Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark one)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended October 25, 2008
OR
 
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from                      to                     
Commission file number 0-18225

CISCO SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

California	 	77-0059951	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification Number)	
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x	  	Accelerated filer   ¨	  	Non-accelerated filer   ¨	  	Smaller reporting company   ¨	
	  		  	(Do not check if a smaller reporting company)	  		
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES    ¨      NO   x
As of November 13, 2008, 5,855,086,794 shares of the registrant’s common stock were outstanding.

 

Table of Contents
 Cisco Systems, Inc.
FORM 10-Q for the Quarter Ended October 25, 2008
INDEX

 	  	 	  	Page	
			
Part I.	  	Financial Information	  		
  Item 1.	  	Financial Statements (Unaudited)	  		
	  	Consolidated Balance Sheets at October 25, 2008 and July 26, 2008	  	3	
	  	Consolidated Statements of Operations for the three months ended October 25, 2008 and October 27, 2007	  	4	
	  	Consolidated Statements of Cash Flows for the three months ended October 25, 2008 and October 27, 2007	  	5	
	  	Consolidated Statements of Shareholders’ Equity for the three months ended October 25, 2008 and October 27, 2007	  	6	
	  	Notes to Consolidated Financial Statements	  	7	
  Item 2.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	32	
  Item 3.	  	Quantitative and Qualitative Disclosures About Market Risk	  	53	
  Item 4.	  	Controls and Procedures	  	56	
Part II.	  	Other Information	  		
  Item 1.	  	Legal Proceedings	  	57	
  Item 1A.	  	Risk Factors	  	58	
  Item 2.	  	Unregistered Sales of Equity Securities and Use of Proceeds	  	71	
  Item 3.	  	Defaults Upon Senior Securities	  	71	
  Item 4.	  	Submission of Matters to a Vote of Security Holders	  	71	
  Item 5.	  	Other Information	  	71	
  Item 6.	  	Exhibits	  	71	
	  	Signature	  	72	
 
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Table of Contents
 PART I. FINANCIAL INFORMATION
 
 Item 1.	Financial Statements (Unaudited)	
 CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)

 	  	October 25,
2008	 	 	July 26,
2008	
ASSETS	  				 			
Current assets:	  				 			
Cash and cash equivalents	  	$	4,197	 	 	$	5,191	
Investments	  	 	22,566	 	 	 	21,044	
Accounts receivable, net of allowance for doubtful accounts of $191 at October 25, 2008 and $177 at July 26, 2008	  	 	3,278	 	 	 	3,821	
Inventories	  	 	1,209	 	 	 	1,235	
Deferred tax assets	  	 	2,071	 	 	 	2,075	
Prepaid expenses and other current assets	  	 	2,341	 	 	 	2,333	

Total current assets	  	 	35,662	 	 	 	35,699	
			
Property and equipment, net	  	 	4,181	 	 	 	4,151	
Goodwill	  	 	12,554	 	 	 	12,392	
Purchased intangible assets, net	  	 	1,976	 	 	 	2,089	
Other assets	  	 	4,514	 	 	 	4,403	

TOTAL ASSETS	  	$	58,887	 	 	$	58,734	

LIABILITIES AND SHAREHOLDERS’ EQUITY	  				 			
Current liabilities:	  				 			
Current portion of long-term debt	  	$	500	 	 	$	500	
Accounts payable	  	 	804	 	 	 	869	
Income taxes payable	  	 	101	 	 	 	107	
Accrued compensation	  	 	2,100	 	 	 	2,428	
Deferred revenue	  	 	6,276	 	 	 	6,197	
Other current liabilities	  	 	3,767	 	 	 	3,757	

Total current liabilities	  	 	13,548	 	 	 	13,858	
			
Long-term debt	  	 	6,371	 	 	 	6,393	
Income taxes payable	  	 	659	 	 	 	749	
Deferred revenue	  	 	2,568	 	 	 	2,663	
Other long-term liabilities	  	 	682	 	 	 	669	

Total liabilities	  	 	23,828	 	 	 	24,332	

Minority interest	  	 	24	 	 	 	49	
Shareholders’ equity:	  				 			
Preferred stock, no par value: 5 shares authorized; none issued and outstanding	  	 	—  	 	 	 	—  	
Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 5,864 and 5,893 shares issued and outstanding at October 25, 2008 and July 26, 2008, respectively	  	 	33,791	 	 	 	33,505	
Retained earnings	  	 	1,580	 	 	 	120	
Accumulated other comprehensive income (loss)	  	 	(336	)	 	 	728	

Total shareholders’ equity	  	 	35,035	 	 	 	34,353	

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	  	$	58,887	 	 	$	58,734	
	  	 	 	 	 	 	 	
See Notes to Consolidated Financial Statements.
 
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 CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited)

 	  	Three Months Ended	
 	  	October 25,
2008	 	 	October 27,
2007	
NET SALES:	  				 			
Product	  	$	8,635	 	 	$	8,015	
Service	  	 	1,696	 	 	 	1,539	
	  	 	 	 	 	 	 	
Total net sales	  	 	10,331	 	 	 	9,554	
	  	 	 	 	 	 	 	
COST OF SALES:	  				 			
Product	  	 	2,981	 	 	 	2,830	
Service	  	 	669	 	 	 	584	
	  	 	 	 	 	 	 	
Total cost of sales	  	 	3,650	 	 	 	3,414	
	  	 	 	 	 	 	 	
GROSS MARGIN	  	 	6,681	 	 	 	6,140	
			
OPERATING EXPENSES:	  				 			
Research and development	  	 	1,406	 	 	 	1,232	
Sales and marketing	  	 	2,283	 	 	 	2,078	
General and administrative	  	 	395	 	 	 	342	
Amortization of purchased intangible assets	  	 	112	 	 	 	117	
In-process research and development	  	 	3	 	 	 	3	
	  	 	 	 	 	 	 	
Total operating expenses	  	 	4,199	 	 	 	3,772	

OPERATING INCOME	  	 	2,482	 	 	 	2,368	
Interest income, net	  	 	195	 	 	 	223	
Other income (loss), net	  	 	(72	)	 	 	31	
	  	 	 	 	 	 	 	
Interest and other income (loss), net	  	 	123	 	 	 	254	
	  	 	 	 	 	 	 	
INCOME BEFORE PROVISION FOR INCOME TAXES	  	 	2,605	 	 	 	2,622	
Provision for income taxes	  	 	404	 	 	 	417	
	  	 	 	 	 	 	 	
NET INCOME	  	$	2,201	 	 	$	2,205	

Net income per share:	  				 			
Basic	  	$	0.37	 	 	$	0.36	
	  	 	 	 	 	 	 	
Diluted	  	$	0.37	 	 	$	0.35	

Shares used in per-share calculation:	  				 			
Basic	  	 	5,881	 	 	 	6,087	
	  	 	 	 	 	 	 	
Diluted	  	 	5,972	 	 	 	6,330	
	  	 	 	 	 	 	 	
See Notes to Consolidated Financial Statements.
 
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Table of Contents
 CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Cash flows from operating activities:	  				 				
Net income	  	$	2,201	 	 	$	2,205	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Depreciation and amortization	  	 	393	 	 	 	421	 	
Employee share-based compensation expense	  	 	282	 	 	 	226	 	
Share-based compensation expense related to acquisitions and investments	  	 	22	 	 	 	24	 	
Provision for doubtful accounts	  	 	17	 	 	 	18	 	
Deferred income taxes	  	 	26	 	 	 	(491	)	
Excess tax benefits from share-based compensation	  	 	(17	)	 	 	(252	)	
In-process research and development	  	 	3	 	 	 	3	 	
Net losses (gains) on investments	  	 	70	 	 	 	(54	)	
Change in operating assets and liabilities, net of effects of acquisitions:	  				 				
Accounts receivable	  	 	453	 	 	 	554	 	
Inventories	  	 	8	 	 	 	7	 	
Lease receivables, net	  	 	(65	)	 	 	(127	)	
Accounts payable	  	 	(35	)	 	 	32	 	
Income taxes payable and receivable	  	 	(83	)	 	 	394	 	
Accrued compensation	  	 	(197	)	 	 	(99	)	
Deferred revenue	  	 	(2	)	 	 	70	 	
Other assets	  	 	(405	)	 	 	81	 	
Other liabilities	  	 	47	 	 	 	77	 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	2,718	 	 	 	3,089	 	

Cash flows from investing activities:	  				 				
Purchases of investments	  	 	(12,461	)	 	 	(4,360	)	
Proceeds from sales of investments	  	 	6,833	 	 	 	2,917	 	
Proceeds from maturities of investments	  	 	3,509	 	 	 	609	 	
Acquisition of property and equipment	  	 	(361	)	 	 	(296	)	
Acquisition of businesses, net of cash and cash equivalents acquired	  	 	(288	)	 	 	(45	)	
Change in investments in privately held companies	  	 	(11	)	 	 	(20	)	
Other	  	 	(60	)	 	 	(65	)	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(2,839	)	 	 	(1,260	)	

Cash flows from financing activities:	  				 				
Issuance of common stock	  	 	224	 	 	 	1,539	 	
Repurchase of common stock	  	 	(1,002	)	 	 	(2,993	)	
Excess tax benefits from share-based compensation	  	 	17	 	 	 	252	 	
Other	  	 	(112	)	 	 	58	 	
	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(873	)	 	 	(1,144	)	
	  	 	 	 	 	 	 	 	
Net (decrease) increase in cash and cash equivalents	  	 	(994	)	 	 	685	 	
Cash and cash equivalents, beginning of period	  	 	5,191	 	 	 	3,728	 	

Cash and cash equivalents, end of period	  	$	4,197	 	 	$	4,413	 	
	  	 	 	 	 	 	 	 	
See Notes to Consolidated Financial Statements.
 
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 CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(Unaudited)

Three Months Ended October 27, 2007	  	Shares
of
Common
Stock	 	 	Common Stock
and Additional
Paid-In
Capital	 	 	Retained
Earnings	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Total
Shareholders’
Equity	 	
BALANCE AT JULY 28, 2007	  	6,100	 	 	$	30,687	 	 	$	231	 	 	$	562	 	 	$	31,480	 	
Cumulative effect of adopting FIN 48	  	—  	 	 	 	249	 	 	 	202	 	 	 	—  	 	 	 	451	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE AT JULY 29, 2007	  	6,100	 	 	 	30,936	 	 	 	433	 	 	 	562	 	 	 	31,931	 	
Net income	  	—  	 	 	 	—  	 	 	 	2,205	 	 	 	—  	 	 	 	2,205	 	
Change in unrealized gains and losses on investments, net of tax	  	—  	 	 	 	—  	 	 	 	—  	 	 	 	599	 	 	 	599	 	
Cumulative translation adjustment and other	  	—  	 	 	 	—  	 	 	 	—  	 	 	 	80	 	 	 	80	 	
	  			 				 				 				 	 	 	 	
Comprehensive income	  			 				 				 				 	 	2,884	 	
	  			 				 				 				 	 	 	 	
Issuance of common stock	  	78	 	 	 	1,539	 	 	 	—  	 	 	 	—  	 	 	 	1,539	 	
Repurchase of common stock	  	(96	)	 	 	(496	)	 	 	(2,517	)	 	 	—  	 	 	 	(3,013	)	
Tax benefits from employee stock incentive plans	  	—  	 	 	 	279	 	 	 	—  	 	 	 	—  	 	 	 	279	 	
Purchase acquisitions	  	—  	 	 	 	2	 	 	 	—  	 	 	 	—  	 	 	 	2	 	
Employee share-based compensation expense	  	—  	 	 	 	226	 	 	 	—  	 	 	 	—  	 	 	 	226	 	
Share-based compensation expense related to acquisitions and investments	  	—  	 	 	 	24	 	 	 	—  	 	 	 	—  	 	 	 	24	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE AT OCTOBER 27, 2007	  	6,082	 	 	$	32,510	 	 	$	121	 	 	$	1,241	 	 	$	33,872	 	

Three Months Ended October 25, 2008	  	Shares
of
Common
Stock	 	 	Common Stock
and Additional
Paid-In
Capital	 	 	Retained
Earnings	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Total
Shareholders’
Equity	 	
BALANCE AT JULY 26, 2008	  	5,893	 	 	$	33,505	 	 	$	120	 	 	$	728	 	 	$	34,353	 	
Net income	  	—  	 	 	 	—  	 	 	 	2,201	 	 	 	—  	 	 	 	2,201	 	
Change in unrealized gains and losses on investments, net of tax	  	—  	 	 	 	—  	 	 	 	—  	 	 	 	(447	)	 	 	(447	)	
Cumulative translation adjustment and other	  	—  	 	 	 	—  	 	 	 	—  	 	 	 	(617	)	 	 	(617	)	
	  			 				 				 				 	 	 	 	
Comprehensive income	  			 				 				 				 	 	1,137	 	
	  			 				 				 				 	 	 	 	
Issuance of common stock	  	17	 	 	 	224	 	 	 	—  	 	 	 	—  	 	 	 	224	 	
Repurchase of common stock	  	(46	)	 	 	(271	)	 	 	(741	)	 	 	—  	 	 	 	(1,012	)	
Tax benefits from employee stock incentive plans	  	—  	 	 	 	19	 	 	 	—  	 	 	 	—  	 	 	 	19	 	
Purchase acquisitions	  	—  	 	 	 	10	 	 	 	—  	 	 	 	—  	 	 	 	10	 	
Employee share-based compensation expense	  	—  	 	 	 	282	 	 	 	—  	 	 	 	—  	 	 	 	282	 	
Share-based compensation expense related to acquisitions and investments	  	—  	 	 	 	22	 	 	 	—  	 	 	 	—  	 	 	 	22	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE AT OCTOBER 25, 2008	  	5,864	 	 	$	33,791	 	 	$	1,580	 	 	$	(336	)	 	$	35,035	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 25, 2008, the Company’s Board of Directors had authorized an aggregate repurchase of up to $62 billion of common stock under this program. For additional information regarding stock repurchases, see Note 12 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impact on shareholders’ equity are summarized in the table below (in millions):

 	  	Shares
of
Common
Stock	  	Common Stock
and Additional
Paid-In
Capital	  	Retained
Earnings	  	Accumulated
Other
Comprehensive
Income (Loss)	  	Total
Shareholders’
Equity	
Repurchases of common stock	  	2,646	  	$	9,834	  	$	44,745	  	$	—  	  	$	54,579	
See Notes to Consolidated Financial Statements.
 
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 CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.	Basis of Presentation	
The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2009 and 2008 are 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis in the following theaters: 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).
The accompanying financial data as of October 25, 2008 and for the three months ended October 25, 2008 and October 27, 2007 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The July 26, 2008 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 26, 2008.
In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the statement of financial position as of October 25, 2008, and results of operations, cash flows, and shareholders’ equity for the three months ended October 25, 2008 and October 27, 2007, as applicable, have been made. The results of operations for the three months ended October 25, 2008 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
During the first quarter of fiscal 2009, the Company began to allocate certain costs, which had previously been recorded in general and administrative expenses (related to information technology, financing business, and human resources), to sales and marketing, research and development, and cost of sales, as applicable. These changes also resulted in reclassifications to prior period gross margin by theater amounts. In addition, the Company has made certain reclassifications to prior period amounts relating to net sales by theater and net sales for similar groups of products due to refinement of the respective categories. The Company has made certain other reclassifications to prior period amounts in order to conform to the current period’s presentation.
 
2.	Summary of Significant Accounting Policies	
(a) Fair Value Measures
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. In October 2008, the FASB issued FSP 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active, and provides guidance on the key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective July 27, 2008, the Company adopted the measurement and disclosure requirements related to financial assets and financial liabilities. The adoption of SFAS 157 for financial assets and financial liabilities did not have a material impact on the Company’s results of operations or the fair values of its financial assets and liabilities.
FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,” (“FSP 157-2”) delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of fiscal 2010. The Company is currently assessing the impact that the application of SFAS 157 to nonfinancial assets and liabilities will have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). Under SFAS 159, a company may choose, at specified election dates, to measure eligible items at fair value and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Effective July 27, 2008, the Company adopted SFAS 159, but the Company has not elected the fair value option for any eligible financial instruments as of October 25, 2008.
(b) Computation of Net Income per Share
SFAS No. 128, “Earnings per Share,” requires that employee equity share options, unvested shares, and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options and nonvested restricted stock and stock units, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
 
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(c) Recent Accounting Pronouncements
SFAS 141(R) and SFAS 160
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) will significantly change current practices regarding business combinations. Among the more significant changes, SFAS 141(R) expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; requires assets acquired and liabilities assumed from contractual and noncontractual contingencies to be recognized at their acquisition-date fair values with subsequent changes recognized in earnings; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. SFAS 160 will change the accounting and reporting for minority interests, reporting them as equity separate from the parent entity’s equity, as well as requiring expanded disclosures. SFAS 141(R) and SFAS 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact that SFAS 141(R) and SFAS 160 will have on its results of operations and financial position.
SFAS 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”) , which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently assessing the impact that the adoption of SFAS 161 will have on its financial statement disclosures.
 
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3.	Business Combinations	
(a) Purchase Acquisitions
A summary of the purchase acquisitions for the three months ended October 25, 2008 is as follows (in millions):

 	  	Purchase
Consideration	  	In-Process
R&D Expense	  	Purchased
Intangible
Assets	  	Goodwill	
Pure Networks, Inc.	  	$	105	  	$	—  	  	$	30	  	$	79	
PostPath, Inc.	  	 	197	  	 	3	  	 	52	  	 	152	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	302	  	$	3	  	$	82	  	$	231	

 	•	 	The Company acquired Pure Networks, Inc. to provide solutions designed to allow end users to easily set up and manage a home network and connect a range of devices, applications and services.	
 
 	•	 	The Company acquired PostPath, Inc. to enhance the existing email and calendaring capabilities of Cisco’s WebEx Connect collaboration platform.	
Under the terms of the definitive agreements related to the Company’s purchase acquisitions completed during the three months ended October 25, 2008, the purchase consideration consisted of cash and fully vested stock options assumed. The purchase consideration for the Company’s purchase acquisitions is also allocated to tangible assets acquired and liabilities assumed.
The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three months ended October 25, 2008 have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to the Company’s financial results.
(b) Compensation Expense Related to Acquisitions and Investments
The following table presents the compensation expense related to acquisitions and investments (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Share-based compensation expense	  	$	22	  	$	24	
Cash compensation expense	  	 	122	  	 	15	
	  	 	 	  	 	 	
Total	  	$	144	  	$	39	
	  	 	 	  	 	 	
Share-Based Compensation Expense
As of October 25, 2008, the remaining balance of share-based compensation related to acquisitions and investments to be recognized over the vesting periods was approximately $235 million.
Cash Compensation Expense
In connection with the Company’s purchase acquisitions, asset purchases, and acquisitions of variable interest entities, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones, or the continued employment with the Company of certain employees of the acquired entities. In each case, any additional amounts paid will be recorded as compensation expense. As of October 25, 2008, the Company may be required to recognize future compensation expense pursuant to these agreements of up to $454 million, which includes the remaining potential amount of additional compensation expense related to Nuova Systems, Inc., as discussed below.
Nuova Systems, Inc.
During fiscal 2008, the Company purchased the remaining interests in Nuova Systems, Inc. (“Nuova Systems”) not previously held by the Company, representing approximately 20% of Nuova Systems. Under the terms of the merger agreement, the former minority interest holders of Nuova Systems are eligible to receive up to three milestone payments based on agreed-upon formulas. During the first quarter of fiscal 2009, the Company recorded $19 million of compensation expense, and through October 25, 2008, the Company has recorded aggregate compensation expense of $296 million related to the fair value of amounts that are expected to be earned by the minority interest holders pursuant to a vesting schedule. Actual amounts payable to the former minority interest holders of Nuova Systems will depend upon achievement under the agreed-upon formulas.
 
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Subsequent changes to the fair value of the amounts probable of being earned and the continued vesting will result in adjustments to the recorded compensation expense. The potential amount that could be recorded as compensation expense may be up to a maximum of $678 million, including the $296 million that has been expensed as of October 25, 2008. The compensation is expected to be paid during fiscal 2010 through fiscal 2012.
 
4.	Goodwill and Purchased Intangible Assets	
(a) Goodwill
The following table presents the changes in goodwill allocated to the Company’s reportable segments during the three months ended October 25, 2008 (in millions):

 	  	Balance at
July 26,
2008	  	Acquisitions	  	Other	 	 	Balance at
October 25,
2008	
United States and Canada	  	$	9,059	  	$	179	  	$	  —  	 	 	$	9,238	
European Markets	  	 	1,650	  	 	28	  	 	(65	)	 	 	1,613	
Emerging Markets	  	 	405	  	 	11	  	 	(4	)	 	 	412	
Asia Pacific	  	 	479	  	 	12	  	 	—  	 	 	 	491	
Japan	  	 	799	  	 	1	  	 	—  	 	 	 	800	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
Total	  	$	12,392	  	$	231	  	$	(69	)	 	$	12,554	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
In the table above, “Other” primarily includes foreign currency translation and purchase accounting adjustments.
(b) Purchased Intangible Assets
The following table presents details of the purchased intangible assets acquired through business combinations during the three months ended October 25, 2008 (in millions, except years):

 	  	TECHNOLOGY	  	CUSTOMER
RELATIONSHIPS	  	TOTAL	
 	  	Weighted-
Average
Useful Life
(in Years)	  	Amount	  	Weighted-
Average
Useful Life
(in Years)	  	Amount	  	Amount	
Pure Networks, Inc.	  	4.0	  	$	27	  	3.0	  	$	3	  	$	30	
PostPath, Inc.	  	6.0	  	 	52	  	—  	  	 	—  	  	 	52	
	  		  	 	 	  		  	 	 	  	 	 	
Total	  		  	$	79	  		  	$	3	  	$	82	
	  		  	 	 	  		  	 	 	  	 	 	
The following tables present details of the Company’s purchased intangible assets (in millions):

October 25, 2008	  	Gross	  	Accumulated
Amortization	 	 	Net	
Technology (1)	  	$	1,864	  	$	(1,002	)	 	$	862	
Customer relationships	  	 	1,824	  	 	(758	)	 	 	1,066	
Other	  	 	247	  	 	(199	)	 	 	48	
	  	 	 	  	 	 	 	 	 	 	
Total	  	$	3,935	  	$	(1,959	)	 	$	1,976	

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July 26, 2008	  	Gross	  	Accumulated
Amortization	 	 	Net	
Technology (1)	  	$	1,785	  	$	(905	)	 	$	880	
Customer relationships	  	 	1,821	  	 	(674	)	 	 	1,147	
Other	  	 	247	  	 	(185	)	 	 	62	
	  	 	 	  	 	 	 	 	 	 	
Total	  	$	3,853	  	$	(1,764	)	 	$	2,089	

(1)	The technology category includes technology intangible assets acquired through business combinations as well as technology licenses.	
The following table presents the amortization of purchased intangible assets (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Amortization of purchased intangible assets	  			  			
Cost of sales	  	$	59	  	$	61	
Operating expenses	  	 	112	  	 	117	
	  	 	 	  	 	 	
Total	  	$	171	  	$	178	
	  	 	 	  	 	 	
The estimated future amortization expense of purchased intangible assets as of October 25, 2008 is as follows (in millions):

Fiscal Year	  	Amount	
2009 (remaining nine months)	  	$	461	
2010	  	 	532	
2011	  	 	442	
2012	  	 	306	
2013	  	 	220	
Thereafter	  	 	15	
	  	 	 	
Total	  	$	1,976	

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5.	Balance Sheet Details	
The following tables provide details of selected balance sheet items (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	
Inventories:	  				 				
Raw materials	  	$	144	 	 	$	111	 	
Work in process	  	 	65	 	 	 	53	 	
Finished goods:	  				 				
Distributor inventory and deferred cost of sales	  	 	445	 	 	 	452	 	
Manufactured finished goods	  	 	331	 	 	 	381	 	

Total finished goods	  	 	776	 	 	 	833	 	

Service-related spares	  	 	179	 	 	 	191	 	
Demonstration systems	  	 	45	 	 	 	47	 	

Total	  	$	1,209	 	 	$	1,235	 	
	  	 	 	 	 	 	 	 	
Property and equipment, net:	  				 				
Land, buildings, and leasehold improvements	  	$	4,438	 	 	$	4,445	 	
Computer equipment and related software	  	 	1,775	 	 	 	1,770	 	
Production, engineering, and other equipment	  	 	4,884	 	 	 	4,839	 	
Operating lease assets	  	 	205	 	 	 	209	 	
Furniture and fixtures	  	 	446	 	 	 	439	 	
	  	 	 	 	 	 	 	 	
	  	 	11,748	 	 	 	11,702	 	
			
Less accumulated depreciation and amortization	  	 	(7,567	)	 	 	(7,551	)	

Total	  	$	4,181	 	 	$	4,151	 	

Other assets:	  				 				
Deferred tax assets	  	$	1,886	 	 	$	1,770	 	
Investments in privately held companies	  	 	703	 	 	 	706	 	
Lease receivables, net	  	 	842	 	 	 	862	 	
Financed service contracts	  	 	612	 	 	 	588	 	
Other	  	 	471	 	 	 	477	 	

Total	  	$	4,514	 	 	$	4,403	 	
	  	 	 	 	 	 	 	 	
Deferred revenue:	  				 				
Service	  	$	5,955	 	 	$	6,133	 	
Product:	  				 				
Unrecognized revenue on product shipments and other deferred revenue	  	 	2,212	 	 	 	2,152	 	
Cash receipts related to unrecognized revenue from two-tier distributors	  	 	677	 	 	 	575	 	

Total product deferred revenue	  	 	2,889	 	 	 	2,727	 	

Total	  	$	8,844	 	 	$	8,860	 	
	  	 	 	 	 	 	 	 	
Reported as:	  				 				
Current	  	$	6,276	 	 	$	6,197	 	
Noncurrent	  	 	2,568	 	 	 	2,663	 	

Total	  	$	8,844	 	 	$	8,860	 	

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6.	Financing Receivables and Guarantees	
(a) Lease Receivables
Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products. These lease arrangements typically have terms from two to three years and are generally collateralized by a security interest in the underlying assets. The net lease receivables are summarized as follows (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	
Gross lease receivables	  	$	1,700	 	 	$	1,730	 	
Unearned income	  	 	(171	)	 	 	(178	)	
Allowances	  	 	(148	)	 	 	(136	)	
	  	 	 	 	 	 	 	 	
Lease receivables, net	  	$	1,381	 	 	$	1,416	 	

Reported as:	  				 				
Current	  	$	539	 	 	$	554	 	
Noncurrent	  	 	842	 	 	 	862	 	
	  	 	 	 	 	 	 	 	
Lease receivables, net	  	$	1,381	 	 	$	1,416	 	
	  	 	 	 	 	 	 	 	
Contractual maturities of the gross lease receivables at October 25, 2008 were $523 million in the remaining nine months of fiscal 2009, $539 million in fiscal 2010, $363 million in fiscal 2011, $187 million in fiscal 2012, and $88 million in fiscal 2013 and thereafter. Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.
(b) Financed Service Contracts
Financed service contracts are summarized as follows (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	
Gross financed service contracts	  	$	1,393	 	 	$	1,328	 	
Allowances	  	 	(15	)	 	 	(10	)	
	  	 	 	 	 	 	 	 	
Financed service contracts, net	  	$	1,378	 	 	$	1,318	 	

Reported as:	  				 				
Current	  	$	766	 	 	$	730	 	
Noncurrent	  	 	612	 	 	 	588	 	
	  	 	 	 	 	 	 	 	
Financed service contracts, net	  	$	1,378	 	 	$	1,318	 	
	  	 	 	 	 	 	 	 	
The revenue related to financed service contracts, which primarily relates to technical support services, is deferred and included in deferred service revenue. The revenue is recognized ratably over the period during which the related services are to be performed, which is typically from one to three years.
 
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(c) Loan Receivables
Loan receivables are summarized as follows (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	
Gross loan receivables	  	$	575	 	 	$	607	 	
Allowances	  	 	(91	)	 	 	(128	)	
	  	 	 	 	 	 	 	 	
Loan receivables, net	  	$	484	 	 	$	479	 	

Reported as:	  				 				
Current	  	$	270	 	 	$	263	 	
Noncurrent	  	 	214	 	 	 	216	 	
	  	 	 	 	 	 	 	 	
Loan receivables, net	  	$	484	 	 	$	479	 	
	  	 	 	 	 	 	 	 	
A portion of the revenue related to loan receivables is deferred and included in deferred product revenue based on revenue recognition criteria.
(d) Financing Guarantees
The Company provides financing guarantees, which are generally for various third-party financing arrangements extended to channel partners and other customers. The Company could be called upon to make payments under these guarantees in the event of nonpayment to the third party. As of October 25, 2008 and July 26, 2008, the total maximum potential future payments related to these guarantees were approximately $875 million and $830 million, respectively, of which approximately $620 million and $610 million, respectively, were recorded as deferred revenue on the Consolidated Balance Sheets in accordance with revenue recognition policies and FIN 45.
 
