more color there on the guidance?

In terms of the guidance, John, that is about as optimistic as we get in terms of positioning. We view the quarter as an extremely strong quarter and hitting on most all the cylinders in terms of our engine. We're going to continue to be a conservative company in terms of how we manage our backlog and our customer requirements, but we are very optimistic going into Q4 given the changes that are occurring on a global basis, John. Each quarter that you've listened to us, we have slowly over this last year done what we've said we would do and continue to be a little bit more optimistic on the next quarter. John Marchetti - Morgan Stanley: Thank you.

Our next question comes from Tim Long, Banc of America. Tim Long - Banc of America: Thank you. Maybe it is a related question. I just wanted to dig into Scientific-Atlanta a little bit. A pretty impressive performance for the two months that you had it, but it seems like the guidance is down sequentially into the July quarter. Did Scientific-Atlanta actually exceed your expectations in the quarter? Is there just conservatism there, set-top related and maybe there was some product pulled in? If you could just give us your sense on the reaction and what it means into next quarter, that would be great. Thank you.

I think the question, Tim, is a fair one. In terms of Scientific-Atlanta, we gave the guidance of 10% to 12% year-over-year growth, they were clearly in the 11% to 12% in this quarter as best as we can measure; because remember, you're comparing different quarters and different months from their perspective. So if you look at the momentum, they had a solid quarter at the higher end of our expectations for them this quarter and we are expecting another solid quarter next quarter in terms of momentum. In terms of set-top shipments growth as an example for the two months, we'd probably put it at over 20% comparisons on that. So I think they are doing very well in terms of momentum and we're looking for a very solid Q4 from them again in the 10% to 12% range, but looking probably at the upper end of that if we execute well. Tim Long - Banc of America: But down sequentially, John?

No, it would not be down sequentially. So doing the math on the last two months of the quarter, if this were $407 million and you look out that you will obviously usually ship more in the last month of a quarter than you do in the first month of a quarter and book more along that line, I would anticipate that you would see reasonable sequential growth. But I would focus primarily on year-over-year numbers, Tim. Our Q3 and our Q4 normally are good ones for Scientific-Atlanta. We're anticipating this to continue to go well and the demand looks very solid for them at this time. Tim Long - Banc of America: Thank you.

Our next question comes from Brantley Thompson, Goldman Sachs & Co. Brantley Thompson - Goldman Sachs: I'm going to see if I can get a clarification and a question. On the guidance that you guys talked about for the full year of fiscal '06 of around $28 billion, if we've got the math correct, shouldn't that be closer to $28.4 billion? A little bit higher if you took what you've done for the past three and then take into account your next quarter? That's just a clarification. Then on the LAN business with your switching, you have put in another quarter of double-digit year-on-year growth. If you look across the last six quarters, several of them have been very strong double-digit, year-on-year growth. When we think about switching in terms of an upgrade cycle, could you just give us a little color on where you feel we are? Thanks.

Betsy, if you want to do a clarification on the total number, and then I will talk about the switching.

Absolutely. So I think the way that I would think about that is, clearly we have three quarters of actuals in and we gave the guidance range for Q4 both on a total business including Scientific-Atlanta as well as separately. You are right, if you do the math, that creates a range of a little over $28 billion. What we were trying to do is just provide you some context about where it was going to come in at, but I think the best way to do it would be to, again, take the results plus the sequential range and add those together.

I think it was you, Brant, that asked the question, your math was fairly accurate in terms of your interpretation of us rounding down. To the second part of the question on switching, switching was unusually strong. The Catalyst 6500 had one of its best year-over-year quarters we've seen in a long time. It was equally as well-balanced in fixed and modular switching across the board. Momentum feels good in the enterprise. To the indirect part of your question, Q4 is usually a good enterprise quarter and Q3 is usually a service provider stronger led quarter. So we feel very good about the momentum in the enterprise segment, especially in the U.S. and I would look for the switching business to continue on an optimistic basis. Brantley Thompson - Goldman Sachs: Thanks John.

