Blair Christie - VP of Corporate Communications & IR John Chambers - President and CEO Dennis Powell - CFO Rick Justice - SVP, Worldwide Operations and Business Development Charlie Giancarlo - Chief Development Officer Jim McDonald - CEO of Scientific Atlanta

Jeff Evanson - Sanford Bernstein Brant Thompson - Goldman Sachs John Marchetti - Morgan Stanley Nikos Theodosopoulos - UBS Tim Long - Banc of America Mark Sue - RBC Capital Markets Tal Liani - Merrill Lynch Jiang Shao - Lehman Brothers Ehud Gelblum - JP Morgan Paul Silverstein - Credit Suisse Bill Choi - Jeffries Subu Subrahmanyan - Sanders Morris Samuel Wilson - JMP Securities Phil Cusick - Bear Stearns

Welcome to Cisco Systems second quarter fiscal year 2007 financial results conference call. At the request of Cisco Systems, today's conference is being recorded. If you have any objection, you must disconnect. Now I would like to introduce, Ms. Blair Christie, Vice President of Corporation Communications for Cisco Systems. Ma'am, you may begin.

Thank you, Marty and good afternoon, everyone. Welcome to our 68th quarterly conference call. This is Blair Christie and I'm joined by John Chambers, our Chairman and CEO; Dennis Powell, Chief Financial Officer; Rick Justice, Senior Vice President of Worldwide Operations and Business Development; Charlie Giancarlo, Chief Development Officer; and Jim McDonald, Chief Executive Officer of Scientific Atlanta. The Q2 fiscal year 2007 press release is on First Call, Full National Market Wire and European Financial and Technology Wire and on the Cisco website at www.cisco.com. If you'd like a fax of the press release, please call 408-526-8890 and follow the instructions. A corresponding webcast with slides and downloadable information regarding Cisco's financial statements can be found on our website in 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. Please note that we have provided a reconciliation of GAAP to non-GAAP information in the slides accompanying this webcast. We have also posted full reconciliation information along with our financial statements and the slides I just referenced to our website. Please go to the financial section in the Investor Relations website for further details. Throughout our call today, we will provide both Cisco and Scientific Atlanta financial information in order to illustrate the impact of the acquisition on our overall Q2 fiscal year 2007 results. Where we referred to Cisco standalone, the financial information represents Cisco's performance, excluding the results of the acquisition. 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 report on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted. And I will now turn it over to John for his commentary on the quarter. John.

Blair, thank you very much. Based upon the feedback from many of the listeners from the last two conference calls, we are going to stay with the new format with the goal to reduce the time of the narrative part of the call and to allow more time for questions and answers. The opening comments of the conference call will focus on what I view to be the key takeaways for the quarter, as well as the revenue guidance for the next quarter. The opening comments will be followed by a detailed yet abbreviated discussion versus prior conference calls by the financials, by you, Dennis. The third section of the call will focus on general business momentum and strategy on a geographic, product, and customer segment basis. Dennis will then provide additional financial parameters around our guidance for Q3 and then I'll wrap it up with some general comments in terms of Cisco's momentum going into Q3 of fiscal 2007 and finally, our Q&A session. Again, this briefer format will be supplemented with more detailed information in the slides accompanying this webcast. Now on to the discussion of Q2. This quarter was once again another very strong and record quarter from a revenue, GAAP, and non-GAAP net income and earnings per share perspective. To put these record results into proper perspective, I will summarize the quarterly highlights. First, from a key financial perspective; second, from a product and services perspective; third, by customer segment; and fourth, from a geographic point of view. As per many of your requests in this discussion and in future quarterly conference calls, we will discuss product growth and other financials primarily from a revenue perspective and use order growth rates to add color or momentum to the discussion. The customer segment and geographic discussion will be primarily in order growth numbers, as this is now how we run our business. The key financial highlights for Q2 include the following: Record revenue of approximately $8.4 billion, a 27% year-over-year increase and a Cisco standalone increase of approximately 18%, which was above our standalone guidance of 14 to 15% provided in the Q1 conference call. This is the fastest standalone year-over-year revenue growth we have seen in several years. As a reminder, our long-term revenue guidance is for growth in the 10 to 15% range. We are obviously pleased with both the growth on the topline and bottomlines, as well as the market share gains. Order growth continued to be very solid with product book-to-build greater than one. Product booking growth from a Cisco standalone perspective, that is not including Scientific Atlanta, grew in the mid-teens. Non-GAAP net income was $2.1 billion, an increase year-over-year of approximately 28%. Non-GAAP earnings per share were a record $0.33 and GAAP earnings per share were a record $0.31, which were increases of 27% and 41% respectively over the year-over-year. Cash generated from operations was a very solid $2.7 billion. We repurchased $3.3 billion of common stock and we exited the quarter with $20.7 billion in cash, cash equivalents, and investments. Revenue growth from our key products and services was extremely strong across all categories. In terms of my view of our momentum from a product and service perspective this quarter, I would analyze the results in the following five categories, routing, switching, advanced technologies, Scientific Atlanta, and customer advocacy services. Routing revenue grew year-over-year by 18%. Switching revenue grew year-over-year by 13%, and advanced technologies revenues grew year-over-year by approximately 23%, not including Scientific Atlanta. Scientific Atlanta's revenue grew approximately 21% year-over-year. The advanced technologies revenues are now becoming larger in terms of their total contribution to our topline than even routing is. This again speaks to Cisco's constant evolution moving into new markets and product adjacencies. Substantially all of the advanced technologies grew year-over-year in double digits in terms of orders led by storage -- I'm sorry, that's in terms of revenues, led by storage, unified communication, wireless, and security. Although competition remains robust, we believe we are gaining market share versus almost all of our major competitors, but we also believe we are getting a larger share of our customer's total spend on communications and IT. Our customer advocacy services revenue now represents approximately 15% of our total revenue. In Q2, our revenues for services grew year-over-year by approximately 20% and our non-GAAP gross margins remained extremely strong at approximately 65%. In future calls, we'll be sharing more of our service and support strategies as well as the revenue and profitability models of our customer service group. With the expanding services model and our movement of our Chief Globalization Officer, Wim Elfrink, to India, we fully intend to dramatically differentiate Cisco, both in terms of customer satisfaction as well as service revenues and profit growth from our services. Our customer satisfaction numbers remain very high in Q2. To the best of our knowledge, no other high-tech company is achieving these types of both balance and growth results from such a broad product portfolio as well as a strong services portfolio. From a Cisco standalone customer segment perspective, we saw continued strength in the commercial market with product order growth continuing of approximately 20% year-over-year. The service provider business remained very strong with standalone orders growing in the mid-teens. As we said earlier, Scientific Atlanta was above the high end of our expectations with year-over-year growth comfortably above 20%. Video continued to drive network demand and is potentially the killer application. We were very pleased with accelerating momentum from video applications, with a key example being the growth of both bandwidth and set-top box from Scientific Atlanta's group and the US and Europe, as an example, being over 30% from a year-over-year perspective. The global enterprise business, which includes the public sector, was solid with growth of approximately 12% year-over-year. From a geographic perspective, momentum was strong from an orders perspective, and balance was very good across our large theaters during Q2. Despite the slower growth from many of our technology peers in the most recent quarter, our business remains strong. As anticipated, we saw very strong order growth from the emerging markets theater approaching 40% year-over-year. We continue to see solid order growth momentum in our European operations. The improvement we saw in Q4 and Q1 continued into Q2 in Europe, with very solid year-over-year growth order rates in the low-teens. In the US, orders grew in low double digits year-over-year. Asia Pacific achieved solid order growth in the low-teens. From the commentary perspective, we executed as we outlined in our Q4 and Q1 calls. We will always try to share some with our shareholders in a very transparent way, both our reasons for optimism and occasional caution. Going into Q4, we did share some caution, and this concern turned out to be appropriate at least on a macro and general technology spending level in that quarter. Going into our fiscal Q1 of 2007, we are a little bit more optimistic than some of the prevailing views in early August, and it appears that these balances in Q4 and Q1 were accurate using the quarter results as the proof point. From a Cisco perspective, the key takeaway in Q2 is that the momentum remains strong. These record results for Q2 continue to be due to the momentum being created by the successful implementation of our strategy. We laid the cornerstones of this strategy three, five and seven years ago. Many of the market transitions we anticipated are converging today, as more and more of both communications and IT capabilities are moving into the network. Our architectural approach based on our intelligence in the network and [indiscernible] is increasing the total available market to Cisco and share of total customer spend. You could characterize Cisco's position this way. We believe that the network is becoming the platform for all forms of communications in IT. The expanding role of the network builds on the end-to-end and architectural-based differentiation that we have been investing in for many years. In terms of our revenue guidance for Q3 fiscal year '07, we are going to lead with the total growth year-over-year, which will now include two months of comparison for Scientific Atlanta, as the acquisition closed in the first month of Q3 of last fiscal year. We will then follow with Cisco's standalone growth, which does not include Scientific Atlanta. Therefore, our revenue guidance for Q3 fiscal 2007, including our usual caveats as discussed in prior calls, is for year-over-year revenue growth of 19 to 20%. We are also increasing our guidance for Q3 Cisco standalone year-over-year revenue growth to approximately 15 to 17%. This is higher than any recent quarterly guidance from a standalone perspective that we have provided. To put in this perspective relative to prior quarters' guidance, this compares to the standalone guidance of 14 to 15% for Q2, which at that point in time was the highest standalone guidance that we provided in many years' quarters. Given that our long-term revenue guidance remains in the 10 to 15% range for our growth, we are obviously very pleased with our expectations of standalone growth for the next two quarters to be in the mid-teens, remembering our normal caveats. At this time, I would like to turn it over to Dennis for further discussion of the financial highlights. Dennis, to you, buddy.

