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Article by DailyStocks_admin    (11-26-08 06:48 AM)

The Daily Magic Formula Stock for 11/26/2008 is Cisco Systems Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW


General

We design, manufacture, and sell Internet Protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. We provide a broad line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Our products are designed to transform how people connect, communicate, and collaborate. Our products, which include primarily routers, switches, and products that we refer to as our advanced technologies, are installed at large enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. We conduct our business globally and are managed geographically in five segments: the United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The Emerging Markets theater consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States (CIS).

For revenue and other information regarding these segments, see Note 14 to the Consolidated Financial Statements in our 2008 Annual Report to Shareholders. Note 14 is incorporated into this report by reference.

We were incorporated in California in December 1984, and our headquarters are in San Jose, California. The mailing address of our headquarters is 170 West Tasman Drive, San Jose, California 95134-1706, and our telephone number at that location is (408) 526-4000. Our website is www.cisco.com . Through a link on the Investor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available free of charge.

Products and Services

We sell Internet Protocol (IP)-based networking and other products and services related to the communications and IT industry. Our products and services are designed to address a wide range of customers’ business needs, including improving productivity, reducing costs, and gaining a competitive advantage. Our corresponding technology focus is on delivering networking products and solutions that simplify and secure customers’ infrastructures and offer integrated services. Our products and services help customers build their own network infrastructures that support tools and applications that allow them to communicate with key stakeholders, including customers, prospects, business partners, suppliers, and employees. Our product offerings fall into the following categories: our core technologies, routing and switching; advanced technologies; and other products. In addition to our product offerings, we provide a broad range of service offerings, including technical support services and advanced services. Our customer base spans virtually all types of public and private agencies and businesses, comprising large enterprise companies, service providers, commercial customers, and consumers.

Our products are used individually or as integrated offerings to connect personal and business computing devices to networks or computer networks with each other—whether they are within a building, across a campus, or around the world. Our breadth of product and service offerings across multiple technology segments enables us to offer a wide range of products and services to meet customer-specific requirements. We also provide products and services that allow customers to transition their various networks to a single multiservice data, voice, and video network, enabling economies of scale.

Our advanced technologies as a group have represented a larger proportion of our total revenue than routing in recent periods. Each of our advanced technologies, in addition to our core routing and switching product categories, builds upon our existing competencies and allows us to expand the overall market for our products and services. We have currently identified the following advanced technologies: application networking services, home networking, security, storage area networking, unified communications, video systems and wireless technology. We are in the process of identifying additional advanced technologies for focus and investment in the future. As has been the case from time to time in the past, one or more of our presently identified advanced technologies may be curtailed or eliminated depending on market developments. We have also continued to focus on developing a new wave of technologies, which we refer to as emerging technologies, including such products as Cisco TelePresence systems, physical security, and digital media, among others.

The investments we have made and our architectural approach are based on the belief that collaboration and networked Web 2.0 technologies that enable user collaboration, including unified communications and Cisco TelePresence systems, and the increased use of the network as the platform for all forms of communications and information technology will create new market opportunities for us. As part of the second major phase of the Internet, we believe the industry is evolving as both personal and business process collaboration enabled by networked Web 2.0 technologies help to increase innovation and productivity. We will endeavor to lead this market transition both through product development and adoption in the external customer marketplace and through our own internal adoption and use.

Many of our strategic initiatives and investments are also based on our vision of the evolution of the network. Over time, we believe that the Internet and the various networks associated with it, including corporate intranets; cable, broadband and dialup networks; and voice and video networks, will evolve to include embedded resources and the virtualization of applications and services to produce an integrated, intelligent system. This is our vision for the evolution of networking from connectivity products to intelligent systems. In this evolving environment, we believe successful vendors will be capable of providing a broad spectrum of products aimed not at a particular technology platform but at solutions to networking problems that span all segments. As such, we aim many of our strategic initiatives and investments at meeting the requirements that an intelligent network would demand, making the network the platform for the next generation of value-added communications. For a discussion of the risks associated with that strategy, please see “Item 1A. Risk Factors,” including the risk factor entitled “We depend upon the development of new products and enhancements to existing products, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results and market share may suffer.” For information regarding sales of our major products and services, see Note 14 to the Consolidated Financial Statements in our 2008 Annual Report to Shareholders, which Note is incorporated into this report by reference.

Our offerings fall into several categories:

Routing

Routing technology is the foundation of an IP network. Routers interconnect IP networks, moving information such as data, voice, and video from one network to another across metropolitan-area networks (MANs) and wide-area networks (WANs). Our routing products offer features designed to increase the intelligence, security, reliability, scalability, and level of performance in the transmission of information and media-rich applications. We offer a broad range of routers, from core network infrastructure for service providers and large businesses to access routers for the service-rich branch office to home network deployments for telecommuters and consumers. Many of our routers host a wide range of services and advanced technologies, delivering integrated voice, video, data, and mobility for homes and businesses. During fiscal 2008, we introduced the Cisco ASR 1000 Series Aggregation Services Routers, designed to help service provider and enterprise edge networks simultaneously host an increasing array of integrated data, voice and video business and consumer services.

Switching

Switching is another integral networking technology used in campuses, branch offices, and data centers to build local-area networks (LANs), across cities to build MANs, and across great distances to build WANs. Our switching products connect and forward packets at the data-link layer in the network, and process data at the network layer. They offer many forms of connectivity to end users, workstations, IP phones, access points, and servers, and function as aggregators on LANs, MANs, and WANs. Our systems employ several widely used technologies including Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet, Power over Ethernet, Asynchronous Transfer Mode, Packet over Synchronous Optical Network, and Multiprotocol Label Switching. Many of our switches support an integrated set of advanced services, delivering an integrated network solution for the organization. During fiscal 2008, we announced the Cisco Nexus 7000 and 5000 Series of data center-class switches, introduced interoperability through an ecosystem of application and systems partners, and accelerated adoption with a data center channel partner enablement strategy.

Advanced Technologies

Application Networking Services

Cisco Application Networking Services is a comprehensive portfolio of application networking solutions to enable the successful and highly secure delivery of applications within data centers and across WANs to remote and branch-office users. Using technology to accelerate, maximize availability of, and secure both application traffic and computing resources, these solutions are designed to provide a powerful framework to help ensure the successful deployment and delivery of business applications across the entire organization.

Home Networking

Home networking products connect different devices in the household, through wired or wireless connections, allowing users to share Internet access, printers, music, movies, and games throughout the home. Our products include voice and data modems, routers, network cards, media adapters, Internet video cameras, network storage, universal serial bus (USB) adapters, and other products that enable customers to share an Internet connection or move digital content around their homes or small-office environments. These products are sold through select retailers, value-added resellers, online retailers, and service providers worldwide.

Security

Cisco security solutions include a wide range of information security products and services designed to protect critical information systems from unauthorized use; defend against attack; and minimize the effect of Internet-borne worms, spam, viruses, and other malware. Our Self-Defending Network integrates security into the network, adapts to new and evolving threats, and enables collaboration across all security elements. As part of this strategy, we offer numerous network security technologies embedded within our routers and switches, in standalone security appliances and as host-based software agents with central management and analysis. Our information security product and service offerings are designed to help ensure the end-to-end integrity of the information network, simplify operations, and lower total cost of ownership. During fiscal 2008, we introduced the Cisco ASA 5580 Adaptive Security Appliance, designed to deliver data center-class performance with firewall and Secure Socket Layer/IP security Virtual Private Network capabilities in a single platform.

Storage Area Networking

We provide storage area networking products that deliver multilayer, scalable, and highly secure connectivity between servers and storage systems, including products such as storage arrays and tape drives. Our products incorporate intelligent network features, such as advanced network security, traffic management, virtualization, and tools that are designed to help make storing, retrieving, and protecting critical data across widely distributed environments more efficient.

Unified Communications

Cisco Unified Communications integrate voice, video, data, and mobile applications on fixed and mobile networks, delivering a media-rich collaboration experience to the workspace. Specific products include IP phones, client software, servers, and network appliances supporting call control, contact centers, messaging, conferencing, voice mobility, and collaboration including presence and preference information. These products are available as software, as standalone devices, and as integrated components in Cisco routers and switches. These applications use the network as the platform to enhance competitive advantage by enabling users to accelerate decision time and reduce transaction time. The security and scalability of the network enable users in any workspace to connect with one another through a computer, handset, personal digital assistant (PDA) or other similar communications equipment. Cisco Unified Communications are part of a comprehensive solution that includes network infrastructure, security, wireless, management applications, lifecycle services, flexible deployment, outsourced management options, and third-party applications. These products include the web-based collaborative offerings from our fiscal 2007 acquisition of WebEx Communications, Inc. (“WebEx”). Web-based collaboration offerings allow users to share presentations, applications, documents, and desktops, with full-motion video and integrated audio, in a rich-multimedia environment online through the use of a standard web browser.