Our next question comes from Nikos Theodosopoulos, UBS. Nikos Theodosopoulos - UBS: I wanted to ask about the two relatively mature markets you have, U.S. and Europe. The U.S. in the last couple of quarters continues to grow strongly, Europe not as strongly. Is this purely a function of business confidence and GDP growth which is better in the U.S. versus Europe? Or do you see more of a competitive environment there? Why are we seeing such a difference in these two markets? If there is really a upgrade cycle, why would it just be the U.S.? Why wouldn't it be Europe as well? Thank you.

If you look at the momentum on a total global basis by all segments of our market, whether it's the enterprise, the service provider, the commercial marketplace, all of them are in the teens or low 20s, as we refer to it, for commercial. In terms of the U.S. operations, we continue to gain both market share and good momentum there. Part of it as you said is GDP growth, part of it also in the U.S. was an outstanding service provider quarter with growth in the upper 20s in terms of year-over-year growth. That is the best quarter they've had ever since 2001. If you look what is occurring in the U.S. also, you saw very solid growth again in the high teens from the enterprise and very solid growth from the high teens for the commercial marketplace as well. In Europe, as many of our peers have experienced, you are seeing not as much momentum. We were actually pleased that Germany and France and the UK were all in low-double-digits quarter-over-quarter growth. Our Eastern European numbers, which we do not include in Europe, were growing in the high teens as we alluded to earlier. Russia and the Middle East, which we used to include as part of the European operations, Russia grew in the 40% range and the Middle East and Africa grew about 70%. So I think what you are seeing in Europe in my opinion is primarily related to economics. We did not get as much service provider business this quarter in Europe versus what we traditionally have done in other parts of the world. So I think it's fair to summarize the quarter as we're hitting on almost all of the cylinders well. Europe was a little bit less than we would liked to have seen, Japan appears to be flattening out and may be headed back, we'll see over time. But that is how I would account for it. Nikos Theodosopoulos - UBS: You're not seeing any market share loss in Europe, you just see it as a slower market then?

We see it as a slower market, Nikos, but after your question I will check. But no, we think we're gaining market share in most product categories. We also within Europe, as you know, if you're referring to service provider business, we do not recognize the revenue until we get transferred in customer acceptance. So we don't sell through systems integrators where you have a different revenue recognition issue. That may be in part what you're asking also, Nikos. Nikos Theodosopoulos - UBS: Thanks a lot.

Our next question comes from Jeff Evenson, Stanford Bernstein. Jeff Evenson - Stanford Bernstein: How big a role are VoIP upgrades playing in your strong switching and enterprise routing businesses?

I'm going to let Charlie take part of the question, but let me lead with I think a more basic one. What you're seeing Jeff is that I think you are finding almost all of our customer segments begin to think about their product play -- data, voice, video, with mobility. I think you are beginning to see people not make a VoIP decision as much as they're making moving toward a unified communications and if you're in the service provider business, service generation by new capabilities. If you're in the enterprise business, voiceover IP really being the infrastructure on which you're going to expand unified communications. So I think you're seeing in combination ,all of the above. Obviously, the better we do, Jeff, on the architectural wins, the better position we are as we go forward for not just voice, but for video as well as the mobility. Charlie?

I would certainly agree with that. I think you see two phenomena. That is that, on the one hand, to the extent that a customer is putting in an IP telephony system in with an existing network and older networks, generally we see about a 2:1 or a 3:1 spend on infrastructure to what they're spending on the IP telephony itself, which is very positive for us. I think more than that, what we are seeing is general upgrades of network infrastructure in anticipation not only of IP telephony, but of other advanced communications technologies. As companies go through that change, they are upgrading to an integrated or a converged network architecture that can accommodate these things.

Thank you, Jeff. Jeff Evenson - Stanford Bernstein: Thank you.

Our next question comes from Alex Henderson, Citigroup. Alex Henderson - Citigroup: So I'm a little confused about the tone of your guidance versus the tone of your comments. Specifically, you have had two quarters in a row of mid-teens type order growth or better; you have had a book-to-bill above 1 in each the last two quarters, a book-to-bill above 1 in the year ago period, yet your guidance for the upcoming quarter is still seemingly implying that you have a reasonable probability of decelerating sequentially year-over-year growth in the July quarter. Your comment about seasonality causing the October quarter to be weaker makes sense sequentially, but does not make sense year-over-year to the extent that a year-over-year comparison by definition does not have seasonality in it. The year-over-year number would have a same seasonal period in both timeframes. So I don't understand why you're implying that that growth rate would be at the lower end of the band of growth of the 10% to 15% vicinity. It sounds like your visibility is eroded, not improved. What am I missing here relative to those factors?