Thanks, John. Now, for some comments on our P&L. We were very pleased with the financial results for both Cisco standalone and Scientific Atlanta exceeded our expectations this quarter for revenue, operating income, and earnings per share. Total revenue for the second quarter was $8.4 billion, an increase of 27% year-over-year. Fiscal Q2 standalone revenue was $7.8 billion, or 18% growth year-over-year. Scientific Atlanta Q2 revenue was $639 million, or 21% growth year-over-year, for a comparable period, aligned to conform to Cisco's fiscal quarters. Routing revenue totaled $1.7 billion, up 18% year-over-year, due to continued growth in our high-end router portfolio, particularly the CRS-1. Switching revenue was $3 billion, an increase of 13% year-over-year, due to strength in our fixed switching portfolio. Advanced technologies revenue totaled $1.9 billion, including $504 million of Scientific Atlanta sales, representing an increase of 66% growth year-over-year on a combined basis. Advanced technologies revenue, not including Scientific Atlanta, grew 23% year-over-year. Other products revenue totaled $482 million, an increase of 67% year-over-year on a combined basis and an increase of 32% year-over-year not including Scientific Atlanta. Total service revenue was $1.34 billion, up approximately 23% year-over-year. Q2 total non-GAAP gross margin was 64.8%, the same as in Q1. For product only, non-GAAP gross margin for the second quarter was also 64.8%, up slightly from 64.7% last quarter. This quarter, we saw a positive impact from reduced discounts offset primarily by mix, including the impact of higher Scientific Atlanta revenue. Our non-GAAP service margins for the second quarter were 64.4%, down from 65.5% last quarter, due primarily to investments in headcount and advanced services making up the higher proportion of our service revenue. Non-GAAP operating expenses as a percentage of revenue were approximately 35% in Q2 FY '07 down from approximately 37% in Q2 FY '06. Our Q2 FY '07 non-GAAP tax provision was approximately 24%, down from 28% in Q2 FY '06. Due to the legislative reinstatement of the US Federal Research Tax Credit that quarter, we received a benefit on a non-GAAP basis of 4/10s of a penny for Q1 and 4/10s of a penny for Q2. We also received a $60 million tax benefit from this tax credit legislation related to FY '06, which we excluded from our Q2 non-GAAP results. We expect our non-GAAP tax rate, going forward, to be at 25%. Non-GAAP net income for the second quarter of fiscal 2007 was $2.7 billion compared to $1.6 billion in the second quarter of fiscal year 2006 -- I'm sorry -- $2.1 billion for the second quarter of fiscal year 2007 compared to $1.6 billion

We're all here to help you, Dennis.

Non-GAAP earnings per share on a fully diluted basis for the second quarter were $0.33, up from $0.26 in the second quarter of fiscal year 2006 representing a 27% increase year-over-year. If we had excluded the 4/10s of a penny related to the research tax credit for Q1 FY '07, our Q2 non-GAAP earnings per share would have stayed at a solid $0.33. GAAP net income for the second quarter was $1.9 billion as compared to $1.4 billion in the second quarter of fiscal year 2006 representing a 40% increase year-over-year. GAAP earnings per share on a fully diluted basis for the second quarter were $0.31, up from $0.22 in the same quarter of fiscal year 2006, representing a 41% increase year-over-year. Now, moving on to the balance sheet. The total of cash and cash equivalents and investments at the end of Q2 was $20.7 billion, up from $19.5 billion last quarter. During Q2, we generated $2.7 billion in cash flow from operations and $1.8 billion in proceeds from stock option exercises and employee stock purchase plan activity. We used $3.3 billion to repurchase 121 million shares of our stock at an average price of $27.01. While the share count used for the calculation of fully diluted earnings per share has increased due to stock price increases, our absolute total shares outstanding continue to decline as a result of our share repurchase program. Moving on to accounts receivable. We ended the quarter at $2.9 billion, down from $3.1 billion at the end of Q1. At the end of Q2 FY '07, DSO, or day sales outstanding, was 31 days improving from 34 days at the end of last quarter as a result of improved shipment linearity. Total inventory for Q2 was $1.6 billion, up from $1.5 billion last quarter. Non-GAAP inventory turns were 7.6 times down from 8.1 times last quarter. The sequential rise in inventory is due primarily to an increase in finished goods in anticipation of higher shipments early in this quarter, and also due to added raw materials for increased demand in Scientific Atlanta in Q3. Our inventory purchase commitments at the end of Q2 were $2.5 billion as compared to $2.3 billion at the end of Q1 reflecting increased volume. Deferred revenue increased from $5.8 billion in Q1 to $6.1 billion in Q2, an increase of approximately $300 million. Both product and service deferred revenues increased this quarter. Our total Q2 FY '07 reported headcount ended at 54,563, a net increase of 27,023 from Q1. The new headcount was concentrated in sales, engineering, services and our Scientific Atlanta, Juarez manufacturing facility. In conclusion, we were very pleased with our performance for the second quarter of fiscal year. EPS increased 27% from Q2 last year on a non-GAAP basis and 41% on a GAAP basis. Our operating leverage has continued to be strong, with non-GAAP operating income increasing to 30% of revenue -- that's 30% of revenue. And finally, I am extremely pleased with the continued strength of both our Cisco standalone business with 18% growth year-over-year and our Scientific Atlanta business with 21% growth year-over-year. I'll turn it back over to John. John?