Video Systems

Our video systems consist primarily of digital set-top boxes and digital media technology products. Digital set-top boxes provide video entertainment services to consumers. They enable subscribers to access a variety of interactive digital television services developed either by Cisco or third parties. Our equipment includes Standard-Definition (SD) basic digital set-top boxes, DOCSIS (Data Over Cable System Interface Specification) digital set-top boxes, DOCSIS Gateway (DSG) digital set-top boxes, High-Definition (HD) digital set-top boxes, Digital Video Recorder (DVR) set-top boxes, HD-DVR set-top boxes, Multi-Room DVR set-top boxes, Media Center DVR set-top boxes, and digital-only set-top boxes. Digital media technology products span a wide range of signal processing and headend capabilities including reception, encoding or transcoding, transrating, multiplexing, ad insertion, switching, and modulation. Deployment of these capabilities can help service providers and broadcast customers to more efficiently deliver entertainment, information, and communications services over their existing access networks.

Wireless Technology

We offer a broad variety of in-building and outdoor wireless networking products. These products include access points, wireless LAN controllers, wireless integrated switches and routers, wireless management software, wireless LAN clients and client software, bridges, antennas, and accessories. Our wireless networking products are designed to provide high performance and highly secure, manageable, and reliable wireless LANs that enable mobility and increase productivity.

Other Products

Our other products are comprised primarily of optical networking products, cable access, and service provider voice-over-IP (VoIP) services. We provide optical networking products for both the enterprise and service provider markets. We market and sell analog and digital optoelectronics which may reside in a network operator’s headend, in other facilities such as distribution hubs, and in optical nodes. Our other products also include such emerging technologies as Cisco TelePresence systems, physical security, and digital media products.

Service

In addition to our product offerings, we provide a broad range of service offerings, including technical support services and advanced services. Technical support services help ensure that our products operate efficiently, remain available, and benefit from the most up-to-date system software. These services help customers protect their network investments and minimize downtime for systems running mission-critical applications. Advanced services are services that are part of a comprehensive program that is designed to provide responsive, preventive, and consultative support of our technologies for specific networking needs. The advanced services program supports networking devices, applications, and complete infrastructures. Our service and support strategy seeks to capitalize on increased globalization, and we believe this strategy, along with our architectural approach, has the potential to further differentiate us from competitors.

Customers and Markets

Our customers’ IT collaboration networking needs are influenced by numerous factors, including the size of the organization, number and types of technology systems, geographic location, and the business applications deployed throughout the network. Our customer base is not concentrated in any particular industry, geography, or market segment. In each of the past three fiscal years, no single customer has accounted for 10 percent or more of our net sales. Our customers are primarily in the following markets:

Large Enterprise Businesses

Generally, we define large enterprise businesses as regional, national, or global organizations with 1,000 or more employees working in multiple locations or branch offices. Many of these customers have unique IT collaboration networking needs within a multivendor environment. Our large enterprise customers include private and public sector firms and governments. We take advantage of the network as the platform to integrate business processes with technology architectures to assist customer growth. We offer service and support packages, financing, and managed network services through our service provider partners. We sell these products through a network of third-party application and technology vendors and channel partners.

Service Providers

Service providers offer data, voice, and video communication services to businesses, governments, utilities, and consumers worldwide. They include regional, national, and international telecommunications carriers as well as Internet, cable, and wireless service providers. Service providers use a variety of our routing, switching, optical, storage, security, unified communications and call center, video systems, and network management products in their own networks. Compared with other customers, service providers are more likely to require network design, deployment, and support services because of the scale and complexity of their networks. Additionally, many service providers offer managed network services incorporating our enterprise and commercial products such as unified communications and call centers, including Intercompany TelePresence managed services, as well as virtual private networks (VPNs), security, and managed firewalls, for their business customers. We also group media, broadcast, and portal providers within our service provider market, as the lines in the telecommunications industry continue to blur between traditional network-based service offerings and content and application-based service offerings.

Commercial

Generally, we define commercial customers as those having 5 to 1,000 employees, with two distinct sub-segments: mid-market customers and small and medium-sized businesses (SMBs). Mid-market customers typically have 250 to 1,000 employees, while SMB customers typically have 5 to 250 employees. Mid-market customers are served by a combination of our sales department and channel partners and typically require the latest advanced technology that is available to our large enterprise customers, but with less complexity. SMBs require information technology and communication products that are easy to configure, install and maintain. SMB customers are served primarily by our channel partners.

Consumer

Consumer customers are individuals who utilize the network for personal use to enjoy a broad range of entertainment, communications and information experiences. Cisco is able to deliver these solutions to consumers through an extensive variety of retailers, service providers and content owners.

Sales Overview

As of the end of fiscal 2008, our worldwide sales and marketing department consisted of 23,529 employees, including managers, sales representatives, and technical support personnel. We have field sales offices in more than 85 countries and we sell our products and services both directly and through a variety of channels with support from our salesforce. A substantial portion of our products and services is sold through our channel partners and the remainder is sold through direct sales. Our channel partners include systems integrators, service providers, other resellers, distributors, and retail partners.

Systems integrators and service providers typically sell directly to end users and often provide system installation, technical support, professional services, and other support services in addition to network equipment sales. Systems integrators also typically integrate our products into an overall solution. Some service providers are also systems integrators.

Distributors hold inventory and typically sell to systems integrators, service providers, and other resellers. In addition, home networking products are generally sold through distributors and retail partners. We refer to sales through distributors and retail partners as our two-tier system of sales to the end customer. Revenue from distributors and retail partners is recognized based on a sell-through method using information provided by them. These distributors and retail partners are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs.

For information regarding risks related to our channels, please see “Item 1A. Risk Factors,” including the risk factors entitled “Disruption of or changes in our distribution model could harm our sales and margins” and “Our inventory management relating to our sales to our two-tier distribution channel is complex, and excess inventory may harm our gross margins.”

For information regarding risks relating to our international operations, please see “Item 1A. Risk Factors,” including the risk factors entitled “Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment,” “Entrance into new or developing markets exposes us to additional competition and will likely increase demands on our service and support operations,” “Due to the global nature of our operations, political or economic changes or other factors in a specific country or region could harm our operating results and financial condition,” “We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” and “Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our operating results” among others.

Our service offerings complement our products through a range of consulting, technical, project, quality, and maintenance services, including 24-hour online and telephone support through technical assistance centers.

We provide financing arrangements, such as leases, financed service contracts, and loans, for certain qualified customers to build, maintain, and upgrade their networks. We believe customer financing is a competitive factor in obtaining business, particularly in serving customers involved in significant infrastructure projects. Leases include sales-type, direct financing, and operating leases. We also provide certain qualified customers with the option of financing long-term service contracts, which primarily relate to technical support services and typically range from one to three years. Our loan financing arrangements may include not only financing the acquisition of our products and services but also providing additional funds for other costs associated with network installation and integration of our products and services. For additional information regarding these financing arrangements, see Note 6 to the Consolidated Financial Statements in our 2008 Annual Report to Shareholders, which Note is incorporated into this report by reference. Backlog

Our backlog at July 26, 2008, the last day of our 2008 fiscal year, was approximately $4.8 billion, compared with backlog of approximately $3.9 billion at July 28, 2007, the last day of our 2007 fiscal year. Backlog includes orders confirmed for products scheduled to be shipped within 90 days to customers with approved credit status. Because of the generally short cycle between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which are made without significant penalty), we do not believe that our backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.

Acquisitions, Investments, and Alliances

The markets in which we compete require a wide variety of technologies, products, and capabilities. The combination of technological complexity and rapid change within our markets makes it difficult for a single company to develop all the technological solutions that it desires to offer within its family of products and services. Through acquisitions, investments, and alliances we work to broaden the range of products and services we are able to deliver to customers in target markets. We employ the following strategies to address the need for new or enhanced networking and communications products and services:


• Developing new technologies and products internally


• Entering into joint-development efforts with other companies


• Reselling other companies’ products


• Acquiring all or parts of other companies

Acquisitions

We have acquired many companies, and we expect to make future acquisitions. Mergers and acquisitions of high-technology companies are inherently risky, especially if the acquired company has yet to ship a product. No assurance can be given that our previous or future acquisitions will be successful or will not materially adversely affect our financial condition or operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to an inability to do so. The risks associated with acquisitions are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.”

Investments in Privately Held Companies

We make investments in privately held companies that develop technology or provide services that are complementary to our products or provide strategic value. The risks associated with these investments are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “We are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our earnings.”

Strategic Alliances

We pursue strategic alliances with other companies in areas where collaboration can produce industry advancement and acceleration of new markets. The objectives and goals for a strategic alliance can include one or more of the following: technology exchange, product development, joint sales and marketing, or new-market creation. Currently, we have strategic alliances with Accenture Ltd; AT&T Inc.; BearingPoint, Inc.; Cap Gemini S.A.; Dell Inc.; EMC Corporation; Fujitsu Limited; Hewlett-Packard Company; Intel Corporation; International Business Machines Corporation; Italtel SpA; Microsoft Corporation; Nokia; Nokia Siemens Networks; Oracle Corporation; Siemens AG; Sitronics Telecom Solutions, Czech Republic a.s.; Sprint Nextel Corporation; ThruPoint Inc. and Wipro Limited; among others. Companies with which we have strategic alliances in some areas may be competitors in other areas. The risks associated with our strategic alliances are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “If we do not successfully manage our strategic alliances, we may experience increased competition or delays in product development.”