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7.	Investments	
The following tables summarize the Company’s investments (in millions):

October 25, 2008	  	Amortized
Cost	  	Gross
Unrealized
Gains	  	Gross
Unrealized
Losses	 	 	Fair Value	
Fixed income securities:	  			  			  				 			
Government securities	  	$	7,443	  	$	42	  	$	(2	)	 	$	7,483	
Government agency securities	  	 	9,358	  	 	29	  	 	(10	)	 	 	9,377	
Corporate debt securities	  	 	4,549	  	 	17	  	 	(195	)	 	 	4,371	
Asset-backed securities	  	 	647	  	 	—  	  	 	(29	)	 	 	618	

Total fixed income securities	  	 	21,997	  	 	88	  	 	(236	)	 	 	21,849	
Publicly traded equity securities	  	 	841	  	 	84	  	 	(208	)	 	 	717	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
Total	  	$	22,838	  	$	172	  	$	(444	)	 	$	22,566	

														
July 26, 2008	  	Amortized
Cost	  	Gross
Unrealized
Gains	  	Gross
Unrealized
Losses	 	 	Fair Value	
Fixed income securities:	  			  			  				 			
Government securities	  	$	7,249	  	$	50	  	$	(33	)	 	$	7,266	
Government agency securities	  	 	5,815	  	 	34	  	 	(10	)	 	 	5,839	
Corporate debt securities	  	 	5,814	  	 	24	  	 	(96	)	 	 	5,742	
Asset-backed securities	  	 	1,035	  	 	5	  	 	(18	)	 	 	1,022	

Total fixed income securities	  	 	19,913	  	 	113	  	 	(157	)	 	 	19,869	
Publicly traded equity securities	  	 	860	  	 	391	  	 	(76	)	 	 	1,175	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
Total	  	$	20,773	  	$	504	  	$	(233	)	 	$	21,044	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
During the three months ended October 25, 2008, the Company realized net losses of $152 million on fixed income securities and realized net gains of $91 million on publicly traded equity securities. Included in the realized net losses and gains were $183 million and $17 million of impairment losses on fixed income and publicly traded equity securities, respectively. The impairment charges were due to a decline in the fair value of the investments below their cost basis that were judged to be other-than-temporary and were recorded as a reduction to the amortized cost of the respective investments. There were no impairments of fixed income or publicly traded equity securities during the three months ended October 27, 2007.
The following table summarizes the maturities of the Company’s fixed income securities at October 25, 2008 (in millions):

 	  	Amortized
Cost	  	Fair
Value	
Less than 1 year	  	$	12,426	  	$	12,411	
Due in 1 to 2 years	  	 	3,944	  	 	3,941	
Due in 2 to 5 years	  	 	4,878	  	 	4,819	
Due after 5 years	  	 	749	  	 	678	
	  	 	 	  	 	 	
Total	  	$	21,997	  	$	21,849	
	  	 	 	  	 	 	
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
 
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8.	Fair Value Measures	
SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
(a) Fair Value Hierarchy
SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS 157 establishes three levels of inputs that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
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(b) Asset and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of October 25, 2008 were as follows:

 	  	Fair Value Measurements Using	
October 25, 2008	  	Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)	  	Significant Other
Observable
Inputs
(Level 2)	  	Significant
Unobservable
Inputs
(Level 3)	  	Total Balance	
Assets:	  			  			  			  			
Money market funds	  	$	2,114	  	$	—  	  	$	—  	  	$	2,114	
Government securities	  	 	—  	  	 	7,872	  	 	—  	  	 	7,872	
Government agency securities	  	 	—  	  	 	9,453	  	 	—  	  	 	9,453	
Corporate debt securities	  	 	—  	  	 	5,188	  	 	—  	  	 	5,188	
Asset-backed securities	  	 	—  	  	 	—  	  	 	618	  	 	618	
Publicly traded equity securities	  	 	717	  	 	—  	  	 	—  	  	 	717	
Derivative assets	  	 	—  	  	 	42	  	 	—  	  	 	42	

Total assets measured at fair value	  	$	2,831	  	$	22,555	  	$	618	  	$	26,004	

Liabilities:	  			  			  			  			
Derivative liabilities	  	$	—  	  	$	79	  	$	—  	  	$	79	

Total liabilities measured at fair value	  	$	—  	  	$	79	  	$	—  	  	$	79	
	  	 	 	  	 	 	  	 	 	  	 	 	
Fixed income securities classified as Level 2 assets consist of securities priced using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques. The Company’s derivative instruments are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs. Level 3 assets include asset-backed securities whose values are determined based on discounted cash flow models using inputs that the Company could not corroborate with market quotes. A change in the observability of significant inputs for the valuation of asset-backed securities caused these assets to be classified as Level 3 assets as of October 25, 2008.
Assets and liabilities measured at fair value on a recurring basis were presented on the Company’s consolidated balance sheet as of October 25, 2008 as follows:

 	  	Fair Value Measurements Using	
October 25, 2008	  	Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)	  	Significant Other
Observable
Inputs
(Level 2)	  	Significant
Unobservable
Inputs
(Level 3)	  	Total Balance	
Cash equivalents	  	$	2,114	  	$	1,282	  	$	—  	  	$	3,396	
Investments	  	 	717	  	 	21,231	  	 	618	  	 	22,566	
Prepaid expenses and other current assets	  	 	—  	  	 	42	  	 	—  	  	 	42	

Total assets measured at fair value	  	$	2,831	  	$	22,555	  	$	618	  	$	26,004	

Other current liabilities	  	$	—  	  	$	79	  	$	—  	  	$	79	

Total liabilities measured at fair value	  	$	—  	  	$	79	  	$	—  	  	$	79	

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(c) Assets Measured at Fair Value on a Nonrecurring Basis
The following table presents the Company’s private investments that were measured at fair value on a nonrecurring basis as of October 25, 2008 and the losses recorded during the three months ended October 25, 2008 on those assets (in millions):

 	  	Balance as of
October 25,
2008	  	Fair Value Measured Using	  	 	 	
	  		  	Quoted Prices
In Active
Markets for
Identical
Instruments
(Level 1)	  	Significant
Other
Observable
Inputs
(Level 2)	  	Significant
Unobservable
Inputs
(Level 3)	  	(Losses) for the
Three Months
Ended
October 25, 2008	 	
Private Investments	  	$	13	  	$	—  	  	$	—  	  	$	13	  	$	(23	)	
These private investments, all still held as of October 25, 2008, were measured at fair value during the first quarter of fiscal 2009 due to events or circumstances the Company identified that significantly impacted the fair value of these investments, resulting in an impairment charge of $23 million which was included in earnings for the period. The Company measured fair value using financial metrics, comparison to other private and public companies, analysis of the financial condition and near-term prospects of the investees, including recent financing activities and their capital structure as well as other economic variables. These investments were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Company’s assumptions about the assumptions market participants would use in pricing these investments due to the absence of quoted market prices and inherent lack of liquidity.
 
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9.	Borrowings	
(a) Long-Term Debt
In February 2006, the Company issued $500 million of senior floating interest rate notes based on the London Interbank Offered Rate (“LIBOR”) due 2009 (the “2009 Notes”), $3.0 billion of 5.25% senior notes due 2011 (the “2011 Notes”), and $3.0 billion of 5.50% senior notes due 2016 (the “2016 Notes”), for an aggregate principal amount of $6.5 billion. The following table summarizes the Company’s long-term debt (in millions, except percentages):

 	  	October 25, 2008	 	 	July 26, 2008	 	
 	  	Amount	 	 	Effective
Rate	 	 	Amount	 	 	Effective
Rate	 	
Senior notes:	  				 			 				 			
Floating-rate notes, due 2009	  	$	500	 	 	2.89	%	 	$	500	 	 	2.74	%	
5.25% fixed-rate notes, due 2011	  	 	3,000	 	 	3.12	%	 	 	3,000	 	 	3.12	%	
5.50% fixed-rate notes, due 2016	  	 	3,000	 	 	4.34	%	 	 	3,000	 	 	4.34	%	

Total senior notes	  	 	6,500	 	 			 	 	6,500	 	 			
					
Other notes	  	 	3	 	 			 	 	4	 	 			
Unaccreted discount	  	 	(14	)	 			 	 	(15	)	 			
Hedge accounting adjustment of the carrying amount of the fixed-rate debt	  	 	382	 	 			 	 	404	 	 			

Total	  	$	6,871	 	 			 	$	6,893	 	 			

Reported as:	  				 			 				 			
Current portion of long-term debt	  	$	500	 	 			 	$	500	 	 			
Long-term debt	  	 	6,371	 	 			 	 	6,393	 	 			

Total	  	$	6,871	 	 			 	$	6,893	 	 			
	  	 	 	 	 			 	 	 	 	 			
During the third quarter of fiscal 2008, the Company terminated the interest rate swaps entered into in connection with the 2011 Notes and the 2016 Notes and received proceeds of $432 million, net of accrued interest, which was recorded as a hedge accounting adjustment of the carrying amount of the fixed-rate debt and is being amortized as a reduction to interest expense over the remaining terms of the fixed-rate notes. The effective rates for the fixed-rate debt include the interest on the notes, the amortization of the hedge accounting adjustment and the accretion of the discount.
The 2011 Notes and the 2016 Notes are redeemable by the Company at any time, subject to a make-whole premium. Based on market prices, the fair value of the Company’s long-term debt, including the current portion of long-term debt was $6.3 billion as of October 25, 2008. The Company was in compliance with all debt covenants as of October 25, 2008.
Interest is payable quarterly on the 2009 Notes and semi-annually on the 2011 Notes and 2016 Notes. Interest expense and cash paid for interest are summarized as follows (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Interest expense	  	$	64	  	$	96	
Cash paid for interest	  	$	165	  	$	178	
(b) Credit Facility
In August 2007, the Company entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on August 17, 2012. Due to the bankruptcy of one of the lenders during the first quarter of fiscal 2009, the Company believes the amount available under the credit facility as of October 25, 2008 may be effectively reduced to $2.9 billion.
 
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Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50% or Bank of America’s “prime rate” as announced from time to time, or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. The credit agreement requires that the Company maintain an interest coverage ratio as defined in the agreement.
As of October 25, 2008, the Company was in compliance with the required interest coverage ratio and the Company had not borrowed any funds under the credit facility. The Company may also, upon the agreement of either the then existing lenders or of additional lenders not currently parties to the agreement, increase the commitments under the credit facility up to a total of $5.0 billion and/or extend the expiration date of the credit facility up to August 15, 2014.
 
10.	Derivative Instruments	
The Company uses derivative instruments primarily to manage exposures to foreign currency, interest rate, and equity security price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency, interest rates, and equity security prices. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
(a) Foreign Currency Derivatives
The Company’s foreign exchange forward and option contracts are summarized as follows (in millions):

 	  	October 25, 2008	 	 	July 26, 2008	 	
 	  	Notional
Amount	  	Fair
Value	 	 	Notional
Amount	  	Fair
Value	 	
Forward contracts:	  			  				 			  				
Purchased	  	$	    1,732	  	$	(38	)	 	$	1,803	  	$	5	 	
Sold	  	$	880	  	$	80	 	 	$	902	  	$	2	 	
Option contracts:	  			  				 			  				
Purchased	  	$	1,902	  	$	12	 	 	$	1,440	  	$	50	 	
Sold	  	$	1,760	  	$	(87	)	 	$	1,256	  	$	(6	)	
The Company conducts business globally in numerous currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into foreign exchange forward or option contracts for trading purposes.
The Company enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. Gains and losses on the contracts are included in other income (loss), net, and offset foreign exchange gains and losses from the revaluation of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity. The Company’s foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original maturity. Additionally, the Company has entered into foreign exchange forward contracts with maturities of up to two years related to long-term customer financings. The foreign exchange forward contracts related to investments generally have maturities of less than two years. The Company also hedges certain net investments in its foreign subsidiaries with forward contracts which generally have maturities of less than six months.
The Company hedges certain foreign currency forecasted transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency option and forward contracts generally have maturities of less than 18 months and these transactions are designated as cash flow hedges. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. During the three months ended October 25, 2008, and October 27, 2007, there were no significant gains or losses recognized in earnings for hedge ineffectiveness. The Company did not discontinue any hedges during any of the periods presented because it was probable that the original forecasted transaction would not occur.
 
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(b) Interest Rate Derivatives
The Company’s interest rate derivatives are summarized as follows (in millions):

 	  	October 25, 2008	 	 	July 26, 2008	 	
 	  	Notional
Amount	  	Fair
Value	 	 	Notional
Amount	  	Fair
Value	 	
Interest rate swaps — investments	  	$	500	  	$	(4	)	 	$	1,000	  	$	(4	)	
The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of October 25, 2008, the Company was a party to $500 million of interest rate swaps designated as fair value hedges of its investment portfolio.
During the three months ended October 25, 2008, the Company received proceeds for $500 million of the underlying hedged investments and terminated the related interest rate swaps designated as fair value hedges. Under these interest rate swap contracts, the Company made fixed-rate interest payments and receives interest payments based on LIBOR. The effect of these swaps was to convert fixed-rate returns to floating-rate returns based on LIBOR for a portion of the Company’s fixed income portfolio. The gains and losses related to changes in the value of the interest rate swaps were included in other income (loss), net, and offset the changes in fair value of the underlying hedged investment. In November 2008, the Company received proceeds for the remaining $500 million of underlying hedged investments and the related interest rate swaps designated as fair value hedges were terminated.
(c) Equity Derivatives
The Company’s equity derivatives are summarized as follows (in millions):

 	  	October 25, 2008	  	July 26, 2008	
 	  	Notional
Amount	  	Fair
Value	  	Notional
Amount	  	Fair
Value	
Forward sale agreements	  	$	—  	  	$	  —  	  	$	157	  	$	32	
The Company maintains a portfolio of publicly traded equity securities which are subject to price risk. The Company may hold equity securities for strategic purposes or to diversify the Company’s overall investment portfolio. To manage its exposure to changes in the fair value of certain equity securities, the Company may enter into equity derivatives, including forward sale and option agreements. During the three months ended October 25, 2008, the Company terminated its previously existing forward sale agreements on publicly traded equity securities designated as fair value hedges. The gains and losses due to changes in the value of the hedging instruments were included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment.
 
11.	Commitments and Contingencies	
(a) Operating Leases
The Company leases office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, Canada, China, France, Germany, India, Israel, Italy, Japan, and the United Kingdom. Future annual minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of October 25, 2008 are as follows (in millions):

Fiscal Year	  	Amount	
2009 (remaining nine months)	  	$	211	
2010	  	 	220	
2011	  	 	183	
2012	  	 	136	
2013	  	 	122	
Thereafter	  	 	519	
	  	 	 	
Total	  	$	1,391	

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(b) Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or that establish the parameters defining the Company’s requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of the Company’s reported purchase commitments arising from these agreements are firm, noncancelable, and unconditional commitments. As of October 25, 2008 and July 26, 2008, the Company had total purchase commitments for inventory of $2.9 billion and $2.7 billion, respectively.
In addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of October 25, 2008 and July 26, 2008, the liability for these purchase commitments was $186 million and $184 million, respectively, and was included in other current liabilities.
(c) Compensation Expense Related to Acquisitions and Investments
In connection with the Company’s purchase acquisitions, asset purchases, and acquisitions of variable interest entities, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with the Company of certain employees of acquired entities. See Note 3.
(d) Other Commitments
The Company also has certain funding commitments primarily related to its investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were approximately $323 million and $359 million as of October 25, 2008 and July 26, 2008, respectively.
(e) Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers through its wholly owned subsidiaries, which may be considered to be variable interest entities. The Company has evaluated its investments in these privately held companies and customer financings and determined that there were no significant unconsolidated variable interest entities as of October 25, 2008.
(f) Guarantees and Product Warranties
The following table summarizes the activity related to the product warranty liability during the three months ended October 25, 2008 and October 27, 2007 (in millions):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Balance at beginning of period	  	$	399	 	 	$	340	 	
Provision for warranties issued	  	 	101	 	 	 	135	 	
Payments	  	 	(119	)	 	 	(126	)	
	  	 	 	 	 	 	 	 	
Balance at end of period	  	$	381	 	 	$	349	 	
	  	 	 	 	 	 	 	 	
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The products sold are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty.
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.
 
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The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other customers. See Note 6. The Company’s other arrangements as of October 25, 2008 that were subject to recognition and disclosure requirements under FIN 45 were not material.
(g) Legal Proceedings
Brazilian authorities are investigating certain employees of the Company’s Brazilian subsidiary and certain employees of a Brazilian importer of the Company’s products relating to the allegation of evading import taxes and other alleged improper transactions involving the subsidiary and the importer. The Company is conducting a thorough review of the matter. To date, Brazilian authorities have not asserted a claim against the Company. The Company is unable to determine the likelihood of an unfavorable outcome on any potential claims against it or to reasonably estimate a range of loss, if any. In addition, the Company is investigating the allegations regarding improper transactions, the Company has proactively communicated with United States authorities to provide information and report on its findings, and the United States authorities are currently investigating such allegations.
In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
 
12.	Shareholders’ Equity	
(a) Stock Repurchase Program
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 25, 2008, the Company’s Board of Directors had authorized an aggregate repurchase of up to $62 billion of common stock under this program and the remaining authorized repurchase amount was $7.4 billion with no termination date. The stock repurchase activity under the stock repurchase program during the first three months of fiscal 2009 is summarized as follows (in millions, except per-share amounts):

Three Months Ended October 25, 2008	  	Shares
Repurchased	  	Weighted-
Average Price
per Share	  	Amount
Repurchased	
Cumulative balance at July 26, 2008	  	2,600	  	$	20.60	  	$	53,579	
Repurchase of common stock (1)	  	46	  	 	21.95	  	 	1,000	
	  	 	  			  	 	 	
Cumulative balance at October 25, 2008	  	2,646	  	$	20.62	  	$	54,579	

(1)	Includes stock repurchases that were pending settlement as of October 25, 2008.	
The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity. In accordance with Accounting Principles Board Opinion No. 6, “Status of Accounting Research Bulletins,” the Company is required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings until retained earnings are zero and then as an increase to accumulated deficit and (ii) a reduction of common stock and additional paid-in capital. Issuance of common stock and the tax benefit related to employee stock incentive plans are recorded as an increase to common stock and additional paid-in capital.
(b) Other Repurchases of Common Stock
The Company also repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock or stock units.
(c) Preferred Stock
Under the terms of the Company’s Articles of Incorporation, the Board of Directors may determine the rights, preferences, and terms of the Company’s authorized but unissued shares of preferred stock.
 
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(d) Comprehensive Income
The components of comprehensive income are as follows (in millions):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Net income	  	$	2,201	 	 	$	2,205	 	
Other comprehensive income:	  				 				
Change in unrealized gains and losses on investments, net of tax benefit (expense) of $102 and $(234), for the three months ended October 25, 2008 and October 27, 2007, respectively	  	 	(472	)	 	 	720	 	
Cumulative translation adjustment and other	  	 	(617	)	 	 	80	 	

Comprehensive income before minority interest	  	 	1,112	 	 	 	3,005	 	
Change in minority interest	  	 	25	 	 	 	(121	)	

Total	  	$	1,137	 	 	$	2,884	 	
	  	 	 	 	 	 	 	 	
The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as the Company is the primary beneficiary as defined under FIN 46(R). As a result, SOFTBANK’s interest in the change in the unrealized gains and losses on the investments in the venture fund is recorded as a component of accumulated other comprehensive income (loss) and is reflected as a change in minority interest.
 
13.	Employee Benefit Plans	
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes its sub-plan, the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 321.4 million shares of the Company’s stock have been reserved for issuance. Eligible employees may purchase a limited number of shares of the Company’s stock at a discount of up to 15% of the lesser of the market value on the subscription date or the purchase date, which is approximately six months after the subscription date. The Purchase Plan terminates on January 3, 2010. During the three months ended October 25, 2008 and October 27, 2007, the Company did not issue any shares under the Purchase Plan. As of October 25, 2008, 63 million shares were available for issuance under the Purchase Plan.
(b) Employee Stock Incentive Plans
Stock Incentive Plan Program Description
As of October 25, 2008, the Company had five stock incentive plans: the 2005 Stock Incentive Plan (the “2005 Plan”); the 1996 Stock Incentive Plan (the “1996 Plan”); the 1997 Supplemental Stock Incentive Plan (the “Supplemental Plan”); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the “SA Acquisition Plan”); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the “WebEx Acquisition Plan”). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted share-based awards to a significant percentage of its employees, and the majority has been granted to employees below the vice president level. The Company’s primary stock incentive plans are summarized as follows:
2005 Plan
As amended on November 15, 2007, the maximum number of shares issuable under the 2005 Plan over its term is 559 million shares plus the amount of any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. However, any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms will not be considered to become available for reissuance under the 2005 Plan. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, then the shares underlying the awards will again be available under the 2005 Plan. The number of shares available for issuance under the 2005 Plan will be reduced by 2.5 shares for each share awarded as stock grants or stock units.
The 2005 Plan permits the granting of stock options, stock, stock units, and stock appreciation rights to employees (including employee directors and officers) and consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Stock grants and stock units will generally vest with respect to 20% or 25% of the shares covered by the grant on each of the first through fifth or fourth anniversaries of the date of the grant, respectively. The Compensation and Management
 
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Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.
1996 Plan
The 1996 Plan expired on December 31, 2006, and the Company can no longer make equity awards under the 1996 Plan. The maximum number of shares issuable over the term of the 1996 Plan was 2.5 billion shares. Stock options granted under the 1996 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain other grants have utilized a 60-month ratable vesting schedule. In addition, the Board of Directors, or other committees administering the plan, have the discretion to use a different vesting schedule and have done so from time to time.
Supplemental Plan
The Supplemental Plan expired on December 31, 2007, and the Company can no longer make equity awards under the Supplemental Plan. Officers and members of the Company’s Board of Directors were not eligible to participate in the Supplemental Plan. Nine million shares were reserved for issuance under the Supplemental Plan.
Acquisition Plans
In connection with the Company’s acquisitions of Scientific-Atlanta, Inc. (“Scientific-Atlanta”) and WebEx Communications, Inc. (“WebEx”), the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renamings of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.
General Share-Based Award Information
Stock Option Awards
A summary of the stock option activity is as follows (in millions, except per share amounts):

 	  	STOCK OPTIONS OUTSTANDING	
 	  	Number
Outstanding	 	 	Weighted-
Average
Exercise Price
per Share	
BALANCE AT JULY 28, 2007	  	1,289	 	 	$	26.60	
Granted and assumed	  	159	 	 	 	31.12	
Exercised	  	(146	)	 	 	18.50	
Canceled/forfeited/expired	  	(103	)	 	 	30.74	
	  	 	 	 			
BALANCE AT JULY 26, 2008	  	1,199	 	 	 	27.83	
Granted and assumed	  	4	 	 	 	23.04	
Exercised (1)	  	(13	)	 	 	16.82	
Canceled/forfeited/expired	  	(23	)	 	 	36.51	
	  	 	 	 			
BALANCE AT OCTOBER 25, 2008	  	1,167	 	 	$	27.77	

(1)	The total pretax intrinsic value of stock options exercised during the three months ended October 25, 2008 was $104 million.	
 
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The following table summarizes significant ranges of outstanding and exercisable stock options as of October 25, 2008 (in millions, except years and share prices):

 	  	STOCK OPTIONS OUTSTANDING	  	STOCK OPTIONS EXERCISABLE	
Range of Exercise Prices	  	Number
Outstanding	  	Weighted-
Average
Remaining
Contractual
Life
(in Years)	  	Weighted-
Average
Exercise
Price per
Share	  	Aggregate
Intrinsic
Value	  	Number
Exercisable	  	Weighted-
Average
Exercise
Price per
Share	  	Aggregate
Intrinsic
Value	
$  0.01 – 15.00	  	90	  	3.46	  	$	11.15	  	$	464	  	82	  	$	11.25	  	$	412	
  15.01 – 18.00	  	187	  	4.71	  	 	17.29	  	 	16	  	129	  	 	17.06	  	 	16	
  18.01 – 20.00	  	251	  	4.32	  	 	19.22	  	 	—  	  	206	  	 	19.23	  	 	—  	
  20.01 – 25.00	  	222	  	5.73	  	 	22.67	  	 	—  	  	121	  	 	22.59	  	 	—  	
  25.01 – 30.00	  	54	  	7.02	  	 	26.71	  	 	—  	  	17	  	 	26.90	  	 	—  	
  30.01 – 35.00	  	127	  	7.80	  	 	32.16	  	 	—  	  	26	  	 	32.16	  	 	—  	
  35.01 – 50.00	  	14	  	0.80	  	 	42.74	  	 	—  	  	14	  	 	42.74	  	 	—  	
  50.01 – 72.56	  	222	  	0.61	  	 	54.90	  	 	—  	  	222	  	 	54.90	  	 	—  	
	  	 	  		  			  	 	 	  	 	  			  	 	 	
Total	  	1,167	  	4.34	  	$	27.77	  	$	480	  	817	  	$	29.25	  	$	428	
	  	 	  		  			  	 	 	  	 	  			  	 	 	
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $16.31 as of October 24, 2008, which would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of October 25, 2008 was 134 million. As of July 26, 2008, 795 million outstanding stock options were exercisable and the weighted-average exercise price was $29.53.
Restricted Stock and Stock Unit Awards
A summary of the restricted stock and stock unit activity is as follows (in millions, except per share amounts):

 	  	Restricted
Stock/Stock
Units	 	 	Weighted-
Average Price
per Share	
BALANCE AT JULY 28, 2007	  	11	 	 	$	22.52	
Granted and assumed	  	4	 	 	 	27.29	
Vested	  	(4	)	 	 	22.49	
Canceled/forfeited	  	(1	)	 	 	24.24	
	  	 	 	 			
BALANCE AT JULY 26, 2008	  	10	 	 	 	24.27	
Granted and assumed	  	31	 	 	 	22.87	
Vested	  	(1	)	 	 	23.32	
	  	 	 	 			
BALANCE AT OCTOBER 25, 2008	  	40	 	 	$	23.34	
	  	 	 	 			
Certain of the restricted stock units are awarded contingent on the future achievement of financial performance metrics.
 
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Share-Based Awards Available for Grant
A summary of share-based awards available for grant are as follows (in millions):

 	  	Share-
Based
Awards
Available
for Grant	 	
BALANCE AT JULY 28, 2007	  	294	 	
Options granted and assumed	  	(159	)	
Restricted stock, stock units, and other share-based awards granted and assumed	  	(11	)	
Share-based awards canceled/forfeited/expired	  	27	 	
Additional shares reserved	  	211	 	
	  	 	 	
BALANCE AT JULY 26, 2008	  	362	 	
Options granted and assumed	  	(4	)	
Restricted stock, stock units, and other share-based awards granted and assumed	  	(77	)	
Share-based awards canceled/forfeited/expired	  	11	 	
Additional shares reserved	  	1	 	
	  	 	 	
BALANCE AT OCTOBER 25, 2008	  	293	 	
	  	 	 	
As reflected in the table above, for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 plan subsequent to November 15, 2007, an equivalent of 2.5 shares is deducted from the available share-based award balance.
Valuation and Expense Information Under SFAS 123(R)
Share-based compensation expense recognized under SFAS 123(R) consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes employee share-based compensation expense (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Cost of sales—product	  	$	11	  	$	9	
Cost of sales—service	  	 	31	  	 	23	
	  	 	 	  	 	 	
Employee share-based compensation expense in cost of sales	  	 	42	  	 	32	
	  	 	 	  	 	 	
Research and development	  	 	82	  	 	65	
Sales and marketing	  	 	113	  	 	99	
General and administrative	  	 	45	  	 	30	
	  	 	 	  	 	 	
Employee share-based compensation expense in operating expenses	  	 	240	  	 	194	
	  	 	 	  	 	 	
Total employee share-based compensation expense (1)	  	$	282	  	$	226	

(1)	Share-based compensation expense of $22 million and $24 million related to acquisitions and investments for the three months ended October 25, 2008 and October 27, 2007, respectively, is disclosed in Note 3 and is not included in the above table.	
As of October 25, 2008, total compensation cost related to unvested share-based awards, including share-based compensation relating to acquisitions and investments, not yet recognized was $3.7 billion, which is expected to be recognized over approximately 3.4 years on a weighted-average basis. The income tax benefit for employee share-based compensation expense was $77 million and $74 million for the three months ended October 25, 2008 and October 27, 2007, respectively.
Valuation of Employee Stock Options
Upon adoption of SFAS 123(R) at the beginning of fiscal 2006, the Company began estimating the value of employee stock options and employee stock purchase rights on the date of grant using a lattice-binomial option-pricing model. The Company’s employee stock options have vesting provisions and various restrictions including restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity. Lattice-binomial models are more capable of incorporating the features of the Company’s employee stock options than closed-form models such as the Black-Scholes model. The use of a lattice-binomial model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, kurtosis, and skewness.
 
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The number of employee stock options granted, the weighted-average assumptions using the lattice-binomial model, the weighted-average expected life, and weighted-average estimated grant date fair values, of employee stock options granted during the respective periods are summarized as follows:

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Number of options granted (in millions)	  	 	3	 	 	 	131	 	
Weighted-average assumptions:	  				 				
Expected volatility	  	 	34.8	%	 	 	30.6	%	
Risk-free interest rate	  	 	3.0	%	 	 	4.4	%	
Expected dividend	  	 	0.0	%	 	 	0.0	%	
Kurtosis	  	 	4.6	 	 	 	4.6	 	
Skewness	  	 	(0.22	)	 	 	(0.80	)	
			
Weighted-average expected life (in years)	  	 	5.9	 	 	 	6.3	 	
Weighted-average estimated grant date fair value (per option share)	  	$	7.11	 	 	$	9.92	 	
The determination of the fair value of share-based payment awards on the date of grant using the lattice-binomial model is impacted by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. The weighted-average assumptions were determined as follows:
 
 	•	 	For employee stock options, the Company used the implied volatility for two-year traded options on the Company’s stock as the expected volatility assumption required in the lattice-binomial model, consistent with SFAS 123(R) and SAB 107. The selection of the implied volatility approach was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility.	
 
 	•	 	The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options.	
 
 	•	 	The dividend yield assumption is based on the history and expectation of dividend payouts.	
 
 	•	 	The estimated kurtosis and skewness are technical measures of the distribution of stock price returns, which affect expected employee exercise behaviors, and are based on the Company’s stock price return history as well as consideration of various academic analyses.	
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model. The expected life of employee stock options is impacted by all of the underlying assumptions and calibration of the Company’s model. The lattice-binomial model assumes that employees’ exercise behavior is a function of the option’s remaining vested life and the extent to which the option is in-the-money. The lattice-binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations on all past option grants made by the Company.
 
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Accuracy of Fair Value Estimates
The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company’s determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
 
14.	Income Taxes	
The following table provides details of income taxes (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Effective tax rate	  	 	15.5	%	 	 	15.9	%	
Cash paid for income taxes	  	$	460	 	 	$	514	 	
During the three months ended October 25, 2008, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2008. As a result, the effective tax rate for the three months ended October 25, 2008 reflected a $106 million tax benefit related to fiscal 2008 R&D expenses. The effective tax rate for the three months ended October 27, 2007, reflected a net tax benefit of $162 million from the settlement of certain tax matters with the Internal Revenue Service (“IRS”).
The amount of unrecognized tax benefits determined in accordance with Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), increased by $101 million during the first three months of fiscal 2009 to $2.6 billion. The total amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate is $2.2 billion at October 25, 2008. Although timing of the resolution of audits is highly uncertain, the Company does not believe it is reasonably possible that the total amounts of unrecognized tax benefits as of October 25, 2008 will materially change in the next 12 months.
 
15.	Segment Information and Major Customers	
The Company’s operations involve the design, development, manufacturing, marketing, and technical support of networking and other products and services related to the communications and information technology industry. Cisco products include routers, switches, advanced technologies, and other products. These products, primarily integrated by Cisco IOS Software, link geographically dispersed local-area networks (LANs), metropolitan-area networks (MANs) and wide-area networks (WANs).
(a) Net Sales and Gross Margin by Theater
The Company conducts business globally and is primarily managed on a geographic basis. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system. Sales are attributed to a geographic theater based on the ordering location of the customer.
The Company does not allocate research and development, sales and marketing, or general and administrative expenses to its geographic theaters in this internal management system because management does not include the information in its measurement of the performance of the operating segments. In addition, the Company does not allocate amortization of acquisition-related intangible assets, share-based compensation expense, and the effects of purchase accounting adjustments to inventory to the gross margin for each theater because management does not include this information in its measurement of the performance of the operating segments.
 
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Summarized financial information by theater for the three months ended October 25, 2008 and October 27, 2007, based on the Company’s internal management system and as utilized by the Company’s CODM, is as follows (in millions):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007 (3)	 	
Net sales:	  				 				
United States and Canada (1)	  	$	5,549	 	 	$	5,482	 	
European Markets	  	 	2,153	 	 	 	1,911	 	
Emerging Markets	  	 	1,229	 	 	 	872	 	
Asia Pacific	  	 	1,022	 	 	 	982	 	
Japan	  	 	378	 	 	 	307	 	
	  	 	 	 	 	 	 	 	
Total	  	$	10,331	 	 	$	9,554	 	
	  	 	 	 	 	 	 	 	
Gross margin:	  				 				
United States and Canada	  	$	3,670	 	 	$	3,639	 	
European Markets	  	 	1,413	 	 	 	1,242	 	
Emerging Markets	  	 	779	 	 	 	496	 	
Asia Pacific	  	 	654	 	 	 	638	 	
Japan	  	 	261	 	 	 	218	 	
	  	 	 	 	 	 	 	 	
Theater total	  	 	6,777	 	 	 	6,233	 	
Unallocated corporate items (2)	  	 	(96	)	 	 	(93	)	
	  	 	 	 	 	 	 	 	
Total	  	$	6,681	 	 	$	6,140	 	

(1)	Net sales in the United States were $5.2 billion for the three months ended October 25, 2008 and October 27, 2007.	

(2)	The unallocated corporate items primarily include the effects of amortization of acquisition-related intangible assets and share-based compensation expense.	

(3)	Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.	
(b) Net Sales for Groups of Similar Products and Services
The following table presents net sales for groups of similar products and services (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007  (1)	
Net sales:	  			  			
Routers	  	$	1,884	  	$	1,863	
Switches	  	 	3,595	  	 	3,317	
Advanced technologies	  	 	2,714	  	 	2,325	
Other	  	 	442	  	 	510	
	  	 	 	  	 	 	
Product	  	 	8,635	  	 	8,015	
Service	  	 	1,696	  	 	1,539	
	  	 	 	  	 	 	
Total	  	$	10,331	  	$	9,554	

(1)	Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.	
The Company refers to some of its products and technologies as advanced technologies. As of October 25, 2008, the Company had identified the following advanced technologies for particular focus: application networking services, home networking, security, storage area networking, unified communications, video systems, and wireless technology. The Company continues to identify additional advanced technologies for focus and investment in the future, and the Company’s investments in some previously identified advanced technologies may be curtailed or eliminated depending on market developments.
 