Dennis, thank you very much. Nice job, as always. In this section of the call, we will cover our geographies, customer segments and product review for Q2 in more detail. Unless specifically indicated, all comments in this section are for Cisco standalone only. From a geographic point of view, there were a number of positives from our four largest theaters. Our business and technology architecture strategy for the emerging markets is working extremely well. While this business by definition will be lumpy and based in part on very large orders, we have been pleased with the consistent performance. This model appears to have legs for the next decade. Within the emerging markets, the Middle East and Africa led the way with year-over-year order growth approaching 80%. This was followed by Russia and the CIS States with growth of approximately 40%. Eastern Europe, the third area within the emerging markets group, after a very strong Q1 with growth of approximately 50%, had another very strong quarter with growth of approximately 30%. And finally, Latin America had growth in the mid teens. While there are many caveats and as obviously true to say for sure in this process, it is very possible that we can maintain the growth in these markets in the 40% range for the foreseeable future. It also may be of interest to some of you that the emerging markets have now become our third largest theater behind the US and Europe. After a slow last fiscal year, the momentum that we saw in Q1 continued to be very solid in Q2 in Europe. Year-over-year order growth in Europe was in the low teens. Balance was very good across all regions. We were especially pleased with the year-over-year growth in the three largest countries, which were the UK, Germany and France. That growth was in the mid teens year-over-year in all the three countries from an orders perspective. From the US and Canadian perspective, balance across the Canadian operation was very good with growth of approximately 30% year-over-year. From the US perspective, the search provider market segment continued to lead the way with growth in the low 20s. The commercial market continued its very strong pace with growth in the high teens and very good balance. It was interesting to see across all four of the commercial areas to make up that number. The enterprise business, after a very strong Q1 with growth comfortably above 20%, grew in the mid single digits in Q2 from the US perspective. The Asia Pacific theater continued its solid momentum with growth in the low teens from an order perspective. Australia and India led the way with the strongest growth. After several good quarters in a row in China, China grew only in low single digits. Overall momentum in Asia Pacific feels pretty good. With Wim Elfrink, our Chief Globalization Officer, moving to Bangalore and taking approximately 10 Cisco executives with him from around the world to develop our new services and support model, we believe that this should have a very positive benefit throughout the region. Japan continued to show slight year-over-year improvement with growth in the low single digits. Now moving on to the customer segment discussion. To put the following into proper perspective, and as we have reviewed in prior quarters, a rough rule of thumb is that the enterprise represents approximately 45% of our business, commercial and service provider slightly above 25% respectively, and consumer approximately 4%. As we said earlier, the commercial market segment continued its solid momentum with year-over-year growth of approximately 20%. The commercial customer segment also achieved the best balance, not just across the commercial areas in the US, but across all five of our theaters with order growth in each of the theaters being in double-digits. Growth in the service provider segment continued to be very solid with Cisco standalone growth in the mid teens and growth from Scientific Atlanta well above 20%. To put this in perspective, Scientific Atlanta represents almost 10% of our total product revenue. Our high end routing leadership with the CRS 1 continued to have very solid momentum from a revenue perspective, with revenue of approximately $150 million in Q2, up from about $110 million in Q1, which is 400% growth from a year-over-year perspective. We continue to gain market share versus almost all of our peers in the service provider market segment. Growth in the enterprise, which includes the public sector, was mixed. On a global basis, the enterprise and public sector segments, order growth grew in the low double-digits. From a global perspective, the public sector grew in the low 20s, while the US federal business grew approximately 10%. The enterprise business grew in the mid single digits in the US, while growing in double-digits in the emerging markets and Asia Pacific operations. We have now had 12 quarters in a row of order growth in the 12 to 19% growth range year-over-year on a standalone basis. It is this balance across products, services, geographies and customer segments in our business that is resulting in the consistent results. For example, this quarter the product balance was very strong across all areas. Our customer segments were very solid with commercial leading the way. While in Q1, it was the service provider market segment. However, one of the key takeaways of this quarter is clearly the expanding role of our service provider customers. Our technology and business architecture strategy is moving Cisco from a tactical or strategic technology partner for our service providers to a strategic business partner relationship in many of our service provider accounts. And as we discussed in prior conference calls, while it is too early to say for sure, I would parallel this progress to a very similar evolution that Cisco achieved in the enterprise markets in the mid 1990s. All this understand the business result and strategic positioning in the enterprise customers that Cisco has achieved is that time period. Moving next to the product discussions. As a reminder, in this discussion and in the future quarterly conference call product discussions, we will cover the products primarily from a revenue perspective and use orders to add color or illustrate momentum trends. Revenue balance was once again very good across our core routing, switching and advanced technologies. As discussed earlier, revenues for routing grew 18% and switching grew 13% year-over-year. Advanced technologies in total, from a revenue perspective, grew by approximately 23% standalone; that is not including Scientific Atlanta products; and 66% on a combined basis. Jim, just a great quarter by your team. Storage led the way at advanced technologies with revenues growing over 45% year-over-year, followed by unified communications growing approximately 38% year-over-year, wireless in the mid-20s, security in the high teens, and the home networking in the low double-digits. As we said several quarters ago, our optical business, while still remaining important to Cisco, will no longer be included in our advanced technology group. However, just as a continuing transition data point, the optical business grew 40% year-over-year. It is very difficult to single out unique products in Q2 from their results, because candidly almost all of our top products did very well. Our top 20 products account for approximately 80% of our product revenue this quarter. And 16 of these 20 products grew at least in double digits from the revenue perspective. We are not aware of any other company in the IT and communication industry that is even close to these type of growth numbers and market share gains across such a broad away of products. Our technology architecture play with the convergence of layers 1 through 7 of the OSI stack continues to gain traction and mindshare. For example, customers understand the leadership, total cost of ownership, flexibility and investment protection advantages they receive when they install a Cisco switch, which allows them to easily and cost effectively add market-leading routing, voice, data, security, wireless, video and other capabilities to their existing Cisco switch. This is a very profound differentiator compared to our competitors who are usually not present in only -- who are usually present in only one or two product categories and often do not loosely, much less tightly, integrate their products from an architectural perspective. In summary, our vision of how the industry is going to evolve appears to be playing out very much as we expected. Our differentiated strategy is also achieving the benefits to both Cisco and our customers that we thought were possible. And finally, our execution is on target in terms of results as measured by customer partnership perspective, market share of spin and our share of customers' total communications and IT expenditures, as the network becomes the platform for delivering these capabilities. It is now my pleasure to turn the call back over to Dennis for a detailed discussion of the financials regarding additional guidance. Dennis?