Competition

We compete in the networking and communications equipment markets, providing products and services for transporting data, voice, and video traffic across intranets, extranets, and the Internet. These markets are characterized by rapid change, converging technologies, and a migration to networking solutions that offer superior advantages. These market factors represent both an opportunity and a competitive threat to us. We compete with numerous vendors in each product category. The overall number of our competitors providing niche product solutions may increase. Also, the identity and composition of competitors may change as we increase our activity in our advanced technology markets. As we continue to expand globally, we may see new competition in different geographic regions. In particular, we have experienced price-focused competition from competitors in Asia, especially from China, and we anticipate this will continue.

Our competitors include: Alcatel-Lucent; ARRIS Group, Inc.; Aruba Networks, Inc.; Avaya Inc.; Belden CDT Inc.; Brocade Communications Systems, Inc.; Check Point Software Technologies Ltd.; D-Link Corporation; LM Ericsson Telephone Company; Extreme Networks, Inc.; F5 Networks, Inc.; Force10 Networks, Inc.; Fortinet Inc.; Foundry Networks Inc.; Hewlett-Packard Company; Huawei Technologies Co., Ltd; International Business Machines Corporation; Juniper Networks, Inc.; Meru Networks, Inc.; Microsoft Corporation; Motorola, Inc.; NETGEAR, Inc.; Nortel Networks Corporation; Riverbed Technology, Inc.; and Symantec Corporation; among others.

Some of these companies compete across multiple product lines, while others are primarily focused in a specific product area. Barriers to entry are relatively low, and new ventures to create products that do or could compete with our products are regularly formed. In addition, some of our competitors may have greater resources, including technical and engineering resources, than we do. As we expand into new markets, we will face competition not only from our existing competitors but also from other competitors, including existing companies with strong technological, marketing, and sales positions in those markets. We also sometimes face competition from resellers and distributors of our products. Companies with which we have strategic alliances in some areas may be competitors in other areas.

CEO BACKGROUND

Business Experience of Nominees

Ms. Bartz, 60, has been a member of the Board of Directors since November 1996 and has served as Lead Independent Director since November 2005. Since May 2006, she has been Executive Chairman of the Board of Autodesk, Inc. From April 1992 to April 2006, she served as Chairman of the Board and Chief Executive Officer of Autodesk. Prior to that, she was employed by Sun Microsystems, Inc. from 1983 to April 1992. Ms. Bartz also currently serves on the boards of directors of Intel Corporation and NetApp, Inc.

Ms. Burns, 50, has been a member of the Board of Directors since November 2003. She is the Chairman and Chief Executive Officer of Mercer LLC. She began her career in 1981 at Arthur Andersen, LLP and became a partner in 1989. In 1999, Ms. Burns joined Delta Air Lines, Inc. assuming the role of Executive Vice President and Chief Financial Officer in 2000 and holding that position through April 2004. Delta filed for protection under Chapter 11 of the United States Bankruptcy Code in September 2005. From May 2004 to January 2006, Ms. Burns served as Executive Vice President, Chief Financial Officer and Chief Restructuring Officer of Mirant Corporation, taking on the company’s bankruptcy restructuring. Upon successful restructuring and emergence of the company from bankruptcy, Ms. Burns joined Marsh & McLennan Companies, Inc. as Chief Financial Officer in March 2006. She assumed the role of Chairman and Chief Executive Officer of Mercer six months later. Ms. Burns also serves on the board of directors of Wal-Mart Stores, Inc.

Mr. Capellas, 54, has been a member of the Board of Directors since January 2006. He has served as the Chairman and Chief Executive Officer of First Data Corporation since September 2007. From October 2006 to July 2007, Mr. Capellas served as a Senior Advisor at Silver Lake Partners. From November 2002 to January 2006, he served as Chief Executive Officer of MCI, Inc., which was known as WorldCom, Inc. prior to its emergence from bankruptcy in April 2004, and from March 2004 to January 2006 he also served as that company’s President. From November 2002 to March 2004, he was also Chairman of the Board of WorldCom. Mr. Capellas left MCI as planned in early January 2006 upon its acquisition by Verizon Communications Inc. Previously, Mr. Capellas was President of Hewlett-Packard Company from May 2002 to November 2002. Before the merger of Hewlett-Packard and Compaq Computer Corporation in May 2002, Mr. Capellas was President and Chief Executive Officer of Compaq, a position he had held since July 1999, and Chairman of the Board of Compaq, a position he had held since September 2000. Mr. Capellas held earlier positions as Chief Information Officer and Chief Operating Officer of Compaq.

Mr. Carter, 65, has been a member of the Board of Directors since July 2000. He joined Cisco in January 1995 as Vice President of Finance and Administration, Chief Financial Officer and Secretary. In July 1997, he was promoted to Senior Vice President of Finance and Administration, Chief Financial Officer and Secretary. In May 2003, upon his retirement as Chief Financial Officer and Secretary, he was appointed Senior Vice President, Office of the Chairman and CEO. Before joining Cisco, he was employed by Advanced Micro Devices, Inc. as Vice President and Corporate Controller.

Mr. Chambers, 59, has served as a member of the Board of Directors since November 1993 and as Chairman of the Board since November 2006. He joined Cisco as Senior Vice President in January 1991, was promoted to Executive Vice President in June 1994 and to Chief Executive Officer as of January 31, 1995. He also served as President from January 31, 1995 until November 2006. Before joining Cisco, he was employed by Wang Laboratories, Inc. for eight years, where, in his last role, he was the Senior Vice President of U.S. Operations.

Mr. Halla, 62, has been a member of the Board of Directors since January 2007. He has served as Chairman of the Board and Chief Executive Officer of National Semiconductor Corporation since May 1996. Additionally, he served as President of National Semiconductor Corporation from May 1996 to May 2005. Prior to May 1996, Mr. Halla served in several capacities at LSI Logic Corporation, where, in his last role, he was the Executive Vice President of LSI Logic Products.

Dr. Hennessy, 55, has been a member of the Board of Directors since January 2002. He has been President of Stanford University since September 2000. He served as Provost of Stanford from June 1999 to August 2000, Dean of the Stanford University School of Engineering from June 1996 to June 1999, and Chair of the Stanford University Department of Computer Science from September 1994 to March 1996. Dr. Hennessy also currently is the Chairman of the Board of Atheros Communications, Inc. and serves on the board of directors of Google Inc.

Mr. Kovacevich, 64, has been a member of the Board of Directors since January 2005. He currently serves as Chairman of the Board of Wells Fargo & Company, which position he has held since April 2001. He also served as Chief Executive Officer of Wells Fargo & Company from November 1998 to June 2007, and as President from November 1998 to July 2005. From January 1993 to November 1998, he served as Chief Executive Officer of Norwest Corporation, which merged with Wells Fargo & Company in November 1998. He also served as President of Norwest Corporation from January 1993 through January 1997 and as Chairman of the Board of Norwest Corporation from May 1995 to November 1998. He became a member of the board of directors of Norwest Corporation in 1986. Mr. Kovacevich also currently serves on the board of directors of Target Corporation.

Mr. McGeary, 58, has been a member of the Board of Directors since July 2003. He has served as Chairman of the Board of BearingPoint, Inc. since November 2004. From November 2004 to March 2005, he also served as interim Chief Executive Officer of BearingPoint, Inc. Mr. McGeary served as Chief Executive Officer of Brience, Inc. from July 2000 to July 2002. From April 2000 to June 2000, he served as a Managing Director of KPMG Consulting LLC, a wholly owned subsidiary of BearingPoint, Inc. (formerly KPMG Consulting, Inc.). From August 1999 to April 2000, he served as Co-President and Co-Chief Executive Officer of BearingPoint, Inc. From January 1997 to August 1999, he was employed by KPMG LLP as its Co-Vice Chairman of Consulting. Prior to 1997 he served in several capacities with KPMG LLP, including audit partner for technology clients. Mr. McGeary is a Certified Public Accountant and holds a B.S. degree in Accounting from Lehigh University. Mr. McGeary also currently serves on the board of directors of Dionex Corporation.

Mr. Powell, 45, has been a member of the Board of Directors since March 2007. He currently serves as Senior Advisor to Providence Equity Partners, a private equity investment firm, and as Chairman of the MK Powell Group, a consulting firm. Mr. Powell was Chairman of the Federal Communications Commission from January 2001 to March 2005, having served as a Commissioner since November 1997. Mr. Powell previously served as the Chief of Staff of the Antitrust Division of the Department of Justice.

Mr. West, 53, has been a member of the Board of Directors since April 1996. He is a founder and partner of Emerging Company Partners LLC, which was formed in January 2004 and provides executive management advisory and consulting services for early to mid-stage technology companies. He served as Chief Operating Officer of nCUBE Corporation, a provider of on-demand media systems, from December 2001 to July 2003. Prior to joining nCUBE, he was the President and Chief Executive Officer of Entera, Inc. from September 1999 until it was acquired by Blue Coat Systems, Inc. (formerly CacheFlow Inc.) in January 2001. From June 1996 to September 1999, he was President and Chief Executive Officer of Hitachi Data Systems, a joint venture computer hardware services company owned by Hitachi, Ltd. and Electronic Data Systems Corporation. Prior to that, Mr. West was at Electronic Data Systems Corporation from November 1984 to June 1996. Mr. West also currently serves on the board of directors of Autodesk, Inc.