Okay, Alex, taken in sequence: to avoid any confusion, our Q4 guidance is approximately 6% to 9% sequential and 18% to 21% year-over-year, including Scientific-Atlanta. Cisco-only guidance for Q4 is in the 10% to 12.5% range. You are right on the math in terms of, we clearly added to our backlog this quarter. As we get our manufacturing in position to meet customer commitments and be able to have more of our products both for advanced technologies/new video systems balance within it, we are building backlog as we move forward on that which makes it a lot easier to run our operations while still hitting the customer's expectations within it. In terms of Q1 year-over-year, that was just what the orders were. That's not necessarily what we would say the revenues would be on that. So I would expect the revenues not to be down in that proportion versus Q4. So we were purely giving you the math that has occurred every quarter that I can remember in recent years for a Q1 order rate versus a Q4 order rate, and that's just a natural phenomena from ourselves. So I think what you're asking for, Alex, is we are very optimistic in this market in terms of what we're seeing that we can control, that we do not see signs that our other peers have done, so we are going to continue to be conservative both in how we lead our business and meet our customer expectations and don't get overextended in the market.

The one thing I would add to that, John, and I think we're talking about a sequential rise throughout the quarter in terms of our growth rates. So if you take the 10% to 15% as the base range, generally speaking it would start at the lower end of that range in Q1 with an acceleration throughout the fiscal year; with the thought being that then we would return to that same sort of cycle in the next year. Alex Henderson - Citigroup: If I could intercede there just for a second, because that's the question. I do not understand why a year-over-year growth rate has seasonality.

It doesn't, year-over-year does not. Alex Henderson - Citigroup: So why are you saying that your annual pattern of growth would be low in the first quarter and higher in the back half? It makes no sense that there would be a differential between the growth rate.

Okay, Alex, I hear what you're saying. Bear with me. If you look at the guidance as we move forward in terms of Q4 year-over-year growth, as you begin to look at it without Scientific-Atlanta, the higher range is 12.5%. If you compare that to Q4, Q3, you clearly are seeing an increase both sequentially with Cisco only, not including Scientific-Atlanta, and in terms of the year-over-year numbers at the high end of our guidance. In terms of Q1, as we go into it with any direct sales organization, there tends to be a reset for Q1. But we're talking about being lower than Q4, not in terms of year-over-year type numbers. Did that explain it more? Alex Henderson - Citigroup: So you're not suggesting that the Q1 is down in revenues, you're just saying it would be down in orders, which is normal.

Which is normal, versus Q4. Alex Henderson - Citigroup: But the year-over-year growth rates does not have any implication to that.

Year-over-year growth would be, let's say, at the low end of the 10% to 15%. Alex Henderson - Citigroup: Why is there seasonality on a year-over-year growth rate? It's still back to the same question.

There isn't much. Alex Henderson - Citigroup: We'll take it offline. Thank you.

Our next question comes from Mark Sue, RBC Capital Markets. Mark Sue - RBC Capital Markets:

Breaking these into a couple of questions. First, the commercial marketplace continues to do very well with growth in the low 20s year-over-year. We're going to continue to develop, Charlie, a lot of products for that marketplace and I think we're just getting started in the last few years with our focus there. So we think we will do well in the commercial marketplace, but I think still good opportunities we'll continue to gain market share in most of the categories. In terms of the enterprise, I think there is a more fundamental change occurring. If you watch what the network does, it enables the change in the business models and also in the productivity models. I think you see more and more if a share of wallet spend that we referred to over the last several quarters, in each of our momentums in the enterprise customers. So both in terms of how they view Cisco, in terms of the role we play in helping them achieve their productivity and flexibility need for the future, as well as the consumption of technology. I would not necessarily draw the correlation at all between the number of PCs that may be sold and the networking load that grows in the marketplace. That's true in the service provider environment where we're seeing growth probably in the 8% to 9% sequential monthly loads on service provider networks, which is obviously over 100% growth year by year and starting to accelerate; and that's before video really begins to take hold. In terms of the Enterprise segment, as you began to play in the quad play within the enterprise as well with unified communications, I think you see Cisco not only playing in our traditional routing and switching market, but playing in everything from security to the data center as well. So I do not think that's a cycle that you're running through. There's always a chance we would be getting this wrong, but again, reiterating the issue. There is no change in our guidance in terms of what we've been saying for almost two years now. We thought the growth would be in the 10% to 15% range. And then reiterating the points which I think Alex asked earlier, if you're reading any caution into what I'm saying, we're just being more transparent and telling you what our order rates are; which by the way, has been exactly what they've been relative to a Q4 before. So I think the right comparison is to focus on year-over-year and we're not sending mixed signals in that. We're very comfortable based on what we see today with our year-over-year growth rates for this next quarter. The only reason we mention Q1 is so we don't surprise anyone when we finish up with Q4, and then we say by the way, here's what we have traditionally seen in the reset of Q1, which we allude to for several quarters. Mark Sue - RBC Capital Markets: Thank you, John. Get well, Dennis.