Thanks, John. Let me remind you again that our comments include forward-looking statements, and you should review our recent SEC filing that identify important risk factors and that actual results could materially differ from those contained in forward-looking statements. As a reminder, we are providing guidance on a non-GAAP basis with a reconciliation to Generally Accepted Accounting Principles. I will be providing guidance for Cisco on a combined basis, including the affect of Scientific-Atlanta. You will also find the details of this discussion in the slides accompanying this webcast. Also, as a reminder, the end of February will be the anniversary of the close of the Scientific-Atlanta acquisition. Accordingly, Q3 FY '06 reflected only two months of Scientific-Atlanta financial results versus three months for Q3 FY '07. We anticipate total revenue for the third quarter to be in the range of $8.7 billion to $8.8 billion, representing a 19% to 20% growth year-over-year and Cisco standalone growth of 15 to 17%. Additionally, we would expect that total revenue for Q4 would be in the range of $9.0 billion to $9.3 billion, representing a 14% to 16% year-over-year growth. As you keep in mind and think about our business going forward, there are three things that I would like you to keep in mind. First, if you include all three months of Scientific-Atlanta in our financial statements for Q3 FY '06, our guidance represents a range of 16% to 17% combined organic growth for Q3 FY '07. Second, given our guidance for Q3 and Q4, this would result in combined organic FY '07 revenue growth of 16% to 17%. And third, this is obviously above the long-term 10% to 15% growth range we gave at the beginning of this fiscal year. Moving on to gross margin guidance, we believe total gross margins will be slightly above or below 64.5% due to product mix. As a result of regulations requiring the separation of security out of set-top boxes by July 2007, we anticipate an above normal increase in revenue in Q3 from Scientific-Atlanta. As we have said in the past, forecasting gross margins has always been challenging due to various factors such as volume, product mix, variable component costs, customer and channel mix and competitive pricing pressures. We believe Q3 operating expenses will be slightly below or slightly above 35.5% of revenue. We expect interest and other income to be approximately $200 million in the third quarter. Our tax provision rate is expected to be approximately 25%, down from our guidance of 26% last quarter. We would expect this to be our rate going forward absent any further legislative or regulatory changes. While we expect to continue our share repurchase program, it is difficult to predict the exact weighted average shares outstanding. We are modeling share count to be flat in weighted average shares outstanding for EPS purposes. In this estimate of share count, we are not taking into consideration any further change in our stock price that could occur in the third quarter of FY '07. And just as a point of reference, a $1 increase in our average stock price would increase the calculated shares outstanding for purposes of determining earnings per share by 20 million to 30 million shares. Regarding cash flow from operations, we would expect to generate $500 million to $700 million per month at these revenue levels. For our Q3 FY '07 Generally Accepted Accounting Principles earnings, we anticipate that Q3 GAAP EPS will be $0.03 to $0.05 per share lower than non-GAAP EPS, primarily due to acquisition-related charges and stock option expense. Please see the slides that accompany this webcast for more detail. Other than those items noted above, there are no other significant differences between GAAP and our non-GAAP guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring or other events, which may or may not be significant. I'll now turn the call back over to John. John?

Dennis, thank you. The following is a summary of my view of Cisco's momentum and opportunities entering the third quarter of fiscal 2007. In areas that Cisco can control or influence, our momentum continues to be even stronger than it was a year ago. Balance continued to be very good across our geographies, products, services and customer segments. In the US, our strategic value to our service provider customers is increasing both from a technology and a business architecture perspective, and as we said last quarter, has the potential to continue to expand Cisco's added value to our service provider customers. As we said last quarter, the progress at Scientific-Atlanta is actually ahead of what we would have anticipated to be at this point in time. While success is still dependent upon solid execution, our role with Scientific-Atlanta in service providers has the potential to continue to expand throughout fiscal 2007. And we will have a one-time unique revenue benefit from the 707 security requirements during Q3 and Q4 of our fiscal year. The commercial market remains very solid and very well-balanced on a global basis. Our European results continue to show solid improvement with Germany, France and the UK continuing their momentum we saw in Q1 and Q2. Asia-Pacific continues to remain solid. Our architectural strategy in the emerging markets is working extremely well. Barring some major economic or political surprises across many of these emerge countries, I would expect this theater to have the potential grow over twice the average growth rate of the other four theaters if we execute effectively. While the enterprise market grew at a solid basis around the world, we did experience moderate growth in the US enterprise market in Q2. This was following a very strong Q1 as we said earlier with growth in the low 20s from a year-over-year perspective. And based upon our input from our customers in terms of their confidence and their own business momentum as well as the detailed analysis of our US fueled forecast, it was probably a small bump, which will occur at times in all of our products, geographies and other customer segments. However, with the usual caveats, we will continue to watch this area. The most likely scenario is that we will return to solid growth numbers in the second half of our fiscal year. To put this balance in proper perspective from our customer segments to geography theaters and products and technology markets, we are focusing on approximately 20 areas. And as we said in the Q1 conference call, it is extremely unusual to overachieve on all of our focus areas as we did in Q1. Even in very strong quarters, such as this one, we would expect at least one or two or possibly even three of our focus areas to be in the low to mid single-digit range. Q2 was a very strong quarter for example. All five of our advanced technology, the emerging markets, European operations, Asia-Pacific operations, US service provider and commercial operations, global service provider and customer segment, global enterprise and public sector, commercial, consumer, services and Scientific Atlanta all achieved growth in double digits. Only the US enterprise and Japan being in the mid-to-low single-digits. Our balanced product momentum across our core technologies and advanced technologies is the best that I've seen in a number of quarters. But again, it is the loosely and then tightly coupled product architectural strategy for these technologies that dramatically differentiates Cisco from our peers. Our pipeline of potential new core routing and switching products looks very good. Our continued evolution of the first wave of our advanced technologies and the emergence of a second wave started -- Charlie, just a great job by the entire team -- of advanced technologies is evolving as expected. At the same time, we're beginning to plant a potential third wave with our early stage emerging technologies. In summary, our product pipeline is in excellent shape and looks really exciting. Having said that, obviously, the proof is in the results. I was especially pleased with our balance product growth almost all of our product areas, given the challenge that many of our peers continue to experience. We see the same challenges and uncertainties from an economic and a capital spending concern that many of you continue to witness at the risk of stating the obvious, Cisco will also be affected by economic changes, capital spending patterns, new and existing competitors, and our ability or to execute or not on our strategies. Having said that, Q1 and Q2 were unusually strong quarters. With the usual caveat, our Q3 guidance of 15% to 17% year-over-year standalone revenue growth is obviously above the high end of our traditional 10% to 15% guidance and the strongest that we've given in a number of years. And the fact that we are probably going to maintain the aggressive guidance staying in the mid-teens growth, in terms of, Q4 guidance from a year-over-year perspective in next quarter's conference call. This obviously indicates a high degree of confidence in our strategy and business momentum, once again, with the usual caveats. We will focus on what we can control and influence and attempt to position Cisco to gain momentum in market transitions, whether they are industry consolidation, product transitions, or economic. In summary, for those area that is we can control or influence, we believe that our vision, strategy, and execution are in great shape and producing the results. As always, I want to thank you, our shareholders, our customers, employees, 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, Blair, I would like to turn it back over to you.

Thank you, John. We'll now open the floor to questions-and-answers. We still request that sell-side analysts please ask only one question during the session. Operator, please open the floor to questions.

Thank you. And our first question from Brant Thompson, Goldman Sachs. We'll move to our next question.

Brant, we'll get back to you. If you'd replace the phone call for some reason it didn't go through. Probably not using a Cisco IP phone. We'll give you a special discount if you want one.

Next question, please.

Thank you. Our next question comes from Jeff Evanson, Sanford Bernstein. Jeff Evanson - Sanford Bernstein: Application networking is one of the most important areas for Cisco's total addressable market expansion and I'm wondering if you can give us an update on what's going on with SONA? And how we might expect that to play out over the next few quarters?