Mr. Yang, 39, has been a member of the Board of Directors since July 2000. He is a co-founder of Yahoo! Inc. and has served as a member of the board of directors and an officer of Yahoo! since March 1995. He was appointed as Chief Executive Officer of Yahoo! in June 2007.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Overview

In the first quarter of fiscal 2009, our results reflected an 8% increase in net sales from the first quarter of fiscal 2008, as we continued to achieve year-over-year revenue growth across most of our products and services, customer markets, and geographic theaters. Net income was flat compared with the first quarter of fiscal 2008, as the higher gross margin was offset by higher operating expenses and lower interest and other income during the first quarter of fiscal 2009. Net income for the first quarter of fiscal 2009 included a retroactive R&D tax credit, while net income for the first quarter of fiscal 2008 included a benefit for a tax settlement. Net income per diluted share increased by 6% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008.

During the last month of the first quarter of fiscal 2009, it became apparent that the economic conditions we had been monitoring have deteriorated and that we are in the midst of a global economic downturn. Specifically, during the last month of the quarter, we experienced a downturn in our global enterprise, service provider, and commercial markets, a downturn that started in the United States and appears to have spread first to customers in our European Markets theater and then to customers in other geographies, with the decline in the enterprise market in the United States being the most significant and characterized by cautious spending by our large enterprise customers. We believe it is likely that this economic downturn will persist; however, we cannot predict its severity or duration.

Strategy and Focus Areas

Drawing from our experience from managing through economic downturns in the past, we have developed a multifaceted strategy for addressing the current economic downturn that involves the following:


• Vision and strategy : We believe our vision of how the industry will evolve is being driven by the increasing role intelligent networks will play as nearly all forms of communication and information technology are enabled by the network. This transition appears to be occurring as we expected. Our differentiated strategy enabled by networked collaboration, we believe, will allow us to move into market adjacencies with speed, scale and flexibility. We intend to remain focused on both the technology and business architectures to enable our customers’ objectives.

• Collaboration/Web 2.0 : The investments we have made and our architectural approach are based on the belief that collaboration and networked Web 2.0 technologies that enable user collaboration, including unified communications and Cisco TelePresence systems, and the increased use of the network as the platform for all forms of communications and information technology, will create new market opportunities for us. As part of the second major phase of the Internet, we believe the industry is evolving as personal and business process collaboration enabled by networked Web 2.0 technologies such as wikis and blogs help to increase innovation and productivity. We will attempt to lead this market transition through product development and adoption in the external customer marketplace and through our own internal adoption and use.

• Resource management and realignment : During the first quarter of fiscal 2009, we continued to realign resources to better focus on our priorities. During the second quarter of fiscal 2009, we plan to continue this realignment and at the same time reduce our expenses.

• Implementation of our strategy : During the economic downturn, we will attempt to prudently take advantage of opportunities to capture market transitions, and to put our assets to use in existing and new markets as the recovery occurs. In addition to collaboration and Web 2.0, we will endeavor to prioritize and focus on continuing to evolve into a next-generation company and developing next-generation customer relationships, the data center and virtualization, video, and globalization.

• Focus on the United States and selected emerging countries : We intend to devote particular attention to two distinct geographic sectors- the United States and selected emerging countries. We believe it is likely that since the economic uncertainty began in the United States, the U.S. economy may be the first major economy to recover. We also believe that selected emerging countries may be less adversely impacted during this economic downturn as compared to other countries.


• The network as the platform : We believe the growth we experienced in the first quarter of fiscal 2009 was attributable to the continued deployment by customers of our end-to-end architecture and the convergence of data, voice, video, and mobility into IP networks. Video applications, including IP television (IPTV), Cisco TelePresence systems, unified communications, physical security and other video products, have the potential to accelerate the growth of bandwidth demand and to increase loads on networks, which may require upgrades to existing networks.

As we have done in the past, we will attempt to use the current economic downturn as an opportunity to expand our share of our customers’ information technology spending and to continue moving into product adjacencies. Our approach of aiming to achieve balance across products and services, customer markets and geographic theaters contributed to the growth we experienced in past quarters. We have delivered several new products recently, and we are pleased with the breadth and depth of our innovation across all aspects of our business and the impact that we believe this innovation will have on our long-term prospects. We believe that our strategy and our ability to innovate and execute may enable us to improve our relative competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.

Revenue

Net sales increased by 8% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008; however, during October 2008, the last month of the first quarter of fiscal 2009, we began to experience a decline in our business as a result of the economic downturn in the United States and its acceleration globally. For the first quarter of fiscal 2009, revenue was relatively flat in the United States compared with the first quarter of fiscal 2008, and despite the challenging economic conditions that we experienced, revenue increased compared with the first quarter of fiscal 2008 in our other geographic theaters. For the first quarter of fiscal 2009, revenue also increased in the enterprise, commercial, and service provider markets.

Among our product categories, the largest proportion of the increase in net product sales in the first quarter of fiscal 2009 was in sales of advanced technologies. Sales of our advanced technologies increased by 17% in the first quarter of fiscal 2009. The increase in our sales of advanced technologies reflects our balanced product portfolio and our efforts to constantly innovate and evolve into new markets and product adjacencies. Categories within our advanced technologies that showed strength during the first quarter of fiscal 2009 were unified communications, video systems, wireless, application networking services, and security products.

However, in the first quarter of fiscal 2009, we did experience slower growth in sales of our routing products, including relatively flat sales of our high-end routers. The increase in switching revenue in the first quarter of fiscal 2009 was led by higher sales of our modular and fixed-configuration switches. In the first quarter of fiscal 2009, our net service revenue increased by approximately 10% compared with the first quarter of fiscal 2008. Our service and support strategy seeks to capitalize on increased globalization, and we believe this strategy, along with our architectural approach, has the potential to further differentiate us from competitors.

Based on the decline in our business that we began to experience in October 2008, we anticipate that our revenue will decline on a year-over-year basis in the second quarter of fiscal 2009.

Operating Margin

In the first quarter of fiscal 2009, our gross margin percentage increased compared with the first quarter of fiscal 2008. The increase was driven by higher product gross margin, which was due to lower manufacturing costs and higher shipment volume, partially offset by higher sales discounts, rebates, product pricing, and product mix. If our shipment volumes, product mix, pricing or other significant factors that impact our gross margin are adversely affected by the economic downturn, our gross margin could be adversely affected. Operating expenses in the first quarter of fiscal 2009 increased in both absolute dollars and as a percentage of revenue compared with the first quarter of fiscal 2008, primarily as a result of increased headcount-related expenses and acquisition-related milestone payments. In the near term, we anticipate that despite the efforts to reduce operating expenses as discussed below, operating expenses will increase as a percentage of total revenue.

Other Financial Highlights

The following is a summary of our other financial highlights for the first quarter of fiscal 2009:


• We generated cash flows from operations of $2.7 billion during the first quarter of fiscal 2009. Our cash and cash equivalents, together with our investments, were $26.8 billion at the end of the first quarter of fiscal 2009, compared with $26.2 billion at the end of fiscal 2008.

• Our deferred revenue at the end of the first quarter of fiscal 2009 was $8.8 billion, compared with $8.9 billion at the end of fiscal 2008.

• We repurchased 46 million shares of our common stock for $1.0 billion during the first quarter of fiscal 2009.

• Days sales outstanding in accounts receivable (DSO) at the end of the first quarter of fiscal 2009 was 29 days, compared with 34 days at the end of fiscal 2008.


• Our inventory balance was $1.2 billion at the end of the first quarter of fiscal 2009 and at the end of fiscal 2008. Annualized inventory turns were 11.9 in the first quarter of fiscal 2009 and in the fourth quarter of fiscal 2008. Our purchase commitments with contract manufacturers and suppliers were $2.9 billion at the end of the first quarter of fiscal 2009, compared with $2.7 billion at the end of fiscal 2008.

We believe that our strong cash position, our solid balance sheet, our visibility into our supply chain, our strong investment portfolio management, and our financing capabilities all provide a key competitive advantage and collectively will enable us to be well positioned to manage our business through the economic downturn.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 26, 2008 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

Our products are generally integrated with software that is essential to the functionality of the equipment. Additionally, we provide unspecified software upgrades and enhancements related to the equipment through our maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” and all related interpretations. For sales of products where software is incidental to the equipment, or in hosting arrangements, we apply the provisions of Staff Accounting Bulletin No. 104, “Revenue Recognition,” and all related interpretations. Revenue is recognized when all of the following criteria have been met:


• When persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.

• Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.

• The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

• Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. The amount of product and service revenue recognized is affected by our judgment as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists. Changes to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition.