Dennis, by the way if you're listening on that end, we thank you very much for your many contributions. Your team has done a great job. So next question please.

Our next question comes from Tal Liani, Merrill Lynch. Tal Liani - Merrill Lynch: Maybe you can discuss the issue of sales force efficiency. You recruited many salespeople in the last two years and you haven't provided much information about the sales efficiency of a new salesperson. When do you expect it to impact sales? Is it what we are currently seeing? Last quarter, this quarter are good quarters. Also if you can discuss, where did you add these new salespeople? What areas, regions?

Rick, this sounds like a good one for you to take.

Tal, thanks for the question. First of all, we measure very closely the productivity of new salespeople and we expect them to get up to full productivity in four to six quarters. We're finding with the people we have hired over the last six quarters, that in fact continues to be the case. Of course we watch that very closely because if we saw a trend, a diminishing return in that productivity, it might indicate to us that we're reaching a point where we shouldn't continue to add more capacity in the market. We're not seeing those trends at this point in time. In terms of where we're adding the salespeople, and of course when we say salespeople, we're adding SEs as well as supporting people. Of course, the first priority is commercial. That's about coverage, and of course that is why you see the productivity being strong because as you go into new territories that don't have the coverage, you would expect that. We're also adding quite a number of people to the low end of enterprise where companies, again, it's a coverage issue. There are thousands of those companies, particularly in the United States, but we see them all over the world. Then we're also adding geographically aggressively in the emerging markets. And here, we mean emerging countries, both in what we call the emerging markets theater, but also in Asia-Pacific where the countries are emerging. So it's in line with our priorities, it's in line with our growth rates. We are adding a service provider as well, but when you have the infrastructure coverage, when you have big opportunities and you have momentum in the market, it may not be directly related to a coverage issue, and so you wouldn't see as great an increase on the service provider side. So that's how we're approaching it, Tal, and we keep a very close look at it from the time someone comes on board to one quarter out, two, three, four, five, six, and so far the trend looks very positive for us. Tal Liani - Merrill Lynch: Thank you.

Thank you, Tal.

Our next question comes from Jiong Shao, Lehman Brothers. Jiong Shao - Lehman Brothers: Actually I wanted to ask a question, I think I asked it last quarter. Your booking growth year-over-year has been above your revenue growth for several quarters in a row now. John, what do you think your revenue growth is going to match the booking growth? Is that going to happen this quarter or October quarter? Could you provide some comment on that?

Without getting tied too closely down, Jiong, you've asked the right question. Are we increasing the backlog while still maintaining our customer satisfaction lead times? The answer is yes. And if you look within that as the changes that Angel Mendez is making and Randy are making in manufacturing, it gives us more flexibility to run our operations effectively across product lines where literally our advanced technologies are rapidly approaching the same volume as our routing business is. Getting that mix right, as we've seen from quarter to quarter, is challenging. So the key is, how do you keep your lead times where customers want it and be able to run your operation as effectively as you want within it? So to the second part of the question, we are not at all forecasting nor should it be interpreted as a slowdown in the order growth rates based on what we have seen. We are, however, going to run our business very effectively and conservatively given a market condition which some people view with uncertainty which we have not seen, but we want to make sure that we are able to meet our customers' needs within that guidance. So to the point that several of you have asked, I just want to reiterate. We're not in any way indicating that we see a slowing in terms of the order rates as we do Q4, Q1 into next year. We will only forecast one quarter at a time, and again, only in the interest of just being very transparent, we wanted to share with you what our order rates in Q1 are versus what Q4 traditionally is, not making a revenue forecast at this time. Jiong Shao - Lehman Brothers: Thanks.