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(c) Other Segment Information
The majority of the Company’s assets, excluding cash and cash equivalents and investments, as of October 25, 2008 and July 26, 2008 were attributable to its U.S. operations. The Company’s total cash and cash equivalents and investments held outside of the United States in various foreign subsidiaries was $24.3 billion as of October 25, 2008, and the remaining $2.5 billion was held in the United States. For the three months ended October 25, 2008 and October 27, 2007, no single customer accounted for 10% or more of the Company’s net sales.
Property and equipment information is based on the physical location of the assets. The following table presents property and equipment information for geographic areas (in millions):

 	  	October 25,
2008	  	July 26,
2008	
Property and equipment, net:	  			  			
United States	  	$	3,556	  	$	3,478	
International	  	 	625	  	 	673	
	  	 	 	  	 	 	
Total	  	$	4,181	  	$	4,151	

16.	Net Income per Share	
The following table presents the calculation of basic and diluted net income per share (in millions, except per-share amounts):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Net income	  	$	2,201	  	$	2,205	
	  	 	 	  	 	 	
Weighted-average shares — basic	  	 	5,881	  	 	6,087	
Effect of dilutive potential common shares	  	 	91	  	 	243	
	  	 	 	  	 	 	
Weighted-average shares — diluted	  	 	5,972	  	 	6,330	
	  	 	 	  	 	 	
Net income per share — basic	  	$	0.37	  	$	0.36	
	  	 	 	  	 	 	
Net income per share — diluted	  	$	0.37	  	$	0.35	

Antidilutive employee share-based awards	  	 	620	  	 	354	
 
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 Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
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.	
 
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 	•	 	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.
 
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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
 
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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.
Warranty Costs
The liability for product warranties, included in other current liabilities, was $381 million as of October 25, 2008, compared with $399 million as of July 26, 2008. See Note 11 to the Consolidated Financial Statements. Our products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products we provide a limited lifetime warranty. We accrue for warranty costs as part of our cost of sales based on associated material costs, technical support labor costs, and associated overhead. Material cost is estimated based primarily upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost is estimated based primarily upon historical trends in the rate of customer cases and the cost to support the customer cases within the warranty period. Overhead cost is applied based on estimated time to support warranty activities.
 
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The provision for product warranties issued during the first quarter of fiscal 2009 and 2008 was $101 million and $135 million, respectively. If we experience an increase in warranty claims compared with our historical experience, or if the cost of servicing warranty claims is greater than expected, our gross margin could be adversely affected.
Share-Based Compensation Expense
Share-based compensation expense recognized under SFAS 123(R) was as follows (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Employee share-based compensation expense	  	$	282	  	$	226	
Share-based compensation expense related to acquisitions and investments	  	 	22	  	 	24	
	  	 	 	  	 	 	
Total	  	$	304	  	$	250	
	  	 	 	  	 	 	
The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The use of a lattice-binomial model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, kurtosis, and skewness.
Because share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for forfeitures. If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.
Investment Impairments
Our fixed income and publicly traded equity securities, collectively, are reflected in the Consolidated Balance Sheets at a fair value of $22.6 billion as of October 25, 2008, compared with $21.0 billion as of July 26, 2008. See Note 7 to the Consolidated Financial Statements. We recognize an impairment charge when the declines in the fair values of our fixed income or publicly traded equity securities fall below their cost basis and the declines are judged to be other-than-temporary. The ultimate value realized on these securities, to the extent unhedged, is subject to market price volatility until they are sold. We consider various factors in determining whether we should recognize an impairment charge, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our ongoing consideration of these factors could result in additional impairment charges in the future, which could adversely affect our net income. The total impairment charges on investments in fixed income securities and publicly traded equity securities during the first quarter of fiscal 2009 were $200 million. There were no impairments of fixed income or publicly traded equity securities during the first quarter of fiscal 2008.
We also have investments in privately held companies, some of which are in the startup or development stages. As of October 25, 2008, our investments in privately held companies were $703 million, compared with $706 million as of July 26, 2008, and were included in other assets. See Note 5 to the Consolidated Financial Statements. We monitor these investments for impairment and make appropriate reductions in carrying values if we determine that an impairment charge is required, based primarily on the financial condition and near-term prospects of these companies. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Our impairment charges on investments in privately held companies were $23 million and $3 million during the first quarters of fiscal 2009 and 2008, respectively.
Goodwill Impairments
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for each reporting unit. The goodwill recorded in the Consolidated Balance Sheets as of October 25, 2008 and July 26, 2008 was $12.6 billion and $12.4 billion, respectively. In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. There was no impairment of goodwill in the first quarter of fiscal 2009 and 2008.
 
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Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rates differ from the statutory rate primarily due to the tax impact of state taxes, foreign operations, R&D tax credits, tax audit settlements, nondeductible compensation, and international realignments. Our effective tax rate was 15.5% and 15.9% in the first quarter of fiscal 2009 and fiscal 2008, respectively.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax credit laws; by transfer pricing adjustments including the post-acquisition integration of purchased intangible assets from certain acquisitions into our intercompany R&D cost sharing arrangement; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; or by changes in tax laws, regulations, or accounting principles, including accounting for uncertain tax positions or interpretations thereof. Significant judgment is required to determine the recognition and measurement attribute prescribed in FIN 48. In addition, FIN 48 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely affect our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse impact on our operating results and financial condition.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
Reclassifications
During the first quarter of fiscal 2009, we began to allocate certain costs, which had previously been recorded in general and administrative expenses (related to information technology, financing business, and human resources), to sales and marketing, research and development, and cost of sales, as applicable. These changes also resulted in reclassifications to prior period gross margin by theater amounts. In addition, we have made certain reclassifications to prior period amounts relating to net sales by theater and net sales for similar groups of products due to refinement of the respective categories.
 
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Net Sales
The following table presents the breakdown of net sales between product and service revenue (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October
25, 2008	  	October 27,
2007	  	Variance
in
Dollars	  	Variance
in
Percent	 	
Net sales:	  			  			  			  			
Product	  	$	8,635	  	$	8,015	  	$	620	  	7.7	%	
Service	  	 	1,696	  	 	1,539	  	 	157	  	10.2	%	
	  	 	 	  	 	 	  	 	 	  			
Total	  	$	10,331	  	$	9,554	  	$	777	  	8.1	%	
	  	 	 	  	 	 	  	 	 	  			
Net sales, which include product and service revenue, for each theater are summarized in the following table (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	 	Variance
in
Dollars	  	Variance
in
Percent	 	
Net sales:	  				 				 			  			
United States and Canada	  	$	5,549	 	 	$	5,482	 	 	$	67	  	1.2	%	
Percentage of net sales	  	 	53.7	%	 	 	57.4	%	 			  			
European Markets	  	 	2,153	 	 	 	1,911	 	 	 	242	  	12.7	%	
Percentage of net sales	  	 	20.8	%	 	 	20.0	%	 			  			
Emerging Markets	  	 	1,229	 	 	 	872	 	 	 	357	  	40.9	%	
Percentage of net sales	  	 	11.9	%	 	 	9.1	%	 			  			
Asia Pacific	  	 	1,022	 	 	 	982	 	 	 	40	  	4.1	%	
Percentage of net sales	  	 	9.9	%	 	 	10.3	%	 			  			
Japan	  	 	378	 	 	 	307	 	 	 	71	  	23.1	%	
Percentage of net sales	  	 	3.7	%	 	 	3.2	%	 			  			
	  	 	 	 	 	 	 	 	 	 	 	  			
Total	  	$	10,331	 	 	$	9,554	 	 	$	777	  	8.1	%	
	  	 	 	 	 	 	 	 	 	 	 	  			
For the first quarter of fiscal 2009, net sales increased across our five geographic theaters compared with the first quarter of fiscal 2008. Our sales benefited from our entry into new markets and the development of adjacent product offerings. Although net sales increased 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, we began to experience a decline in our business due to the economic downturn in the United States and its acceleration globally. We experienced weakness during the last month of the quarter not just in the financial, automotive, and retail sectors, but also among other enterprise customers, and while the weakness began in the United States, it appears to have spread to other geographic theaters. As a result, we expect our net product sales across our geographic theaters will be impacted by the unfavorable economic environment. We believe that the economic downturn will persist, but cannot predict its severity or duration.
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on sales has not been material because our sales are primarily denominated in U.S. dollars. However, as the U.S. dollar strengthens relative to other currencies, it could have indirect effect on our sales to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations.
In addition to the impact of macroeconomic factors described above, net sales by theater in a particular period may be significantly impacted by several factors related to revenue recognition, including the complexity of transactions such as multiple element arrangements, the mix of financings provided to our channel partners and customers, and final acceptance of the product, system, or solution, among other factors. In addition, certain customers tend to make large and sporadic purchases and the net sales related to these transactions may also be affected by the timing of revenue recognition.
 
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Net Product Sales by Theater
The following table presents the breakdown of net product sales by theater (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	 	Variance
in
Dollars	 	 	Variance
in
Percent	 	
Net product sales:	  				 				 				 			
United States and Canada	  	$	4,447	 	 	$	4,453	 	 	$	(6	)	 	(0.1	)%	
Percentage of net product sales	  	 	51.5	%	 	 	55.6	%	 				 			
European Markets	  	 	1,879	 	 	 	1,655	 	 	 	224	 	 	13.5	%	
Percentage of net product sales	  	 	21.8	%	 	 	20.6	%	 				 			
Emerging Markets	  	 	1,092	 	 	 	776	 	 	 	316	 	 	40.7	%	
Percentage of net product sales	  	 	12.6	%	 	 	9.7	%	 				 			
Asia Pacific	  	 	896	 	 	 	866	 	 	 	30	 	 	3.5	%	
Percentage of net product sales	  	 	10.4	%	 	 	10.8	%	 				 			
Japan	  	 	321	 	 	 	265	 	 	 	56	 	 	21.1	%	
Percentage of net product sales	  	 	3.7	%	 	 	3.3	%	 				 			
	  	 	 	 	 	 	 	 	 	 	 	 	 			
Total	  	$	8,635	 	 	$	8,015	 	 	$	620	 	 	7.7	%	
	  	 	 	 	 	 	 	 	 	 	 	 	 			
United States and Canada
Net product sales in the United States and Canada theater during the first quarter of fiscal 2009 were relatively flat compared with the first quarter of fiscal 2008. During the first quarter of fiscal 2009, we experienced lower sales to the service provider market in the United States due to lower spending by a few large customers. In the enterprise market, our net product sales increased during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008, but we experienced cautious spending by our enterprise customers as economic conditions worsened in the last month of the quarter. Sales to the U.S. federal government and the commercial market were relatively flat compared with the first quarter of fiscal 2008. We expect our overall net product sales in the United States will continue to be impacted by the unfavorable macroeconomic environment and its impact on information technology spending. Net product sales increased in Canada during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008, due in part to strength in sales to the service provider market in Canada.
European Markets
The increase in net product sales in the European Markets theater during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was attributable to the growth in the enterprise and commercial market. Net product sales to our service provider market in this theater decreased in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 due to lower spending by our service provider customers. During the first quarter of fiscal 2009, we continued to experience growth in Germany compared with the first quarter of fiscal 2008, while we experienced slower overall growth in Western Europe, particularly as economic conditions deteriorated in October 2008.
Emerging Markets
During the first quarter of fiscal 2009, net product sales in the Emerging Markets theater increased compared with the first quarter of fiscal 2008 due to increased shipments and recognition of previously deferred revenue and effects of reserves in the first quarter of fiscal 2008. We experienced continued network deployment across our customer markets, with strength in Russia and Latin America. Certain of our customers in the Emerging Markets theater tend to make large and sporadic purchases, and the net sales related to these transactions may also be affected by the timing of revenue recognition. Further, some customers may continue to require greater levels of financing arrangements, service, and support in future periods which may also impact the timing of recognition of the revenue for this theater. As a result of these and other factors and coupled with the effects of the global economic downturn, in the immediate term, we anticipate that net product sales for this theater will grow at a slower rate or decline on a year-over-year basis.
Asia Pacific
The slight increase in net product sales in the Asia Pacific theater during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was primarily attributable to balanced growth in the service provider and commercial markets. China experienced solid growth in net product sales. We expect our overall net product sales in this theater will be adversely impacted by the unfavorable macroeconomic environment.
Japan
Net product sales in the Japan theater increased during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008, primarily due to service providers building out next-generation networks.
 
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Net Product Sales by Groups of Similar Products
The following table presents net sales for groups of similar products (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	 	Variance
in
Dollars	 	 	Variance
in
Percent	 	
Net product sales:	  				 				 				 			
Routers	  	$	1,884	 	 	$	1,863	 	 	$	21	 	 	1.1	%	
Percentage of net product sales	  	 	21.8	%	 	 	23.2	%	 				 			
Switches	  	 	3,595	 	 	 	3,317	 	 	 	278	 	 	8.4	%	
Percentage of net product sales	  	 	41.7	%	 	 	41.4	%	 				 			
Advanced technologies	  	 	2,714	 	 	 	2,325	 	 	 	389	 	 	16.7	%	
Percentage of net product sales	  	 	31.4	%	 	 	29.0	%	 				 			
Other	  	 	442	 	 	 	510	 	 	 	(68	)	 	(13.3	)%	
Percentage of net product sales	  	 	5.1	%	 	 	6.4	%	 				 			
	  	 	 	 	 	 	 	 	 	 	 	 	 			
Total	  	$	8,635	 	 	$	8,015	 	 	$	620	 	 	7.7	%	
	  	 	 	 	 	 	 	 	 	 	 	 	 			
Routers
Sales of our high-end routers, which represent a larger proportion of our total router sales compared with midrange and low-end routers, were relatively flat in the first quarter of fiscal 2009, compared with the first quarter of fiscal 2008. Our high-end router sales are primarily to service providers, and during the first quarter of fiscal 2009, high-end router sales were adversely impacted by a slowdown in capital expenditures in the global service provider market, as well as by the tendency of service providers to make large and sporadic purchases. Sales of midrange and low-end routers were also relatively flat during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. In the first quarter of fiscal 2009, sales of our integrated services routers, which we include in the category of midrange and low-end routers, increased and contributed to growth in sales of our advanced technologies products, such as our security, unified communications, and wireless offerings.
Switches
The increase in net product sales related to switches in the first quarter of fiscal 2009, compared with the first quarter of fiscal 2008, was primarily due to the higher sales of our modular switches, which increased by approximately $165 million, and local-area network (LAN) fixed-configuration switches, which increased by approximately $110 million.
The increase in sales of modular switches was primarily due to the increased sales of Cisco Catalyst 4500 and 6000 Series Switches. The increase in sales of LAN fixed-configuration switches was a result of the continued adoption by our customers of new technologies throughout their networks from the data center to the wiring closet, including Gigabit Ethernet, 10 Gigabit Ethernet, and Power over Ethernet, which leads to the higher sales of Cisco Catalyst 2960 and 3750 Series Switches. Additionally, growth in sales of advanced technologies such as unified communications and wireless LANs creates demand for LAN fixed-configuration infrastructure as additional endpoints are added to the network.
Advanced Technologies
The increase in net product sales of advanced technologies in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was due to the following:
 
 	•	 	Sales of unified communications increased by approximately $135 million, primarily due to sales of IP phones and associated software as our customers continued to transition from an analog-based to an IP-based infrastructure.	
 
 	•	 	Sales of video systems, which include solutions and systems designed to enable video-specific delivery systems for service providers, increased by approximately $110 million. The increase was attributable to several factors, including an increase in the demand for IP set-top boxes, high-definition cable set-top boxes, and international growth.	
 
 	•	 	Sales of security products increased by approximately $70 million, primarily due to module and line card sales related to our routers and LAN switches as customers continued to emphasize network security and also due to sales of our next-generation adaptive security appliance products, which integrate multiple technologies including virtual private network (VPN), firewall, and intrusion prevention services on one platform.	
 
 	•	 	Sales of wireless LAN products increased by approximately $50 million, primarily due to new customers, continued deployments with existing customers, and customers’ adoption of our unified architecture platform.	
 
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 	•	 	Sales of application networking services increased by approximately $30 million, primarily due to higher demand from customers for wide area network (WAN) optimization solutions.	
 
 	•	 	Home networking sales were flat, and storage area networking product sales declined slightly. 	
Other Product Revenue
The decrease in other product revenue in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was primarily due to the decline in sales of our optical and cable products. Other product revenue also includes sales of emerging technology products.
Net Service Revenue
The increase in net service revenue during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was primarily due to technical support service contract initiations and renewals associated with higher product sales, which have resulted in a larger installed base of equipment being serviced, as well as increased revenue from advanced services, which relates to consulting support services for specific networking needs. The increase in advanced services revenue in the first quarter of fiscal 2009, compared with the first quarter of fiscal 2008, was attributable primarily to our revenue growth in the Emerging Markets theater and the advanced technologies products.
Gross Margin
The following table presents the gross margin for products and services (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	Amount	  	Percentage	 	
 	  	October 25,
2008	  	October 27,
2007	  	October 25,
2008	 	 	October 27,
2007	 	
Gross margin:	  			  			  			 			
Product	  	$	5,654	  	$	5,185	  	65.5	%	 	64.7	%	
Service	  	 	1,027	  	 	955	  	60.6	%	 	62.1	%	
	  	 	 	  	 	 	  			 			
Total	  	$	6,681	  	$	6,140	  	64.7	%	 	64.3	%	
	  	 	 	  	 	 	  			 			
The following table presents the gross margin for each theater (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	Amount	 	 	Percentage	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	 	October 25,
2008	 	 	October 27,
2007	 	
Gross margin:	  				 				 			 			
United States and Canada	  	$	3,670	 	 	$	3,639	 	 	66.1	%	 	66.4	%	
European Markets	  	 	1,413	 	 	 	1,242	 	 	65.6	%	 	65.0	%	
Emerging Markets	  	 	779	 	 	 	496	 	 	63.4	%	 	56.9	%	
Asia Pacific	  	 	654	 	 	 	638	 	 	64.0	%	 	65.0	%	
Japan	  	 	261	 	 	 	218	 	 	69.0	%	 	71.0	%	
	  	 	 	 	 	 	 	 	 			 			
Theater Total	  	 	6,777	 	 	 	6,233	 	 	65.6	%	 	65.2	%	
Unallocated corporate items (1)	  	 	(96	)	 	 	(93	)	 			 			
	  	 	 	 	 	 	 	 	 			 			
Total	  	$	6,681	 	 	$	6,140	 	 	64.7	%	 	64.3	%	

(1)	The unallocated corporate items primarily include the effects of amortization of acquisition-related intangible assets and employee share-based compensation expense. We do not allocate these items to the gross margin for each theater because management does not include the information in measuring the performance of the operating segments.	
The gross margin for each theater is derived from information from our internal management system. The gross margin percentage for a particular theater may fluctuate and period-to-period changes in such percentages may or may not be indicative of a trend for that theater.
 
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Product Gross Margin
The increase in total product gross margin percentage during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was due to the following factors:
 
 	•	 	Lower overall manufacturing costs related to lower component costs, value engineering and other manufacturing-related costs, increased product gross margin percentage by 2.9%. Value engineering is the process by which production costs are reduced through component redesign, board configuration, test processes, and transformation processes.	
 
 	•	 	Higher shipment volume, net of certain variable costs, increased product gross margin percentage by 0.4%.	
 
 	•	 	Net effects of amortization of purchased intangible assets and share-based compensation expense increased product gross margin percentage by 0.2%.	
The above were partially offset by the following factors:
 
 	•	 	Sales discounts, rebates, and product pricing decreased product gross margin percentage by 1.8%.	
 
 	•	 	Changes in the mix of products sold decreased product gross margin percentage by 0.9%.	
Service Gross Margin
Our service gross margin percentage decreased in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 primarily due to lower technical support margins and the fact that advanced services constituted a higher proportion of total service revenue. Technical support margins will experience some variability due to various factors such as the timing of technical support service contract initiations and renewals, and the timing of our strategic investments in headcount and resources to support this business. Our service gross margin from technical support services is higher than the service gross margin from our advanced services, and our revenue from advanced services may continue to increase to a higher proportion of total service revenue due to our continued focus on providing comprehensive support to our customers’ networking devices, applications, and infrastructures. Additionally, we have continued to invest in building out our technical support and advanced services capabilities in the Emerging Markets theater.
Factors That May Impact Net Sales and Gross Margin
Net product sales may continue to be affected by factors including the current global economic downturn and related market uncertainty, which so far has resulted in cautious spending in our global enterprise, service provider and commercial markets; changes in the geopolitical environment and global economic conditions; competition, including price-focused competitors from Asia, especially from China; new product introductions; sales cycles and product implementation cycles; changes in the mix of our customers between service provider and enterprise markets; changes in the mix of direct sales and indirect sales; variations in sales channels; and final acceptance criteria of the product, system, or solution as specified by the customer. Sales to the service provider market have been characterized by large and sporadic purchases, especially relating to our router sales and sales of certain advanced technologies. In addition, service provider customers typically have longer implementation cycles, require a broader range of services, including network design services, and often have acceptance provisions that can lead to a delay in revenue recognition. Certain of our customers in the Emerging Markets theater also tend to make large and sporadic purchases and the net sales related to these transactions may similarly be affected by the timing of revenue recognition. As we focus on new market opportunities, customers may require greater levels of financing arrangements, service, and support, especially in the Emerging Markets theater, which may result in a delay in the timing of revenue recognition. To improve customer satisfaction, we continue to focus on managing our manufacturing lead-time performance, which may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results.
Net product sales may also be adversely affected by fluctuations in demand for our products, especially with respect to Internet businesses and telecommunications service providers, whether or not driven by any slowdown in capital expenditures in the service provider market, price and product competition in the communications and information technology industry, introduction and market acceptance of new technologies and products, adoption of new networking standards, and financial difficulties experienced by our customers. We may, from time to time, experience manufacturing issues that create a delay in our suppliers’ ability to provide specific components, resulting in delayed shipments. To the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods when we and our suppliers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters are not remediated within the same quarter. For additional factors that may impact net product sales, see “Part II, Item 1A. Risk Factors.” Our distributors and retail partners participate in various cooperative marketing and other programs. In addition, increasing sales to our distributors and retail partners generally results in greater difficulty in forecasting the mix of our products and, to a certain degree, the timing of orders from our customers. We recognize revenue for sales to our distributors and retail partners based on a sell-through method using information provided by them, and we maintain estimated accruals and allowances for all cooperative marketing and other programs.
 
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Product gross margin may be adversely affected in the future by changes in the mix of products sold, including further periods of increased growth of some of our lower-margin products; introduction of new products, including products with price-performance advantages; our ability to reduce production costs; entry into new markets, including markets with different pricing structures and cost structures, as a result of internal development or through acquisitions; changes in distribution channels; price competition, including competitors from Asia, especially from China; changes in geographic mix of our product sales; the timing of revenue recognition and revenue deferrals; sales discounts; increases in material or labor costs; excess inventory and obsolescence charges; warranty costs; changes in shipment volume; loss of cost savings due to changes in component pricing; effects of value engineering; inventory holding charges; and the extent to which we successfully execute on our strategy and operating plans. Service gross margin may be impacted by various factors such as the change in mix between technical support services and advanced services, the timing of technical support service contract initiations and renewals, and the timing of our strategic investments in headcount and resources to support this business.
Research and Development, Sales and Marketing, and General and Administrative Expenses
Research and Development (R&D), sales and marketing, and general and administrative (G&A) expenses are summarized in the following table (in millions, except percentages):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	 	Variance
in
Dollars	  	Variance
in
Percent	 	
Research and development	  	$	1,406	 	 	$	1,232	 	 	$	174	  	14.1	%	
Percentage of net sales	  	 	13.6	%	 	 	12.9	%	 			  			
Sales and marketing	  	 	2,283	 	 	 	2,078	 	 	 	205	  	9.9	%	
Percentage of net sales	  	 	22.1	%	 	 	21.8	%	 			  			
General and administrative	  	 	395	 	 	 	342	 	 	 	53	  	15.5	%	
Percentage of net sales	  	 	3.8	%	 	 	3.6	%	 			  			
	  	 	 	 	 	 	 	 	 	 	 	  			
Total	  	$	4,084	 	 	$	3,652	 	 	$	432	  	11.8	%	
	  	 	 	 	 	 	 	 	 	 	 	  			
Percentage of net sales	  	 	39.5	%	 	 	38.2	%	 			  			
R&D Expenses
R&D expenses increased in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 primarily due to higher acquisition-related compensation expenses, which increased by approximately $100 million primarily due to the achievement of certain acquisition-related milestones. The increase in R&D expenses also reflects higher headcount-related expenses. The higher headcount-related expenses reflect our continued investment in R&D for routers, switches, advanced technologies, and other product technologies. We have also continued to purchase or license technology in order to bring a broad range of products to market in a timely fashion. If we believe that we are unable to enter a particular market in a timely manner with internally developed products, we may license technology from other businesses or acquire businesses as an alternative to internal R&D. All of our R&D costs have been expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses for the first quarter of fiscal 2009 increased compared with the first quarter of fiscal 2008, primarily due to an increase in sales expenses of approximately $165 million. Sales expenses increased primarily due to an increase in headcount-related expenses.
G&A Expenses
G&A expenses for the first quarter of fiscal 2009 increased compared with the first quarter of fiscal 2008, primarily due to increased headcount-related expenses. The increase in G&A expenses also reflects increased share-based compensation expense and increased acquisition-related compensation expense.
Effect of Foreign Currency
Foreign currency fluctuations, net of hedging, increased total R&D, sales and marketing, and G&A expenses by $46 million, or approximately 1.3%, in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008.
 
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Headcount
Our headcount increased by 1,518 employees in the first quarter of fiscal 2009, reflecting a seasonal increase in hires of recent college graduates, the effects of our investments in sales and R&D described above and increased investments in our service business and acquisitions. If we do not achieve the benefits anticipated from these investments, our operating results may be adversely affected.
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 to reduce our expenses, as part of our strategy of addressing the global economic downturn. We plan to achieve these expense reductions through a pause in hiring, as well as decreases in travel, offsite meetings, outside services, marketing, and other expenses. In the near term, we anticipate that despite these efforts, operating expenses will increase as a percentage of total revenue. If we do not achieve the benefits anticipated from this realignment or achieve these cost reductions, our operating results may be adversely affected.
Share-Based Compensation Expense
Employee share-based compensation expense under SFAS 123(R) was as follows (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Cost of sales—product	  	$	11	  	$	9	
Cost of sales—service	  	 	31	  	 	23	
	  	 	 	  	 	 	
Employee share-based compensation expense in cost of sales	  	 	42	  	 	32	
	  	 	 	  	 	 	
Research and development	  	 	82	  	 	65	
Sales and marketing	  	 	113	  	 	99	
General and administrative	  	 	45	  	 	30	
	  	 	 	  	 	 	
Employee share-based compensation expense in operating expenses	  	 	240	  	 	194	
	  	 	 	  	 	 	
Total employee share-based compensation expense (1)	  	$	282	  	$	226	

(1)	Share-based compensation expense of $22 million and $24 million related to acquisitions and investments for the three months ended October 25, 2008 and October 27, 2007, respectively, is disclosed in Note 3 and is not included in the above table.	
In conjunction with the adoption of SFAS 123(R), we changed our method of attributing the value of share-based compensation to expense from the accelerated multiple-option approach to the straight-line single-option method. Compensation expense for all share-based payment awards granted on or prior to July 30, 2005 is recognized using the accelerated multiple-option approach, whereas compensation expense for all share-based payment awards granted subsequent to July 30, 2005 is recognized using the straight-line single-option method. Employee share-based compensation expense for the first quarter of fiscal 2009 increased compared with the first quarter of fiscal 2008 primarily due to the effects of straight-line vesting of share-based awards and higher weighted-average fair value for each share-based award.
Amortization of Purchased Intangible Assets and In-Process Research and Development
The following table presents the amortization of purchased intangible assets and in-process R&D included in operating expenses (in millions):

 	  	Three Months Ended	
 	  	October 25,
2008	  	October 27,
2007	
Amortization of purchased intangible assets	  	$	112	  	$	117	
In-process research and development	  	$	3	  	$	3	
The slight decrease in the amortization of purchased intangible assets included in operating expenses for the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008 was due to certain intangible assets becoming fully amortized, partially offset by additional amortization of purchased intangible assets related to recent acquisitions. For additional information regarding purchased intangibles, see Note 4 to the Consolidated Financial Statements.
 
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Our methodology for allocating the purchase price, relating to purchase acquisitions, to in-process R&D is determined through established valuation techniques. See Note 3 to the Consolidated Financial Statements for additional information regarding the acquisitions completed in the first quarter of fiscal 2009 and the in-process R&D amounts recorded for these acquisitions. In-process R&D was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed.
Interest Income, Net
The components of interest income, net, are as follows (in millions):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Interest income	  	$	259	 	 	$	319	 	
Interest expense	  	 	(64	)	 	 	(96	)	
	  	 	 	 	 	 	 	 	
Total	  	$	195	 	 	$	223	 	
	  	 	 	 	 	 	 	 	
The decrease in interest income in the first quarter of fiscal 2009 was primarily due to lower average interest rates partially offset by higher average total cash and cash equivalents and fixed income security balances compared with the first quarter of fiscal 2008. The decrease in interest expense in the first quarter of fiscal 2009 compared with the first  quarter of fiscal 2008 was due to lower effective interest rates on our debt.
Other Income (Loss), Net
The components of other income (loss), net, are as follows (in millions):

 	  	Three Months Ended	 	
 	  	October 25,
2008	 	 	October 27,
2007	 	
Net gains on investments in publicly traded equity securities	  	$	91	 	 	$	45	 	
Net (losses) gains on investments in fixed income securities	  	 	(152	)	 	 	9	 	
Net losses on investments in privately held companies	  	 	(9	)	 	 	—  	 	
	  	 	 	 	 	 	 	 	
Net (losses) gains on investments	  	 	(70	)	 	 	54	 	
Other	  	 	(2	)	 	 	(23	)	
	  	 	 	 	 	 	 	 	
Total	  	$	(72	)	 	$	31	 	
	  	 	 	 	 	 	 	 	
For the first quarter of fiscal 2009, net losses on investments in fixed income securities included impairment losses of $183 million on fixed income securities and net gains on investments in publicly traded equity securities included impairment losses of $17 million on publicly traded equity securities. There were no such impairment charges during the first quarter of fiscal 2008. During the first quarter of fiscal 2009, we terminated our remaining forward sale agreements on publicly traded equity securities designated as fair value hedges. See Note 7 to the Consolidated Financial Statements for the unrealized gains and losses on investments. Net losses on investments in privately held companies included impairment charges of $23 million and $3 million for the first quarters of fiscal 2009 and fiscal 2008, respectively.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 15.5% for the first quarter of fiscal 2009. The effective tax rate for the first quarter of fiscal 2009 included a tax benefit of $106 million, or 4.1%, related to fiscal 2008 R&D expenses due to the retroactive reinstatement during the quarter of the U.S. federal R&D tax credit. The provision for income taxes resulted in an effective tax rate of 15.9% for the first quarter of fiscal 2008. The effective tax rate for the first quarter of fiscal 2008 included a net tax benefit of $162 million, or 6.2%, from the settlement of certain tax matters with the IRS. The remaining decrease in the effective tax rate was primarily attributable to an increase in foreign income taxed at rates lower than the U.S. federal statutory tax rate of 35%.
 
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Recent Accounting Pronouncements and Developments
SFAS 141(R) and SFAS 160
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) will significantly change current practices regarding business combinations. Among the more significant changes, SFAS 141(R) expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; requires assets acquired and liabilities assumed from contractual and noncontractual contingencies to be recognized at their acquisition-date fair values with subsequent changes recognized in earnings; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. SFAS 160 will change the accounting and reporting for minority interests, reporting them as equity separate from the parent entity’s equity, as well as requiring expanded disclosures. SFAS 141(R) and SFAS 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently assessing the impact that SFAS 141(R) and SFAS 160 will have on our results of operations and financial position.
SFAS 161
In March 2008, the FASB issued SFAS 161 which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We are currently assessing the impact that the adoption of SFAS 161 will have on our financial statement disclosures.
IFRS
In August 2008, the U.S. Securities and Exchange Commission (SEC) announced that they will issue for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements, and we will continue to monitor the development of the potential implementation of IFRS.
 