Revenue deferrals relate to the timing of revenue recognition for specific transactions based on financing arrangements, service, support, and other factors. Financing arrangements may include sales-type, direct-financing, and operating leases, loans, and guarantees of third-party financing. Our total deferred revenue for products was $2.9 billion and $2.7 billion as of October 25, 2008 and July 26, 2008, respectively. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Advanced services revenue is recognized upon delivery or completion of performance. Our total deferred revenue for services was $6.0 billion and $6.1 billion as of October 25, 2008 and July 26, 2008, respectively.

We make sales to distributors and retail partners and recognize revenue based on a sell-through method using information provided by them. Our distributors and retail partners participate in various cooperative marketing and other programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by our distributors and retail partners under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

Allowance for Doubtful Accounts and Sales Returns

Our accounts receivable balance, net of allowance for doubtful accounts, was $3.3 billion and $3.8 billion as of October 25, 2008 and July 26, 2008, respectively. The allowance for doubtful accounts was $191 million, or 5.5% of the gross accounts receivable balance, as of October 25, 2008, and $177 million, or 4.4% of the gross accounts receivable balance, as of July 26, 2008. The allowance is based on our assessment of the collectibility of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

Our provision for doubtful accounts was $17 million and $18 million for the first quarter of fiscal 2009 and 2008, respectively. If a major customer’s creditworthiness deteriorates, or if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our revenue.

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns as of October 25, 2008 and July 26, 2008 was $115 million and $103 million, respectively, and was recorded as a reduction of our accounts receivable. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

Inventory Valuation and Liability for Purchase Commitments with Contract Manufacturers and Suppliers

Our inventory balance was $1.2 billion as of October 25, 2008 and July 26, 2008. Inventory is written down based on excess and obsolete inventories determined primarily by future demand forecasts. Inventory write-downs are measured as the difference between the cost of the inventory and market based upon assumptions about future demand and are charged to the provision for inventory, which is a component of our cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

We record a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of October 25, 2008, the liability for these purchase commitments was $186 million, compared with $184 million as of July 26, 2008 and was included in other current liabilities.

Our provision for inventory was $8 million and $44 million for the first quarter of fiscal 2009 and 2008, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was $19 million and $11 million for the first quarter of fiscal 2009 and 2008, respectively. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory write-downs and our liability for purchase commitments with contract manufacturers and suppliers and gross margin could be adversely affected. Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory obsolescence.

CONF CALL

Blair Christie - SVP of Corporate Communications

Than you Kim, and good afternoon everyone, welcome to our 75th quarterly conference call. This is Blair Christie, and I’m joined by John Chambers, our Chairman and CE0, Frank Calderoni, Chief Financial Officer, Rick Justice, Executive Vice President of Worldwide Operations and Business Development, as well as Ned Hooper, Senior Vice President of Corporate Development and Consumer Groups, and Rob Lloyd, Senior Vice President of Sales for US, Canada, and Japan.

The Q1 fiscal year 2009 press release is on full national market wire and the European Financial and Technology Wire, and on the Cisco website at www.cisco.com. I would like to remind you that we have a corresponding webcast with slides. In those slides you will find the financial information we cover during this conference call, as well as additional financial metrix and analysis that you may find helpful. Additionally, downloadable Q1 financial statements will be available following the call, including revenue segments by product and geography, income statements, full GAAP to non GAAP reconciliation information, balance sheets, and cash flow statements can be found on our website in the Investor Relations section. Click on the financial section of the website to access the webcast slides and these documents. A replay of this call will be available via telephone from November 5 through November 12 at 866-3574205 or 203-369-0122 for international callers. It is also available from November 5th through January 16th on Cisco’s investor relations website at www.cisco.com/go/investors.

Throughout this call we will be referencing both GAAP and non GAAP financial results, as is customary with many companies, we have used this Q1 time period to reflect certain immaterial reclassifications to our financial statements and results, which will also be reflecting in our Form 10-Q. The financial results in the press release are unaudited. The matters we will be discussing today include forward looking statements, and as such as subject to the risks and uncertainties that we discussed in detail in our documents filed with the SEC. specifically, the most recent annual report on Form 10-K 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.

John Chambers - Chairman and CEO

Thank you Blair. During the opening comments of the conference call, I will focus on what I view to be the key takeaways for Q1 fiscal year ’09. an update on why we continue to be comfortable with our long term growth goals of 12 to 17%, assuming that the global economy returns to normal growth rates, a very candid discussion about what we are seeing in the market on global basis relative to Q1, and its effect on our Q2 expectations, then finally our revenue guidance for Q2, with the appropriate caveats.

Frank will follow these opening comments with additional detail on Q1 fiscal year 2009. The third section of the call will focus on business momentum and strategy from a geographic, product, customer statement perspective, Frank will them follow with additional financial parameter around our guidance. I will then wrap it up with some comments in terms of Cisco’s momentum going into Q2, and finally our Q&A session.

Q1FY2009 was a solid quarter for Cisco from a revenue and an earnings per share perspective, especially given the many challenges that we are all seeing occur in the global marketplace. In terms of those areas that we can control or influence, we continue to feel very comfortable with both our progress in the quarter and our long term vision and differentiative strategy as we move into new market adjacencies.

We exit Q1 with an extremely strong position in the marketplace, approximately 27 billion in cash and investments, solid balance from the product, geographic, and customer segments perspective, perhaps one of the broadest balances across the IT industry. Continued success in being the number one and number two player in most of our 20 plus targeted product areas, and innovation engine that results in product leadership across the broadest range of products that we’ve had in our history, combined with our product pipeline of new innovations that we believe is also the strongest that we have ever had.

Not only does our end to end technology architecture, form the device to the data center across any combination of networks, but also of next generation of entertainment and business models. So we have had what we believe to be the strongest position in terms of customer relationships at the enterprise and service provider level, and helping to enable our customers’ business goals. Just as we led in the first phase of the internet, i.e. Web 1.0, from both the internal utilization and the expertise we offer our customers to enable this capability, we believe we are now uniquely positioned to provide very similar leadership in the second phase of the internet, through collaboration, enabled by Network Web 2.0 technologies. Once again, we are leading in our terms of our own utilization and partnering with our customers to drive their goals, a changing business model enabled by the network.

Now moving on to a summary of our Q1 financials, we were pleased with the following results. Revenue was $10.3 billion, approximately an 8% year over year increase. Pace generated from operations was $2.7 billion. Non-GAAP earnings per share were $.42, a 5% year over year increase and GAAP earnings per share were $.37, a 6% year over year increase. Total non-GAAP gross margins were very solid at 65.6, an increase from 64.9% last quarter. Non-GAAP operating expenses are a percentage of revenues for Q1 with 35.8%. We continue to drive innovation and product leadership from our core, advanced and emerging technologies. The following is a summary of each of those areas for Q1 in terms of year over year product revenue growth.

Core technologies and services were solid with switching growing at 8% year over year, routing growing at 1% and service revenues growing at 10% year over year. Our first wave of advanced technologies grew 15% year over year, unified communications within that group grew at 22%, wireless grew at 21%, security grew at 19%, the network home decreased 2% and storage decreased 4%. Our second phase of advanced technologies had a very strong quarter with revenue growth year over year of 22%. Application networking services grew 25% and video systems grew 21%.

Our early stage internal start-ups that we call “Emerging Technologies” were also solid in Q1 in terms of year over year order growth. Our strategy is to develop a reasonable percentage of these emerging technologies into what we categorize as advanced technologies, with a realistic probability of becoming 1 billion plus in sales and the number 1 market position in their respective product categories. Overall progress was again, very strong in this quarter. While these numbers are not material financially at this point in time, we believe that with proper execution they can become very significant to our long term growth rates in the longer run. The emerging technology group orders in total grew approximately 180% year over year. We had strong year over year order growth from the mid teens to the low thirties in the following countries: China, Canada, Japan, Russia. While we find some of our largest countries such as the US, UK and Italy with negative order growth year over year in Q1.

We provide additional details on geographies and customer segments later in the conference call. In summary, for those areas that we can control and influence, we feel that we are doing reasonably well. The key market transitions relative to collaboration and digital networking, which will drive productivity for the next decade are evolving even faster than we thought one quarter ago. However, all of us are seeing the same financial and global economic challenges that have occurred over this last quarter, especially in the month of October. At this point in time, I would like to share with you some of the detail about how we will approach the current challenges and our underlying assumptions regarding our short term strategy by taking these challenges into consideration.

First, we start with a culture and track record of using economic challenges to gain market share and profit share and move into new market adjacencies. Our long term growth goals, assuming reasonable global balance and GDP growth have not changed and will remain in the 12-17% range. Third, it was one year ago when Cisco was among the first to indicated we were seeing some challenges in orders from our US financial and global accounts. We do believe that these challenges we have seen in the US have expanded to Europe, as well as many of the emerging market countries and finally into Asia.

But if there is one lesson learned during the proceeding economic challenges that Cisco faced in 1993, 1997, 2001 and 2003, is the importance of taking action early when you have long term objectives. We also want to use this call, as we have done in the past, to share very transparently what we are seeing in terms of order momentum and feedback from our customers, with the appropriate caveat that we could be wrong in our assumptions and strategies. Our approach to all of the economic slowdowns that have occurred over the last two decades has remained very similar. We will follow this approach in dealing with the current challenges. When we see these market transitions occurring, we go through our playbook, if you will, for economic downturns where there are four basic guidelines that we follow.