Our next question comes from Paul Silverstein, Credit Suisse. Paul Silverstein - Credit Suisse: I was hoping for a clarification and question. Clarification -- with respect to the UK, when you look at that region, are you seeing a continued pickup, or is the modest strength of last quarter up to this point, is that kind of steady-state?

If you look at it, I would anticipate it to continue to grow in the UK. A lot has to do with revenue recognition issues for customers like BT, et cetera. Also, I want to be very upfront. The only area that we have seen a concern in terms of current momentum, was in Western Europe. So we see Japan leveling out, we see Asia-Pacific very strong at about the 20% range, we see North America unusually strong. Remember, that is 50% of our business there. Europe, which represents 23% at 22%. UK is doing okay at low double-digits growth rate. Germany is looking better. France we were pleased with the numbers, given what was going on economically there. The issues with Europe were more Central Europe and Southern Europe, in terms of the momentum areas, like Italy, et cetera. So I view the UK as good, not great, remembering again that our team there had two great years of growth in the mid 20's year-over-year. I think this is also pretty typical of what we're seeing from most of our peers when I talk to our industry peers, either in IT or communications. So if you take out revenue recognition issues, I think most people see Europe in terms of their big theaters being the slower growth versus the others in total, Paul. Paul Silverstein - Credit Suisse: Okay. And John, [iPic]'s and the other new ATG products area. I trust that they don't factor meaningfully in your guidance for either ATG or for overall revenues?

I think that's fair. As you introduce most new introduced most new advanced technologies from scratch, it is usually several years before they really begin to be material in terms of their revenue. That doesn't mean that they aren't material in terms of customers making architectural decisions for you and beginning to say, here's the vendor that I want to have as my preferred vendor, or perhaps standardize on, which we are seeing an increasing trend on today. Paul Silverstein - Credit Suisse: But even '07 would be too soon to look for meaningful impact in those new areas?

Charlie?

Yes, I would say so. They're early in their phases. Obviously, video systems is a new one, but it's off of a big base, so that can make a meaningful impact. I would say both [iPic]'s and Linksys 1 should be reasonably small and not truly meaningful from a revenue basis in FY07.

Paul, that's the way all of them are built for us. Each of the advanced technologies, the first couple of years in shipments have been fairly small, and then it usually takes us five to seven years to get to the billion-dollar run rate, if they get on that.

Just to be clear, I don't want to let those teams off of their commitment next year, John. So from their standpoint, it's very important. Paul Silverstein - Credit Suisse: Thank you.

Thank you, Paul.

Our next question comes from Ehud Gelblum, JP Morgan. Ehud Gelblum - J.P. Morgan: First of all, I do want to echo what Alex said earlier when you come to the answer to his question I think we all would like to hear it, because what I understand from his question and from what you said earlier was that the year-over-year growth rates go the lower end of the 10% to 12%, which they shouldn't necessarily be doing in the first quarter, regardless of what order rates go to. So when you resolve that, I think we would all love to hear the answer to that and that would be great. I kind of agree with the premise that he was saying. My question, actually I have a clarification on Scientific-Atlanta as well. Can you give us the number of set-top boxes that Scientific-Atlanta sold in the quarter? Any kind of mix or information you have in there that the Company used to give out? And when I back into what Scientific-Atlanta's gross margin was this quarter by starting off with the core Cisco gross margin, I get 35.1%. Your guidance had been 36% to 38%. I'm wondering where the delta happened there, did that have something to do with acquiring them and somehow the OpEx trend or the COGS didn't translate exactly? Where do you see the trend? Does that mean that we're going to be below that 36% to 38% going forward, or do we move back into that and continue going higher as time goes on?