Hey, Charlie.

Thanks, John. We actually define application networking broader than the A on set of products, the application oriented networking that you identified. That continues forward, but that's really focused on the ability to provide networking for XML and other Middleware high level messaging applications. Our overall application networking technologies, which include acceleration, compression, and so forth, as well as application acceleration in the data center environment, grew at mid double-digit rate. So we had very -- and we continue to have very good growth in that area. We believe that we are picking up some market share against the major competitors in that space. I think who are names that you're very familiar with, some of which that went public recently. And we believe that we've got a very strong product pipeline that will allow us not only to catch up to them in some areas where we are behind, but actually to exceed their capabilities. So we view it as a very promising new area for us. Already many hundreds of millions of dollars for us in revenue. And we really see it as being something that will allow us to gain market share and achieve our growth goals there.

Jeff, two comments. For those of you that haven't heard Charlie talk very often, that's has excited as Charlie gets. And it's clearly an area that he's architecturally driving through our engineering organization very, very effectively. But I would look at it, as he said, not just from the traditional, quote, software segment of the business or others, but how this virtualization of application, processors and storage is going to take place, which if plays out the way we think it will, we're very uniquely positioned to moving aggressively to take advantage of. Next question, please. And thank you, Jeff.

Thank you. Our next question comes from Brant Thompson. Brant Thompson - Goldman Sachs: Hey, John. I think I'll take you up on the phone offer there.

You got it my friend. Go ahead, Brant, I'm sorry the first one didn't go through properly. Brant Thompson - Goldman Sachs: No worries. On your order growth momentum, you guys have share over the last couple of quarters, can you talk about what you think the order growth rate might be in April on your business. Just so we can have an idea as we look out into the second half. Would you expect that you're sustaining into these mid-to-high teens? And if so, I know that your business is balanced and not every area works. But where are your bets leaning the hardest in the back of the year for achieving that outlook? Is it more on the new products and routing and the carrier side coming up, or would you expect the US enterprise to become stronger, kind of, what goes into that expectation? Thanks.

Obviously there's going to be every quarter one or two areas that are performing at the low end of our expectations. And that will be true especially when you're following against perhaps 20 major areas that I personally focus on. In terms of momentum for the second half of the year, Jim, it doesn't get any stronger than the momentum at Scientific Atlanta. In fact you know, two CEOs looking at each other, this is the best pipeline I've seen. Just an outstanding job there and I clearly think they're going to have a great Q3 and a great Q4. But one of the things that might have got passed some of the people as quickly as I covered it. It isn't just set-top boxes -- of 1.5 million set-top boxes or high definition TV. Their transmission business, which is a signal for how fast bandwidth is growing and the requirement for bandwidth. Jim, if I remember, I grew from 120 to almost $185 million. Maybe if you'd like make some comments about Scientific Atlanta. And then I'll come back and comment to answer Brant's question in more detail.

If you look at our business, we had a very strong book-to-bill in the quarter. Basically our business grew across the board in both subscriber transmission and service. It's driven by a variety of things. The first thing is if you look at HDTV shipments, it's almost 50% of the total shipments today. So there's a tremendous amount of momentum going in HDTV and of course, that drives our customers to focus on either going to all digital, to switching systems and like switch digital video, or to upgrade their networks to 1 gigahertz. So the movement to HD, obviously has a very big impact on our transmission business. We begin shipments of IPTV set-top so we shipped more than 100,000 set-tops in the quarter. And of course, you know, if you look at that, of course, some of the transmission technologies like compression that go along with them basically are needed to support that as you drive HDTV signals into the switching systems for IPTV. So as you see HD, it affects both our transmission business as well as our subscriber business. Our international business exceeded 30% for the first time in a long time, so we're seeing a lot of growth in our international side of the business. And of course, the Adelphia transaction closed and because the Adelphia transaction closed, part of it went to Comcast, part went to Time Warner. There's been an increase in spending those systems basically for some catch-up. So that plus the 707 transition, where we have coming up, where the customer has to move to non-embedded security systems. There is a transition that goes through there and we see momentum associated with that. So both of our businesses performed very well during the quarter and we had a very strong book-to-bill ratio during the quarter. So we've got a lot more visibility going out into the next quarter.

Yeah. The exciting thing is that video in my opinion. I've never seen there was a killer App until I talked about video. It is the killer App unloading the network and differentiation. And so the video business is very, very important to us. But if you look Brian answering your question very crisply, the exciting thing is out of those 20 areas that I focused on, it's hard not to see one of them that doesn't have a very good chance of momentum over the next six months, hopefully you could get or next year or two for that sake. But if we could accurately predict every quarter what the mix could be, it would be a lot easiest on Dennis' life and manufacturing life. But if you think about an emerging markets is on fair that strategy I do think has legs for probably a decade, 40% plus or minus some growth is very doable. Asia-Pacific is looking real good for the next couple of quarters. Europe is really getting some foundations underneath it. With the three big countries in Europe all being very solid, our routing, switching, is solid. When you see the advanced technologies, that's the best growth we've had on advanced technologies in quite a while. The optical business already which is another signal, bandwidths is very solid. The US service providers have been for eight quarters in a row. They're going to have fits getting 20% growth this next quarter. Because I think that requires 150 million sequential growth just to get to mid-teens. But the US service provider team looks very good. Commercial business is our most stable business. And that should have come across in the call. Every theater across the area, it speaks to the small to medium business being to where a lot of the action is going to be. And so far very execution on and we'll watch the US enterprise. I wouldn't get overall excited one way or the other about it yet. Rick, I think we're forecasting your team about 10% growth this next quarter and I would normally would not give that number, but I want to give color to what we just said, plus or minus a couple points on that. Brant Thompson - Goldman Sachs: John, One other thing on a lot of these global accounts, we're seeing a lot of purchasing going overseas. So again we look at our enterprise business globally and that business is in double-digits globally. So when we talk about an enterprise growth in the US, we're excluding that growth that's taking place in those companies and other parts of the world. We see that momentum.

I would agree. So I guess a long-winded summary to it is our business looks very solid across most areas. There will be blips along the way. We'll obviously watch where those blips occur and as long as they don't repeat in the next quarter, things feel pretty good. Thank you, Brant. I hope that was helpful.

Next question, please.

And you next question comes from John Marchetti, Morgan Stanley. John Marchetti - Morgan Stanley: Thanks. John I was hoping you can give us a sense of where you are in sort of your head count additions. You had a lot added this quarter, 2700 plus. And as you're adding more people to the services organization, are you still seeing the same sort of productivity profile as you had with the sales, or does it take longer on the services side to get these people up to speed?

Got you. So a quick summary out of the 2700 people, think of it 1100 I think more as from the manufacturing point of view. So for those of you who have any questions about how Scientific Atlanta is going, it's going great. Our profit manufacturing capacity and so 1100 of those are what we would have normally outsourced those will obviously welcome and. Our sales organization, we added about 650 people, Rich . The exciting thing is the sales rep productivity has been remarkably consistent, in increasing every quarter. We continue to see that and we'll continue to add see sales reps aggressively until that slows. Even if it were to slow below the current rate, a great return. Our CDO Charlie, I think you were about 350 heads and a lot of aggressive opportunities. To your question about the CA side of the house, we added about 380 people. A lot of those in advanced services. They have a slower upturn, John. They don't ramp as quickly as the sales reps do. And remember again, great productivity is 400,000 per year, 40% gross margin. So we do this clearly on our architectural support. But so many of our big projects, whether it's with the cable companies in the US where we now provide IP telephony for them or the major city buildouts we're doing in the Middle East, or our movements in the large developing countries like India require these advanced services. So it's a much slower uptake. In fact, usually the first couple of quarters that it sounds like we get any payback. So sales reps pay for themselves the first quarter they are on. The CA recourses are equally as important but they probably have a lag of almost 6 to 12 months in terms of the impact so they the experience. That probably has it slower productivity build.