The first is to determine if it is the macro-environment or your strategy. Candidly determine if the slowing of your business is due primarily to market forces, and that your strategy is working well or was your challenge largely self-inflicted? If your strategy was working well, stay focused on its implementation.

Second, length and depth of a downturn – determine the magnitude of the slowdown and your best estimate on the length and depth of the slowdown, then adjust and realign your asset utilization appropriately.

Third, prepare for the upturn. Start preparing as soon as possible for the upturn and how you are going to gain share and differentiate yourself from your peers as it relates to profitable growth.

Fourth, expand customer relationships. Use the slowdown to take advantage of building even stronger relationships and differentiation with your customers.

Just as we’ve done in prior challenges, we will also implement our game plan or action plan, if you will, for dealing with these challenges while following our playbook with the four basic guidelines outlined above. The game plan for the current downturn will have six major points and will be called our six-point plan.

Point one of the plan is our vision, strategy and execution model and it’s the fabric for implementation success. First, we believe our vision of how the industry will evolve is being driven by the increasing role intelligent networks will play as all forms of communications and IP are enabled by the networks. This transition is occurring as we expected. Our differentiated strategy enabled by the network collaboration is allowing us to move into market adjacencies with tremendous speed, scale and flexibility. Cisco will remain focused on both the technology and business architectures to enable our customer’s objectives. In short, our vision, strategy and execution approach is working well and we plan to stay focused on continuing to expand this approach.

Second, collaboration Web 2.0 driving the future growth and productivity – we will continue our rapid expansion of collaborative technologies and new business models in both our product architectures and our own internal IP implementation. We plan to quickly realign resources to focus on over two dozen market adjacencies that will loosely, then tightly, come together with our core technologies, and we will be the best example of using Web 2.0 technology such as telepresence, WebX, Wiki, slogs, discussion forums, C-visions, widgets, etcetera, in an architectural process driven approach that drives productivity and new business models.

Third, resource management and realignment – through our counsels and board structures, we have already realigned over 500 million of resources through these opportunities. Beginning in Q2, our goal is to realign another 500 million of resources while at the same time reducing our expenses for fiscal year ’09 over 1 billion from our original budget. Our goal is to achieve these changes by the end of Q4 of fiscal year 2009. This includes a pause in hiring as well as reductions in travel, off-sites, outside services, equipment, events, prototypes, marketing and other activities.

Fourth, we intend to be aggressive in our strategy, prioritize and then execute. We will also be bold in taking good business risk during this downturn to build on market transitions, opportunities and put our many assets to use in existing and new markets as the recovery occurs. We will prioritize the top 5 objectives of both the company and then each of our counsels and boards. The top 5 objectives for the company are: next generation company and next generation relationships, what we call Cisco 3.0 and rob your leading course. Second - collaboration/web 2.0. Third - data center virtualization. F

Fourth - video, and fifth, globalization. We will then align our resources to these top priorities, both as a company and within each of the counsels and boards.

Fifth - investment in the US and selective emerging countries. We intend to invest aggressively in two geographic areas – the US and selective emerging countries. In our opinion, the US will be the first major country to recover. Therefore, we will make many of our market adjustments in the US. On the other hand, we believe countries like China and India are the best positioned among their emerging country peers to minimize the effect of global challenges on their own economy. We are also optimistic that we will continue to see strong support by many governments around the world to minimize the effects of these major changes.

Also, built into our assumption is the view that many companies will use network technology for innovation, productivity, speed and skill, both during the downturn and positioning for the upturn. The strategy on emerging countries is simple – over time we expect the majority of the world’s GDP with come from these emerging countries. In expanding these relationships during tough times, our goal is to be uniquely positioned as the market turn around occurs. This is identical to what we did in the Asia 1997 financial crisis.

And sixth, the power of the network as a platform, driving the future of communications and IT. Finally, we will remain focused on our stressed goal of evolving into the top communications and IT company, which will be enabled by the expanding role of intelligent networks. This could be the definition of a very success implementation of our six-point plan, looking three to four years out, after the inevitable upturn occurs.

Now at this time, I would like to give you some additional data and customer feedback for you to understand why we are moving rapidly to realign our call structure after a solid Q1, fiscal 2009. There were a number of positives in the quarter, such as our financial results, balance product revenue growth, advanced technology growth and solid momentum from some of our developed and emerging geography such as Latin America, China, Germany, Japan, Canada and Russia. There were, however, even more challenges from an order perspective as well as global customer feedback on the health of their businesses, especially in the US and western Europe.

Over 70% of our business comes from the US and western Europe today. Both experienced negative year over year order growth in Q1. We are seeing customers, not just in the financial, automotive or retail sectors, but across most of our enterprise industries facing what they view as a very challenging business environment. This started in the US, it then in our opinion, expanded to Europe, then to emerging market theater, and now to Asia. Total year over year product order growth varied dramatically during the quarter from August to October. In August our order growth increased by 7% year over year, while in October our order growth decreased by 9% year over year. Overall for Q1 year over year product order growth decreased by 3%. While revenue growth in Q1 was a solid 8%, book to bill was below 1.

In summary, we were one of the first high-tech companies to report our quarter that included October. These challenges that we saw in the US did spread globally in our opinion. The environment has changed dramatically in the last two months, with the financial crisis in September and the economic crisis becoming more apparent on a global basis in October. Cisco is uniquely compared to many of our peers in that approximately 84% of our business is non-recurring each quarter, and therefore is a good indicator of new spending patterns. Also, our balance across all major geographic areas, four major customer segments, and over two dozen product families normally works to our advantage. But when you are the number one player in many of these categories and the slowdown has truly gone global across all of these industry segments, geographies and product families, we will be impacted.

It is very difficult, given all of the uncertainties going on in the market to provide a forecast, give the dramatic variability and it is probably the second most difficult time in my career in terms of my comfort level with the forecast. It would not be a major surprise to see these numbers vary on either the positive or negative side of revenue guidance that we provided for Q2. In providing our revenue guidance for Q2 fiscal year ’09, we are going to assume that what we saw in October in terms of order momentum challenges will continue into the next quarter. This is also what we are hearing from our global customers as our field rolls out their forecast for Q2.

As we have said in conference calls over many years, Cisco will always be affected by major economic changes, capital spending patterns, new and existing competitors and our ability to execute or not on our strategy and other factors, as discussed in our SEC reports. For the purpose of our long range goals, as well as our quarterly guidance, we are also exploring our vision of how the market will evolve will be accurate and will be effectively, and we will effectively execute on that vision. With this in mind our revenue guidance for fiscal Q2 2009 including our usual caveat as discussed earlier in our financial report is for revenue to decrease in the 5 to 10% range year over year.

Again as a reminder during each of the past second economic slowdown Cisco has always navigated through them very effectively. We did this in 1993, 1997, 2001, 2003, and each scenario we gained both wallet share and in my opinion profit share. As a result we were better positioned coming out of these transitions versus our peers.

We will also to continue to be aggressive in our investments in this slowdown. Cisco uses time as an opportunity to expand our share of our customers spin and we will be aggressive about moving into market adjacencies during the slowdown.

As we approach with the opportunities and challenges in front of us with being a very experienced and broad leadership team, they've been through these challenges together over the last decade. We also bring a culture that adjust very quickly to change and has consistently continued to execute effectively regardless of opportunities and challenges.

And as we have done before leveraging market slowdown to move into many new market adjacencies. While we all wish these challenges would not occur, it is during these times that we have consistently gained the confidence of our customers, partners, shareholders, and employees to be even stronger versus our peers following these challenges.

In summary we believe that we are very well positioned in the industry from a vision, differentiated strategy, and a execution perspective. We believe we are entering the next phase of the internet as growth and productivity was in our collaboration enables by network web 2.0 technologies. We will do our best to provide the product architectures any expertise to help our customers in the implementation of these collaborative capabilities from a technology and business perspective. We will also share with our customers how we've done this internally. In short we are going to attempt to execute a strategy over the next decade, but it's similar to what we did in the early '90's. And as we said before it powered our growth for the next decade except for the obvious differences of being a company that has now at a run rate of approximately $40 billion with over 67,000 employees focused on the opportunities. Now I turn it over to you, Frank.

Frank Calderoni - CFO

Thanks, John.

John Chambers - Chairman and CEO

You're welcome.

Frank Calderoni - CFO

As John stated earlier Cisco has a strong history of successfully navigating market transition. And I remain confident that our financial model enables us to execute in both good and tough environments. For today's call I will provide a recap of our solid financial results for the first quarter of Cisco 2009, and then I will discuss what I believe our financial strength positions us well to manage during the uncertain economic environment we saw - especially in the second half of the quarter, but also more importantly going forward.

The total revenue for the first quarter was $10.3 billion, an increase of approximately 8% year over year, in line with our guidance. Searching revenue was $3.6 billion an increase of 8% year over year, driven by growth in both our modular and (unintelligible) port folio. Routing revenue was $1.9 billion up 1% year over year - against technologies revenue totaled $2.7 billion representing an increase of 17% year over year with strong performance in unified communications of 22% year over year growth. The video systems growth of approximately 21% year over year, securities with growth of approximately 19%, wireless land growth of approximately 21% and application networking services growth of approximately 25%. Other product revenue totaled $442 million, a decrease of 13% year over year - related to our obstacle and cable businesses quarter.