Okay. Starting with, Ehud, a little bit on the Scientific-Atlanta, then Betsy, you will take the second part, if that's alright? Okay. In terms of Scientific-Atlanta, repeating what we've said a little bit earlier, the increase versus last year in terms of the two months that we were aligned was in the 11% to 12% range, which means probably just about the middle of that in terms of direction. Set-top shipments growth for the two months were about 22% in terms of the approach. We seem to do a little bit better in the high-end of the high-definition DVR set-top shipments in terms of market share within that. Total set-top shipments were in the 434 category in terms of total shipments. Charlie, is that right? Ehud Gelblum - J.P. Morgan: 434? That's way too low -- should be well over 1 million.

1.004 million, I'm sorry, in terms of shipments for the two months. Thank you on that, Ehud. Ehud Gelblum - J.P. Morgan: That's for two months?

1.004, right. Ehud Gelblum - J.P. Morgan: For two months only?

Correct.

The other question with respect to OpEx growth. So we have been talking for certainly the last several quarters about the increase in sales head count, which is targeted to drive the top line growth, and we have also been making some longer-term investments in the engineering organizations. Clearly. the expectation is that over time, the percentage, the OpEx percentage, if you compare to revenue, is going to go down closer to the 35% range. But we do feel that it's appropriate to make the investments in these both as John has often talked about a shorter payback on the sale side with a longer-term payback on the engineering side. But if we don't make those investments at a time when we need the top line growth, we won't really be ready to do that. Ehud Gelblum - J.P. Morgan: Sorry -- I was talking gross margin.

I apologize. Ehud Gelblum - J.P. Morgan: Sorry, I didn't mean to cut you off, but the 35.1% is what you got on the gross margin Scientific-Atlanta?

We said that the gross margin impact from Scientific-Atlanta was approximately 2 percentage points. Ehud Gelblum - J.P. Morgan: Right, but when you back into Scientific-Atlanta's gross margin, you get a 35.1% gross margin for SA's 407 in revenue. Your guidance had been 36% to 38%, and I was wondering what was the reason for that?

The primary driver for that is certainly with an acquisition, we had some kind of minor conforming policies related primarily to inventory, as well as some of the normal activity that happens in an acquisition where you mark up the fair value of the assets, et cetera. So it was not significant, but relative to the size of the revenue, it translates into that from a gross margin percentage. Ehud Gelblum - J.P. Morgan: So you expect it to really be 36% to 38% next quarter?

We don't have any reason to believe that it wouldn't be in the range we've provided, and certainly consistent with their historical performance. Ehud Gelblum - J.P. Morgan: Excellent. That's very helpful, thank you.

Our next question comes from Tim Daubenspeck, Pacific Crest Securities. Tim Daubenspeck - Pacific Crest Securities: Thank you. My question is involved with carrier revenue recognition and video. Obviously, you announced a nice win with Deutsche Telekom, you have some work going on globally. When do you think we could see some of this, as you point out, some of the revenue recognition issues worked out? Do you expect fiscal 2007 to be the year where we really start to see acceleration in home networking, edge routing, core routing, driven by video initiatives at carriers?

Charlie, do you want to take that one?

I will take the second part of that John. We expect that FY07 is going to be a very busy year in terms of early engagements and early rollouts of video activity with major carrier partners. I would expect it to be an extremely important timeframe from the standpoint of getting the technology up and running and working and proving out the business models and proving out the content and customer satisfaction with these networks, but I really would expect scaling to occur in the FY08 timeframe for those networks. That's not to say that there isn't some very real wins and some very real revenue that will be solidified in the FY '07 timeframe. But in terms of the real strong buildouts, I'd say that, that would wait until the FY '08 timeframe. Tim Daubenspeck - Pacific Crest Securities: Thank you very much.

In terms of carrier recognition for video, obviously we have an ongoing process for the cable companies that is going very, very smoothly. As you do some of these new contracts for example in BT or DT or AT&T or others, there is an issue in terms of when recognition occurs on that. So you would probably be into next year before you would begin to recognize most of the revenue. So orders that we receive now in most cases are not booking through and definitely not revenue.