Thank you. Next question, please.

Next question comes from Nikos Theodosopoulos, UBS. Nikos Theodosopoulos - UBS: Specifically, you mentioned on the call how there's this positive impact due to the regulation and the April and July quarters. I'm wondering if there's a way you can quantify. And as a follow-up to that, as you plan hiring and manufacturing people there and adding more lines , how do you -- what do you think will happen to the volume coming out of that business once we get passed this regulatory requirement? Are we going to see a big drop-off? And would you have to adjust for it? Or do you think it's absorbed by other parts of the business post this regulatory requirement? Thank you.

Nikos, so I don't put Jim in a tough spot, we absolutely have our projections in each product category of what we're going to do in Q3 and Q4. And other than saying we expect it to be above the current growth rates, I don't Jim to get tied down on it. Just maybe just some general comments. And Nikos, I apologize for not being more specific on that. But we get the totals and we get pretty accurate always worry about get in the each category other than it feels really good. So Jim, how do we balance this from a capacity and resource perspective?

I think first thing, Nikos. I'd tell you there's a lot of factors that are driving our business today. You know, it has to start with the customers -- the customers businesses are doing quite well. If you look into our customer base, they're growing 15% a year their stock prices are hitting all-time highs. I think if you look at some of the recent earning announcements, they talk about how they're going to increase capital spending as they go through the next year or two. So the business is doing quite well. And of course, as you see increased competition among service providers, what you see time to market and new services become more important, so they actually will accelerate capital equipment in a more important market. And then if you look on to that you'd see the momentum of the DVR continues, HD momentum has really taken hold and I think driven by a lot of things. Our international business is now over 30% and it's moving up quite well. We're shipping IPTV boxes and these are, at this stage, all going into international markets. So I think if you look at it, yes, 707 is a factor that will go through here as we go through the next couple of quarters, but we see an awful lot of momentum in our business that is driven by other factors other than 707. So yes, it causes us some capacity issues as we go through the quarters over the next quarter or so, but we're moving to outsource more stuff into the international marketplaces and we're taking ways of outsourcing things so that we basically spread that load across multiple facilities and not just for us. So I think it's a factor, it's almost possible to put a number on it, we've tried, but I think we've got a lot of factors driving our business and we see a majority of all these factors continuing where 707 is a transition. And of course, I would remind you that when we sell a cable car different than a set-top, that is added value, not necessarily less value. So it does actually take the price up. Nikos Theodosopoulos - UBS: Thanks, Jim.

Nikos, thank you very much.

Okay. Next question, please.

Next question comes from Tim Long, Banc of America. Tim Long - Banc of America: Hi. Thank you. Just drilling down a little bit on the US enterprise, you said that was one of the areas that was little softer in the quarter. I understand the part about the -- some business going international for some of those large enterprises. Could you talk a little bit about what else you think might be going on there from a market share perspective, particularly, or do you think it's just more of a little bit of a slowdown in the market relative to your other businesses? Some of your competitors, although a lot smaller, did seem to have pretty decent quarters. Could you just clarify for us what you think, is the near term issue in that US enterprise business, thank you?

Well, first of all, Tim, I'm not sure I'm going to buy it all that we're losing market share to certain segment competitors. You know if you track it on a month by month basis, that's one thing, if you track it over a reasonable time period, orders seem to go up and down. Revenue recognition and incompatible communication goes up and down. The first quarter was over 20% growth, as we said before. So I do expect that to vacillate. And if you come back into where I gave the projections for Q3 and Q4, realizing with all the caveats, including us watching this carefully, we feel good about our enterprise business. As you would expect, Rick and I along with Rob Lloyd, our head of North American Operations, we really went through these numbers very carefully on it. Also, when I talked to our customers, most of them see the economy like we talked earlier. They realized their challenges they understand the other issues, but their business is on track and where would expect on the norm. So you combine that with portfolio from customers, Cisco momentum in the enterprise customers feels great. And we run it not on in and thank you for giving me the chance to clarify this, Tim. We don't run our business on a month or quarterly business. We feel very good about our position in the enterprise. It's customer satisfaction as excellent. We are executing extremely well on expanding the margin, moving into new areas such as storage area networking, being up 45% year-over-year, security, Charlie, first time we've seen that in the high teens, again, etcetera. So Tim, I want to watch this anytime there's a number that isn't where we expect, we obviously analyze it and wait to see what the results are. But I feel very good about our North American Enterprises. If it doesn't adjust next quarter, then we'll adjust appropriately, but we'll probably be talking about a different issue in Q3 and one in Q4. Tim Long - Banc of America: Great. Thank you.

Thank you. Next question, please.

And your next question, Mark Sue, RBC Capital Markets. Mark Sue - RBC Capital Markets: John, when we step back and look at your pipeline, it seems like the start of something new and it seems the good times will not only continue, but continue for a while. Is there a particular segment that's behind the accelerated growth? Is it the product cycle or do you feel that service providers are seriously considering a single lender similar to the enterprise?

You know, Mark, it's a good question. And Blair has very nicely given me nudge to keep my answers tighter, so I apologize as we can afford to keep it little bit tighter. If you look at the factors that are really driving it, I think the most fundamental of all, is I believe and we've clearly said our strategy over the last three, five, seven years, that it isn't just going to be convergence of data, voice, video, and mobility into the network an television is going to go there enable offers communication in IT. That's a very nice, architectural way of saying that we're going to be in the sweet spot Charlie for a large amount of business on communications and IT evolution. The second thing that's driving it is video. If there is a killer application as I said earlier. It's not just video for entertainment through the service providers, it is absolute video for telepresence. It's really how we're going to communicate in the future in terms of the blend within it. And the third thing is we have done a very good job of going across the enterprise, service provider, commercial marketplace, and consumer. And we said five years ago we thought those markets would come together, where you as a user won't care what combination networks you need. You use in fact you want it to be pretty transparency on how you do that whether you're using it for business use or for personal use. So I'd have a lot of trouble bringing it down to one or two areas. The emerging markets, the strategy Rick that you and Paul and the team have done there has been outstanding. So I think really market, the key takeaway here, it isn't just good balance, it is an architectural play. Jim, just real quick about that.

I think if you look at the service providers, I think our customers have told us that they are going to fewer vendors and they want the vendors to understand more of the end-to-end system. Because as you layer voice, data, and video on a single network, it gets to be pretty complicated and you have to make sure one application doesn't interfere with the other one.

It's interesting, Mark. That's been a topic within our company for quite a while. Jim and I share the same view. I think they are going to move to fewer vendors and a preferred business partner. We'll see it if that's right or wrong. Jim I think we're still in the minority, but that minority is getting a little bit bigger. Next question please, and thank you, Mark.