Total service revenue was $1.7 billion up 10% year over year with solid growth in emerging markets. We are pleased with our growth and advanced services of approximately 15%. Total revenue by geography ranged from 1% year over year in the US and Canada to a high of 41% in emerging markets. Emerging markets revenue growth for the quarter were higher than the order growth rate that John reported due to some increased shipments - recognition of previously deferred revenue and the affect of our reserves from Q1 of fiscal 08.

We want to remind you that revenue growth in emerging markets may experience variability and order growth may provide a better indication of future revenue performance. Q1 total non-GAAP gross margin was 65.6% up 7/10ths of a point quarter over quarter and up 4/10ths of a point year over year. For product only non-GAAP gross margin for the first quarter was 66.2% up a percentage point quarter over quarter and up 6/10ths of a point year over year.

The quarter over quarter improvement was driven by higher cost savings partially offset by product mix. The year over year improvement was driven by higher cost savings partially offset by higher product discounts as well as mix.

Our non-GAAP service margin for the first quarter was 62.4% down from 63.1% last quarter and 63.5% in Q1 fiscal year 08. The service margin will typically experience some variability over time due to various factors, such as the changes in mix between our technical support services and advanced services as well as the timing of support contract initiations as well as renewal.

Total gross margin by geography range from 63.4% for emerging market to 69% in Japan this quarter. Across the geographies the margins have remained relatively stable over the last few quarters. Non-GAAP operating expenses as a percentage of revenue for approximately 35.8% in Q1 fiscal year 09 relatively consistent with the 35.7% we had in Q1 fiscal year 08.

Foreign exchange impact for the quarter was $46 million when compared to the same period last year which added approximately 4/10ths of a point to this ratio. Excluding foreign exchange our non-GAAP operating expenses for Q1 were at 7% year over year.

Interest and other income $123 million Q1 which includes the recognition of realized gains, losses, as well as impairment. We remain very pleased with our diversified high quality cash and investment port folio. I will provide more detail on investment port folio in just a few moments.

Our Q1 fiscal year '09 non-GAAP tax provision rate was 22% down approximately 2 points from fiscal year '08. This decline in the affected tax rate was driven primarily by the renewal of US Federal R&D tax credits which occurred last month in a more favorable mix of foreign earnings at lower tax rates. Non-GAAP net income for the first quarter fiscal year 2009 was $2.5 billion which was flat year over year. As a reminder in Q1 fiscal year '08 we did record a onetime tax benefit of $162 million. Non-GAAP earnings per share on a fully diluted basis for the first quarter were 42 cents per share up from 40 cents per share in the first quarter of fiscal year 2008 - a 5% increase year over year and our highest earnings per share to date.

The onetime tax benefit in Q1 fiscal year '08 was approximately 3 cents per share. Non-GAAP net income for the first quarter was $2.2 billion dollars flat compared to $2.2 billion dollars in the first quarter - in fiscal year 2008. GAAP net earnings per share on a fully diluted basis for the first quarter was 37 cents per share that was up from 35 cents per share in the same quarter of fiscal year 2008.

Now moving onto the balance sheet - the total of cash, cash equivalent and investments at the end of Q1 was $26.8 billion up $528 million from Q4 fiscal year '08. During Q1 we generated $2.7 billion dollars in cash flow from operations as well as $224 million in proceeds from stock option exercises. For the quarter we re-purchased $1 billion of common stock or 46 million shares of our stock at an average price of $21.95 cents per share. We ended the quarter with approximately $7.4 billion remaining in the current stock re-purchasing authorization.

Moving onto accounts receivable - we ended the quarter at $3.3 billion which was down 14% on Q4 fiscal year '08. At the end of Q1 days sales outstanding or our DSO was 29 days compared to 34 days in Q4 fiscal year '08 driven by lower service billing due to seasonality as well as improved collection. Total inventory at the end of Q1 was $1.2 billion that was flat quarter over quarter. Non-GAAP interim returns for 11.6 this quarter which was also flat from last quarter. Our inventory purchase commitment and the end of 2/1 were $2.9 billion up 5% from the end of Q4 fiscal year '08.

Deferred revenue was $8.8 billion at the end of Q1 an increase of approximately 24% year over year. The third product revenue was $2.9 billion up approximately 18% from last year. While the third service revenue was $6 billion up approximately 28% year over year. At the end of Q1 our head count totaled 67,647 a net increase of approximately 1,518 from Q4 fiscal year '08 of which more than 50% were college hires which we normally experience in Q1 each year. Separate from our college hires we added 722 to head count this quarter which were mostly engineering, sales, and services. In mid October we did implement a pause in our external hiring while we did assess the changing macroeconomic environment.

Now I'd like to discuss how we are managing Cisco Financial positions. In both good times and challenging times and why we believe this is a competitive advantage and positions us to manage our business well and continue to lead in the future.

We do understand that during turbulent economic times like we are currently experiencing our investors would like a solid understanding of key areas we believe allow us to perform well. I would start by saying with nearly $27 billion in cash - cash equivalents and investments, a solid balance sheet, visibility into our supply chain, strong investment port folio management, and our fiscal capital financing arm - all of which provide a key competitive advantage we believe we are well positioned to manage our business through any type of market condition. For example, take the key items that influence our results this quarter. First, we continue to have very high quality receivables as evidence by our DSL 29 days. We continue to conduct regular assessments of the quality of our receivables given the current market conditions and we remain comfortable with our portfolio.

Second, our strong supply chain management continues to be a key lever in our ability to maintain strong growth margins whilst at the same time providing visibility and management of our demand planning. Over the last several years we are significantly enhanced our supply chain capabilities to better anticipate and manage our demands. Our lean manufacturing model allows us to more fully optimize our supply chains inventory and investment. We have enhanced processes and systems to provide increased visibility inventory management and better responses to fluctuations in demand.

Over time this has resulted in better lead times, on-time shipment predictability, and improved inventory management across our supply chain. While there is always inherent risk given the current economic environment we have enhanced the monitoring of our supply base to identify potential issues so that we can take appropriate measures on a timely basis.

Key metrics such as inventory returns, purchase commitments, and on-going review of excess and obsolete inventory remains strong. And again contributes to Cisco's consistent margin performance.

Our investment strategy has served us well in the turbulent environment. The overall credit quality of our port folio is extremely strong with our cash and fixed income port folio invested in securities with an average credit rating of double A or better.

In light of more challenging market conditions over the last six months we have more conservatively managed our $27 billion diversifies port folio, which has resulted in slightly less than 1% mark to market impact on a cash, and fixed income port folio valuation compared to last quarter.

Finally, our financing arm, or Cisco Capital - continues to provide financing to our customers and our channel partners, which enables incremental sales of Cisco's products, services, and networking solutions. In fiscal year '08 fiscal capital originated or facilitated approximately $4.3 billion dollars in lease and longer term loan arrangements. While the number of credit requests for enquiries has increased in the current environment we have adhered to our consistent methodology and prudent financing practices. Our thorough review process for monitoring a variety of risk metrics has enabled us to affectively balance risk reward as well as sales enablement.

We believe there has been no material impact to the quality of our port folio. Broadly speaking we believe our port folio has on average an investment grade profile. We remain comfortable with the credit profile and the way we're deploying our capital.

With respect to our accounting policies we remain conservative in how we account for our Cisco capital financing business. Specifically this comprises gross receivables, loan receivables, finance service contracts, and financing guarantees. To update the numbers previously disclosed like Q1 fiscal year '09 we have a combined balance sheet and contingent liability position of approximately $4.4 billion. Of this $4.4 billion we have a net reserve and deferred revenue position of $2.5 billion, this represents an overall reserve and revenue deferral position of over 50% of the financing portfolio position.

Again, I would like to remind you that we believe this portfolio maintains an average or around investment grade. We believe that Cisco capital on board lease and loan port folio remains an excellent use of our own cash. We have not accessed any capital market for funds to finance this element of our operation.

In summary we have long stated that our financial management and position are a competitive advantage for Cisco, and that belief has not changed even in light of the current economic condition. In fact, it is precisely during a difficult environment like we are currently experiencing that the strong financial foundation that we have allows us to focus on the things that we believe will grow our company and capture market transitions in the industry.

I do believe our performance this quarter reflects our ability to manage profitability during a period of uncertainty, and I expect through continued prudent expense management, along with calculated investments in certain areas we will be able to balance the parties of growth and profitability as we move through the current environment.

Through our unwavering focus on customers, a strong financial foundation and the power of a very talented global work force I believe Cisco will emerge stronger coming out of this period and enhance its position as a global business leader. I'll now turn the call back over to John.

John Chambers - Chairman and CEO

Thank you, Frank.

In this section of the call we will cover our geographies, customer segments, and products for Q1 in more detail. The products review will be in revenue growth terms while they geographic and customer segments will be discussed in terms of orders unless indicated otherwise.