Our next question comes from Jason Ader, Thomas Weisel Partners. Jason Ader - Thomas Weisel Partners:

Sure. If you look overall, the Advanced Technologies are beginning to approach our total router business, so it's over 20% of our product business today, and that's without Scientific-Atlanta being a part of it. I would expect the booking growth and the revenue growths to even out over quarters in terms of the momentum within that. Therefore, you can correctly interpret that our orders this quarter came in more in Q3 than traditionally we see in Q3 and a little bit less in Q1. So nobody asked the question about linearity, but if you look at our typical quarters, they often run 25%, 26% in month one, 31% or so in month two, and the delta in month three, let's say 43%. This quarter, the month one was a little bit lighter than we normally experienced and the third month was a little bit stronger than we normally experienced in terms of run rates. So in terms of the total of Advanced Technologies, we feel pretty good with momentum. Security is running in the bookings low-double digits and the revenue is high-single digits. Part of that is being bundled into the products, part of it is still is selling the architecture for it, in terms of the momentum. Charlie?

On the application networking side, we actually saw good order momentum quarter over quarter, so we are seeing that on an upswing but it's still a relatively small market overall. It is accelerating nicely and we believe that it's something that we're going to continue to focus on as we go forward and we have high expectations from that market overall. Security was less than what we would like to see on a longer-term basis. Part of that we think is the market, part of it was just the complexion of this quarter. As we've said in the past, AT can be quite lumpy. We think that was the case this quarter with security. Jason Ader - Thomas Weisel Partners: Thank you.

Our next question comes from Cobb Sadler, Deutsche Bank. Cobb Sadler - Deutsche Bank: I have a quick question on the government. I think you talked about the rollout being a little slower than it normally is. When were budgets released, how does that compare with what you would have expected and what you have seen on a historical basis? Could you talk about the revenue ramp throughout the quarter on a month by month basis as far as the federal government goes? Thanks a lot.

The federal government on a month by month basis I don't have, but I do have a pretty good feel in terms of the quarters. We have had a very good year in federal government and we would anticipate, barring a surprise, that we will end up the Q4 with a very good year as well. We saw this quarter growth in the low-single digits in the federal government. Next quarter looks better and both in terms of sequential growth and year-over-year growth in terms of momentum. Cobb, I don't split it out by individual months within that. Cobb Sadler - Deutsche Bank: But was there momentum throughout the quarter? I guess the first month was probably a little bit lower since budgets were released late than the last month of the quarter I would assume.

Well, it varies. The answer to your general question would be, probably yes. I don't follow it down to that level of detail. I think it's fair to say that the budgets in the civil side of the federal government were fairly typical. The defense tends to go up and down a little bit more, but we are forecasting a good Q4. Rick?

Of course, the Defense Department, I mean the DOD, has just released a supplemental budget now and we were waiting for that. But you're absolutely right. Civilian and intelligence, the money was flowing. It was not flowing in DOD and we hope to see some improvement there now. Q4 is obviously always a very strong quarter for us seasonally in the federal space. Cobb Sadler - Deutsche Bank: Is the feel with the supplemental budgets that things will accelerate a little bit, or is it too early to tell?

We're glad that the supplemental budget was released, we were looking for that, so that good news and we would hope that we get more than our fair share. Cobb Sadler - Deutsche Bank: Thanks a lot.

But to answer the question very directly, Cobb, we would be disappointed if Q4 were not up over Q3 and we think we'll finish the year in federal government probably in growth in terms of orders in the mid-teens. Cobb Sadler - Deutsche Bank: Sounds great.

Our next question comes from Inder Singh, Prudential. Inder Singh - Prudential: Thank you. I wanted to ask you about Scientific-Atlanta and the degree of operational integration you expect you will do. I think when you did the acquisition initially, you said you intended to leave it essentially independent and let it run way the way it was. Does that mean that you're intending to do field force integration than? And then what kind of hiring do you think that might entail, along with the quotas you might anticipate for those people?

What we said in the original acquisition, and Charlie feel free to jump in here, is that we were not going to make significant changes in the first year. We want to make sure, and this is what each of our customers said, that they love the acquisition, they want to see that occur. But they said, make sure this goes very smoothly, not just in your field, but in terms of how you go to market with customers, et cetera. So I think you will see us tread lightly in terms of how we bring together just from an efficiency point of view and really focus on how do we meet the customer requirements. And so I think what we will be seeing, Inder, is that is a gradual approach.