Thank you. Next question Tal Liani, Merrill Lynch. Tal Liani - Merrill Lynch: Hi. I have a question on leverage and also buybacks and it ties in together into EPS performance. This quarter, you had a very nice performance overall and margins went up from 21% to 20 -- sorry -- 29.1% in expectations you printed 29.8%, so pretty nice performance versus expectations. Nevertheless, if you back half over all the one-offs, there was only half a penny upside to EPS. How do we model, you have great performance, the outlook is way better than expected. How do we think about margins, operating margin going forward and then you spend $1 billion more than your cash flow on buybacks, so how do we think about this as the components of EPS? Thanks.

Dennis, I'm going to ask you to give a response to that, because I know, Tal, on the first cut that might be the impression, it couldn't be more wrong. And so Dennis, kind of walk us through the math on why it's a solid $0.33. And actually the stock going up and other factors actually contributed to it just being $0.33.

Sure. So first of all, in terms of the operating expense, in fact we did see an increase in our operating income going from 29 to 30%. That was all solid results of continuing to maintain our gross margin at the same level and having an improvement in our operating expense as a percentage of revenue. So we're right in the middle of the guidance that we said we're going to be for long-term, 29 to 31% of revenue. In terms of the earnings per share, we were, if you look at, rounding the numbers, we were at 33.3% and we pro form and out all of the impact that did not relate to FY '07. So it's none of the pro forma numbers include the benefits from that. And if you want to take a very conservative position and exclude the impact from Q1 '07, that's four-tenth of a penny. So taking that out, we're still a very solid 33 that's $32.09. Tal Liani - Merrill Lynch: Dennis, then just a moment because almost you ended the good news as our stock up 0.5 points on average versus the prior quarter. Each point it goes up what is it 20 or 30 million shares to go in that calculation that was almost the equivalent of the investment tax credit alone the other way.

It is. And if you look at the weighted impact from our employee stock option exercises and the weighted impact from our share repurchase, they pretty much washed either other out. The reason that our shares outstanding for purposes earnings per share moved by about 80 million shares is strictly the price going up. We went up to an average price of $22 to $27 during this last quarter. And that created an increase of 80 million shares for purposes of earnings per share…

So it's a problem we hope we have in future quarters.

…have that problem continued.

But, Tal, thank you for the question, because I know it's very confusing one and you and Dennis spent a fair amount of time educating me on it. But we saw $0.33 per share I think is the key takeaway there way above expectations.

Thank you. Next question, please?

Thank you. Next we have Jiang Shao, Lehman Brothers. Jiang Shao - Lehman Brothers: Thank you very much. I have a clarification first. With a book to build for core Cisco above one for the quarter, and my question is back to the US enterprise. John, I know you mentioned, you don't run the business quarter-by-quarter. If you look at the US enterprise business a whole for the longer-term perspective for the next one or two years, what kind of a tick are you seeing is somewhat a reasonable for people to look at that business? Thanks.

Yes, Jiang. Don't mind the question. We're going to break the data just into purely total book to build for the Company. We are not going to break it down into individual segments, but it was above one terms of total book to build. As we said Cisco internal growth in terms of orders, we're in the mid-teens. So we gave you the element of that and I apologize for having you work through it a little bit. In term of the compounded growth rates, in enterprise, it's tough to say because it's kind of like our switching business. Many people think of switching as a standalone product area. Our switching business is both standalone per traditional switching transmission, but it also is the way we implement our IP telephony solutions. It's the way we implement our security solution, it's the way we implement our wireless solutions. So each of these market adjacencies we go into tend to tie together towards switching business and growth within it. So compound revenue growth rate in the enterprise, it goes back to what I said before. Our overall growth and I wish I could be better than that, and given Rick, I hold you accountable for doing more but it's hard. If we can get the total growth rate, but if we were to project exactly what it would be over the next year in one category, no matter what it was, but maybe with the exception of commercial, Charlie, it's hard to do. So I expect the numbers to vacillate on that, but we clearly expect the compound growth rate in enterprise to be very solid assuming the market that's what we assume it's going to be.

Absolutely on and yeah, double-digit solid and we need to look at it globally. I mean there are going to be times when that growth is higher in the US. Clearly right now, emerging markets with all this growth, high enterprise growth, we see in Europe right now enterprise growth going up, switching selling as people are building out data centers in Europe. There's the lag between the European economy and what was going on here. So we look at it globally. If you look at US enterprise as a percentage of all the enterprise business, it's a lot smaller number than you think. We are doing business all over the world today. And that is a hedge for us for continuous double-digit growth.

And then Rob, just so you're listening, our head in North America, we're expecting US enterprise to do well.

Okay. Next question, please.

Thank you. Next question Ehud Gelblum, JP Morgan. Ehud Gelblum - JP Morgan: Hi. Can you hear me?

We sure can, Ehud. Ehud Gelblum - JP Morgan: Hi, great. Thanks, Blair. Question I didn't hear little bit before clarification on inventory of deferred revenues -- actually, I'm sorry, deferred revenue is playing in the inventory and DSOs. DSOs came down very nicely inventory was up a little bit, just if there's a clarification on that? And my main question has to do with, as you look -- John, as you try and segment out the growth that you're seeing, some of it from a product cycles that certainly are going on in lot of your products and some of it from just geographic expansion as you move into emerging markets. I think you mentioned it was going to be 40% growth either for a decade or until the end of the decade, I wasn't sure which, so if you can clarify that? If you can kind of give a sense as to how much of your ongoing growth, you think is coming from new product cycles? And how much of is it – is it from getting into new geographic areas? And sort of give us a sense as to growth in each one of those? And how they contribute therefore going forward? And finally, Jim, do you still think $43 is the right stock price?

That's five questions, Ehud. Ehud Gelblum - JP Morgan: No. I'm trying to….

Did some ask to clarification, but our deferred revenue went up in all categories.

Our deferred revenue went up in all categories, both products and services. In terms of inventory, we were up a little bit and it's fully expected and finished -- the primary reason is finished goods. And finished goods is up as, we gear for shipments that we would expect to go out early in this quarter. And secondly, there was an increase in raw materials related to gearing up for the increased activity that we expect to see for Scientific Atlanta.

Ehud, the second part of the question, and thank you for the clarification. Two separate comments, the first part of the comment is for our emerging markets. We expect our strategy within emerging markets to have legs probably for a decade, Rick, in terms of the implementation. In terms of the growth, we expect it to be nearing probably two times what the other theaters are, a little bit better. In terms of the foreseeable future, which is only one to two years type of approach, you not hold former efforts team accountable, with the appropriate caveats realizing that if we knew which one of these projections we were going to miss. We wouldn't make it. But some will be above projections, some will be below. But it wouldn't surprise me at all if we see for the next 18 to 24 months in the 40% range in terms of type of order growth potentially ahead. So, thank you for the clarification.

Okay. Next question, please.

Thank you. Next question comes from Paul Silverstein, Credit Suisse. Paul Silverstein - Credit Suisse: A question actually for Dennis. Even if I missed it earlier in the call, I apologize. But last quarter to previous quarters, you had broken down gross margins in terms of the composition. How much of it was pricing related, how much of it was Scientific Atlanta manufacturing efficiencies, services, et cetera? And I was hoping that you could share that with us again?

Yes, Paul. I didn't go into as much detail, simply because we were basically flat on an overall basis and only up with 1/10 of 1% on a product basis. I did say that we saw a slight improvement and I'm talking slight improvement on the discounts and also a slight decrease in terms of mix. And again, it's very slight and remember we're talking about tenth of a point on this and a tenth of a point is only $6 million, so very small. Paul Silverstein - Credit Suisse: Right. Then if I may very quickly, John, can you give us a little bit of insight going into little bit more detail in the routing space in terms of (inaudible). Obviously I heard your comments about CRS-1. But can you give us little bit more in terms of what you're seeing on edging core both in the quarter and looking forward?