First, from a geographic and a customer segment point of view in terms of Q1 year over year order growth - Japan. Japan continued their solid momentum in Q1, with growth of approximately 20%. Leading the way was service provider with growth of approximately 45% year over year, which represents approximately half of our total business in Japan. Public sector grew in the mid-teens, enterprise and commercial were relatively flat. Overall given all the challenges we feel good about our momentum in the Japanese market.

Now, moving on to Asia-Pacific - year over year order growth in Asia-Pacific was in Q1 very dramatically by country. China grew in the mid teens while India was down in the mid single digits. From a customer segment perspective service provider and the commercial market grew in mid single digits. While enterprise was down in the high teens, Asia in total was down approximately 4% year over year in terms of orders.

Europe , after maintaining growth in our Q4 fiscal year 2008 in the low double digits, we saw Europe's growth slow to negative mid single digits in Q1. Germany continued to do reasonably well, but the UK, Italy, Spain and the Netherlands were challenged, all with double digit decreases in orders year over year. From a customer segment perspective, commercial and the consumer were relatively flat in Europe, Public sector grew in the mid single digits, enterprise was down in the Mid single digits while service provider was down in the mid teens year over year.

Moving to the US, excluding Canada. For the US, orders in Q1 were down approximately 8% year over year. From a customer segment perspective, enterprise growth, not including public sector, was down in the high teens. Commercial, service provider and public sector were down in the mid-single digits in Q1 year over year. The emerging market theaters, not including our emerging Asian countries, were down slightly in terms of orders. Enterprise in the emerging markets was down in the high single digits while the commercial grew in the mid-single digits, service provider was down slightly Q1 year over year.

In summary, from a customer segment perspective, enterprise year over year order growth across all of Cisco was down approximately 11%, while the service provider, commercial and public sector were approximately flat from the year over year orders perspective.

Products – Q1 year over year product revenue growth was up approximately 8% and detailed and/or individual product areas were covered in the opening section of our call. In summary, although we all would like to avoid the downturns, our vision of how the industry is going to evolve appears to be playing out very much as we expected. We believe our differentiated strategy is also achieving the benefits both to Cisco and our customers that we thought were possible. And finally, our execution is on target in terms of the results as measured by our customer partnership perspective, market share and share of our customer’s total communications and IT expenditures, as the network becomes the platform for revenue capabilities. Now I’d like to turn it back over to Frank for additional detail of the financial guidance and other financial highlights. Frank, back to you.

Frank Calderoni - CFO

Thanks, John. Let me remind you again that our comments include forward looking statements, you should review our recent SEC filings that identify important risk factors, and understand that actual results could materially differ from those contained in the forward looking statements. The guidance we are providing is on a non-GAAP basis with reconciliation to GAAP. It is very difficult to provide a forecast given the dramatic variability and the uncertainties going on in the market. These events increase the potential that our actual results could vary materially from our expectations.

To reiterate John’s earlier note, our revenue guidance for Q2 makes the prudent assumption that the order momentum challenges that we saw in October will continue into Q2. Therefore, we anticipate total revenue for the second quarter to be down approximately 5-10% year over year. At this point, let me remind you that in light of regulation FD, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

Now let me give you additional details on the Q2 financial guidance. 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 as well as competitive pricing pressures. That being said, we believe that total gross margins in Q2 will be approximately 64%, reflecting the revenue guidance I just shared with you. We believe Q2 operating expenses will be approximately 39-41% of revenue, as you would expect in this environment, and as John outlined earlier, we are focused on managing our expenses through a pause in hiring, further decreasing travel and discretionary related expenses as well as deferring certain capital related projects.

Also as John mentioned, our goal is to reduce our expenses for fiscal year ’09 by over $1 billion from our original budget. Considering the expense control actions I previously mentioned, this means we are targeting our Q4 fiscal year ’09 quarterly expense run rate to be reduced by about $200 million - $300 million as compared to our Q1 fiscal year ’09 quarterly expense run rate.

While we will undertake appropriate expense management initiatives in the current environment, we will also make some calculated investments into areas where we believe we can accelerate development and Cisco’s leadership. We expect the areas will be adjacencies to our current markets, where we feel it is possible to extend the network as a platform, such as next generation companies, globalization, virtualization of the data center, video and collaboration architecture. We expect interest and other income to be approximately $130 million in the 2nd quarter.

Our tax provision rate for Q2 is approximately 22%. While we expect to continue our share repurchase program, it is difficult the exact weighted average shares outstanding. We are modeling share counts to be down $50-$100 million in weighted average shares outstanding for EPS purposes. In this estimate of share count, we are not taking into consideration any further change in stock price that could occur in the second half fiscal year ’09. At the point of reference, a $1 movement in our average stock price would change the calculated shares outstanding for the purposes of determining EPS by approximately $10 million.

Regarding cash flow from operations, we would expect to generate $500-$700 million per month. For our Q2 fiscal year ’09 GAAP earnings, we anticipate that Q2 GAAP EPS will be $.05 per share to $.08 per share lower than non-GAAP EPS, primarily due to acquisition related charges and stock compensation expense. Please view the slides that accompany this web cast for more detail. Other than those items noted above, there are not other significant differences between our GAAP and our non-GAAP guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring and tax and other events which may or may not be significant.

Again, I’ll turn the call back over to John.

John Chambers - Chairman and CEO

Frank, thank you very much. I would like to make some summary comments at this point as my view of Cisco’s momentum and opportunities entering Q2 of fiscal year 2009. In areas that Cisco can control or influence, our momentum continues to be solid in the areas of product leadership, innovation and spot leadership. Balance in a very tough environment, given the global challenges, continues to be reasonable across our geographies, products, services and customer segments. This balance normally works to our advantage when there is a slowdown in a product area, a customer segment, or one or two geographies. However, when you are often the number one player across these categories and the challenges truly go global across all these categories, it is almost impossible to avoid the impact. As we said before, even if the market slows, we don’t see this change in our long term growth targets. If we execute the way we have in prior slowdowns, and assuming that the global economy recovers the GDP growth rates similar to those in the middle of the decade, as we continue in the Q2 fiscal year 2009, we plan to aggressively invest in new and adjacent markets for the longer term, assuming global recovery, regardless of how long it takes for the macro-environment to rebound.

We would not invest as aggressively if we were to determine that this current slowdown was going to be long in duration, and that we didn’t have a high probability of achieving our 12-17% long term growth objectives and normal economic environment as the market recovers.

In terms of major areas where the momentum appears solid and even possibly gaining, would be the following areas:

First, innovation and product leadership looks very solid across our core technologies, first and second wave of advanced technologies and our new, emerging technologies.
Second, collaboration and network enabled 2.0 acceptance in Cisco’s leadership role.

Third, speed, skill and flexibility. As we move into new market adjacencies based upon our collaboration teamwork approach, our counsels and boards organization structure, combined with our vision strategy and execution model.

Fourth, emerging markets. While some of the countries may be challenged in the short term, we are positioning ourselves especially in the selected emerging countries. For the long run in terms of country transformation in partnership with our customers at both the business and government levels.

Fifth, Japan in service provider next generation build-outs. While we believe there are some more positive areas than there are areas of concern, the areas that we continue to focus on are expanding and include the US, Europe and part of the emerging countries.

As we stated earlier, we do believe that the challenges that initially affected the US have spread to other countries around the world. On a global and US basis, we see the same challenges and uncertainties from an economic, political and capital spending perspective that many of you continue to witness.

The second area that we are watching closely is service provider CapEx spending. One way to analyze CapEx growth in service providers is capital expenditures as a percentage of total sales.

The rate of growth in this area appears to be moderating, although it varies dramatically from company to company capital spending and by geography. While our technology and business partnership relationship in most of these service providers are continuing to get even stronger, there are clearly some very tough comparisons for our service provider business to fiscal year 2007 Q4 and fiscal year 2008 Q1 and Q2, which had very strong year over year growth rates in service providers.

Again, if the market does continue to slow, we believe this will not dramatically change our long term opportunities with our vision of how the industry evolved and our differentiated strategy. In fact, it is our intent to expand our share of customer spend during these corrections as we have done in the past. We also believe that our opportunities to expand in our current markets and market adjacencies are actually increasing. This is true from the data center to the home market, from the service provider to the small to medium business and consumer. Therefore, you will continue to see us invest aggressively where appropriate, while maintaining our focus on our financial models.

Once again, with the usual caveats that we discussed earlier and in our financial reports, our Q2 fiscal 2009 guidance is for year over year revenue to be in the negative -5-10% range. We believe our long term growth opportunities remain in the 12-17% range, again assuming our usual caveat and global GDP growth. We will focus on what we can control and influence, and attempt to position Cisco to gain momentum in market transitions whether they are an industry consolidation, product transitions, market adjacency opportunities, or economic.

In summary, for those areas that we control and influence, we believe that our vision strategy and execution are in great shape and producing the results. As always, I want to thank our shareholders, customers, employees and 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’d like to turn it back over to you for some comments and the Q&A.

Blair Christie - SVP of Corporate Communications

Great, thank you John. We’ll now open the call to the question and answer session; we do request that the analysts please ask only one question. So Kim, why don’t you open the call to the first question?

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