That's absolutely right, John. And Inder, you and I spoke of at the time of the acquisition. What we said was, we would do a very careful and thoughtful integration over the first two years, right, but that we were going to take our time on the integration so that we made sure that we really were bringing together the best aspects of both companies and we didn't come to any hasty conclusions or actions. And that is our plan and we're proceeding along in that way. Obviously, there are areas where we can get immediate benefits on the supply chain side, as well as on the coordination and presentation to customers, on the integration of advanced services and so forth, and we're clearly doing those things. But we are taking a very cautious, thoughtful approach. Inder Singh - Prudential: Thank you.

Thank you, Inder.

Our final question comes from Ari Bensinger, Standard & Poor's. Ari Bensinger - Standard & Poor's: Thank you for squeezing me in. Just on product gross margin, you guided down, which I understand reflects another month of Scientific-Atlanta, but do you have any long-term targets for that? And is it fair to assume that as you're focused more on consumer-oriented products that pricing pressure will sort of increase versus historic numbers?

Let me address it first very directly in terms of competition. Our competition is pretty much what we've seen before -- aggressive on pricing but nothing out of the ordinary. Rick's discounts have been very solid, very predictable versus prior quarters. So we are seeing just the normal pricing pressure and that has not changed. You'll want to probably look at our gross margins in three categories. I think you'll want to look at our traditional Cisco gross margins, which clearly at this point in time, we're just seeing the normal pressure and no major surprises there at all. That's more of a mix issue in a given quarter and how those go up or down half a point or so and we were very comfortable with the gross margins for the traditional Cisco products this quarter. In terms of Scientific-Atlanta, obviously they had lower gross margins, but a lower expense model as well. So what we focus on is the profit contribution that they make and it looks like it's very much in line with the guidance that we gave in terms and profit contribution from Scientific-Atlanta being about $0.01 a quarter minus the debt issues that we would be paying interest on. In terms of all the way down to Linksys, Charlie, obviously, gross margins in the mid-20s, an operating expense model at the 10% and that's kind of how we look at it. So the answer directly is, we're seeing very little abnormal competition on pricing that we are comfortable with where we are in our gross margins today versus what we've said in other prior quarters. And actually, I think a large amount of the consolidation that is occurring in the industry and the architectural decisions that are going on and the products' inner workings works to our favor on gross margins, especially when you can help the customers achieve their goals in terms of their own productivity and their cost of ownership. So I would like to summarize at this time, and Blair, I want to thank you very much for running the session. I want to make sure that we're very clear in terms of our view of the quarter, what we're seeing going into Q4 and just a general statement about Q1, reminding everyone that we don't give guidance more than one quarter at a time. But I think it's fair to ask the question. In terms of this quarter, we were extremely pleased with what we view as a very strong quarter. This is true from a financial perspective, a market share gains perspective and acceptance within our customers across all key verticals and across most of our key geographies. That the challenges that we see this quarter aren't any more than what we traditionally see, that our optimism going into Q4 is very solid. Again, I want to make sure that we're not singling anyone in our 10% to 15% growth in orders for Q4 that we expect Q4, barring a surprise, to be a very solid or for us. That Q1 in terms of giving you the data, what we want to just be very clear on is that we see Q1 and we will measure it in terms of year-over-year type of growth numbers. We are not indicating that we see in the segment of the market that we see today a slowdown in times of what our order expectations would be. So bottom line from our side, in spite of what is going on in the market, we see the order growth rates and the revenues in the 10 to 15% range, that Q3 was solid for us at the very high end in terms of order growth range. Q4, we will see how that develops. After Q4, we will be able to get more indication on Q1. Our comments on Q1 related only, related only to our order rate versus Q4, which we've traditionally seen down in the mid-single digits, that our order momentum at this time gives us no reason to indicate that it won't be within the 10% to 15% range that we have traditionally seen.

Thank you, John. As a reminder, our next quarterly conference call, which will reflect our fourth quarter and fiscal 2006 results, will be on Tuesday, August 8, 2006 at 1:30 PM Pacific time, 4:30 P.M. Eastern time. Again, I would like to remind you that in light regulation fair disclosure, Cisco does plan to retain its long-standing policy not to comment on its financial guidance during the quarter unless it is done through a public disclosure. Please call the investor relations department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call.

Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 866-357-4205. For participants, dialing from outside the U.S., please dial 203-369-0122.