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Liquidity and Capital Resources
The following sections discuss the effects of changes in our balance sheet and cash flows, contractual obligations, other commitments, and the stock repurchase program on our liquidity and capital resources.
Balance Sheet and Cash Flows
Cash and Cash Equivalents and Investments
The following table summarizes our cash and cash equivalents and investments (in millions):

 	  	October 25,
2008	  	July 26,
2008	  	Increase
(Decrease)	 	
Cash and cash equivalents	  	$	4,197	  	$	5,191	  	$	(994	)	
Fixed income securities	  	 	21,849	  	 	19,869	  	 	1,980	 	
Publicly traded equity securities	  	 	717	  	 	1,175	  	 	(458	)	
	  	 	 	  	 	 	  	 	 	 	
Total	  	$	26,763	  	$	26,235	  	$	528	 	
	  	 	 	  	 	 	  	 	 	 	
The increase in cash and cash equivalents and investments was primarily a result of cash provided by operating activities of $2.7 billion and issuance of common stock of $224 million related to employee stock option exercises. These factors were partially offset by the repurchase of common stock of $1.0 billion; approximately $600 million related to the change in unrealized gains and losses on publicly traded equity and fixed income securities as well as realized gains and losses from these investments; capital expenditures of $361 million and acquisitions of businesses of $288 million.
Our total cash and cash equivalents and investments held outside of the United States in various foreign subsidiaries was $24.3 billion as of October 25, 2008, and the remaining $2.5 billion was held in the United States. If cash and cash equivalents and investments held outside the United States are distributed to the United States in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. For internal management purposes, we target specific ranges of net realizable cash, representing cash and cash equivalents and investments, net of (i) long-term debt and the present value of operating lease commitments, and (ii) U.S. income taxes that we estimate would be payable upon the distribution to the United States of cash and cash equivalents and investments held outside the United States. We believe that our strong total cash and cash equivalents and investments position allows us to use our cash resources for strategic investments to gain access to new technologies, acquisitions, customer financing activities, working capital, and the repurchase of shares.
In light of the challenging conditions in the financial markets over the last several months, we have been more proactively managing our cash equivalents and fixed income portfolio. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in securities with a weighted-average credit rating exceeding AA. A majority of our investments are priced by pricing vendors and over 95% of our fixed income and publicly traded equity securities are classified as Level 1 or Level 2 investments, as measured under SFAS 157, as these vendors either provide a quoted market price in an active market or use observable inputs. See Note 8 to the Consolidated Financial Statements.
We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter (which we refer to as shipment linearity), accounts receivable collections, inventory and supply chain management, excess tax benefits from share-based compensation, and the timing and amount of tax and other payments. For additional discussion, see “Part II, Item 1A.  Risk Factors.”
Accounts Receivable, Net
The following table summarizes our accounts receivable, net (in millions) and DSO:

 	  	October 25,
2008	  	July, 26
2008	  	Increase
(Decrease)	 	
Accounts receivable, net	  	$	3,278	  	$	3,821	  	$	(543	)	
DSO	  	 	29	  	 	34	  	 	(5	)	
Our DSO as of October 25, 2008 was positively affected by lower service billings, due to seasonality, and improved collections.
 
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Inventories and Purchase Commitments with Contract Manufacturers and Suppliers
The following table summarizes our inventories and purchase commitments with contract manufacturers and suppliers (in millions, except annualized inventory turns):

 	  	October 25,
2008	  	July 26,
2008	  	Increase
(Decrease)	 	
Inventories:	  			  			  				
Raw materials	  	$	144	  	$	111	  	$	33	 	
Work in process	  	 	65	  	 	53	  	 	12	 	
Finished goods:	  			  			  				
Distributor inventory and deferred cost of sales	  	 	445	  	 	452	  	 	(7	)	
Manufactured finished goods	  	 	331	  	 	381	  	 	(50	)	
	  	 	 	  	 	 	  	 	 	 	
Total finished goods	  	 	776	  	 	833	  	 	(57	)	
Service-related spares	  	 	179	  	 	191	  	 	(12	)	
Demonstration systems	  	 	45	  	 	47	  	 	(2	)	
	  	 	 	  	 	 	  	 	 	 	
Total	  	$	1,209	  	$	1,235	  	$	(26	)	
	  	 	 	  	 	 	  	 	 	 	
Annualized inventory turns	  	 	11.9	  	 	11.9	  	 	—  	 	
Purchase commitments with contract manufacturers and suppliers	  	$	2,852	  	$	2,727	  	$	125	 	
Our finished goods consist of distributor inventory and deferred cost of sales and manufactured finished goods. Distributor inventory and deferred cost of sales are related to unrecognized revenue on shipments to distributors and retail partners and shipments to customers. Manufactured finished goods consist primarily of build-to-order and build-to-stock products. Service-related spares consist of reusable equipment related to our technical support and warranty activities. All inventories are accounted for at the lower of cost or market. 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.
We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our reported purchase commitments arising from these agreements are firm, noncancelable, and unconditional commitments. In addition, we record a liability, included in other current liabilities, for firm, noncancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. The purchase commitments for inventory are expected to be primarily fulfilled within one year.
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 because of rapidly changing technology and customer requirements. We believe the amount of our inventory and purchase commitments is appropriate for our revenue levels.
 
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Financing Receivables and Guarantees
The following table summarizes our financing receivables, financing guarantees, and the related deferred revenue (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	 	Increase
(Decrease)	 	
Lease receivables	  	$	1,529	 	 	$	1,552	 	 	$	(23	)	
Financed service contracts	  	 	1,393	 	 	 	1,328	 	 	 	65	 	
Loan receivables	  	 	575	 	 	 	607	 	 	 	(32	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Gross financing receivables	  	$	3,497	 	 	$	3,487	 	 	$	10	 	
	  				 				 	 	 	 	
Financing guarantees- customer	  	 	404	 	 	 	380	 	 				
Financing guarantees- channel partner	  	 	471	 	 	 	450	 	 				
	  	 	 	 	 	 	 	 	 				
Gross financing receivables and guarantees	  	$	4,372	 	 	$	4,317	 	 				
Allowances for financing receivables	  	 	(254	)	 	 	(274	)	 				
Deferred revenue	  	 	(2,204	)	 	 	(2,091	)	 				
	  	 	 	 	 	 	 	 	 				
Financing receivables and guarantees, net	  	$	1,914	 	 	$	1,952	 	 				
	  	 	 	 	 	 	 	 	 				
We provide financing to certain customers and channel partners, which enables sales of our products, services and networking solutions. These financing arrangements include leases, financed service contracts, loans, and financing guarantees. These arrangements are generally collateralized by a security interest in the underlying assets.
Lease receivables include sales-type and direct financing leases. We also provide certain qualified customers financing for long-term service contracts, which primarily relate to technical support services. 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.
Third parties may provide financing arrangements to our customers and channel partners in the normal course of business. The financing arrangements to customers provided by third parties are related to leases and loans and typically have terms of three years. The financing arrangements to channel partners consist of revolving short-term financing provided by third parties, generally with payment terms up to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners and, in some cases, we guarantee a portion of these arrangements. We could be called upon to make payments under these guarantees in the event of nonpayment by the channel partner to the third party. Where we provide a guarantee, we defer the revenue associated with the channel partner and customer financing arrangement or we record a liability for the guarantee exposure and the amounts are recorded as deferred revenue in accordance with revenue recognition policies and FIN 45. In either case, the deferred revenue is recognized as revenue when the guarantee is removed.
The deferred revenue in the table above is primarily related to financed service contracts. The revenue related to financed service contracts, which primarily relates to technical support services, is deferred and included in deferred service revenue. The revenue related to financed service contracts is recognized ratably over the period during which the related services are to be performed. A portion of the revenue related to lease and loan receivables is also deferred and included in deferred product revenue based on revenue recognition criteria.
In the current economic environment, we have continued to consistently apply our credit standards and policies in making our financing decisions. We also monitor a variety of risk metrics which helps us to balance risks and rewards. We believe the global economic downturn did not materially impact the quality of our financing receivables during the first quarter of fiscal 2009. We expect to continue to expand the use of our financing programs in the near term.
 
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Long-Term Debt
The following table summarizes our long-term debt (in millions):

 	  	October 25,
2008	 	 	July 26
2008	 	 	Increase
(Decrease)	 	
Senior notes:	  				 				 				
Floating-rate notes, due 2009	  	$	500	 	 	$	500	 	 	$	—  	 	
5.25% fixed-rate notes, due 2011	  	 	3,000	 	 	 	3,000	 	 	 	—  	 	
5.50% fixed-rate notes, due 2016	  	 	3,000	 	 	 	3,000	 	 	 	—  	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total senior notes	  	 	6,500	 	 	 	6,500	 	 	 	—  	 	
Other notes	  	 	3	 	 	 	4	 	 	 	(1	)	
Unaccreted discount	  	 	(14	)	 	 	(15	)	 	 	1	 	
Hedge accounting adjustment of the carrying amount of the fixed-rate debt	  	 	382	 	 	 	404	 	 	 	(22	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	6,871	 	 	$	6,893	 	 	$	(22	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Reported as:	  				 				 				
Current portion of long-term debt	  	$	500	 	 	$	500	 	 	$	—  	 	
Long-term debt	  	 	6,371	 	 	 	6,393	 	 	 	(22	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	6,871	 	 	$	6,893	 	 	$	(22	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
In February 2006, we issued $500 million of senior floating interest rate notes based on LIBOR due 2009 (the “2009 Notes”), $3.0 billion of 5.25% senior notes due 2011 (the “2011 Notes”), and $3.0 billion of 5.50% senior notes due 2016 (the “2016 Notes”), for an aggregate principal amount of $6.5 billion. The proceeds from the debt issuance were used to fund the acquisition of Scientific-Atlanta and for general corporate purposes. The 2011 Notes and the 2016 Notes are redeemable by us at any time, subject to a make-whole premium. In the third quarter of fiscal 2008, we terminated $6.0 billion of interest rate swaps that we had entered into in connection with the issuance of our fixed-rate notes due in 2011 and 2016 and received proceeds of $432 million, net of accrued interest, which was received and recorded as a hedge accounting adjustment to the carrying amount of the fixed-rate debt, and is amortized as a reduction to interest expense over the remaining terms of the fixed-rate notes. See Note 9 to the Consolidated Financial Statements. We were in compliance with all debt covenants as of October 25, 2008.
In August 2007, we entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on August 17, 2012. Due to the bankruptcy of one of the lenders during the first quarter of fiscal 2009, we believe the amount available under the credit facility as of October 25, 2008 may be effectively reduced to $2.9 billion.
Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50% or Bank of America’s “prime rate” as announced from time to time, or (ii) LIBOR plus a margin that is based on our senior debt credit ratings as published by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. The credit agreement requires that we maintain an interest coverage ratio as defined in the agreement.
As of October 25, 2008, we were in compliance with the required interest coverage ratio and we had not borrowed any funds under the credit facility. We may also, upon the agreement of either the then existing lenders or of additional lenders not currently parties to the agreement, increase the commitments under the credit facility up to a total of $5.0 billion, and/or extend the expiration date of the credit facility up to August 15, 2014.
 
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Deferred Revenue
The following table presents the breakdown of deferred revenue (in millions):

 	  	October 25,
2008	  	July 26,
2008	  	Increase
(Decrease)	 	
Service	  	$	5,955	  	$	6,133	  	$	(178	)	
Product	  	 	2,889	  	 	2,727	  	 	162	 	
	  	 	 	  	 	 	  	 	 	 	
Total	  	$	8,844	  	$	8,860	  	$	(16	)	
	  	 	 	  	 	 	  	 	 	 	
Reported as:	  			  			  				
Current	  	$	6,276	  	$	6,197	  	$	79	 	
Noncurrent	  	 	2,568	  	 	2,663	  	 	(95	)	
	  	 	 	  	 	 	  	 	 	 	
Total	  	$	8,844	  	$	8,860	  	$	(16	)	
	  	 	 	  	 	 	  	 	 	 	
The decrease in deferred service revenue reflects the ongoing amortization of deferred service revenue, partially offset by the impact of new contract initiations and renewals. The increase in deferred product revenue was primarily related to timing of cash receipts related to unrecognized revenue from two-tier distributors, shipments not having met revenue recognition criteria, and other revenue deferrals.
Operating Leases
We lease office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, Canada, China, France, Germany, India, Israel, Italy, Japan, and the United Kingdom. As of October 25, 2008, the future minimum lease payments under all our noncancelable operating leases with an initial term in excess of one year were $1.4 billion. For additional information see Note 11 to the Consolidated Financial Statements.
Compensation Expense Related to Acquisitions and Investments
In connection with our purchase acquisitions, asset purchases, and acquisitions of variable interest entities, we have agreed to pay certain additional amounts contingent upon the achievement of agreed-upon technology, development, product, or other milestones or continued employment with us of certain employees of acquired entities. See Note 3 to the Consolidated Financial Statements.
Other Commitments
We also have certain funding commitments primarily related to our investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were approximately $323 million as of October 25, 2008, compared with approximately $359 million as of July 26, 2008.
Off-Balance Sheet Arrangements
We consider our investments in unconsolidated variable interest entities to be off-balance sheet arrangements. In the ordinary course of business, we have investments in privately held companies and provide financing to certain customers through our wholly owned subsidiaries, which may be considered to be variable interest entities. We have evaluated our investments in these privately held companies and customer financings and have determined that there were no significant unconsolidated variable interest entities as of October 25, 2008.
Certain events can require a reassessment of our investments in privately held companies or customer financings to determine if they are variable interest entities and if we would be regarded as the primary beneficiary. As a result of such events, we may be required to make additional disclosures or consolidate these entities. Because we may not control these entities, we may not have the ability to influence these events.
We provide financing guarantees, which are generally for various third-party financing arrangements to our channel partners and other customers. We could be called upon to make payments under these guarantees in the event of nonpayment to the third party. See further discussion of these financing guarantees under Financing Receivables and Guarantees above.
 
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Stock Repurchase Program
In September 2001, our Board of Directors authorized a stock repurchase program. As of October 25, 2008, our Board of Directors had authorized an aggregate repurchase of up to $62 billion of common stock under this program and the remaining authorized repurchase amount was $7.4 billion with no termination date. The stock repurchase activity under the stock repurchase program during the first three months of fiscal 2009 is summarized as follows (in millions, except per-share amounts):

Three Months Ended October 25, 2008	  	Shares
Repurchased	  	Weighted-
Average Price
per Share	  	Amount
Repurchased	
Cumulative balance at July 26, 2008	  	2,600	  	$	20.60	  	$	53,579	
Repurchase of common stock (1)	  	46	  	 	21.95	  	 	1,000	
	  	 	  			  	 	 	
Cumulative balance at October 25, 2008	  	2,646	  	$	20.62	  	$	54,579	

(1)	Includes stock repurchases that were pending settlement as of October 25, 2008.	
The purchase price for the shares of our common stock repurchased is reflected as a reduction to shareholders’ equity. In accordance with Accounting Principles Board Opinion No. 6, “Status of Accounting Research Bulletins,” we are required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings until retained earnings are zero and then as an increase to accumulated deficit and (ii) a reduction of common stock and additional paid-in capital. Issuance of common stock and the tax benefit related to employee stock incentive plans are recorded as an increase to common stock and additional paid-in capital. As a result of future repurchases, we may report an accumulated deficit as a component in shareholders’ equity.
Liquidity and Capital Resource Requirements
Based on past performance and current expectations, we believe our cash and cash equivalents, investments, and cash generated from operations, and our ability to access capital markets, including committed credit lines, will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, contractual obligations, commitments, future customer financings, and other liquidity requirements associated with our operations through at least the next 12 months. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity, the availability, and our requirements for capital resources.
 
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Item 3.	Quantitative and Qualitative Disclosures About Market Risk	
Investments
We maintain an investment portfolio of various holdings, types, and maturities. See Note 7 to the Consolidated Financial Statements. As of October 25, 2008, these securities are classified as available-for-sale and consequently are recorded in the Consolidated Balance Sheets at fair value with unrealized gains or losses, to the extent unhedged, reported as a component of accumulated other comprehensive income (loss), net of tax. In light of the challenging conditions in the financial markets over the last several months, we have been more proactively managing our cash equivalents and fixed income portfolio. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in securities with a weighted-average credit rating exceeding AA.
We consider various factors in determining whether we should recognize an impairment charge for our fixed income securities and publicly traded equity securities, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
During the three months ended October 25, 2008, we realized net losses of $152 million on fixed income securities and realized net gains of $91 million on publicly traded equity securities. Included in the realized net losses and gains were $183 million and $17 million of impairment losses on fixed income and publicly traded equity securities, respectively. There were no impairments of fixed income or publicly traded equity securities for the first quarter of fiscal 2008.
Fixed Income Securities
At any time, a sharp rise in interest rates or credit spreads could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. Our fixed income instruments are not leveraged as of October 25, 2008, and are held for purposes other than trading. We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers.
Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, we may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of October 25, 2008, we had outstanding $500 million of interest rate swaps with a fair value of $4 million designated as a fair value hedge of our investment portfolio. In November 2008, we received proceeds for the underlying hedged investments and terminated these interest rate swaps.
Publicly Traded Equity Securities
The values of our equity investments in several publicly traded companies are subject to market price volatility. The following table presents the hypothetical fair values of publicly traded equity securities as a result of selected potential decreases and increases in the price of each equity security in the portfolio, excluding hedged equity securities. Potential fluctuations in the price of each equity security in the portfolio of plus or minus 10%, 20%, and 30% were selected based on potential near-term changes in those security prices. The hypothetical fair values as of October 25, 2008 and July 26, 2008 are as follows (in millions):

 	  	VALUATION OF SECURITIES
GIVEN AN X% DECREASE IN
EACH STOCK’S PRICE	  	FAIR VALUE
AS OF
OCTOBER 25,
2008	  	VALUATION OF SECURITIES
GIVEN AN X% INCREASE IN
EACH STOCK’S PRICE	
 	  	(30%)	  	(20%)	  	(10%)	  	 	  	10%	  	20%	  	30%	
Publicly traded equity securities	  	$	502	  	$	574	  	$	645	  	$	717	  	$	789	  	$	860	  	$	932	
				
 	  	VALUATION OF SECURITIES
GIVEN AN X% DECREASE IN
EACH STOCK’S PRICE	  	FAIR VALUE
AS OF
JULY 26,
2008	  	VALUATION OF SECURITIES
GIVEN AN X% INCREASE IN
EACH STOCK’S PRICE	
 	  	(30%)	  	(20%)	  	(10%)	  	 	  	10%	  	20%	  	30%	
Publicly traded equity securities	  	$	736	  	$	842	  	$	947	  	$	1,052	  	$	1,157	  	$	1,262	  	$	1,368	
Our equity portfolio consists of securities with characteristics that most closely match the Standard & Poor’s 500 Index or NASDAQ Composite Index. These equity securities are held for purposes other than trading.
 
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To manage our exposure to changes in the fair value of certain equity securities, we may enter into equity derivatives, including forward sale and option agreements. The gains and losses due to changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment. During the first quarter of fiscal 2009, we terminated our previously existing forward sale agreements on publicly traded equity securities designated as fair value hedges.
Investments in Privately Held Companies
We have invested in privately held companies, some of which are in the startup or development stages. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. We could lose our entire investment in these companies. These investments are primarily carried at cost, which as of October 25, 2008 was $703 million, compared with $706 million at July 26 2008 and are recorded in other assets. Our impairment charges on investments in privately held companies were $23 million and $3 million for the first quarter of fiscal 2009 and 2008, respectively. Our evaluation of investments in private companies is based on the fundamentals of the businesses, including, among other factors, the nature of their technologies and potential for financial return.
Long-Term Debt
As of October 25, 2008, we had $6.0 billion in principal amount of fixed-rate long-term debt outstanding, with a carrying amount of $6.4 billion and a fair value of $5.8 billion, which fair value is based on market prices. A hypothetical 50 basis points increase or decrease in interest rates would decrease or increase, respectively, the fair value of the fixed-rate debt as of October 25, 2008 by approximately $100 million. However, this hypothetical change in interest rates would not impact the interest expense on the fixed-rate debt. A sharp change in rates would not have a material impact on the fair value of our $500 million  variable-rate debt.
Foreign Currency Exchange Rate Risk
Our foreign exchange forward and option contracts are summarized as follows (in millions):

 	  	October 25,
2008	 	 	July 26,
2008	 	
 	  	Notional
Amount	  	Fair
Value	 	 	Notional
Amount	  	Fair
Value	 	
Forward contracts:	  			  				 			  				
Purchased	  	$	1,732	  	$	(38	)	 	$	1,803	  	$	5	 	
Sold	  	$	880	  	$	80	 	 	$	902	  	$	2	 	
Option contracts:	  			  				 			  				
Purchased	  	$	1,902	  	$	12	 	 	$	1,440	  	$	50	 	
Sold	  	$	1,760	  	$	(87	)	 	$	1,256	  	$	(6	)	
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on sales has not been material because our sales are primarily denominated in U.S. dollars. However, as the U.S. dollar strengthens relative to other currencies, it could have indirect effect on our sales to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations. Foreign currency fluctuations, net of hedging, increased total research and development, sales and marketing, and general and administrative expenses by approximately 1.3% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. Approximately 70% of our operating expenses are U.S.-dollar denominated. To reduce variability in operating expenses and service cost of sales caused by non-U.S.-dollar denominated operating expenses and costs, we hedge certain foreign currency forecasted transactions with currency options and forward contracts. These hedging programs are not designed to provide foreign currency protection over long time horizons. In designing a specific hedging approach, we consider several factors, including offsetting exposures, significance of exposures, costs associated with entering into a particular hedge instrument, and potential effectiveness of the hedge. The gains and losses on foreign exchange contracts mitigate the effect of currency movements on our operating expenses and service cost of sales.
 
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We also enter into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on receivables, investments, and payables, primarily denominated in Australian, Canadian, Japanese, and several European currencies, including the euro and British pound. Our market risks associated with our foreign currency receivables, investments, and payables relate primarily to variances from our forecasted foreign currency transactions and balances. Our forward and option contracts generally have the following maturities:

 	  	Maturities	
Forward and option contracts - forecasted transactions related to operating expenses	  	Less than 18 months	
Forward contracts - current assets and liabilities	  	1 to 3 Months	
Forward contracts - long-term customer financings	  	Up to 2 Years	
Forward contracts - investments	  	Less than 2 Years	
We do not enter into foreign exchange forward or option contracts for trading purposes.
 
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 Item 4.	Controls and Procedures	
Evaluation of disclosure controls and procedures . Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting . There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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 PART II. OTHER INFORMATION
 
 Item 1.	Legal Proceedings	
Brazilian authorities are investigating certain employees of our Brazilian subsidiary and certain employees of a Brazilian importer of our products relating to the allegation of evading import taxes and other alleged improper transactions involving the subsidiary and the importer. We are conducting a thorough review of the matter. To date, Brazilian authorities have not asserted a claim against us. We are unable to determine the likelihood of an unfavorable outcome on any potential claims against us or to reasonably estimate a range of loss, if any. In addition, we are investigating the allegations regarding improper transactions, we have proactively communicated with United States authorities to provide information and report on our findings, and the United States authorities are currently investigating such allegations.
In addition, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For additional information regarding intellectual property litigation, see “Part II, Item 1A. Risk Factors—We may be found to infringe on intellectual property rights of others” herein.
 
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 ITEM 1A.	Risk Factors	
Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. The descriptions below include any material changes to and supersede the description of the risk factors affecting our business previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended July 26, 2008.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE
Our operating results have been in the past, and will continue to be, subject to quarterly and annual fluctuations as a result of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include:
 
 	•	 	Fluctuations in demand for our products and services, especially with respect to telecommunications service providers and Internet businesses, in part due to changes in the global economic environment	
 
 	•	 	Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue	
 
 	•	 	Our ability to maintain appropriate inventory levels and purchase commitments	
 
 	•	 	Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation and different business models from various geographic regions	
 
 	•	 	The overall movement toward industry consolidation among both our competitors and our customers	
 
 	•	 	The introduction and market acceptance of new technologies and products and our success in new markets, including emerging and advanced technologies, as well as the adoption of new standards	
 
 	•	 	Variations in sales channels, product costs, or mix of products sold	
 
 	•	 	The timing, size, and mix of orders from customers	
 
 	•	 	Manufacturing and customer lead times	
 
 	•	 	Fluctuations in our gross margins, and the factors that contribute to such fluctuations, as described below	
 
 	•	 	Our ability to achieve targeted cost reductions, including the ongoing resource realignment and expense reduction that is described under “Resource Management and Realignment” in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”	
 
 	•	 	The ability of our customers, channel partners, and suppliers to obtain financing or to fund capital expenditures, especially during a period of global credit market disruption	
 
 	•	 	Share-based compensation expense and the timing and amount of employer payroll tax to be paid on our employees’ gains on stock options exercised	
 
 	•	 	Actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities, and other items reflected in our Consolidated Financial Statements	
 
 	•	 	How well we execute on our strategy and operating plans	
 
 	•	 	Benefits anticipated from our investments in engineering, sales and manufacturing activities	
 
 	•	 	Changes in accounting rules, such as increased use of fair value measures and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (IFRS)	
As a consequence, operating results for a particular future period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition that could adversely affect our stock price.
 
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OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND MARKET CONDITIONS AND THE UNCERTAIN GEOPOLITICAL ENVIRONMENT
Challenging economic conditions worldwide have from time to time contributed, and are currently contributing, to slowdowns in the communications and networking industries at large, as well as to specific segments and markets in which we operate, resulting in:
 
 	•	 	Reduced demand for our products as a result of continued constraints on IT-related capital spending by our customers, particularly service providers, and other customer markets as well	
 
 	•	 	Increased price competition for our products, not only from our competitors but also as a consequence of customers disposing of unutilized products	
 
 	•	 	Risk of excess and obsolete inventories	
 
 	•	 	Excess facilities and manufacturing capacity	
 
 	•	 	Higher overhead costs as a percentage of revenue and higher interest expense	
Turmoil in global credit markets is putting pressure on, and recent turmoil in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs, may continue to put pressure on global economic conditions. Our operating results in one or more segments may also be affected by uncertain or changing economic conditions particularly germane to that segment or to particular customer markets within that segment. The challenges we have seen in the United States have expanded to Europe, as well as to many of the countries in our Emerging Market theater and Asia. If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
DURING THE CURRENT GLOBAL ECONOMIC DOWNTURN AND WHILE THE RELATED MARKET UNCERTAINTY PERSISTS, WE INTEND TO INVEST IN MARKET ADJACENCIES AND ALSO INVEST IN THE UNITED STATES AND SELECT EMERGING COUNTRIES, AND IF THE RETURN ON THESE INVESTMENTS IS LOWER OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR OPERATING RESULTS MAY BE HARMED
We plan to realign resources to focus on certain market adjacencies, such as data center virtualization, video, collaboration architectures, and globalization, primarily in targeted geographic locations. Moreover, since we believe that the United States will be the first major country to recover from the global economic slowdown, we plan to make a significant portion of these investments in the United States so that we can be positioned to benefit from this future recovery while other countries or markets may not be recovering. Additionally, we believe countries such as China and India are positioned to minimize the effect of the global challenges on their own economies, creating opportunities for us as other countries or markets may not be recovering. The return on our investments in these market adjacencies and in these geographic markets may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.
OUR REVENUE FOR A PARTICULAR PERIOD IS DIFFICULT TO PREDICT, AND A SHORTFALL IN REVENUE MAY HARM OUR OPERATING RESULTS
As a result of a variety of factors discussed in this report, our revenue for a particular quarter is difficult to predict, especially in light of the current global economic downturn and related market uncertainty. Our net sales may grow at a slower rate than in past periods or may decline. Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods. We have experienced periods of time during which shipments have exceeded net bookings or manufacturing issues have delayed shipments, leading to nonlinearity in shipping patterns. In addition to making it difficult to predict revenue for a particular period, nonlinearity in shipping can increase costs, because irregular shipment patterns result in periods of underutilized capacity and periods in which overtime expenses may be incurred, as well as in potential additional inventory management-related costs. In addition, to the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which we and our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated within the same quarter.
The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter, primarily in our Emerging Markets theater and other emerging countries. From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in net sales. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.
 