Yeah. If you look at the numbers, it's really exciting in terms of the overall market momentum. And I think that speaks to both loads on the networks as data and voice converges, but also video load starting to occur. The high end routing is clearly on fair and by definition, as it get to be a bigger segment of our business, they can't maintain the growth numbers that we saw before. But we're very optimistic about the high-end and the CRS. Our edge routing continues to -- I think, we've really got our leadership back on that. It would not surprise me to see us gain market share there. In terms of our ISR, it's at the low end. It took us 18 months, if I remember right, to get our first million. We got our next million edge routers in the next nine… Paul Silverstein - Credit Suisse: Million.

Million number of routers. Paul Silverstein - Credit Suisse: Number. I'm sorry.

I wish it were a billion. So it took us 18 months to get our first million edge routers shipped, the ISRs. And it took us nine months to get the next million. So the momentum feels good. We think we are doing very well versus available market and market share there. And architecturally, I really like what the team is doing on the edge as well. So we think we're back in product leadership in all three categories. We think that it will show up in the numbers in terms of positioning. Paul Silverstein - Credit Suisse: And, John, Japan helps that as we go onto the latter half of the calendar year?

I hope so. But you know, again, it's a balance. It depends on when the build-outs occur in Japan. And so Japan is one of the best that we have on service provider that could go well. You know, it might surprise you, some of these new emerging countries, they can have some pretty big build-outs. And so, I think, we got enough balls up in the air. I wish I could know for sure, Paul, which ones will come down and which ones won't. But our key is to get enough upswing to get the balance. Paul Silverstein - Credit Suisse: Thank you very much.

We're going to move on to the next question, please.

Thank you. Bill Choi of Jeffries. Bill Choi - Jeffries: Okay. Thanks. Maybe two quick questions, sir. One, you talked about loosely and then tightly coupling of product architecture strategy. As far as video strength we're seeing, so far it seems to be very assay specific. Can you talk about when you anticipate the tight coupling of this, particularly in the 9K as our markets into the routing space when do you expect the strength to occur? And then a follow-up question on switching.

Let me ask, which one do you want? I apologize, because Blair is going to shoot me about talking too long. Give us one question. And I apologize for holding you to one? Would you want the answer to that first one or would you want us to do the second one? Bill Choi - Jeffries: Let's do the second one. Switching…

I had a good answer to that first one. Bill Choi - Jeffries: It's a little while since we've had a supervisory engine upgrade here on the Cat 6500. A lot of 10-Gig Ethernet adoption here. Can you talk about, you know, switching platform upgrade in the upcoming year, perhaps some update there?

Charlie, if you'll take that and talk about it from an architectural perspective, because you will remember my goal is that they never have to do a complete swap out. That way, our odds of wining are very high. So go ahead, Charlie.

No, John I think that's -- that has been our strategy since we introduced -- well, actually that's been our strategy since we started in the switching space back in 1994. The Cat 6k was introduced in 1999. Since that time, we've had three major upgrades to that product, upgrading the backswing speed from 32-Gig to 150-Gig to now 760 gigabits per second. Our customers can certainly expect us to upgrade that yet again, you know, over a terabit. We have recently introduced some very significant 10-Gig line card capability on that platform. And we'll continue to expand not only the capacity of the overall platform, but the speed and density of the interfaces on it and the functionality that's capable on that platform. And it's been actually something that has allowed Cisco to really maintain leadership in the space, is that not only do we provide our customers with a leading edge platform, but we continue to support the same platform year-after-year, including smooth upgrades that allow them to maintain the investments they have in their existing installed base.

Right. Thank you, Bill. Next question, please.

Next question comes from Subu Subrahmanyan, Sanders Morris. Subu Subrahmanyan - Sanders Morris: Thank you. I had one clarification, which is, did orders grow as fast as revenues did for the quarter. And then, I have to ask a question, John. Now that you've been growing past your 10% to 15% growth range for the last two or three quarters, at what time do you look at that 10% to 15% number and say is that the right number, or are there some unusual factors which helped the last couple of quarters and we kind of go back to somewhere to the mid to the high end of that range?

Yes. Two comments very quickly. The first part is that orders grew in the mid teens and revenues organically fairly grew at 18%. So by definition, there's a couple of point spread on that. To the second part of the question is we will always be conservative in our guidance. I realize that most people do not view our sustainable growth in the 10% to 15% range as reflected, perhaps in the stock growth rates, et cetera, that if we are truly able to grow sustainably, especially at the higher end of that then I would love to see -- about whether or not it'd be appropriate to expand the guidance beyond that. But I think, Subu, your question is a very fair one. It's just one that I'm probably going to wait -- probably another year before I answer specifically. Right now, we clearly are at projections at the high end of that range or slightly above. Don't mind you asking, and hopefully one of these days I will be able to change that. But I'd rather stay conservative for now.

Thank you. Next question, please.

Thank you. Next we have Samuel Wilson, JMP Securities. Samuel Wilson - JMP Securities: Quick clarification and a quick question. Clarification, is the 25% tax guidance because of the R&D tax credit law being changed from the 26? And can you just give us a sense of what linearity was for the core Cisco business? Thank you.

So the answer to the first question, Sam, is yes.

Answer to the second question, it was very linear versus our normal Q2. Remember in the Q2, because of the December and January effect, is a little bit more even throughout the quarter in terms of November, December and January. So it's very much in line with what we've seen in prior quarters in Q2 by month.

Great. Thank you. And we have time for one more question.

Thank you. Next we have Phil Cusick, Bear Stearns. Phil Cusick - Bear Stearns: Hi. Thanks for taking my question. Sort of in line with the question a few minutes ago, given the investments you've been making and the margin pressure it's putting on, certainly seems like that's paying off. But at what point do you say, we have enough salespeople, we need to pull back a little bit on that growth, on the growth in sales and start to run those margins up again, or should we really be thinking about 29% going forward?

Break it into two pieces. First is that I hope we continue to add sales rep for multiple years in front of us, because that new markets, new coverage, et cetera. And in terms of the productivity as we showed, overtime, we clearly intend to improve our productivity regardless of how we measure it, Charlie, in terms of the overall position. Rick, you want to say something?

Well, I was just going to say, keep in mind in some of these emerging countries, and we're trying a large number of countries, we barely have one or two people in those countries at this point. So this country transformation, replicable business process model that we're playing in virtually every country means we're going to continue add people to that part of the world. Keeping in mind the emerging market theatre does not include Asia Pacific, which also has emerging countries running there as well. So in terms of mainstream markets, you know, we'll watch that productivity very closely. Right now, we're still looking at major coverage opportunities in that part of the world.

Great. Thank you. Now as a reminder, our next quarterly conference call, which will reflect our third quarter fiscal 2007 results will be on Tuesday, May 8th, 2007 at 1:30 PM Pacific Time and 4:30 PM Eastern Time. I would like to remind you that in light of Regulation Fair Disclosure, Cisco plans to retain its longstanding policy to not comment on its financial guidance during the quarter, unless it is done through a very public disclosure. Now I know we have a number of questions still on the line. Please call the Investor Relations department for any follow-up questions and we'll be -- talk to you as well. Thank you for your participation and continued support. And this concludes our call.

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