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In addition, to improve customer satisfaction, we continue to attempt to improve our manufacturing lead-time performance, which may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results. Long manufacturing lead times have caused our customers in the past to place the same order multiple times within our various sales channels and to cancel the duplicative orders upon receipt of the product, or to place orders with other vendors with shorter manufacturing lead times. Such multiple ordering (along with other factors) may cause difficulty in predicting our sales and, as a result, could impair our ability to manage parts inventory effectively.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
Any of the above factors could have a material adverse impact on our operations and financial results.
WE EXPECT GROSS MARGIN TO VARY OVER TIME, AND OUR LEVEL OF PRODUCT GROSS MARGIN MAY NOT BE SUSTAINABLE
Our level of product gross margins may not be sustainable and may continue to be adversely affected by numerous factors, including:
 
 	•	 	Changes in customer, geographic, or product mix, including mix of configurations within each product group	
 
 	•	 	Introduction of new products, including products with price-performance advantages	
 
 	•	 	Our ability to reduce production costs	
 
 	•	 	Entry into new markets, including markets with different pricing and cost structures, through acquisitions or internal development	
 
 	•	 	Sales discounts	
 
 	•	 	Increases in material or labor costs	
 
 	•	 	Excess inventory and inventory holding charges	
 
 	•	 	Obsolescence charges	
 
 	•	 	Changes in shipment volume	
 
 	•	 	The timing of revenue recognition and revenue deferrals	
 
 	•	 	Loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand	
 
 	•	 	Lower than expected benefits from value engineering	
 
 	•	 	Increased price competition, including competitors from Asia, especially from China	
 
 	•	 	Changes in distribution channels	
 
 	•	 	Increased warranty costs	
 
 	•	 	How well we execute on our strategy and operating plans	
Changes in service gross margin may result from various factors such as changes in the mix between technical support services and advanced services, as well as the timing of technical support service contract initiations and renewals and the addition of personnel and other resources to support higher levels of service business in future periods.
SALES TO THE SERVICE PROVIDER MARKET ARE ESPECIALLY VOLATILE, AND WEAKNESS IN SALES ORDERS FROM THIS INDUSTRY MAY HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION
Sales to the service provider market have been characterized by large and sporadic purchases, especially relating to our router sales and sales of certain of our advanced technologies, in addition to longer sales cycles. In the past, we have experienced significant weakness in sales to service providers over certain extended periods of time as market conditions have fluctuated. Sales activity in this
 
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industry depends upon the stage of completion of expanding network infrastructures; the availability of funding; and the extent to which service providers are affected by regulatory, economic, and business conditions in the country of operations. Weakness in orders from this industry, including as a result of any slowdown in capital expenditures by service providers (which may be more prevalent in the current global economic downturn), could have a material adverse effect on our business, operating results, and financial condition. For example, we have seen a slowdown in capital expenditures by several of our service provider customers, and believe there may be potential for a broader slowdown in the global service provider market in the next few quarters. Orders from this industry could decline for many reasons other than the competitiveness of our products and services within their respective markets. For example, in the past, many of our service provider customers have been materially and adversely affected by slowdowns in the general economy, by overcapacity, by changes in the service provider market, by regulatory developments, and by constraints on capital availability, resulting in business failures and substantial reductions in spending and expansion plans. These conditions have materially harmed our business and operating results in the past, and some of these or other conditions in the service provider market could affect our business and operating results in any future period. Finally, service provider customers typically have longer implementation cycles; require a broader range of services, including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted with service providers.
DISRUPTION OF OR CHANGES IN OUR DISTRIBUTION MODEL COULD HARM OUR SALES AND MARGINS
If we fail to manage distribution of our products and services properly, or if our distributors’ financial condition or operations weaken, our revenue and gross margins could be adversely affected.
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, and a number of service providers are also systems integrators. Distributors stock 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. If sales through indirect channels increase, this may lead to greater difficulty in forecasting the mix of our products and, to a degree, the timing of orders from our customers.
Historically, we have seen fluctuations in our gross margins based on changes in the balance of our distribution channels. Although variability to date has not been significant, there can be no assurance that changes in the balance of our distribution model in future periods would not have an adverse effect on our gross margins and profitability.
Some factors could result in disruption of or changes in our distribution model, which could harm our sales and margins, including the following:
 
 	•	 	We compete with some of our channel partners through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products	
 
 	•	 	Some of our channel partners may demand that we absorb a greater share of the risks that their customers may ask them to bear	
 
 	•	 	Some of our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions	
 
 	•	 	Revenue from indirect sales could suffer if our distributors’ financial condition or operations weaken	
In addition, we depend on our channel partners globally to comply with applicable regulatory requirements. To the extent that they fail to do so, that could have a material adverse effect on our business, operating results, and financial condition.
OUR INVENTORY MANAGEMENT RELATING TO OUR SALES TO OUR TWO-TIER DISTRIBUTION CHANNEL IS COMPLEX, AND EXCESS INVENTORY MAY HARM OUR GROSS MARGINS
We must manage our inventory relating to sales to our distributors and retail partners effectively, because inventory held by them could affect our results of operations. Our distributors and retail partners may increase orders during periods of product shortages, cancel orders if their inventory is too high, or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them and in response to seasonal fluctuations in end-user demand. Revenue to our distributors and retail partners is recognized based on a sell-through method using
 
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information provided by them, and they are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling price, and participate in various cooperative marketing programs. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write down inventory, which in turn could result in lower gross margins.
A SHORTAGE OF ADEQUATE COMPONENT SUPPLY OR MANUFACTURING CAPACITY COULD INCREASE OUR COSTS OR CAUSE A DELAY IN OUR ABILITY TO FULFILL ORDERS, AND OUR FAILURE TO ESTIMATE CUSTOMER DEMAND PROPERLY MAY RESULT IN EXCESS OR OBSOLETE COMPONENT SUPPLY, WHICH COULD ADVERSELY AFFECT OUR GROSS MARGINS
Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts from our suppliers and contract manufacturers. We have experienced component shortages in the past, including shortages caused by manufacturing process issues, that have affected our operations. We may in the future experience a shortage of certain component parts as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers or contract manufacturers, or strong demand in the industry for those parts, especially if the economy grows. Growth in the economy is likely to create greater pressures on us and our suppliers to accurately project overall component demand and component demands within specific product categories and to establish optimal component levels. If shortages or delays persist, the price of these components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed. Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we need, which is more likely to occur in a period of demand uncertainties such as we are currently experiencing. There can be no assurance that we will not encounter these problems in the future. Although in many cases we use standard parts and components for our products, certain components are presently available only from a single source or limited sources, and the current global economic downturn and related market uncertainty could negatively impact one or more of these sources. We may not be able to diversify sources in a timely manner, which could harm our ability to deliver products to customers and seriously impact present and future sales.
We believe that we may be faced with the following challenges in the future:
 
 	•	 	New markets in which we participate may grow quickly, which may make it difficult to quickly obtain significant component capacity	
 
 	•	 	As we acquire companies and new technologies, we may be dependent, at least initially, on unfamiliar supply chains or relatively small supply partners	
 
 	•	 	We face competition for certain components that are supply-constrained, from existing competitors, and companies in other markets	
Manufacturing capacity and component supply constraints could be significant issues for us. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to improve manufacturing lead-time performance and to help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete components that could adversely affect our gross margins. For additional information regarding our purchase commitments with contract manufacturers and suppliers, see Note 11 to the Consolidated Financial Statements contained in this report.
A reduction or interruption in supply; a significant increase in the price of one or more components; a failure to adequately authorize procurement of inventory by our contract manufacturers; a failure to appropriately cancel, reschedule, or adjust our requirements based on our business needs; or a decrease in demand for our products could materially adversely affect our business, operating results, and financial condition and could materially damage customer relationships. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher than those available in the current market. In the event that we become committed to purchase components at prices in excess of the current market price when the components are actually used, our gross margins could decrease.
The fact that we do not own or operate the bulk of our manufacturing facilities and that we are reliant on our extended supply chain could have an adverse impact on the supply of our products and on our operating results:
 
 	•	 	Reservation of manufacturing capacity at our contract manufacturers by other companies, inside or outside of our industry, could either limit supply or increase costs	
 
 	•	 	Any financial problems of either contract manufacturers or component suppliers could either limit supply or increase costs	
 
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Our key manufacturing facility for Scientific-Atlanta’s products is located in Juarez, Mexico, and we may be materially and adversely affected by any prolonged disruption in the operation of this facility.
THE MARKETS IN WHICH WE COMPETE ARE INTENSELY COMPETITIVE, WHICH COULD ADVERSELY AFFECT OUR REVENUE GROWTH
The markets in which we compete are characterized by rapid change, converging technologies, and a migration to networking and communications solutions that offer relative advantages. These market factors represent 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 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 many of our 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 whom we have strategic alliances in some areas may be competitors in other areas.
The principal competitive factors in the markets in which we presently compete and may compete in the future include:
 
 	•	 	The ability to provide a broad range of networking and communications products and services	
 
 	•	 	Product performance	
 
 	•	 	Price	
 
 	•	 	The ability to introduce new products, including products with price-performance advantages	
 
 	•	 	The ability to reduce production costs	
 
 	•	 	The ability to provide value-added features such as security, reliability, and investment protection	
 
 	•	 	Conformance to standards	
 
 	•	 	Market presence	
 
 	•	 	The ability to provide financing	
We also face competition from customers to which we license or supply technology and suppliers from which we transfer technology. The inherent nature of networking requires interoperability. As such, we must cooperate and at the same time compete with many companies. Any inability to effectively manage these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success.
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
The markets for our products are characterized by rapidly changing technology, evolving industry standards, new product introductions, and evolving methods of building and operating networks. Our operating results depend on our ability to develop and introduce new products into existing and emerging markets and to reduce the production costs of existing products. We believe the industry is evolving to enable personal and business process collaboration enabled by networked Web 2.0, the technologies that enable user collaboration, as part of the second major phase of the Internet. As such, many of our strategic initiatives and investments are aimed at meeting the requirements that a network capable of multiple party, collaborative interaction would demand, and the investments we have made and our architectural approach are designed to enable networked Web 2.0 and the increased use of the network as the platform for all forms of communications and IT. The process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We must commit significant resources, including the investments we intend to make in market adjacencies and in the United States and select emerging countries mentioned above, to developing new products before knowing whether our investments will result in products the market will accept. In particular, if our model of the evolution of networking to collaborative systems does not emerge as we believe it will, or if the industry does not evolve as we believe it will, many of our strategic initiatives and investments may be of no or limited value. Furthermore, we may not execute successfully on that vision because of errors in product planning or timing,
 
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technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and loss of market share, net sales, and earnings. The success of new products depends on several factors, including proper new product definition, component costs, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. Specifically, the products and technologies that we identify as “emerging technologies,” such as Cisco TelePresence systems, or “advanced technologies” may not prove to have the market success we anticipate, and we may not successfully identify and invest in other emerging or advanced technologies.
OVER THE LONG TERM WE ARE INCREASING OUR INVESTMENT IN ENGINEERING, SALES, SERVICE AND MANUFACTURING ACTIVITIES, AND THESE INVESTMENTS MAY ACHIEVE DELAYED, OR LOWER THAN EXPECTED BENEFITS WHICH COULD HARM OUR OPERATING RESULTS
While we intend to manage our costs and expenses over the short term, over the long term, we intend to continue to add personnel and other resources to our engineering, sales, service, and manufacturing functions as we focus on developing emerging technologies, the next wave of advanced technologies, growing the commercial market segment, capitalizing on our emerging market opportunities, enhancing our evolving support model and increasing our market share gains. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.
OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND INTERNET-BASED SYSTEMS
A substantial portion of our business and revenue depends on growth and evolution of the Internet, including the continued development of networked Web 2.0 as part of the second major phase of the Internet, and on the deployment of our products by customers who depend on such continued growth and evolution. To the extent that an economic slowdown and reduction in capital spending adversely affect spending on Internet infrastructure, as we are currently seeing, we could experience material harm to our business, operating results, and financial condition.
Because of the rapid introduction of new products and changing customer requirements related to matters such as cost-effectiveness and security, we believe that there could be performance problems with Internet communications in the future, which could receive a high degree of publicity and visibility. Because we are a large supplier of networking products, our business, operating results, and financial condition may be materially adversely affected, regardless of whether or not these problems are due to the performance of our own products. Such an event could also result in a material adverse effect on the market price of our common stock independent of direct effects on our business.
CHANGES IN INDUSTRY STRUCTURE AND MARKET CONDITIONS COULD LEAD TO CHARGES RELATED TO DISCONTINUANCES OF CERTAIN OF OUR PRODUCTS OR BUSINESSES AND ASSET IMPAIRMENTS
In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Any decision to limit investment in or dispose of or otherwise exit businesses may result in the recording of special charges, such as inventory and technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Our estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions. Further, our estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions. Additionally, we are required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances, and future goodwill impairment tests may result in a charge to earnings.
WE HAVE MADE AND EXPECT TO CONTINUE TO MAKE ACQUISITIONS THAT COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS
Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis. We intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel. Acquisitions involve numerous risks, including the following:
 
 	•	 	Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies, particularly companies with large and widespread operations and/or complex products, such as Scientific-Atlanta and WebEx	
 
 	•	 	Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions	
 
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 	•	 	Potential difficulties in completing projects associated with in-process research and development	
 
 	•	 	Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions	
 
 	•	 	Initial dependence on unfamiliar supply chains or relatively small supply partners	
 
 	•	 	Insufficient revenue to offset increased expenses associated with acquisitions	
 
 	•	 	The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans	
Acquisitions may also cause us to:
 
 	•	 	Issue common stock that would dilute our current shareholders’ percentage ownership	
 
 	•	 	Use a substantial portion of our cash resources, as we did in connection with our June 2007 acquisition of WebEx, or incur debt, as we did in February 2006 when we issued and sold $6.5 billion in senior unsecured notes to fund our acquisition of Scientific-Atlanta	
 
 	•	 	Significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition	
 
 	•	 	Assume liabilities	
 
 	•	 	Record goodwill and nonamortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges	
 
 	•	 	Incur amortization expenses related to certain intangible assets	
 
 	•	 	Incur tax expenses related to the post-acquisition integration of purchased intangible assets into our intercompany R&D cost sharing arrangement	
 
 	•	 	Incur large and immediate write-offs and restructuring and other related expenses	
 
 	•	 	Become subject to intellectual property or other litigation	
Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
From time to time, we have made acquisitions that resulted in in-process research and development expenses being charged in an individual quarter. These charges may occur in any particular quarter, resulting in variability in our quarterly earnings. In addition, our effective tax rate for future periods is uncertain and could be impacted by mergers and acquisitions. Risks related to new product development also apply to acquisitions. Please see the risk factors above, 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 additional information.
ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES US TO ADDITIONAL COMPETITION AND WILL LIKELY INCREASE DEMANDS ON OUR SERVICE AND SUPPORT OPERATIONS
As we focus on new market opportunities—for example, storage; wireless; security; transporting data, voice, and video traffic across the same network; and other advanced technologies and emerging technologies—we will increasingly compete with large telecommunications equipment suppliers as well as startup companies. Several of our competitors may have greater resources, including technical and engineering resources, than we do. Additionally, as customers in these markets complete infrastructure deployments, they may require greater levels of service, support, and financing than we have provided in the past, especially in the Emerging Markets theater. Demand for these types of service, support, or financing contracts may increase in the future. There can be no assurance that we can provide products, service, support, and financing to effectively compete for these market opportunities.
 
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Further, provision of greater levels of services, support and financing by us may result in a delay in the timing of revenue recognition. In addition, entry into other markets, including our entry into the consumer market, has subjected and will subject us to additional risks, particularly to those markets, including the effects of general market conditions and reduced consumer confidence.
PRODUCT QUALITY PROBLEMS COULD LEAD TO REDUCED REVENUE, GROSS MARGINS, AND NET INCOME
We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software typically contains bugs that can unexpectedly interfere with expected operations. There can be no assurance that our preshipment testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins. In the past, we have had to replace certain components and provide remediation in response to the discovery of defects or bugs in products that we had shipped. Although the cost of such remediation has not been material in the past, there can be no assurance that such a remediation, depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of which could have a material impact on our revenue, margins, and net income.
INDUSTRY CONSOLIDATION MAY LEAD TO INCREASED COMPETITION AND MAY HARM OUR OPERATING RESULTS
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.
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 conduct significant sales and customer support operations in countries outside of the United States; maintain a manufacturing facility for a substantial portion of our video systems products in Juarez, Mexico; and also depend on non-U.S. operations of our contract manufacturers and our distribution partners. Recently our Emerging Markets theater has been a relatively fast growing theater, and we have announced plans to expand our commitments and growth expectations in this theater. As such, our growth depends in part on our continuing to increase sales into this theater. We also intend to expand our level of business activity in two large emerging countries, India and China, and our growth in the Asia Pacific theater will also depend in part upon our continuing to increase sales in these countries. Our future results could be materially adversely affected by a variety of factors relating to our operations outside the United States, any or all of which could have a material adverse effect on our operating results and financial condition, including, among others, the following:
 
 	•	 	The impact of the current global economic downturn and related market uncertainty on Europe, many of the countries in our Emerging Markets theater and Asia	
 
 	•	 	Foreign currency exchange rates	
 
 	•	 	Political or social unrest	
 
 	•	 	Economic instability or weakness or natural disasters in a specific country or region; environmental and trade protection measures and other legal and regulatory requirements, some of which may affect our ability to import our products to, export our products from, or sell our products in various countries	
 
 	•	 	Political considerations that affect service provider and government spending patterns	
 
 	•	 	Health or similar issues, such as a pandemic or epidemic	
 
 	•	 	Difficulties in staffing and managing international operations	
 
 	•	 	Adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries	
 
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WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES IN WEAKENED MARKETS, WHICH COULD RESULT IN MATERIAL LOSSES
Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United States and, because of local customs or conditions, longer in some markets outside the United States. We monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. Beyond our open credit arrangements, we have also experienced demands for customer financing and facilitation of leasing arrangements. We expect demand for customer financing to continue, and recently we have seen an increase in this demand as the credit markets have been impacted by the global economic downturn and related market uncertainty. We believe customer financing is a competitive factor in obtaining business, particularly in serving customers involved in significant infrastructure projects. 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.
Our exposure to the credit risks relating to our financing activities described above may increase if our customers are adversely affected by the current global economic downturn, or if there is a continuation or worsening of the downturn. Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there can be no assurance that such programs will be effective in reducing our credit risks.
In the past, there have been significant bankruptcies among customers both on open credit and with loan or lease financing arrangements, particularly among Internet businesses and service providers, causing us to incur economic or financial losses. There can be no assurance that additional losses will not be incurred. Although these losses have not been material to date, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. A portion of our sales is derived through our distributors and retail partners. 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. We maintain estimated accruals and allowances for such business terms. However, distributors tend to have more limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased credit risk, because they may be more likely to lack the reserve resources to meet payment obligations. Additionally, to the degree that the ongoing turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS AND CASH FLOWS
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Historically, our primary exposures have related to nondollar-denominated sales in Japan, Canada, and Australia and certain nondollar-denominated operating expenses and service cost of sales in Europe, Latin America, and Asia, where we sell primarily in U.S. dollars. Additionally, we have exposures to emerging market currencies, which can have extreme currency volatility. An increase in the value of the dollar could increase the real cost to our customers of our products in those markets outside the United States where we sell in dollars, and a weakened dollar could increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies.
Currently, we enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency fluctuations on certain foreign currency receivables, investments, and payables. In addition, we periodically hedge anticipated foreign currency cash flows. Our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income.
OUR PROPRIETARY RIGHTS MAY PROVE DIFFICULT TO ENFORCE
We generally rely on patents, copyrights, trademarks, and trade secret laws to establish and maintain proprietary rights in our technology and products. Although we have been issued numerous patents and other patent applications are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged, invalidated, or circumvented or that our rights will, in fact, provide competitive advantages to us. Furthermore, many key aspects of networking technology are governed by industrywide standards, which are usable by all market entrants. In addition, there can be no assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to protect our technology. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States. Although we are not dependent on any individual patents or group of patents for particular segments of the business for which we compete, if we are unable to protect our proprietary rights to the totality of the features (including aspects of products protected other than by patent rights) in a market, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time, and effort required to create innovative products that have enabled us to be successful.
 
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WE MAY BE FOUND TO INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. Because of the existence of a large number of patents in the networking field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. Further, in the past, third parties have made infringement and similar claims after we have acquired technology that had not been asserted prior to our acquisition.
WE RELY ON THE AVAILABILITY OF THIRD-PARTY LICENSES
Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.
OUR OPERATING RESULTS AND FUTURE PROSPECTS COULD BE MATERIALLY HARMED BY UNCERTAINTIES OF REGULATION OF THE INTERNET
Currently, few laws or regulations apply directly to access or commerce on the Internet. We could be materially adversely affected by regulation of the Internet and Internet commerce in any country where we operate. Such regulations could include matters such as voice over the Internet or using IP, encryption technology, sales taxes on Internet product sales, and access charges for Internet service providers. The adoption of regulation of the Internet and Internet commerce could decrease demand for our products and, at the same time, increase the cost of selling our products, which could have a material adverse effect on our business, operating results, and financial condition.
CHANGES IN TELECOMMUNICATIONS REGULATION AND TARIFFS COULD HARM OUR PROSPECTS AND FUTURE SALES
Changes in telecommunications requirements, or regulatory requirements in other industries in which we operate, in the United States or other countries could affect the sales of our products. In particular, we believe that there may be future changes in U.S. telecommunications regulations that could slow the expansion of the service providers’ network infrastructures and materially adversely affect our business, operating results, and financial condition.
Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could affect the sales of our products for certain classes of customers. Additionally, in the United States, our products must comply with various Federal Communications Commission requirements and regulations. In countries outside of the United States, our products must meet various requirements of local telecommunications authorities. Changes in tariffs or failure by us to obtain timely approval of products could have a material adverse effect on our business, operating results, and financial condition.
 
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FAILURE TO RETAIN AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY OBJECTIVES
Our success has always depended in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel. Competition for these personnel is intense, especially in the Silicon Valley area of Northern California. Stock incentive plans are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. Volatility or lack of positive performance in our stock price, or changes to our overall compensation program, including our stock incentive program, resulting from the management of share dilution and share-based compensation expense or otherwise, may also adversely affect our ability to retain key employees. As a result of one or more of these factors, we may increase our hiring in geographic areas outside the United States, which could subject us to additional geopolitical and exchange rate risk. The loss of services of any of our key personnel; the inability to retain and attract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions. In addition, companies in our industry whose employees accept positions with competitors frequently claim that competitors have engaged in improper hiring practices. We have received these claims in the past and may receive additional claims to this effect in the future.
ADVERSE RESOLUTION OF LITIGATION OR GOVERNMENTAL INVESTIGATIONS MAY HARM OUR OPERATING RESULTS OR FINANCIAL CONDITION
We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. In addition, Brazilian authorities are investigating certain employees of our Brazilian subsidiary and certain employees of a Brazilian importer of our products relating to the allegation of evading import taxes and other alleged improper transactions involving the subsidiary and the importer. We are conducting a thorough review of the matter. To date, Brazilian authorities have not asserted a claim against us. In addition, we are investigating the allegations regarding improper transactions, we have proactively communicated with United States authorities to provide information and report on our findings, and the United States authorities are currently investigating such allegations. An unfavorable resolution of lawsuits or governmental investigations could have a material adverse effect on our business, operating results, or financial condition. For additional information regarding certain of the matters in which we are involved, see Item 1, “Legal Proceedings,” contained in Part II of this report.
CHANGES IN OUR PROVISION FOR INCOME TAXES OR ADVERSE OUTCOMES RESULTING FROM EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR RESULTS
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax credit laws; by transfer pricing adjustments including the post-acquisition integration of purchased intangible assets from certain acquisitions into our intercompany R&D cost sharing arrangement; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; or by changes in tax laws, regulations, accounting principles, including accounting for uncertain tax positions or interpretations thereof. Significant judgment is required to determine the recognition and measurement attribute prescribed in Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). In addition, FIN 48 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
OUR BUSINESS AND OPERATIONS ARE ESPECIALLY SUBJECT TO THE RISKS OF EARTHQUAKES, FLOODS, AND OTHER NATURAL CATASTROPHIC EVENTS
Our corporate headquarters, including certain of our research and development operations are located in the Silicon Valley area of Northern California, a region known for seismic activity. Additionally, a certain number of our facilities are located near rivers that have experienced flooding in the past. A significant natural disaster, such as an earthquake, a hurricane, or a flood, could have a material adverse impact on our business, operating results, and financial condition.
MAN-MADE PROBLEMS SUCH AS COMPUTER VIRUSES OR TERRORISM MAY DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS
Despite our implementation of network security measures our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results, and financial condition. Efforts to limit the ability of malicious third parties to disrupt the operations of the
 
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Internet or undermine our own security efforts may meet with resistance. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries and create further uncertainties or otherwise materially harm our business, operating results, and financial condition. Likewise, events such as widespread blackouts could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected.
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
We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income (loss), net of tax. Our portfolio includes fixed income securities and equity investments in publicly traded companies, the values of which are subject to market price volatility to the extent unhedged. If such investments suffer market price declines, as we experienced with some of our investments during the first quarter of 2009, we may recognize in earnings the decline in the fair value of our investments below their cost basis when the decline is judged to be other-than-temporary. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk” included in this report and in our Annual Report on Form 10-K for the year ended July 26, 2008. Our investments in private companies are subject to risk of loss of investment capital. These investments are inherently risky because the markets for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire investment in these companies.
IF WE DO NOT SUCCESSFULLY MANAGE OUR STRATEGIC ALLIANCES, WE MAY EXPERIENCE INCREASED COMPETITION OR DELAYS IN PRODUCT DEVELOPMENT
We have several strategic alliances with large and complex organizations and other companies with which we work to offer complementary products and services. These arrangements are generally limited to specific projects, the goal of which is generally to facilitate product compatibility and adoption of industry standards. If successful, these relationships may be mutually beneficial and result in industry growth. However, these alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we have a strategic alliance and, at the same time, cooperate with that company in other business areas. Also, if these companies fail to perform or if these relationships fail to materialize as expected, we could suffer delays in product development or other operational difficulties.
OUR STOCK PRICE MAY BE VOLATILE
Historically, our common stock has experienced substantial price volatility, particularly as a result of variations between our actual financial results and the published expectations of analysts and as a result of announcements by our competitors and us. Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations, business, security of our products, or significant transactions can cause changes in our stock price. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions and the announcement of proposed and completed acquisitions or other significant transactions, or any difficulties associated with such transactions, by us or our current or potential competitors, may materially adversely affect the market price of our common stock in the future. Additionally, volatility, lack of positive performance in our stock price or changes to our overall compensation program including our stock incentive program may adversely affect our ability to retain key employees, virtually all of whom are compensated, in part, based on the performance of our stock price.
WE HAVE ISSUED $6.5 BILLION OF SENIOR UNSECURED NOTES, AND THERE CAN BE NO ASSURANCE THAT OUR OPERATING RESULTS AND FINANCIAL CONDITION WILL NOT BE ADVERSELY AFFECTED
We have issued senior unsecured notes in an aggregate principal amount of $6.5 billion that mature at specific dates in 2009, 2011 and 2016. The notes that mature in 2009 bear floating-rate interest payable quarterly while the notes that mature in 2011 and 2016 bear fixed-rate interest payable semi-annually. The fair value of the long-term debt is subject to market interest rate volatility. The instruments governing the notes contain certain covenants applicable to us and our subsidiaries that may adversely affect our ability to incur certain liens or engage in certain types of sale and leaseback transactions. We had not previously undertaken substantial amounts of debt for borrowed money. There can be no assurance that our incurrence of this debt will be a better means of providing liquidity to us than would our use of our existing cash resources, including cash currently held offshore. Further, we cannot be assured that our maintenance of this indebtedness will not adversely affect our operating results or financial condition. In addition, changes by any rating agency to our credit rating can negatively impact the value and liquidity of both our debt and equity securities.
 
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 Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	
(a) On October 15, 2008, we issued an aggregate of 586,632 shares of our common stock in connection with a transaction under South Africa’s Black Economic Empowerment program. The shares issued in this transaction were donated to eligible South African participants, comprised of an external investment/strategic partner, a trust for the benefit of Cisco’s eligible South African employees, and a newly created South African education trust. The offer and sale of the securities were effected without registration in reliance on Regulation S promulgated under the Securities Act of 1933, as amended.
(b) None.
(c) Issuer Purchases of Equity Securities (in millions, except per-share amounts)

Period	  	Total
Number of
Shares
Purchased  (1)	  	Average
Price Paid
per Share  (1)	  	Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)	  	Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs  (2)	
July 27, 2008 to August 23, 2008	  	10	  	$	23.56	  	10	  	$	8,183	
August 24, 2008 to September 20, 2008	  	18	  	$	23.23	  	18	  	$	7,784	
September 21, 2008 to October 25, 2008	  	18	  	$	19.86	  	18	  	$	7,421	
	  	 	  			  	 	  			
Total	  	46	  	$	21.95	  	46	  			

(1)	Includes approximately 500,000 shares repurchased to satisfy tax withholding obligations that arose on the vesting of shares of restricted stock and restricted stock units.	

(2)	On September 13, 2001, we announced that our Board of Directors had authorized a stock repurchase program. As of October 25, 2008, our Board of Directors had authorized the repurchase of up to $62 billion of common stock under this program. During the first quarter of fiscal 2009, we repurchased and retired 46 million shares of our common stock at a weighted-average price of $21.95 per share for an aggregate purchase price of $1.0 billion. As of October 25, 2008, we had repurchased and retired 2.6 billion shares of our common stock at a weighted-average price of $20.62 per share for an aggregate purchase price of $54.6 billion since inception of the stock repurchase program, and the remaining authorized amount for stock repurchases under this program was $7.4 billion with no termination date.	
 
 Item 3.	Defaults Upon Senior Securities	
None.
 
 Item 4.	Submission of Matters to a Vote of Security Holders	
None.
 
 Item 5.	Other Information	
None.
 
 Item 6.	Exhibits	
The following documents are filed as Exhibits to this report

10.1	 	Cisco Systems, Inc. 2005 Stock Incentive Plan (including related form agreements)	
		
31.1	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer	
		
31.2	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer	
		
32.1	 	Section 1350 Certification of Principal Executive Officer	
		
32.2	 	Section 1350 Certification of Principal Financial Officer	
 
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 SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	 	Cisco Systems, Inc.	
			
Date: November 17, 2008	 	By	 	  /s/ Frank A. Calderoni	
	 		 	  Frank A. Calderoni	
	 		 	  Executive Vice President and
  Chief Financial Officer
  (Principal Financial Officer and duly authorized signatory)	
 
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EXHIBIT INDEX

10.1	 	Cisco Systems, Inc. 2005 Stock Incentive Plan (including related form agreements)	
		
31.1	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer	
		
31.2	 	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer	
		
32.1	 	Section 1350 Certification of Principal Executive Officer	
		
32.2	 	Section 1350 Certification of Principal Financial Officer	
 
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Exhibit 10.1
CISCO SYSTEMS, INC.
2005 STOCK INCENTIVE PLAN
EFFECTIVE AS OF NOVEMBER 15, 2005
AS AMENDED AND RESTATED
EFFECTIVE AS OF NOVEMBER 15, 2007

TABLE OF CONTENTS

 	 	 	 	 	  	Page	
SECTION 1.	 		 	INTRODUCTION	  	1	
				
SECTION 2.	 		 	DEFINITIONS	  	1	
				
	 	(a)	 	“Affiliate”	  	1	
				
	 	(b)	 	“Award”	  	1	
				
	 	(c)	 	“Board”	  	1	
				
	 	(d)	 	“Cashless Exercise”	  	1	
				
	 	(e)	 	“Cause”	  	2	
				
	 	(f)	 	“Change In Control”	  	2	
				
	 	(g)	 	“Code”	  	2	
				
	 	(h)	 	“Committee”	  	2	
				
	 	(i)	 	“Common Stock”	  	2	
				
	 	(j)	 	“Company”	  	2	
				
	 	(k)	 	“Consultant”	  	2	
				
	 	(l)	 	“Corporate Transaction”	  	3	
				
	 	(m)	 	“Covered Employees”	  	3	
				
	 	(n)	 	“Director”	  	3	
				
	 	(o)	 	“Disability”	  	3	
				
	 	(p)	 	“Employee”	  	3	
				
	 	(q)	 	“Exchange Act”	  	3	
				
	 	(r)	 	“Exercise Price”	  	3	
				
	 	(s)	 	“Fair Market Value”	  	3	
				
	 	(t)	 	“Fiscal Year”	  	4	
				
	 	(u)	 	“Grant”	  	4	
				
	 	(v)	 	“Incentive Stock Option” or “ISO”	  	4	
				
	 	(w)	 	“Key Employee”	  	4	
				
	 	(x)	 	“Non-Employee Director”	  	4	
				
	 	(y)	 	“Nonstatutory Stock Option” or “NSO”	  	4	
				
	 	(z)	 	“Option”	  	4	
				
	 	(aa)	 	“Optionee”	  	4	
				
	 	(bb)	 	“Parent”	  	4	
 
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 	 	   	 	   	  	Page	
	 	(cc)	 	“Participant”	  	4	
				
	 	(dd)	 	“Performance Goal”	  	5	
				
	 	(ee)	 	“Performance Period”	  	5	
				
	 	(ff)	 	“Plan”	  	5	
				
	 	(gg)	 	“Previous Plan Award”	  	5	
				
	 	(hh)	 	“Re-Price”	  	5	
				
	 	(ii)	 	“SAR Agreement”	  	5	
				
	 	(jj)	 	“SEC”	  	5	
				
	 	(kk)	 	“Section 16 Persons”	  	5	
				
	 	(ll)	 	“Securities Act”	  	5	
				
	 	(mm)	 	“Service”	  	5	
				
	 	(nn)	 	“Share”	  	6	
				
	 	(oo)	 	“Stock Appreciation Right” or “SAR”	  	6	
				
	 	(pp)	 	“Stock Grant”	  	6	
				
	 	(qq)	 	“Stock Grant Agreement”	  	6	
				
	 	(rr)	 	“Stock Option Agreement”	  	6	
				
	 	(ss)	 	“Stock Unit”	  	6	
				
	 	(tt)	 	“Stock Unit Agreement”	  	6	
				
	 	(uu)	 	“Subsidiary”	  	6	
				
	 	(vv)	 	“10-Percent Shareholder”	  	6	
				
SECTION 3.	 		 	ADMINISTRATION	  	7	
				
	 	(a)	 	Committee Composition	  	7	
				
	 	(b)	 	Authority of the Committee	  	7	
				
	 	(c)	 	Indemnification	  	8	
				
SECTION 4.	 		 	GENERAL	  	8	
				
	 	(a)	 	General Eligibility	  	8	
				
	 	(b)	 	Incentive Stock Options	  	8	
				
	 	(c)	 	Restrictions on Shares	  	8	
				
	 	(d)	 	Beneficiaries	  	8	
				
	 	(e)	 	Performance Conditions	  	9	
				
	 	(f)	 	No Rights as a Shareholder	  	9	
 
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 	 	 	 	 	  	Page	
	 	(g)	 	Termination of Service	  	9	
				
	 	(h)	 	Director Fees	  	9	
				
SECTION 5.	 		 	SHARES SUBJECT TO PLAN AND SHARE LIMITS	  	10	
				
	 	(a)	 	Basic Limitations	  	10	
				
	 	(b)	 	Additional Shares	  	10	
				
	 	(c)	 	Dividend Equivalents	  	10	
				
	 	(d)	 	Share Limits	  	10	
				
SECTION 6.	 		 	TERMS AND CONDITIONS OF OPTIONS	  	11	
				
	 	(a)	 	Stock Option Agreement	  	11	
				
	 	(b)	 	Number of Shares	  	11	
				
	 	(c)	 	Exercise Price	  	11	
				
	 	(d)	 	Exercisability and Term	  	11	
				
	 	(e)	 	Modifications or Assumption of Options	  	11	
				
	 	(f)	 	Assignment or Transfer of Options	  	12	
				
SECTION 7.	 		 	PAYMENT FOR OPTION SHARES	  	12	
				
SECTION 8.	 		 	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS	  	13	
				
	 	(a)	 	SAR Agreement	  	13	
				
	 	(b)	 	Number of Shares	  	13	
				
	 	(c)	 	Exercise Price	  	13	
				
	 	(d)	 	Exercisability and Term	  	13	
				
	 	(e)	 	Exercise of SARs	  	13	
				
	 	(f)	 	Modification or Assumption of SARs	  	14	
				
	 	(g)	 	Assignment or Transfer of SARs	  	14	
				
SECTION 9.	 		 	TERMS AND CONDITIONS FOR STOCK GRANTS.	  	14	
				
	 	(a)	 	Amount and Form of Awards	  	14	
				
	 	(b)	 	Stock Grant Agreement	  	14	
				
	 	(c)	 	Payment for Stock Grants	  	15	
				
	 	(d)	 	Vesting Conditions	  	15	
				
	 	(e)	 	Assignment or Transfer of Stock Grants	  	15	
				
	 	(f)	 	Voting and Dividend Rights	  	15	
 
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 	 	 	 	 	  	Page	
	 	(g)	 	Modification or Assumption of Stock Grants	  	15	
				
SECTION 10.	 		 	TERMS AND CONDITIONS OF STOCK UNITS	  	15	
				
	 	(a)	 	Stock Unit Agreement	  	15	
				
	 	(b)	 	Number of Shares	  	16	
				
	 	(c)	 	Payment for Stock Units	  	16	
				
	 	(d)	 	Vesting Conditions	  	16	
				
	 	(e)	 	Voting and Dividend Rights	  	16	
				
	 	(f)	 	Form and Time of Settlement of Stock Units	  	16	
				
	 	(g)	 	Creditors’ Rights	  	17	
				
	 	(h)	 	Modification or Assumption of Stock Units	  	17	
				
	 	(i)	 	Assignment or Transfer of Stock Units	  	17	
				
SECTION 11.	 		 	PROTECTION AGAINST DILUTION	  	17	
				
	 	(a)	 	Adjustments	  	17	
				
	 	(b)	 	Participant Rights	  	17	
				
	 	(c)	 	Fractional Shares	  	18	
				
SECTION 12.	 		 	EFFECT OF A CORPORATE TRANSACTION	  	18	
				
	 	(a)	 	Corporate Transaction	  	18	
				
	 	(b)	 	Acceleration	  	18	
				
	 	(c)	 	Dissolution	  	18	
				
SECTION 13.	 		 	LIMITATIONS ON RIGHTS	  	19	
				
	 	(a)	 	No Entitlements	  	19	
				
	 	(b)	 	Shareholders’ Rights	  	19	
				
	 	(c)	 	Regulatory Requirements	  	19	
				
SECTION 14.	 		 	WITHHOLDING TAXES	  	19	
				
	 	(a)	 	General	  	19	
				
	 	(b)	 	Share Withholding	  	20	
				
SECTION 15.	 		 	DURATION AND AMENDMENTS	  	20	
				
	 	(a)	 	Term of the Plan	  	20	
				
	 	(b)	 	Right to Amend or Terminate the Plan	  	20	
				
SECTION 16.	 		 	EXECUTION	  	20	
 
iv

CISCO SYSTEMS, INC.
2005 STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED
(Effective as of November 15, 2007)
SECTION 1.    INTRODUCTION.
The Company’s Board of Directors adopted the Cisco Systems, Inc. 2005 Stock Incentive Plan, as amended and restated on September 13, 2007; provided that, the Plan shall become effective upon its approval by Company shareholders. If the Company’s shareholders do not approve this Plan, no Awards will be made under this Plan.
The purpose of the Plan is to promote the long-term success of the Company and the creation of shareholder value by offering Key Employees an opportunity to share in such long-term success by acquiring a proprietary interest in the Company.
The Plan seeks to achieve this purpose by providing for discretionary long-term incentive Awards in the form of Options (which may constitute Incentive Stock Options or Nonstatutory Stock Options), Stock Appreciation Rights, Stock Grants, and Stock Units.
The Plan shall be governed by, and construed in accordance with, the laws of the State of California (except its choice-of-law provisions).
Capitalized terms shall have the meaning provided in Section 2 unless otherwise provided in this Plan or any related Stock Option Agreement, SAR Agreement, Stock Grant Agreement or Stock Unit Agreement.
SECTION 2.    DEFINITIONS.
(a) “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity.
(b) “Award” means any award of an Option, SAR, Stock Grant or Stock Unit under the Plan.
(c) “Board” means the Board of Directors of the Company, as constituted from time to time.
(d) “Cashless Exercise” means, to the extent that a Stock Option Agreement so provides and as permitted by applicable law, a program approved by the Committee in which payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price and, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates, including, but not limited to, U.S. federal and state income taxes, payroll taxes, and foreign taxes, if applicable.
 
1

(e) “Cause” means, except as may otherwise be provided in a Participant’s employment agreement or Award agreement, a conviction of a Participant for a felony crime or the failure of a Participant to contest prosecution for a felony crime, or a Participant’s misconduct, fraud or dishonesty (as such terms are defined by the Committee in its sole discretion), or any unauthorized use or disclosure of confidential information or trade secrets, in each case as determined by the Committee, and the Committee’s determination shall be conclusive and binding.
(f) “Change In Control” except as may otherwise be provided in a Participant’s employment agreement or Award agreement, means the occurrence of any of the following:
(i) A change in the composition of the Board over a period of thirty-six consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination; or
(ii) The acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing more than 35% of the total combined voting power of the Company’s then outstanding securities pursuant to a tender or exchange offer made directly to the Company’s shareholders which the Board does not recommend such shareholders accept.
(g) “Code” means the Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder.
(h) “Committee” means a committee described in Section 3.
(i) “Common Stock” means the Company’s common stock.
(j) “Company” means Cisco Systems, Inc., a California corporation.
(k) “Consultant” means an individual who performs bona fide services to the Company, a Parent, a Subsidiary or an Affiliate, other than as an Employee or Director or Non-Employee Director.
 
2

(l) “Corporate Transaction” except as may otherwise be provided in a Participant’s employment agreement or Award agreement, means the occurrence of any of the following shareholder approved transactions:
(i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; or
(ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets.
A transaction shall not constitute a Corporate Transaction if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transactions.
(m) “Covered Employees” means those persons who are subject to the limitations of Code Section 162(m).
(n) “Director” means a member of the Board who is also an Employee.
(o) “Disability” means that the Key Employee is classified as disabled under a long-term disability policy of the Company or, if no such policy applies, the Key Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
(p) “Employee” means an individual who is a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.
(q) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(r) “Exercise Price” means, in the case of an Option, the amount for which a Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value in determining the amount payable upon exercise of such SAR.
(s) “Fair Market Value” means the market price of a Share as determined in good faith by the Committee. The Fair Market Value shall be determined by the following:
 
3

(i) If the Shares were traded over-the-counter or listed with NASDAQ on the date in question, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for the date in question or (ii) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange on the date in question, the Fair Market Value is the closing selling price for the Common Stock as such price is officially quoted in the composite tape of transactions on the exchange determined by the Committee to be the primary market for the Common Stock for the date in question; provided, however, that if there is no such reported price for the Common Stock for the date in question under (i) or (ii), then such price on the last preceding date for which such price exists shall be determinative of Fair Market Value.
If neither (i) or (ii) are applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of The Wall Street Journal . Such determination shall be conclusive and binding on all persons.
(t) “Fiscal Year” means the Company’s fiscal year.
(u) “Grant” means any grant of an Award under the Plan.
(v) “Incentive Stock Option” or “ISO” means an incentive stock option described in Code Section 422.
(w) “Key Employee” means an Employee, Director, Non-Employee Director or Consultant who has been selected by the Committee to receive an Award under the Plan.
(x) “Non-Employee Director” means a member of the Board who is not an Employee.
(y) “Nonstatutory Stock Option” or “NSO” means a stock option that is not an ISO.
(z) “Option” means an ISO or NSO granted under the Plan entitling the Optionee to purchase Shares.
(aa) “Optionee” means an individual, estate or other entity that holds an Option.
(bb) “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.
(cc) “Participant” means an individual or estate or other entity that holds an Award.
 
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(dd) “Performance Goal” means an objective formula or standard determined by the Committee with respect to each Performance Period utilizing one or more of the following factors and any objectively verifiable adjustment(s) thereto permitted and preestablished by the Committee in accordance with Code Section 162(m): (i) operating income; (ii) earnings before interest, taxes, depreciation and amortization; (iii) earnings; (iv) cash flow; (v) market share; (vi) sales; (vii) revenue; (viii) profits before interest and taxes; (ix) expenses; (x) cost of goods sold; (xi) profit/loss or profit margin; (xii) working capital; (xiii) return on capital, equity or assets; (xiv) earnings per share; (xv) economic value added; (xvi) stock price; (xvii) price/earnings ratio; (xviii) debt or debt-to-equity; (xix) accounts receivable; (xx) writeoffs; (xxi) cash; (xxii) assets; (xxiii) liquidity; (xxiv) operations; (xxv) intellectual property (e.g., patents); (xxvi) product development; (xxvii) regulatory activity; (xxviii) manufacturing, production or inventory; (xxix) mergers and acquisitions or divestitures; (xxx) financings; and/or (xxxi) customer satisfaction, each with respect to the Company and/or one or more of its affiliates or operating units. Awards issued to persons who are not Covered Employees may take into account other factors (including subjective factors).
(ee) “Performance Period” means any period not exceeding 36 months as determined by the Committee, in its sole discretion. The Committee may establish different Performance Periods for different Participants, and the Committee may establish concurrent or overlapping Performance Periods.
(ff) “Plan” means this Cisco Systems, Inc. 2005 Stock Incentive Plan as amended and restated, and as it may be further amended from time to time.
(gg) “Previous Plan Award” means any award of an Option, SAR, Stock Grant or Stock Unit under the Cisco Systems, Inc. 1996 Stock Incentive Plan, the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan or the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan.
(hh) “Re-Price” means that the Company has lowered or reduced the Exercise Price of outstanding Options and/or outstanding SARs for any Participant(s), whether through amendment, cancellation, or replacement grants, or any other means.
(ii) “SAR Agreement” means the agreement described in Section 8 evidencing each Award of a Stock Appreciation Right.
(jj) “SEC” means the Securities and Exchange Commission.
(kk) “Section 16 Persons” means those officers, directors or other persons who are subject to Section 16 of the Exchange Act.
(ll) “Securities Act” means the Securities Act of 1933, as amended.
(mm) “Service” means service as an Employee, Director, Non-Employee Director or Consultant. A Participant’s Service does not terminate when continued service crediting
 
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is required by applicable law. However, for purposes of determining whether an Option is entitled to continuing ISO status, a common-law employee’s Service will be treated as terminating ninety (90) days after such Employee went on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Committee determines which leaves count toward Service, and when Service terminates for all purposes under the Plan. Further, unless otherwise determined by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant provides service to the Company, a Parent, Subsidiary or Affiliate, or a transfer between entities (the Company or any Parent, Subsidiary, or Affiliate); provided that there is no interruption or other termination of Service.
(nn) “Share” means one share of Common Stock.
(oo) “Stock Appreciation Right” or “SAR” means a stock appreciation right awarded under the Plan.
(pp) “Stock Grant” means Shares awarded under the Plan.
(qq) “Stock Grant Agreement” means the agreement described in Section 9 evidencing each Award of a Stock Grant.
(rr) “Stock Option Agreement” means the agreement described in Section 6 evidencing each Award of an Option.
(ss) “Stock Unit” means a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan.
(tt) “Stock Unit Agreement” means the agreement described in Section 10 evidencing each Award of a Stock Unit.
(uu) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
(vv) “10-Percent Shareholder” means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its Parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.
 
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SECTION 3.    ADMINISTRATION.
(a) Committee Composition. The Board or a Committee appointed by the Board shall administer the Plan. Unless the Board provides otherwise, the Company’s Compensation & Management Development Committee shall be the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.
The Committee shall have membership composition which enables (i) Awards to Section 16 Persons to qualify as exempt from liability under Section 16(b) of the Exchange Act and (ii) Awards to Covered Employees to qualify as performance-based compensation as provided under Code Section 162(m).
The Board may also appoint one or more separate committees of the Board, each composed of two or more directors of the Company who need not qualify under Rule 16b-3 or Code Section 162(m), that may administer the Plan with respect to Key Employees who are not Section 16 Persons or Covered Employees, respectively, may grant Awards under the Plan to such Key Employees and may determine all terms of such Awards.
Notwithstanding the foregoing, the Board shall constitute the Committee and shall administer the Plan with respect to Non-Employee Directors, shall grant Awards under the Plan to such Non-Employee Directors, and shall determine all terms of such Awards.
(b) Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have full authority and sole discretion to take any actions it deems necessary or advisable for the administration of the Plan. Such actions shall include:
(i) selecting Key Employees who are to receive Awards under the Plan;
(ii) determining the type, number, vesting requirements and other features and conditions of such Awards and amending such Awards;
(iii) correcting any defect, supplying any omission, or reconciling any inconsistency in the Plan or any Award agreement;
(iv) accelerating the vesting, or extending the post-termination exercise term, of Awards at any time and under such terms and conditions as it deems appropriate;
(v) interpreting the Plan;
(vi) making all other decisions relating to the operation of the Plan; and
(vii) adopting such plans or subplans as may be deemed necessary or appropriate to provide for the participation by Key Employees of the Company and its Subsidiaries and Affiliates who reside outside the U.S., which plans and/or subplans shall be attached hereto as Appendices.
 
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The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.
(c) Indemnification. To the maximum extent permitted by applicable law, each member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Stock Option Agreement, SAR Agreement, Stock Grant Agreement or Stock Unit Agreement, and (ii) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.
SECTION 4.    GENERAL.
(a) General Eligibility. Only Employees, Directors, Non-Employee Directors and Consultants shall be eligible for designation as Key Employees by the Committee, in its sole discretion.
(b) Incentive Stock Options. Only Key Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Employee who is a 10-Percent Shareholder shall not be eligible for the grant of an ISO unless the requirements set forth in Section 422(c)(5) of the Code are satisfied.
(c) Restrictions on Shares. Any Shares issued pursuant to an Award shall be subject to such rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine, in its sole discretion. Such restrictions shall apply in addition to any restrictions that may apply to holders of Shares generally and shall also comply to the extent necessary with applicable law. In no event shall the Company be required to issue fractional Shares under this Plan.
(d) Beneficiaries. Unless stated otherwise in an Award agreement, a Participant may designate one or more beneficiaries with respect to an Award by timely filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Participant’s death. If no beneficiary was designated or if no designated beneficiary survives the Participant, then after a Participant’s death any vested Award(s) shall be transferred or distributed to the Participant’s estate.
 
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(e) Performance Conditions. The Committee may, in its discretion, include performance conditions in an Award or grant an Award upon the satisfaction of performance conditions. If performance conditions are included in Awards to Covered Employees, then such Awards may be subject to the achievement of Performance Goals established by the Committee. Such Performance Goals shall be established and administered pursuant to the requirements of Code Section 162(m). Before any Shares underlying an Award or any Award payments subject to Performance Goals are released to a Covered Employee with respect to a Performance Period, the Committee shall certify in writing that the Performance Goals for such Performance Period have been satisfied. Awards with performance conditions that are granted to Key Employees who are not Covered Employees need not comply with the requirements of Code Section 162(m).
(f) No Rights as a Shareholder. A Participant, or a transferee of a Participant, shall have no rights as a shareholder with respect to any Common Stock covered by an Award until such person has satisfied all of the terms and conditions to receive such Common Stock, has satisfied any applicable withholding or tax obligations relating to the Award and the Shares have been issued (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company).
(g) Termination of Service. Unless the applicable Award agreement or, with respect to Participants who reside in the U.S., the applicable employment agreement provides otherwise, the following rules shall govern the vesting, exercisability and term of outstanding Awards held by a Participant in the event of termination of such Participant’s Service (in all cases subject to the expiration term of the Option or SAR as applicable): (i) upon termination of Service for any reason, all unvested portions of any outstanding Awards shall be immediately forfeited without consideration and the vested portions of any outstanding Stock Units shall be settled upon termination; (ii) if the Service of a Participant is terminated for Cause, then all unexercised Options and SARs, unvested portions of Stock Units and unvested portions of Stock Grants shall terminate and be forfeited immediately without consideration; (iii) if the Service of a Participant is terminated for any reason other than for Cause, death, or Disability, then the vested portion of his or her then-outstanding Options and/or SARs may be exercised by such Participant or his or her personal representative within three months after the date of such termination; or (iv) if the Service of a Participant is terminated due to death or Disability, the vested portion of his or her then-outstanding Options and/or SARs may be exercised within eighteen months after the date of termination of Service.
(h) Director Fees. Each Non-Employee Director may elect to receive a Stock Grant or Stock Unit under the Plan in lieu of payment of a portion of his or her regular annual retainer based on the Fair Market Value of the Shares on the date any regular annual retainer would otherwise be paid. For purposes of the Plan, a Non-Employee Director’s regular annual retainer shall not include any additional retainer paid in connection with service on any committee of the Board or paid for any other reason. Such an election may be for any dollar or percentage amount equal to at least 25% of the Non-Employee
 
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Director’s regular annual retainer (up to a limit of 100% of the Non-Employee Director’s regular annual retainer). The election must be made prior to the beginning of the annual board of directors cycle which shall be any twelve month continuous period designated by the Board. Any amount of the regular annual retainer not elected to be received as a Stock Grant or Stock Unit shall be payable in cash in accordance with the Company’s standard payment procedures. Shares granted under this Section 4(h) shall otherwise be subject to the terms of the Plan applicable to Non-Employee Directors or to Participants generally (other than provisions specifically applying only to Employees).
SECTION 5.    SHARES SUBJECT TO PLAN AND SHARE LIMITS.
(a) Basic Limitations. The stock issuable under the Plan shall be authorized but unissued Shares. The aggregate number of Shares reserved for Awards under the Plan shall not exceed 559,000,000 Shares, subject to adjustment pursuant to Section 11. Shares issued as Stock Grants or pursuant to Stock Units will count against the Shares available for issuance under the Plan as 2.5 Shares for every 1 Share issued in connection with the Award.
(b) Additional Shares. If Awards are forfeited or are terminated for any other reason before being exercised or settled, then the Shares underlying such Awards shall again become available for Awards under the Plan. If a Previous Plan Award is forfeited or is terminated for any other reason before being exercised or settled, then the Shares underlying such Previous Plan Award shall again become available for Awards under this Plan. SARs shall be counted in full against the number of Shares available for issuance under the Plan, regardless of the number of Shares issued upon settlement of the SARs.
(c) Dividend Equivalents. Any dividend equivalents distributed under the Plan shall not be applied against the number of Shares available for Awards.
(d) Share Limits.
(i) Limits on Options . Subject to adjustment pursuant to Section 11, no Key Employee shall receive Options to purchase Shares during any Fiscal Year covering in excess of 5,000,000 Shares and the aggregate maximum number of Shares that may be issued in connection with ISOs shall be 559,000,000 Shares.
(ii) Limits on SARs . Subject to adjustment pursuant to Section 11, no Key Employee shall receive Awards of SARs during any Fiscal Year covering in excess of 5,000,000 Shares and the aggregate maximum number of Shares that may be issued in connection with SARs shall be 559,000,000 Shares.
(iii) Limits on Stock Grants and Stock Units . Subject to adjustment pursuant to Section 11, no Key Employee shall receive Stock Grants or Stock Units during any Fiscal Year covering, in the aggregate, in excess of 5,000,000 Shares.
 
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(iv) Limits on Awards to Non-Employee Directors . Subject to adjustment pursuant to Section 11, no Non-Employee Director shall receive Awards during any Fiscal Year covering, in the aggregate, in excess of 50,000 Shares; provided that any Shares received pursuant to an election under Section 4(h) shall not count against such limit.
SECTION 6.    TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each Grant of an Option under the Plan shall be evidenced and governed exclusively by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a Stock Option Agreement (including without limitation any performance conditions). The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Stock Option Agreement shall also specify whether the Option is an ISO or an NSO.
(b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall be subject to adjustment of such number in accordance with Section 11.
(c) Exercise Price. An Option’s Exercise Price shall be established by the Committee and set forth in a Stock Option Agreement. The Exercise Price of an Option shall not be less than 100% of the Fair Market Value (110% for ISO grants to 10-Percent Shareholders) on the date of Grant.
(d) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an Option shall in no event exceed nine years from the date of Grant. Unless the applicable Stock Option Agreement provides otherwise, each Option shall vest and become exercisable with respect to 20% of the Shares subject to the Option upon completion of one year of Service measured from the vesting commencement date, the balance of the Shares subject to the Option shall vest and become exercisable in forty-eight equal installments upon completion of each month of Service thereafter, and the term of the Option shall be nine years from the date of Grant. A Stock Option Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events. Notwithstanding any other provision of the Plan, no Option can be exercised after the expiration date provided in the applicable Stock Option Agreement and no Option may provide that, upon exercise of the Option, a new Option will automatically be granted.
(e) Modifications or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new Options for the same or a different number of
 
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Shares, at the same or a different Exercise Price, and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, the Committee may not Re-Price outstanding Options unless there is approval by the Company shareholders and no modification of an Option shall, without the consent of the Optionee, impair his or her rights or obligations under such Option.
(f) Assignment or Transfer of Options. Except as otherwise provided in the applicable Stock Option Agreement and then only to the extent permitted by applicable law, no Option shall be transferable by the Optionee other than by will or by the laws of descent and distribution. Except as otherwise provided in the applicable Stock Option Agreement, an Option may be exercised during the lifetime of the Optionee only by the Optionee or by the guardian or legal representative of the Optionee. No Option or interest therein may be assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.
SECTION 7.    PAYMENT FOR OPTION SHARES.
The entire Exercise Price of Shares issued upon exercise of Options shall be payable in cash at the time when such Shares are purchased, except as follows and if so provided for in an applicable Stock Option Agreement:
(i) Surrender of Stock. Payment for all or any part of the Exercise Price or Options may be made with Shares which have already been owned by the Optionee; provided that the Committee may, in its sole discretion, require that Shares tendered for payment be previously held by the Optionee for a minimum duration. Such Shares shall be valued at their Fair Market Value.
(ii) Cashless Exercise. Payment for all or any part of the Exercise Price may be made through Cashless Exercise at the Committee’s sole discretion.
(iii) Other Forms of Payment. Payment for all or any part of the Exercise Price may be made in any other form that is consistent with applicable laws, regulations and rules and approved by the Committee.
In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Section 7. In the case of an NSO granted under the Plan, the Committee may, in its discretion at any time, accept payment in any form(s) described in this Section 7.
 
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SECTION 8.    TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.
(a) SAR Agreement. Each Grant of a SAR under the Plan shall be evidenced and governed exclusively by a SAR Agreement between the Participant and the Company. Such SAR shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a SAR Agreement (including without limitation any performance conditions). A SAR Agreement may provide for a maximum limit on the amount of any payout notwithstanding the Fair Market Value on the date of exercise of the SAR. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Participant’s compensation.
(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall be subject to adjustment of such number in accordance with Section 11.
(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price which shall be established by the Committee. The Exercise Price of a SAR shall not be less than 100% of the Fair Market Value on the date of Grant.
(d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR which shall not exceed nine years from the date of Grant. Unless the applicable SAR Agreement provides otherwise, each SAR shall vest and become exercisable with respect to 20% of the Shares subject to the SAR upon completion of one year of Service measured from the vesting commencement date, the balance of the Shares subject to the SAR shall vest and become exercisable in forty-eight equal installments upon completion of each month of Service thereafter, and the term of the SAR shall be nine years from the date of Grant. A SAR Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events. SARs may be awarded in combination with Options or Stock Grants, and such an Award shall provide that the SARs will not be exercisable unless the related Options or Stock Grants are forfeited. A SAR may be included in an ISO only at the time of Grant but may be included in an NSO at the time of Grant or at any subsequent time, but not later than six months before the expiration of such NSO. No SAR may provide that, upon exercise of the SAR, a new SAR will automatically be granted.
(e) Exercise of SARs. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of a SAR, the Participant (or any person having the right to exercise the SAR) shall receive from the Company (i) Shares, (ii) cash or (iii) any combination of Shares and cash, as the Committee shall determine at the time of Grant of the SAR, in its sole discretion. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs
 
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shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of exercise) of the Shares subject to the SARs exceeds the Exercise Price of those Shares.
(f) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding stock appreciation rights or may accept the cancellation of outstanding stock appreciation rights (including stock appreciation rights granted by another issuer) in return for the grant of new SARs for the same or a different number of Shares, at the same or a different Exercise Price, and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, unless there is approval by the Company shareholders, the Committee may not Re-Price outstanding SARs and no modification of a SAR shall, without the consent of the Participant, impair his or her rights or obligations under such SAR.
(g) Assignment or Transfer of SARs. Except as otherwise provided in the applicable SAR Agreement and then only to the extent permitted by applicable law, no SAR shall be transferable by the Participant other than by will or by the laws of descent and distribution. Except as otherwise provided in the applicable SAR Agreement, a SAR may be exercised during the lifetime of the Participant only by the Participant or by the guardian or legal representative of the Participant. No SAR or interest therein may be assigned, pledged or hypothecated by the Participant during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.
SECTION 9.    TERMS AND CONDITIONS FOR STOCK GRANTS.
(a) Amount and Form of Awards. Awards under this Section 9 may be granted in the form of a Stock Grant. Each Stock Grant Agreement shall specify the number of Shares to which the Stock Grant pertains and shall be subject to adjustment of such number in accordance with Section 11. A Stock Grant may also be awarded in combination with NSOs, and such an Award may provide that the Stock Grant will be forfeited in the event that the related NSOs are exercised.
(b) Stock Grant Agreement. Each Stock Grant awarded under the Plan shall be evidenced and governed exclusively by a Stock Grant Agreement between the Participant and the Company. Each Stock Grant shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in the applicable Stock Grant Agreement (including without limitation any performance conditions). The provisions of the various Stock Grant Agreements entered into under the Plan need not be identical.
 
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(c) Payment for Stock Grants. Stock Grants may be issued with or without cash consideration or any other form of legally permissible consideration approved by the Committee.
(d) Vesting Conditions. Each Stock Grant may or may not be subject to vesting. Any such vesting provision may provide that Shares shall vest based on Service over time or shall vest, in full or in installments, upon satisfaction of performance conditions specified in the Stock Grant Agreement which may include Performance Goals pursuant to Section 4(e). Unless the applicable Stock Grant Agreement provides otherwise, each Stock Grant shall vest with respect to 20% of the Shares subject to the Stock Grant upon completion of each year of Service on each of the first through fifth annual anniversaries of the vesting commencement date. A Stock Grant Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events.
(e) Assignment or Transfer of Stock Grants. Except as provided in the applicable Stock Grant Agreement, and then only to the extent permitted by applicable law, a Stock Grant awarded under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. Any act in violation of this Section 9(e) shall be void. However, this Section 9(e) shall not preclude a Participant from designating a beneficiary who will receive any vested outstanding Stock Grant Awards in the event of the Participant’s death, nor shall it preclude a transfer of vested Stock Grant Awards by will or by the laws of descent and distribution.
(f) Voting and Dividend Rights. The holder of a Stock Grant awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other shareholders. A Stock Grant Agreement, however, may require that the holder of such Stock Grant invest any cash dividends received in additional Shares subject to the Stock Grant. Such additional Shares subject to the Stock Grant shall be subject to the same conditions and restrictions as the Stock Grant with respect to which the dividends were paid. Such additional Shares subject to the Stock Grant shall not reduce the number of Shares available for issuance under Section 5.
(g) Modification or Assumption of Stock Grants. Within the limitations of the Plan, the Committee may modify or assume outstanding stock grants or may accept the cancellation of outstanding stock grants (including stock granted by another issuer) in return for the grant of new Stock Grants for the same or a different number of Shares and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, no modification of a Stock Grant shall, without the consent of the Participant, impair his or her rights or obligations under such Stock Grant.
SECTION 10.    TERMS AND CONDITIONS OF STOCK UNITS.
(a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced and governed exclusively by a Stock Unit Agreement between the Participant and the
 
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Company. Such Stock Units shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in the applicable Stock Unit Agreement (including without limitation any performance conditions). The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the Participant’s other compensation.
(b) Number of Shares. Each Stock Unit Agreement shall specify the number of Shares to which the Stock Unit Grant pertains and shall be subject to adjustment of such number in accordance with Section 11.
(c) Payment for Stock Units. Stock Units shall be issued without consideration.
(d) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Any such vesting provision may provide that Shares shall vest based on Service over time or shall vest, in full or in installments, upon satisfaction of performance conditions specified in the Stock Unit Agreement which may include Performance Goals pursuant to Section 4(e). Unless the applicable Stock Unit Agreement provides otherwise, each Stock Unit shall vest with respect to 20% of the Shares subject to the Stock Unit upon completion of each year of Service on each of the first through fifth annual anniversaries of the vesting commencement date. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events.
(e) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach.
(f) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee at the time of the grant of the Stock Units, in its sole discretion. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when the vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred, in accordance with applicable law, to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 11.
 
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(g) Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.
(h) Modification or Assumption of Stock Units. Within the limitations of the Plan, the Committee may modify or assume outstanding stock units or may accept the cancellation of outstanding stock units (including stock units granted by another issuer) in return for the grant of new Stock Units for the same or a different number of Shares and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, no modification of a Stock Unit shall, without the consent of the Participant, impair his or her rights or obligations under such Stock Unit.
(i) Assignment or Transfer of Stock Units. Except as provided in the applicable Stock Unit Agreement, and then only to the extent permitted by applicable law, Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. Any act in violation of this Section 10(i) shall be void. However, this Section 10(i) shall not preclude a Participant from designating a beneficiary who will receive any outstanding vested Stock Units in the event of the Participant’s death, nor shall it preclude a transfer of vested Stock Units by will or by the laws of descent and distribution.
SECTION 11.    PROTECTION AGAINST DILUTION.
(a) Adjustments. In the event of a subdivision of the outstanding Shares, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Shares (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make appropriate adjustments to the following:
(i) the number of Shares and the kind of shares or securities available for future Awards under Section 5;
(ii) the limits on Awards specified in Section 5;
(iii) the number of Shares and the kind of shares or securities covered by each outstanding Award; or
(iv) the Exercise Price under each outstanding SAR or Option.
(b) Participant Rights. Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of
 
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any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. If by reason of an adjustment pursuant to this Section 11 a Participant’s Award covers additional or different shares of stock or securities, then such additional or different shares and the Award in respect thereof shall be subject to all of the terms, conditions and restrictions which were applicable to the Award and the Shares subject to the Award prior to such adjustment.
(c) Fractional Shares. Any adjustment of Shares pursuant to this Section 11 shall be rounded down to the nearest whole number of Shares. Under no circumstances shall the Company be required to authorize or issue fractional shares and no consideration shall be provided as a result of any fractional shares not being issued or authorized.
SECTION 12.    EFFECT OF A CORPORATE TRANSACTION.
(a) Corporate Transaction. In the event that the Company is a party to a Corporate Transaction, outstanding Awards shall be subject to the applicable agreement of merger, reorganization, or sale of assets. Such agreement may provide, without limitation, for the assumption or substitution of outstanding Options, SARs, or Stock Units by the surviving corporation or its parent, for the assumption of outstanding Stock Grant Agreements by the surviving corporation or its parent, for the replacement of outstanding Options, SARs, and Stock Units with a cash incentive program of the surviving corporation which preserves the spread existing on the unvested portions of such outstanding Awards at the time of the transaction and provides for subsequent payout in accordance with the same vesting provisions applicable to those Awards, for accelerated vesting of outstanding Awards, or for the cancellation of outstanding Options, SARs, and Stock Units, with or without consideration, in all cases without the consent of the Participant.
(b) Acceleration. The Committee may determine, at the time of grant of an Award or thereafter, that such Award shall become fully vested as to all Shares subject to such Award in the event that a Corporate Transaction or a Change in Control occurs. Unless otherwise provided in the applicable Award agreement, in the event that a Corporate Transaction occurs and any outstanding Options, SARs or Stock Units are not assumed, substituted, or replaced with a cash incentive program pursuant to Section 12(a) or any outstanding Stock Grant Agreements are not assumed pursuant to Section 12(a), then such Awards shall fully vest and be fully exercisable immediately prior to such Corporate Transaction. Immediately following the consummation of a Corporate Transaction, all outstanding Options, SARs and Stock Units shall terminate and cease to be outstanding, except to the extent that they are assumed by the surviving corporation or its parent.
(c) Dissolution. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.
 
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SECTION 13.    LIMITATIONS ON RIGHTS.
(a) No Entitlements. A Participant’s rights, if any, in respect of or in connection with any Award is derived solely from the discretionary decision of the Company to permit the individual to participate in the Plan and to benefit from a discretionary Award. By accepting an Award under the Plan, a Participant expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards. Any Award granted hereunder is not intended to be compensation of a continuing or recurring nature, or part of a Participant’s normal or expected compensation, and in no way represents any portion of a Participant’s salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent, a Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries and Affiliates reserve the right to terminate the Service of any person at any time, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and such terminated person shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(b) Shareholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a shareholder with respect to any Shares covered by his or her Award prior to the issuance of such Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company). No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such Shares are issued, except as expressly provided in Section 11.
(c) Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Shares or other securities under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Shares or other securities pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Shares or other securities, to their registration, qualification or listing or to an exemption from registration, qualification or listing.
SECTION 14.    WITHHOLDING TAXES.
(a) General. A Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with his or her Award. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.
 
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(b) Share Withholding. If a public market for the Company’s Shares exists, the Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering or attesting to all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued based on the value of the actual trade or, if there is none, the Fair Market Value as of the previous day. Any payment of taxes by assigning Shares to the Company may be subject to restrictions, including, but not limited to, any restrictions required by rules of the SEC. The Committee may, in its discretion, also permit a Participant to satisfy withholding or income tax obligations related to an Award through Cashless Exercise or through a sale of Shares underlying the Award.
SECTION 15.    DURATION AND AMENDMENTS.
(a) Term of the Plan. The Plan shall become effective upon its approval by Company shareholders. The Plan shall terminate at the Company’s 2012 Annual Meeting of Shareholders and may be terminated on any earlier date pursuant to this Section 15.
(b) Right to Amend or Terminate the Plan. The Board may amend or terminate the Plan at any time and for any reason. The termination of the Plan, or any amendment thereof, shall not impair the rights or obligations of any Participant under any Award previously granted under the Plan without the Participant’s consent. No Awards shall be granted under the Plan after the Plan’s termination. An amendment of the Plan shall be subject to the approval of the Company’s shareholders only to the extent such approval is otherwise required by applicable laws, regulations or rules.
SECTION 16.    EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to execute this Plan on behalf of the Company.

CISCO SYSTEMS, INC.	
		
By:	 	 	
	 	Mark Chandler	
		
Title:	 	Senior Vice President, Legal Services,	
	 	General Counsel and Secretary	
 
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(For Grants Prior to September 2008)
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the “Option”) made to purchase shares of Cisco Systems, Inc. (the “Company”) common stock:
Optionee:                                                                                                                                                                                                     
Grant Date:                                                                                                                                                                                                   
							
Type of Option:	 	         Incentive Stock Option	  		  		
	 	          Nonstatutory Stock Option	  		  		
Grant Number:                                                                                                                                                                            
Number of Option Shares:                                                                                                                                                                 shares
Exercise Price: $              per share
Vesting Commencement Date:                                                                                                                                                                      
Expiration Date:                                                                                                                                                                            
Exercise Schedule
The Option shall vest and become exercisable with respect to (i) twenty percent (20%) of the Option Shares upon Optionee’s completion of one (1) year of Service measured from the Vesting Commencement Date and (ii) the balance of the Option Shares in a series of forty-eight (48) successive equal monthly installments upon Optionee’s completion of each additional month of Service over the forty-eight (48)-month period measured from the first annual anniversary of the Vesting Commencement Date. In no event shall the Option vest and become exercisable for any additional Option Shares after Optionee’s cessation of Service.
Should Optionee request a reduction to his or her work commitment to less than thirty (30) hours per week, then the Committee shall have the right, to extend the period over which the Option shall thereafter vest and become exercisable for the Option Shares during the remainder of the Option term. The decision whether or not to approve Optionee’s request for any reduced work commitment shall be at the sole discretion of the Company. In no event shall any extension of the Exercise Schedule for the Option Shares result in the extension of the Expiration Date of the Option.
Optionee understands and agrees that the Option is offered subject to and in accordance with the terms of the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto.
No Employment or Service Contract . Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.
Definitions . All capitalized terms in this Notice shall have the meaning assigned to them in this Notice, the attached Stock Option Agreement or the Plan.

STOCK OPTION AGREEMENT
Recitals
A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and Consultants and other independent advisors who provide services to the Company (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Company (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company’s grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement, the attached Notice of Grant of Stock Option (the “ Notice”), or the Plan.
NOW, THEREFORE , it is hereby agreed as follows:
1. Grant of Option . The Company hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Notice. The Option Shares shall be purchasable from time to time during the Option term specified in Paragraph 2 at the Exercise Price specified in the Notice.
2. Option Term . This Option shall have a maximum term of nine (9) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 4, 5 or 6.
3. Non-Transferability . This Option shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. Notwithstanding the foregoing, should the Optionee die while holding this Option, then this Option shall be transferred in accordance with Optionee’s will or the laws of descent and distribution.
4. Dates of Exercise . This Option shall vest and become exercisable for the Option Shares in one or more installments as specified in the Notice. As the Option becomes exercisable for such installments, those installments shall accumulate and the Option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the Option term under Paragraph 5 or 6. As an administrative matter, the exercisable portion of this Option may only be exercised until the close of the Nasdaq Global Select Market on the Expiration Date or the earlier termination date under Paragraph 5 or 6 or, if such date is not a trading day on the Nasdaq Global Select Market, the last trading day before such date. Any later attempt to exercise this Option will not be honored. For example, if Optionee ceases to remain in Service as provided in Paragraph 5(i) and the date three (3) months from the date of cessation is Monday, July 4 (a holiday on which the Nasdaq Global Select Market is closed), Optionee must exercise the exercisable portion of this Option by 4 pm Eastern Daylight Time on Friday, July 1.

5. Cessation of Service . The Option term specified in Paragraph 2 shall terminate (and this Option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:
(i) Should Optionee cease to remain in Service for any reason (other than death, Disability or Cause) while this Option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this Option, but in no event shall this Option be exercisable at any time after the Expiration Date.
(ii) If Optionee dies while this Option is outstanding, then the personal representative of Optionee’s estate or the person or persons to whom the Option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this Option. Such right shall lapse, and this Option shall cease to be outstanding, upon the earlier of (A) the expiration of the eighteen (18)- month period measured from the date of Optionee’s death or (B) the Expiration Date.
(iii) Should Optionee cease Service by reason of Disability while this Option is outstanding, then Optionee shall have a period of eighteen (18) months (commencing with the date of such cessation of Service) during which to exercise this Option, but in no event shall this Option be exercisable at any time after the Expiration Date.
(iv) Optionee’s date of cessation of Service shall mean the date upon which Optionee ceases active performance of services for the Company following the provision of such notification of termination or resignation from Service and shall be determined solely by this Agreement and without reference to any other agreement, written or oral, including Optionee’s contract of employment, and shall not otherwise include any period of notice of termination of employment, whether expressed or implied.
(v) During the limited period of post-Service exercisability, this Option may not be exercised in the aggregate for more than the number of vested Option Shares for which the Option is exercisable at the time of Optionee’s cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this Option shall terminate and cease to be outstanding for any vested Option Shares for which the Option has not been exercised. However, this Option shall, immediately upon Optionee’s cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares in which Optionee is not otherwise at that time vested or for which this Option is not otherwise at that time exercisable.
(vi) Should Optionee’s Service be terminated for Cause or should Optionee otherwise engage in activities constituting Cause while this Option is outstanding, then this Option shall terminate immediately and cease to remain outstanding. In the event Optionee’s Service with the Company is suspended pending an investigation of whether Optionee’s Service will be terminated for Cause, all Optionee’s rights under the Option, including the right to exercise the Option, shall be suspended during the investigation period.
 
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6. Special Acceleration of Option
(a) This Option, to the extent outstanding at the time of a Corporate Transaction but not otherwise fully vested and exercisable, shall automatically accelerate so that this Option shall, immediately prior to the effective date of the Corporate Transaction, become vested and exercisable for all of the Option Shares at the time subject to this Option and may be exercised for any or all of those Option Shares as fully-vested Shares. No such acceleration of this Option, however, shall occur if and to the extent: (i) this Option is, in connection with the Corporate Transaction, either assumed by the successor corporation (or parent thereof) or replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this Option is replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such Shares) and provides for subsequent pay-out in accordance with the same Exercise Schedule set forth in the Notice. The determination of option comparability under clause (i) shall be made by the Committee, and such determination shall be final, binding and conclusive.
(b) Immediately following the effective date of the Corporate Transaction, this Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.
(c) If this Option is assumed in connection with a Corporate Transaction, then the Committee shall appropriately adjust the number of shares and the kind of shares or securities covered by the Option and the Exercise Price immediately after such Corporate Transaction, provided the aggregate Exercise Price shall remain the same.
(d) This Option, to the extent outstanding at the time of a Change in Control but not otherwise fully vested and exercisable, shall automatically accelerate so that this Option shall, immediately prior to the effective date of the Change in Control, become vested and exercisable for all of the Option Shares at the time subject to this Option and may be exercised for any or all of those Option Shares as fully-vested Shares. This Option shall remain so exercisable until the Expiration Date or sooner termination of the Option term.
(e) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
 
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7. Adjustment in Option Shares . In the event of a subdivision of the outstanding Shares, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Shares (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, appropriate adjustments shall be made to (i) the total number and/or kind of shares or securities subject to this Option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.
8. Shareholder Rights . The holder of this Option shall not have any shareholder rights with respect to the Option Shares until such person shall have exercised the Option, paid the Exercise Price and become a holder of record of the purchased Shares.
9. Manner of Exercising Option .
(a) In order to exercise this Option with respect to all or any part of the Option Shares for which this Option is at the time exercisable, Optionee (or any other person or persons exercising the Option) must take the following actions:
(i) Pay the aggregate Exercise Price for the purchased Shares in one or more of the following forms:
(A) cash or check which, in the Company’s sole discretion, shall be made payable to a Company-designated brokerage firm or the Company;
(B) as permitted by applicable law, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the Option) shall concurrently provide irrevocable written instructions (I) to a Company-designated brokerage firm (or in the case of an executive officer or Board member of the Company, an Optionee-designated brokerage firm) to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased Shares plus, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates and (II) to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; and
(C) a promissory note payable to the Company, but only to the extent authorized by the Committee in accordance with Paragraph 13.
(ii) Furnish to the Company appropriate documentation that the person or persons exercising the Option (if other than Optionee) have the right to exercise this Option.
(iii) Make appropriate arrangements with the Company (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all tax withholding requirements applicable to the Option exercise.
 
4

(b) As soon as practical after the exercise date, the Company shall issue to or on behalf of Optionee (or any other person or persons exercising this Option) the purchased Option Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company), subject to the appropriate legends and/or stop transfer instructions.
(c) In no event may this Option be exercised for any fractional Shares.
(d) Notwithstanding any other provisions of the Plan, this Agreement or any other agreement to the contrary, if at the time this Option is exercised, Optionee is indebted to the Company (or any Parent or Subsidiary) for any reason, the following actions shall be taken, as deemed appropriate by the Committee:
(i) any Shares to be issued upon such exercise shall automatically be pledged against Optionee’s outstanding indebtedness; and
(ii) if this Option is exercised in accordance with subparagraph 9(a)(i)(B) above, the after tax proceeds of the sale of Optionee’s Shares shall automatically be applied to the outstanding balance of Optionee’s indebtedness.
10. Compliance with Laws and Regulations .
(a) The exercise of this Option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Company and Optionee with all applicable laws, regulations and rules relating thereto, including all applicable regulations of any stock exchange (or the Nasdaq Global Select Market, if applicable) on which the Shares may be listed for trading at the time of such exercise and issuance.
(b) The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Shares pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Shares as to which such approval shall not have been obtained. The Company, however, shall use its best efforts to obtain all such approvals.
11. Successors and Assigns . Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.
12. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to the Optionee at the address maintained for the Optionee in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
 
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13. Financing . The Committee may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse promissory note payable to the Company. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Committee in its sole discretion.
14. Construction . The Notice, this Agreement, and the Option evidenced hereby (a) are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan, and (b) constitute the entire agreement between Optionee and the Company on the subject matter hereof and supercede all proposals, written or oral, and all other communications between the parties related to the subject matter. All decisions of the Committee with respect to any question or issue arising under the Notice, this Agreement or the Plan shall be conclusive and binding on all persons having an interest in this Option.
15. Governing Law . The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to the conflict of laws principles thereof.
16. Excess Shares . If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of Shares which may without shareholder approval be issued under the Plan, then this Option shall be void with respect to those excess shares, unless shareholder approval of an amendment sufficiently increasing the number of Shares issuable under the Plan is obtained in accordance with the provisions of the Plan and all applicable laws, regulations and rules.
17. Additional Terms Applicable to an Incentive Stock Options . In the event this Option is designated an Incentive Stock Option in the Notice, the following terms and conditions shall also apply to the Option:
(a) This Option shall cease to qualify for favorable tax treatment as an Incentive Stock Option if (and to the extent) this Option is exercised for one or more Option Shares: (A) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Disability or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Disability.
(b) Even if this Option is designated as an Incentive Stock Option, if the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary, including under other plans of the Company) that first become exercisable in any calendar year have an aggregate Fair Market Value (determined for each Share as of the date of grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option in accordance all applicable laws, regulations and rules.
 
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18. Leave of Absence . Unless otherwise determined by the Committee, the following provisions shall apply upon the Optionee’s commencement of an authorized leave of absence:
(a) The Exercise Schedule in effect under the Notice shall be frozen as of the first day of the authorized leave, and this Option shall not become exercisable for any additional installments of the Option Shares during the period Optionee remains on such leave.
(b) If the Option is designated as an Incentive Stock Option in the Notice and if the leave of absence continues for more than ninety (90) days, then this Option shall automatically convert to a Nonstatutory Stock Option at the end of the three (3)-month period measured from the ninety-first (91st) day of such leave, unless the Optionee’s right to return to active work is guaranteed by law or by a contract.
(c) In no event shall this Option become exercisable for any additional Option Shares or otherwise remain outstanding if Optionee does not resume Service prior to the Expiration Date of the Option term.
19. Further Instruments . The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
20. Authorization to Release Necessary Personal Information .
(a) Optionee hereby authorizes and directs Optionee’s employer to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding Optionee’s employment, the nature and amount of Optionee’s compensation and the fact and conditions of Optionee’s participation in the Plan (including, but not limited to, Optionee’s name, home address, telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all options or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing Optionee’s participation in the Plan. Optionee understands that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the exercise of Options under the Plan or with whom Shares acquired upon exercise of this Option or cash from the sale of such shares may be deposited. Optionee acknowledges that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of Optionee’s residence. Furthermore, Optionee acknowledges and understands that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for Optionee’s participation in the Plan.
(b) Optionee may at any time withdraw the consents herein, by
 
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contacting Optionee’s local human resources representative in writing. Optionee further acknowledges that withdrawal of consent may affect Optionee’s ability to exercise or realize benefits from the Option, and Optionee’s ability to participate in the Plan.
21. No Entitlement or Claims for Compensation .
(a) Optionee’s rights, if any, in respect of or in connection with this Option or any other Award is derived solely from the discretionary decision of the Company to permit Optionee to participate in the Plan and to benefit from a discretionary Award. By accepting this Option, Optionee expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to Optionee. This Option is not intended to be compensation of a continuing or recurring nature, or part of Optionee’s normal or expected compensation, and in no way represents any portion of a Optionee’s salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor this Option or any other Award granted under the Plan shall be deemed to give Optionee a right to remain an Employee, Consultant or director of the Company, a Parent or a Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries and Affiliates reserve the right to terminate the Service of Optionee at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and Optionee shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, this Option or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) Optionee agrees that the Company may require Options granted hereunder be exercised with, and the Option Shares held by, a broker designated by the Company. In addition, Optionee agrees that his or her rights hereunder shall be subject to set-off by the Company for any valid debts the Optionee owes to the Company.
 
8

(For Grants Beginning September 2008)
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the “Option”) made to purchase shares of Cisco Systems, Inc. (the “Company”) common stock:
Optionee:                                                                                                                                                                                                 
Grant Date:                                                                                                                                                                                              
Type of Option: U.S. Nonstatutory Stock Option
Grant Number:                                                                                                                                                                                        
Number of Option Shares:                                                                                                                                                 shares
Exercise Price: $              per share
Vesting Commencement Date:                                                                                                                                                              
Expiration Date:                                                                                                                                                                                      
Exercise Schedule . The Option shall vest and become exercisable with respect to (i)                       percent (      %) of the option shares, as set forth above (the “Option Shares”) upon Optionee’s completion of                      of Service measured from the vesting commencement date as set forth above (“Vesting Commencement Date”) and (ii) the balance of the Option Shares in                      installments upon Optionee’s completion of each additional                      of Service over the                      period measured from the                      anniversary of the Vesting Commencement Date. In no event shall the Option vest and become exercisable for any additional Option Shares after Optionee’s cessation of Service.
Should Optionee request a reduction to his or her work commitment to less than thirty (30) hours per week, then the Company shall have the right to extend the period over which the Option shall thereafter vest and become exercisable for the Option Shares during the remainder of the Option term to the extent permitted under local law. In no event shall any extension of the exercise schedule, as set forth above (“Exercise Schedule”) for the Option Shares result in the extension of the expiration date, as set forth above, (“Expiration Date”) of the Option.
Optionee understands and agrees that the Option is offered subject to and in accordance with the terms of the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement (the “Agreement”) attached hereto.
No Employment or Service Contract . Nothing in this Notice or in the attached Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent, Subsidiary or Affiliate employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause to the extent permissible under local law.
Definitions . All capitalized terms in this Notice shall have the meaning assigned to them in this Notice, the attached Agreement or the Plan.

STOCK OPTION AGREEMENT
Recitals
A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board and Consultants.
B. Optionee is to render valuable services to the Company (or a Parent, Subsidiary or Affiliate), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company’s grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement, the attached Notice of Grant of Stock Option (the “Notice”), or the Plan.
NOW, THEREFORE , it is hereby agreed as follows:
1. Grant of Option . The Company hereby grants to Optionee, as of the grant date, as set forth in the Notice, (the “Grant Date”) an option to purchase up to the number of Option Shares specified in the Notice. The Option Shares shall be purchasable from time to time during the Option term specified in Paragraph 2 at the Exercise Price specified in the Notice.
2. Option Term . This Option shall have a maximum term of seven (7) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 4, 5 or 6.
3. Non-Transferability . This Option shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. Notwithstanding the foregoing, should the Optionee die while holding this Option, then this Option shall be transferred in accordance with Optionee’s will or the laws of descent and distribution.
4. Dates of Exercise . This Option shall vest and become exercisable for the Option Shares in one or more installments as specified in the Notice. As the Option becomes exercisable for such installments, those installments shall accumulate and the Option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the Option term under Paragraph 5 or 6. As an administrative matter, the exercisable portion of this Option may only be exercised until the close of the Nasdaq Global Select Market on the Expiration Date or the earlier termination date under Paragraph 5 or 6 or, if such date is not a trading day on the Nasdaq Global Select Market, the last trading day before such date. Any later attempt to exercise this Option will not be honored. For example, if Optionee ceases to remain in Service as provided in Paragraph 5(i) and the date three (3) months from the date of cessation is Monday, July 4 (a holiday on which the Nasdaq Global Select Market is closed), Optionee must exercise the exercisable portion of this Option by 4:00 p.m. Eastern Daylight Time on Friday, July 1.

5. Cessation of Service . The Option term specified in Paragraph 2 shall terminate (and this Option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:
(i) Should Optionee cease to remain in Service for any reason (other than death, Disability or Cause and whether or not in breach of local labor laws) while this Option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this Option, but in no event shall this Option be exercisable at any time after the Expiration Date.
(ii) If Optionee dies while this Option is outstanding, then the Optionee’s designated beneficiary or, if no beneficiary was designated or properly designated or, if no designated beneficiary survives the Optionee, the Optionee’s estate (to the extent reasonably determinable) or other individual or entity entitled to receive the Option under applicable local law shall have the right to exercise this Option. Such right shall lapse, and this Option shall cease to be outstanding, upon the earlier of (A) the expiration of the eighteen (18) month period measured from the date of Optionee’s death or (B) the Expiration Date. Optionee may only make a beneficiary designation with respect to this Option if the Company has approved a process or procedure for such beneficiary designation for the local jurisdiction within which Optionee performs services for the Company or a Parent, Subsidiary or Affiliate. If no such beneficiary designation process or procedure has been approved by the Company, then, in the event of Optionee’s death, this Option may only be exercised by the Optionee’s estate (to the extent reasonably determinable) or other individual or entity entitled to receive the Option under applicable local law.
(iii) Should Optionee cease Service by reason of Disability while this Option is outstanding, then Optionee shall have a period of eighteen (18) months (commencing with the date of such cessation of Service) during which to exercise this Option, but in no event shall this Option be exercisable at any time after the Expiration Date.
(iv) During the limited period of post-Service exercisability, this Option may not be exercised in the aggregate for more than the number of vested Option Shares for which the Option is exercisable at the date the Optionee ceases to actively provide Service (not extended by any notice period mandated under local law). Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this Option shall terminate and cease to be outstanding for any vested Option Shares for which the Option has not been exercised. However, this Option shall, immediately as of the date the Optionee ceases to actively provide Service for any reason, terminate and cease to be outstanding with respect to any Option Shares in which Optionee is not otherwise at that time vested or for which this Option is not otherwise at that time exercisable.
(v) Should Optionee’s Service be terminated for Cause or should Optionee otherwise engage in activities constituting Cause while this Option is
 
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outstanding, then this Option shall terminate immediately and cease to remain outstanding. In the event Optionee’s Service is suspended pending an investigation of whether Optionee’s Service will be terminated for Cause, all Optionee’s rights under the Option, including the right to exercise the Option, shall be suspended during the investigation period.
(vi) For purposes of this Paragraph 5, in the event of Optionee’s cessation of Service, Optionee’s right to receive additional options or to vest in the Option will end as of the date the Optionee is no longer actively providing Service and will not be extended by any notice period mandated under local law ( e.g ., active Service would not include any period of “garden leave” or similar period pursuant to local law); the Company shall have the exclusive discretion to determine when an Optionee is no longer actively providing Service for purposes of this Option.
6. Special Acceleration of Option .
(a) This Option, to the extent outstanding at the time of a Corporate Transaction but not otherwise fully vested and exercisable, shall automatically accelerate so that this Option shall, immediately prior to the effective date of the Corporate Transaction, become vested and exercisable for all of the Option Shares at the time subject to this Option and may be exercised for any or all of those Option Shares as fully-vested Shares. No such acceleration of this Option, however, shall occur if and to the extent: (i) this Option is, in connection with the Corporate Transaction, either assumed by the successor corporation (or parent thereof) or replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this Option is replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such Shares) and provides for subsequent pay-out in accordance with the same Exercise Schedule set forth in the Notice. The determination of option comparability under clause (i) shall be made by the Committee, and such determination shall be final, binding and conclusive.
(b) Immediately following the effective date of the Corporate Transaction, this Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.
(c) If this Option is assumed in connection with a Corporate Transaction, then the Committee shall appropriately adjust the number of shares and the kind of shares or securities covered by the Option and the Exercise Price immediately after such Corporate Transaction, provided the aggregate Exercise Price shall remain the same.
(d) This Option, to the extent outstanding at the time of a Change in Control but not otherwise fully vested and exercisable, shall automatically accelerate so that this Option shall, immediately prior to the effective date of the Change in Control,
 
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become vested and exercisable for all of the Option Shares at the time subject to this Option and may be exercised for any or all of those Option Shares as fully-vested Shares. This Option shall remain so exercisable until the Expiration Date or sooner termination of the Option term.
(e) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
7. Adjustment in Option Shares . In the event of a subdivision of the outstanding Shares, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Shares (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, appropriate adjustments shall be made to (i) the total number and/or kind of shares or securities subject to this Option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.
8. Shareholder Rights . The holder of this Option shall not have any shareholder rights with respect to the Option Shares until such person shall have exercised the Option, paid the Exercise Price and become a holder of record of the purchased Shares.
9. Manner of Exercising Option .
(a) In order to exercise this Option with respect to all or any part of the Option Shares for which this Option is at the time exercisable, Optionee (or any other person or persons exercising the Option) must take the following actions:
(i) Pay the aggregate Exercise Price for the purchased Shares in one or more of the following forms:
(A) cash or check which, in the Company’s sole discretion, shall be made payable to a Company-designated brokerage firm or the Company; and
(B) as permitted by applicable law, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the Option) shall concurrently provide irrevocable written instructions (I) to a Company-designated brokerage firm (or in the case of an executive officer or Board member of the Company, an Optionee-designated brokerage firm) to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased Shares plus, if applicable, the amount necessary to satisfy the Company’s (or a Parent’s, Subsidiary’s or Affiliate’s) withholding obligations
 
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(including income tax, social taxes or insurance contributions, payroll tax, payment on account or other tax items related to Optionee’s participation in the Plan and legally applicable to Optionee (“Tax-Related Items”)) and (II) to the Company to deliver the purchased Shares directly to such brokerage firm in order to complete the sale transaction.
(ii) Furnish to the Company appropriate documentation that the person or persons exercising the Option (if other than Optionee) have the right to exercise this Option.
(iii) Make appropriate arrangements with the Company (or a Parent, Subsidiary or Affiliate employing or retaining Optionee) for the satisfaction of all withholding or other obligations related to Tax-Related Items applicable to the Option grant, vesting, exercise or the sale of Shares, as applicable.
(b) As soon as practical after the exercise date, the Company shall issue to or on behalf of Optionee (or any other person or persons exercising this Option) the purchased Option Shares, (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company), subject to the appropriate legends and/or stop transfer instructions.
(c) In no event may this Option be exercised for any fractional Shares.
(d) Notwithstanding any other provisions of the Plan, this Agreement or any other agreement to the contrary, if at the time this Option is exercised, Optionee is indebted to the Company (or any Parent, Subsidiary or Affiliate) for any reason, the following actions shall be taken, as deemed appropriate by the Committee:
(i) any Shares to be issued upon such exercise shall automatically be pledged against Optionee’s outstanding indebtedness; and
(ii) if this Option is exercised in accordance with subparagraph 9(a)(i)(B) above, the after tax proceeds of the sale of Optionee’s Shares shall automatically be applied to the outstanding balance of Optionee’s indebtedness.
10. Responsibility for Taxes .
(a) Optionee authorizes the Company and/or the Optionee’s employer (the “Employer”) or their respective agents, at their discretion, to satisfy any obligations related to Tax-Related Items by one or a combination of the following: (1) withholding all applicable Tax-Related Items from Optionee’s wages or other cash compensation paid to Optionee by the Company and/or the Employer; (2) withholding from proceeds of the sale of Shares acquired upon exercise of the Option either through a voluntary sale (specifically including where this Option is exercised in accordance with subparagraph 9(a)(i)(B) above) or through a mandatory sale arranged by the Company (on Optionee’s behalf pursuant to this authorization); or (3) withholding of Shares that would otherwise be issued upon exercise of the Option. To avoid financial accounting charges under applicable accounting guidance, the Company may withhold or account for Tax-Related
 
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Items by considering applicable minimum statutory withholding rates or may take any other action required to avoid financial accounting charges under applicable accounting guidance. Finally, Optionee must pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold or account for as a result of Optionee’s participation in the Plan or Optionee’s purchase of Shares that cannot be satisfied by the means previously described. The Company may refuse to honor the exercise and refuse to issue or deliver the Shares or the proceeds of the sale of the Shares if Optionee fails to comply with Optionee’s obligations in connection with the Tax-Related Items as described in this Paragraph.
(b) Regardless of any action the Company or the Employer takes with respect to any or all Tax-Related Items, Optionee acknowledges that the ultimate liability for all Tax-Related Items is and remains Optionee’s responsibility and may exceed the amount actually withheld by the Company or the Employer. Optionee further acknowledges that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Option to reduce or eliminate Optionee’s liability for Tax-Related Items or achieve any particular tax result. Further, if Optionee becomes subject to taxation in more than one jurisdiction between the Grant Date and the date of any relevant taxable event, Optionee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
11. Compliance with Laws and Regulations .
(a) The exercise of this Option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Company and Optionee with all applicable laws, regulations and rules relating thereto, including all applicable regulations of any stock exchange (or the Nasdaq Global Select Market, if applicable) on which the Shares may be listed for trading at the time of such exercise and issuance and all applicable foreign laws.
(b) The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Shares pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Shares as to which such approval shall not have been obtained.
12. Successors and Assigns . Except to the extent otherwise provided in Paragraphs 3, 5 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.
 
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13. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to the Optionee at the address maintained for the Optionee in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
14. Construction . The Notice, this Agreement, and the Option evidenced hereby (a) are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan, and (b) constitute the entire agreement between Optionee and the Company on the subject matter hereof and supercede all proposals, written or oral, and all other communications between the parties related to the subject matter. All decisions of the Committee with respect to any question or issue arising under the Notice, this Agreement or the Plan shall be conclusive and binding on all persons having an interest in this Option. The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
15. Governing Law and Forum . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. For purposes of litigating any dispute that may arise directly or indirectly from this Agreement, the parties hereby submit and consent to litigation in the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California or the federal courts for the United States for the Northern District of California and no other courts.
16. Excess Shares . If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of Shares which may without shareholder approval be issued under the Plan, then this Option shall be void with respect to those excess shares, unless shareholder approval of an amendment sufficiently increasing the number of Shares issuable under the Plan is obtained in accordance with the provisions of the Plan and all applicable laws, regulations and rules.
17. Leave of Absence . Unless otherwise determined by the Committee, to the extent permitted by local law, the following provisions shall apply upon the Optionee’s commencement of an authorized leave of absence:
(a) The Exercise Schedule in effect under the Notice shall be frozen as of the first day of the authorized leave, and this Option shall not become exercisable for any additional installments of the Option Shares during the period Optionee remains on such leave.
(b) In no event shall this Option become exercisable for any additional Option Shares or otherwise remain outstanding if Optionee does not resume Service prior to the Expiration Date of the Option term.
 
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18. Further Instruments . The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
19. Authorization to Release and Transfer Necessary Personal Information .
(a) Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Optionee’s personal information as described in this Agreement by and among, as applicable, the Employer, and the Company and its Parent, Subsidiaries and Affiliates for the exclusive purpose of implementing, administering and managing Optionee’s participation in the Plan.
(b) Optionee understands that the Company and the Employer may hold certain personal information about Optionee, including, but not limited to, Optionee’s name, home address and telephone number, date of birth, social insurance number (or any other social or national identification number), salary, nationality, job title, residency status, any Shares or directorships held in the Company, details of all options or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding (the “Data”) for the purpose of implementing, administering and managing the Optionee’s participation in the Plan. Optionee understands that Data may be transferred to the Company or any of its Parent, Subsidiaries or Affiliates, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Optionee’s country or elsewhere, including outside the European Economic Area, and that the recipient’s country (e.g., the United States) may have different data privacy laws and protections than Optionee’s country. Optionee understands that Optionee may request a list with the names and addresses of any potential recipients of the Data by contacting Optionee’s local human resources representative. Optionee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purposes of implementing, administering and managing Optionee’s participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of the Option under the Plan or with whom Shares acquired pursuant to these Options or cash from the sale of such Shares may be deposited. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Parent, Subsidiaries or Affiliates, or to any third parties is necessary for your participation in the Plan.
(c) Optionee understands that Data will be held only as long as is necessary to implement, administer and manage Optionee’s participation in the Plan. Optionee understands that Optionee may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting Optionee’s local human resources representative in writing. Optionee further acknowledges that withdrawal of consent may affect Optionee’s ability to vest in or realize benefits from the Options, and Optionee’s ability to participate in the Plan. For
 
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more information on the consequences of Optionee’s refusal to consent or withdrawal of consent, Optionee understands that Optionee may contact Optionee’s local human resources representative.
20. No Entitlement or Claims for Compensation .
(a) Optionee’s rights, if any, in respect of or in connection with this Option or any other Award are derived solely from the discretionary decision of the Company to permit Optionee to participate in the Plan and to benefit from a discretionary Award. The Plan may be amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement. By accepting this Option, Optionee expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to Optionee or benefits in lieu of Options or any other Awards even if Options have been granted repeatedly in the past. All decisions with respect to future Option grants, if any, will be at the sole discretion of the Committee.
(b) This Option and the Shares subject to the Option are not intended to replace any pension rights or compensation and are not to be considered compensation of a continuing or recurring nature, or part of Optionee’s normal or expected compensation, and in no way represent any portion of Optionee’s salary, compensation or other remuneration for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and in no event should be considered as compensation for, or relating in any way to, past services for the Company, the Employer or any Parent, Subsidiary or Affiliate. The value of the Option and the Shares subject to the Option are an extraordinary item that do not constitute compensation of any kind for services of any kind rendered to the Company, the Employer or any Parent, Subsidiary or Affiliate and which are outside the scope of Optionee’s written employment agreement (if any).
(c) Optionee acknowledges that he or she is voluntarily participating in the Plan.
(d) Neither the Plan nor this Option or any other Award granted under the Plan shall be deemed to give Optionee a right to remain an Employee, Consultant or director of the Company, a Parent, Subsidiary or an Affiliate. The Employer reserves the right to terminate the Service of Optionee at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any).
(e) The grant of the Option and Optionee’s participation in the Plan will not be interpreted to form an employment contract or relationship with the Company, the Employer or any Parent, Subsidiary or Affiliate.
(f) The future value of the underlying Shares is unknown and cannot be predicted with certainty. If the underlying Shares do not increase in value, the Option
 
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will have no value. If Optionee exercises the Option and obtains Shares, the value of the Shares acquired upon exercise may increase or decrease in value, even below the Exercise Price. Optionee also understands that neither the Company, nor the Employer or any Parent, Subsidiary or Affiliate is responsible for any foreign exchange fluctuation between the Employer’s local currency and the United States Dollar that may affect the value of this Option.
(g) In consideration of the grant of the Option, no claim or entitlement to compensation or damages shall arise from forfeiture of the Option resulting from termination of Optionee’s Service by the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and Optionee irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, Optionee shall be deemed irrevocably to have waived Optionee’s entitlement to pursue such claim.
(h) Optionee agrees that the Company may require Options granted hereunder be exercised with, and the Option Shares held by, a broker designated by the Company.
(i) Optionee agrees that his or her rights hereunder (if any) shall be subject to set-off by the Company for any valid debts the Optionee owes to the Company.
(j) The Option and the benefits under the Plan, if any, will not automatically transfer to another company in the case of a merger, take-over or transfer of liability.
21. No Advice Regarding Grant . The Company and the Employer have not provided any tax, legal or financial advice, nor has the Company or the Employer made any recommendations regarding Optionee’s participation in the Plan, or Optionee’s acquisition or sale of the underlying Shares. Optionee is hereby advised to consult with Optionee’s own personal tax, legal and financial advisors regarding Optionee’s participation in the Plan before taking any action related to the Plan.
22. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to Optionee’s current or future participation in the Plan by electronic means or to request Optionee’s consent to participate in the Plan by electronic means. Optionee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
23. Language . If this Agreement or any other document related to the Plan is translated into a language other then English and the meaning of the translated version is different from the English version, the English version will take precedence.
24. Appendix . Notwithstanding any provisions in this Agreement, the Option shall be subject to any special terms and conditions set forth in any Appendix to this
 
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Agreement for Optionee’s country of residence. Moreover, if Optionee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to Optionee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable in order to comply with local law or facilitate the administration of the Plan. The Appendix constitutes part of this Agreement.
25. Imposition of Other Requirements . The Company reserves the right to impose other requirements on Optionee’s participation in the Plan, on the Option and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Plan. Optionee agrees to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. Furthermore, Optionee acknowledges that the laws of the country in which Optionee is working at the time of grant, vesting and exercise of the Option or the sale of Shares received pursuant to this Agreement (including any rules or regulations governing securities, foreign exchange, tax, labor, or other matters) may subject Optionee to additional procedural or regulatory requirements that Optionee is and will be solely responsible for and must fulfill.
 
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CISCO SYSTEMS, INC.
STOCK GRANT AGREEMENT
This Stock Grant Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Grant Award are as follows:

Employee ID:	 	 	
		
Grant Date:	 	 	
		
Grant Number:	 	 	
		
Restricted Shares:	 	 	

First Vest Date:	  	                     , 20      (the first annual anniversary of the vesting commencement date)	
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Shares . Pursuant to the Plan, the Company hereby transfers to you, and you hereby accept from the Company, a Stock Grant Award consisting of the Restricted Shares, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Shares . So long as your Service continues, the Restricted Shares shall vest in accordance with the following schedule:                      percent (      %) of the total number of Restricted Shares issued pursuant to this Agreement shall vest on the First Vest Date and on each annual anniversary thereafter, unless otherwise provided by the Plan or Section 3 below. In the event of the termination of your Service for any reason, all unvested Restricted Shares shall be immediately forfeited without consideration. For purposes of facilitating the enforcement of the provisions of this Section 2, the Company may issue stop-transfer instructions on the Restricted Shares to the Company’s transfer agent, or otherwise hold the Restricted Shares in escrow, until the Restricted Shares have vested and you have satisfied all applicable obligations with respect to the Restricted Shares, including any applicable tax withholding obligations set forth in Section 5 below. Any new, substituted or additional securities or other property which is issued or distributed with respect to the unvested Restricted Shares shall be subject to the same terms and conditions as are applicable to the unvested Restricted Shares under this Agreement and the Plan.
3. Special Acceleration .
(a) To the extent the Restricted Shares are outstanding at the time of a Corporate Transaction, but not otherwise fully vested, such Restricted Shares shall automatically accelerate immediately prior to the effective date of the Corporate Transaction and shall become vested in full at that time. No such acceleration, however, shall occur if

and to the extent: (i) this Stock Grant Agreement is, in connection with the Corporate Transaction, assumed by the successor corporation (or parent thereof), or (ii) the Restricted Shares are replaced with a cash incentive program of the successor corporation which preserves the Fair Market Value of the Restricted Shares at the time of the Corporate Transaction and provides for subsequent pay-out in accordance with the vesting schedule set forth in Section 2 above.
(b) Immediately following the effective date of the Corporate Transaction, this Stock Grant Agreement shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.
(c) If this Stock Grant Agreement is assumed in connection with a Corporate Transaction, then the Committee shall appropriately adjust the number of shares and the kind of shares or securities covered by this Stock Grant Agreement immediately after such Corporate Transaction.
(d) To the extent the Restricted Shares are outstanding at the time of a Change in Control but not otherwise fully vested, such Restricted Shares shall automatically accelerate immediately prior to the effective date of the Change in Control and shall become vested in full at that time.
(e) This Stock Grant Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
4. Restriction on Election to Recognize Income in the Year of Grant . Under Section 83 of the Code, the Fair Market Value of the Restricted Shares on the date the Restricted Shares vest will be taxable as ordinary income at that time. You understand, acknowledge and agree that, as a condition to the grant of this Award, you may not elect to be taxed at the time the Restricted Shares are acquired by filing an election under Section 83(b) of the Code with the Internal Revenue Service.
5. Withholding Taxes . You agree to make arrangements satisfactory to the Company for the satisfaction of any applicable withholding tax obligations that arise in connection with the Restricted Shares which, at the sole discretion of the Company, may include (i) having the Company withhold Shares from the Restricted Shares held in escrow, or (ii) any other arrangement approved by the Company, in any case, equal in value to the amount necessary to satisfy any such withholding tax obligation. Such Shares shall be valued based on the Fair Market Value as of the day prior to the date that the amount of tax to be withheld is to be determined under applicable law. The Company shall not be required to release the Restricted Shares from the stop-transfer instructions or escrow unless and until such obligations are satisfied.
6. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences.
 
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YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY STOCK GRANT AWARD. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.
7. Non-Transferability of Restricted Shares . Restricted Shares which have not vested pursuant to Section 2 above shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by the operation of law. However, this Section 7 shall not preclude you from designating a beneficiary who will receive any vested Restricted Shares in the event of the your death, nor shall it preclude a transfer of vested Restricted Shares by will or by the laws of descent and distribution.
8. Restriction on Transfer . Regardless of whether the transfer or issuance of the Restricted Shares has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Restricted Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
9. Stock Certificate Restrictive Legends . Stock certificates evidencing the Restricted Shares may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
10. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Restricted Shares may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
11. Voting and Other Rights . Subject to the terms of this Agreement, you shall have all the rights and privileges of a shareholder of the Company while the Restricted Shares are subject to stop-transfer instructions, or otherwise held in escrow, including the right to vote and to receive dividends (if any).
12. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct your employer to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your employment, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or
 
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any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of this Stock Grant Award under the Plan or with whom Shares acquired pursuant to this Stock Grant Award or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
(b) You may at any time withdraw the consents herein by contacting your local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from this Stock Grant Award, and your ability to participate in the Plan.
13. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with this Stock Grant Award or any other Award is derived solely from the discretionary decision of the Company to permit you to participate in the Plan and to benefit from a discretionary Award. By accepting this Stock Grant Award, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to you. This Stock Grant Award is not intended to be compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represents any portion of a your salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor this Stock Grant Award or any other Award granted under the Plan shall be deemed to give you a right to remain an Employee, Consultant or director of the Company, a Parent, a Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries and Affiliates reserve the right to terminate your Service at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and you shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, this Stock Grant Award or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) You agree that the Company may require that Restricted Shares be held by a broker designated by the Company. In addition, you agree that your rights hereunder shall be subject to set-off by the Company for any valid debts you owe the Company.
14. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
15. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by
 
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confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
16. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
17. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
 
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(For Grants Beginning September 2008)
CISCO SYSTEMS, INC.
STOCK UNIT AGREEMENT
This Stock Unit Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Unit Award are as follows:

Employee ID:                                                                                                                                                                                                                                            	
	
Grant Date:                                                                                                                                                                                                                                                	
	
Grant Number:                                                                                                                                                                                                                                          	
	
Restricted Stock Units:                                                                                                                                                                                                                                                      	
	
Vesting Commencement Date:                                                                                                                                                                                                            	
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Stock Units . Pursuant to the Plan, the Company hereby grants to you, and you hereby accept from the Company, Restricted Stock Units, each of which is a bookkeeping entry representing the equivalent in value of one (1) Share, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Stock Units . So long as your Service continues, the Restricted Stock Units shall vest in accordance with the following schedule:                      percent (      %) of the total number of Restricted Stock Units granted pursuant to this Agreement shall vest on [the                      anniversary of] the Vesting Commencement Date and on each                      anniversary thereafter, unless otherwise provided by the Plan or Section 4 below. If you take a leave of absence, the Company may, at its discretion, suspend vesting during the period of leave to the extent permitted under applicable local law. Prior to the time that the Restricted Stock Units are settled upon vesting, you shall have no rights other than those of a general creditor of the Company. The Restricted Stock Units represent an unfunded and unsecured obligation of the Company.
3. Termination of Service . In the event of the termination of your Service for any reason (whether or not in breach of local labor laws), all unvested Restricted Stock Units shall be immediately forfeited without consideration. For purposes of the preceding sentence, your right to vest in the Restricted Stock Units will terminate effective as of the date that you are no longer

actively providing Service and will not be extended by any notice period mandated under local law ( e.g. , active Service would not include a period of “garden leave” or similar period pursuant to local law); the Company shall have the exclusive discretion to determine when you are no longer actively providing Service for purposes of the Restricted Stock Units.
4. Special Acceleration .
(a) To the extent the Restricted Stock Units are outstanding at the time of a Corporate Transaction, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Corporate Transaction and shall become vested in full at that time. No such acceleration, however, shall occur if and to the extent: (i) these Restricted Stock Units are, in connection with the Corporate Transaction, either assumed by the successor corporation (or parent thereof) or replaced with comparable restricted stock units of the successor corporation (or parent thereof) or (ii) these Restricted Stock Units are replaced with a cash incentive program of the successor corporation which preserves the fair market value of the Restricted Stock Units at the time of the Corporate Transaction and provides for subsequent pay-out in accordance with the vesting schedule set forth in Section 2 above. The determination of the comparability of restricted stock units under clause (i) shall be made by the Committee, and such determination shall be final, binding and conclusive.
(b) Immediately following the effective date of the Corporate Transaction, this Agreement shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.
(c) If this Agreement is assumed in connection with a Corporate Transaction, then the Committee shall appropriately adjust the number of units and the kind of shares or securities to be issued pursuant to this Agreement immediately after such Corporate Transaction.
(d) To the extent the Restricted Stock Units are outstanding at the time of a Change in Control, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Change in Control and shall become vested in full at that time.
(e) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
5. Settlement of Restricted Stock Units . Restricted Stock Units shall be automatically settled in Shares upon vesting of such Restricted Stock Units, provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless and until you have satisfied any applicable tax and/or other obligations pursuant to Section 6 below and such issuance otherwise complies with all applicable law.
6. Taxes .
(a) Regardless of any action the Company or your employer (the “Employer”) takes with respect to any and all income tax, social taxes or insurance contributions, payroll tax, payment on account or other tax-related items related to your participation in the Plan and legally
 
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applicable to you (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items with respect to the Restricted Stock Units is and remains your responsibility and may exceed the amount actually withheld by the Company or the Employer. You further acknowledge that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Restricted Stock Units, including the grant, vesting or settlement of the Restricted Stock Units, or the subsequent sale of any Shares acquired at vesting or the receipt of any dividends with respect to such Shares; and (ii) do not commit to and are under no obligation to structure the terms or any aspect of the Restricted Stock Units to reduce or eliminate your liability for Tax-Related Items or achieve any particular tax result. Further, if you become subject to taxation in more than one jurisdiction between the Grant Date and the date of any relevant taxable event, you acknowledge that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
(b) Prior to any relevant tax, withholding or required deduction event, as applicable, you agree to make arrangements satisfactory to the Company for the satisfaction of any applicable tax, withholding, required deduction and payment on account obligations of the Company and/or the Employer that arise in connection with the Restricted Stock Units. In this regard, you authorize the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligations related to Tax-Related Items by one or a combination of the following: (1) withholding from your wages or other cash compensation payable to you by the Company or the Employer; (2) withholding from proceeds of the sale of Shares acquired upon settlement of the Restricted Stock Units either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization); (3) withholding of Shares that would otherwise be issued upon settlement of the Restricted Stock Units; or (4) requiring you to satisfy the liability for Tax-Related Items by means of any other arrangement approved by the Company. If the obligation for Tax-Related Items is satisfied by withholding of Shares, for tax purposes, you are deemed to have been issued the full number of Shares subject to the vested Restricted Stock Units, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of your participation in the Plan. To avoid financial accounting charges under applicable accounting guidance, the Company may withhold or account for Tax-Related Items by considering applicable minimum statutory rates or may take any other action required to avoid financial accounting charges under applicable accounting guidance.
(c) Finally, you will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold or account for as a result of your participation in the Plan or your acquisition of Shares that cannot be satisfied by the means previously described. The Company shall not be required to issue or deliver Shares pursuant to this Agreement unless and until such obligations are satisfied.
7. Tax and Legal Advice . You represent, warrant and acknowledge that neither the Company nor your Employer have made any warranties or representations to you with respect to any Tax-Related Items, legal or financial consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company, your Employer’s or the Company’s or the Employer’s representatives for an assessment of such consequences. YOU UNDERSTAND THAT THE LAWS GOVERNING THIS AWARD ARE SUBJECT TO
 
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CHANGE. YOU SHOULD CONSULT YOUR OWN PROFESSIONAL TAX, LEGAL AND FINANCIAL ADVISOR REGARDING ANY RESTRICTED STOCK UNITS. YOU UNDERSTAND THAT THE COMPANY AND YOUR EMPLOYER ARE NOT PROVIDING ANY TAX, LEGAL, OR FINANCIAL ADVICE, NOR IS THE COMPANY OR YOUR EMPLOYER MAKING ANY RECOMMENDATION REGARDING YOUR ACCEPTANCE OF THIS AWARD. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER OR OTHER PENALTIES.
8. Non-Transferability of Restricted Stock Units . Restricted Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law.
9. Restriction on Transfer . Regardless of whether the transfer or issuance of the Shares to be issued pursuant to the Restricted Stock Units has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law including all applicable foreign laws.
10. Restrictive Legends and Stop-Transfer Instructions . Stock certificates evidencing the Shares issued pursuant to the Restricted Stock Units may bear such restrictive legends and/or appropriate stop-transfer instructions may be issued to the Company’s transfer agent as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
11. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Shares issued pursuant to the Restricted Stock Units may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable laws.
12. Voting and Other Rights . Subject to the terms of this Agreement, you shall not have any voting rights or any other rights and privileges of a stockholder of the Company unless and until the Restricted Stock Units are settled upon vesting. In addition, you shall not have any rights to dividend equivalent payments with respect to unvested Restricted Stock Units.
13. Authorization to Release and Transfer Necessary Personal Information .
(a) You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal information as described in this Agreement by and among, as applicable, the Employer, and the Company and its Parent, Subsidiaries and Affiliates for the exclusive purpose of implementing, administering and managing your participation in the Plan.
 
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(b) You understand that the Company and the Employer may hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number (or any other social or national identification number), salary, nationality, job title, residency status, any Shares or directorships held in the Company, details of all Restricted Stock Units or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding (the “Data”) for the purpose of implementing, administering and managing your participation in the Plan. You understand that Data may be transferred to the Company or any of its Parent, Subsidiaries or Affiliates, or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, including outside the European Economic Area, and that the recipient’s country (e.g., the United States) may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of these Restricted Stock Units under the Plan or with whom Shares acquired pursuant to these Restricted Stock Units or cash from the sale of such Shares may be deposited. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Parent, Subsidiaries or Affiliates, or to any third parties is necessary for your participation in the Plan.
(c) You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting your local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to vest in or realize benefits from these Restricted Stock Units, and your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.
14. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with these Restricted Stock Units or any other Award are derived solely from the discretionary decision of the Company to permit you to participate in the Plan and to benefit from a discretionary Award. The Plan may be amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement. By accepting these Restricted Stock Units, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Restricted Stock Units to you or benefits in lieu of Restricted Stock Units, even if Restricted Stock Units have been granted repeatedly in the past. All decisions with respect to future grants of Restricted Stock Units, if any, will be at the sole discretion of the Committee.
 
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(b) The Restricted Stock Units and the Shares subject to the Restricted Stock Units are not intended to replace any pension rights or compensation and are not to be considered compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represent any portion of your salary, compensation or other remuneration for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and in no event should be considered as compensation for, or relating in any way to, past services for the Company, the Employer or any Parent, Subsidiary or Affiliate. The value of the Restricted Stock Units is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company, the Employer or any Parent, Subsidiary or Affiliate and which is outside the scope of your written employment agreement (if any).
(c) You acknowledge that you are voluntarily participating in the Plan.
(d) Neither the Plan nor these Restricted Stock Units or any other Award granted under the Plan shall be deemed to give you a right to remain an Employee, Consultant or director of the Company, a Parent, Subsidiary or an Affiliate. The Employer reserves the right to terminate your Service at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws, and a written employment agreement (if any).
(e) The grant of the Restricted Stock Units and your participation in the Plan will not be interpreted to form an employment contract or relationship with the Company, the Employer or any Parent, Subsidiary or Affiliate.
(f) The future value of the underlying Shares is unknown and cannot be predicted with certainty and if you vest in the Restricted Stock Units and are issued Shares, the value of those Shares may increase or decrease. You also understand that neither the Company, nor the Employer or any Parent, Subsidiary or Affiliate is responsible for any foreign exchange fluctuation between your Employer’s local currency and the United States Dollar that may affect the value of this Award.
(g) In consideration of the grant of the Restricted Stock Units, no claim or entitlement to compensation or damages shall arise from forfeiture of the Restricted Stock Units resulting from termination of your Service by the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, you shall be deemed irrevocably to have waived your entitlement to pursue such claim.
(h) You agree that the Company may require Shares received pursuant to the Restricted Stock Units to be held by a broker designated by the Company.
(i) You agree that your rights hereunder (if any) shall be subject to set-off by the Company for any valid debts you owe the Company.
 
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(j) The Restricted Stock Units and the benefits under the Plan, if any, will not automatically transfer to another company in the case of a merger, take-over or transfer of liability.
15. Governing Law and Forum . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. For purposes of litigating any dispute that may arise directly or indirectly from this Agreement, the parties hereby submit and consent to litigation in the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California or the federal courts for the United States for the Northern District of California and no other courts.
16. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
17. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
18. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
19. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to your current or future participation in the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
20. Language . If this Agreement or any other document related to the Plan is translated into a language other than English and the meaning of the translated version is different from the English version, the English version will take precedence.
21. Appendix . Notwithstanding any provisions in this Agreement, the Restricted Stock Units shall be subject to any special terms and conditions set forth in any Appendix to this Agreement for your country of residence. Moreover, if you relocate to one of the countries included in the Appendix, the special terms and conditions for such country will apply to you, to the extent the Company determines that the application of such terms and conditions is necessary or advisable in order to comply with local law or facilitate the administration of the Plan. The Appendix constitutes part of this Agreement.
 
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22. Imposition of Other Requirements . The Company reserves the right to impose other requirements on your participation in the Plan, on the Restricted Stock Units and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Plan. You agree to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. Furthermore, you acknowledge that the laws of the country in which you are working at the time of grant, vesting and settlement of the Restricted Stock Units or the sale of Shares received pursuant to this Agreement (including any rules or regulations governing securities, foreign exchange, tax, labor, or other matters) may subject you to additional procedural or regulatory requirements that you are and will be solely responsible for and must fulfill.
23. Acceptance of Agreement . You must expressly accept the terms and conditions of your Restricted Stock Units as set forth in this Agreement by electronically accepting this Agreement within 300 days after the Company sends this Agreement to you. If you do not accept your Restricted Stock Units in the manner instructed by the Company, your Restricted Stock Units will be subject to cancellation.
*        *        *        *
You acknowledge that by clicking on the I agree button below, you agree to be bound by the terms of this Agreement.
PLEASE PRINT AND KEEP A COPY FOR YOUR RECORDS
 
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(For Grants Prior to September 2008)
CISCO SYSTEMS, INC.
STOCK UNIT AGREEMENT
This Stock Unit Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Unit Award are as follows:
Employee ID:                                                                                                                                                                      
Grant Date:                                                                                                                                                                      
Grant Number:                                                                                                                                                                      
Restricted Stock Units:                                                                                                                                                                      
First Vest Date:                                                                          (the first annual anniversary of the vesting commencement date)
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Stock Units . Pursuant to the Plan, the Company hereby grants to you, and you hereby accept from the Company, Restricted Stock Units, each of which is a bookkeeping entry representing the equivalent in value of one (1) Share, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Stock Units . So long as your Service continues, the Restricted Stock Units shall vest in accordance with the following schedule: twenty percent (20%) of the total number of Restricted Stock Units granted pursuant to this Agreement shall vest on the First Vest Date and on each annual anniversary thereafter, unless otherwise provided by the Plan or Section 4 below.
3. Termination of Service . In the event of the termination of your Service for any reason, all unvested Restricted Stock Units shall be immediately forfeited without consideration.
4. Special Acceleration .
(a) To the extent the Restricted Stock Units are outstanding at the time of a Corporate Transaction, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Corporate Transaction and shall become vested in full at that time. No such acceleration, however, shall occur if and to the extent: (i) these Restricted Stock Units are, in connection with the Corporate Transaction, either assumed by the successor corporation (or parent thereof) or replaced with comparable restricted stock units of the successor corporation (or parent thereof) or (ii) these Restricted Stock Units are replaced with a cash incentive program of the successor corporation which preserves the fair market value of the Restricted Stock Units at the time of the Corporate Transaction and provides for subsequent pay-out in accordance with the vesting schedule set forth in Section 2 above. The determination of the comparability of restricted stock units under clause (i) shall be made by the Committee, and such determination shall be final, binding and conclusive

(b) Immediately following the effective date of the Corporate Transaction, this Agreement shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.
(c) If this Agreement is assumed in connection with a Corporate Transaction, then the Committee shall appropriately adjust the number of units and the kind of shares or securities to be issued pursuant to this Agreement immediately after such Corporate Transaction.
(d) To the extent the Restricted Stock Units are outstanding at the time of a Change in Control, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Change in Control and shall become vested in full at that time.
(e) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
5. Settlement of Restricted Stock Units . Restricted Stock Units shall be automatically settled in Shares upon vesting of such Restricted Stock Units, provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless and until you have satisfied any applicable tax withholding obligations pursuant to Section 6 below and such issuance otherwise complies with all applicable law.
6. Withholding Taxes . You agree to make arrangements satisfactory to the Company for the satisfaction of any applicable withholding tax obligations that arise in connection with the Restricted Stock Units which, at the sole discretion of the Company, may include (i) having the Company withhold Shares from the settlement of the Restricted Stock Units, or (ii) any other arrangement approved by the Company, in any case, equal in value to the amount necessary to satisfy any such withholding tax obligations. The Company shall not be required to issue Shares pursuant to this Agreement unless and until such obligations are satisfied.
7. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences. YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY RESTRICTED STOCK UNITS. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.
8. Non-Transferability of Restricted Stock Units . Restricted Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law.
9. Restriction on Transfer . Regardless of whether the transfer or issuance of the Shares to be issued pursuant to the Restricted Stock Units has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Shares
 
2

(including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
10. Stock Certificate Restrictive Legends . Stock certificates evidencing the Shares issued pursuant to the Restricted Stock Units may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
11. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Shares issued pursuant to the Restricted Stock Units may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
12. Voting and Other Rights . Subject to the terms of this Agreement, you shall not have any voting rights or any other rights and privileges of a stockholder of the Company unless and until the Restricted Stock Units are settled upon vesting.
13. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct your employer to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your employment, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of these Restricted Stock Units under the Plan or with whom Shares acquired pursuant to these Restricted Stock Units or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
(b) Prior to the time that the Restricted Stock Units are settled upon vesting, you shall have no rights other than those of a general creditor of the Company. The Restricted Stock Units represent an unfunded and unsecured obligation of the Company.
(c) You may at any time withdraw the consents herein by contacting your local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from these Restricted Stock Units, and your ability to participate in the Plan.
14. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with these Restricted Stock Units or any other Award are derived solely from the discretionary decision of the
 
3

Company to permit you to participate in the Plan and to benefit from a discretionary Award. By accepting these Restricted Stock Units, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to you. These Restricted Stock Units are not intended to be compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represents any portion of a your salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor these Restricted Stock Units or any other Award granted under the Plan shall be deemed to give you a right to remain an Employee, Consultant or director of the Company, a Parent, a Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries and Affiliates reserve the right to terminate your Service at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and you shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, these Restricted Stock Units or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) You agree that your rights hereunder shall be subject to set-off by the Company for any valid debts you owe the Company.
15. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
16. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
17. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
18. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
 
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PERFORMANCE RSU LETTER
[Date]
[Name]
[Address]
[Address]
Dear                          :
[introductory text]
Your leadership team has recommended that you receive a performance-based restricted stock unit (PRSU) right with a target of [                      ]. RSUs will be granted after the end of FY[      ] based upon the satisfaction of an FY[      ] performance condition.
The right to receive a grant of a restricted stock unit depends on Cisco’s satisfaction of certain operating income growth targets for FY[      ]. Assuming those targets are met or exceeded, the restricted stock units that you are granted will vest [                      ] percent on the date of grant and [                      ] percent on each of the next [              ] anniversaries of the date of grant thereafter, subject to your continued employment with Cisco or an affiliate on the applicable vesting date. On each vesting date, the vested units will be settled in Cisco common stock. In addition, in the unlikely event that a corporate transaction or change in control (each as defined in Cisco’s 2005 Stock Incentive Plan) is consummated during FY[      ], the performance-based restricted stock unit right will be deemed fully earned at target (100%) immediately prior to the effective date of the corporate transaction or the change in control, as the case may be, and will be settled in fully vested Cisco common stock at that time.
Lastly, please note that, if you are employed outside the United States, the Compensation and Management Development Committee can grant the PRSU Right to you, in its sole discretion, only if and as long as it is permitted and feasible to grant restricted stock units under the laws of the country in which you are employed. If local laws make the grant of restricted stock units illegal or impractical, Cisco will let you know as soon as possible. You are under no obligation to accept the PRSU Right or any restricted stock units that may subsequently be granted to you.

[concluding text]	
	
Sincerely,	

PERFORMANCE RSU LETTER – FISCAL 2008
[Date]
[Name]
[Address]
[Address]
Dear                              :
[introductory text]
As an indicator of our confidence in you as a leader, recognizing your current high level of performance as well as your future contributions, I want to tell you about the restricted stock unit component of our FY08 ongoing stock program. This component represents the right to receive a future grant of restricted stock units (after the end of FY08) if an FY08 performance condition is satisfied. This right is referred to in this letter as the “ performance-based restricted stock unit right (PRSU Right) .”
I want to be the first to congratulate you on your leadership team recommending you for a performance-based restricted stock unit right having a target of XX restricted stock units , which will be granted after the end of FY08 based upon the satisfaction of an FY08 performance condition, contingent on shareholder approval as described below. Since you may be eligible to receive a grant of restricted stock units for the first time, I would like to review briefly the details of this program.
The right to receive a grant of a restricted stock unit depends on Cisco’s satisfaction of certain operating income growth targets for FY08. Assuming those targets are met or exceeded, the restricted stock units that you are granted will vest twenty percent on the date of grant and twenty percent on each of the next four anniversaries of the date of grant thereafter, subject to your continued employment with Cisco or an affiliate on the applicable vesting date. Unlike stock options, there is no monthly vesting for restricted stock units. On each vesting date, the vested units will be settled in Cisco common stock. In addition, in the unlikely event that a corporate transaction or change in control (each as defined in Cisco’s 2005 Stock Incentive Plan) is consummated during FY08, the performance-based restricted stock unit right will be deemed fully earned at target (100%) immediately prior to the effective date of the corporate transaction or the change in control, as the case may be, and will be settled in fully vested Cisco common stock at that time.
The PRSU Right and the right to receive restricted stock units depends on our shareholders approving the amendment and extension of Cisco’s 2005 Stock Incentive Plan at the 2007 annual meeting. In the unlikely event that our shareholders do not approve the amendment and extension of the 2005 Stock Incentive Plan, you will not be eligible to receive any restricted stock units. However, at such time as the shareholders do approve a plan, the Compensation and Management Development Committee may make an equitable substitute stock award to you.
Lastly, please note that, if you are employed outside the United States, the Compensation and Management Development Committee can grant the PRSU Right to you, in its sole discretion, only if and as long as it is permitted and feasible to grant restricted stock units under the laws of the country in which you are employed. If local laws make the grant of restricted stock units illegal or impractical, Cisco will let you know as soon as possible. You are under no obligation to accept the PRSU Right or any restricted stock units that may subsequently be granted to you.
[concluding text]

Sincerely,	
	
John Chambers	
Chairman & CEO, Cisco Systems	

(Beginning Fiscal 2009)
NON-EMPLOYEE DIRECTOR INITIAL RSU GRANT
CISCO SYSTEMS, INC.
STOCK UNIT AGREEMENT
This Stock Unit Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive  Plan (the “Plan”). The material terms of this Stock Unit Award are as follows:
Grantee:                                                                                                                                                                                                       
Grant Date:                                                                                                                                                                                                   
Grant Number:                                                                                                                                                                                            
Restricted Stock Units:                                                                                                                                                                             

First Vest Date:	 	                                                (the date of completion of the first year of service as a member of the Board measured from the initial election or appointment date)	
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Stock Units . Pursuant to the Plan, the Company hereby grants to you, and you hereby accept from the Company, Restricted Stock Units, each of which is a bookkeeping entry representing the equivalent in value of one (1) Share, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Stock Units . So long as your service on the Board continues, the Restricted Stock Units shall vest in accordance with the following schedule: fifty percent (50%) of the total number of Restricted Stock Units granted pursuant to this Agreement shall vest on the First Vest Date and upon your completion of each year of service as a member of the Board thereafter, unless otherwise provided by the Plan or Section 4 below.
3. Termination of Service . Except as provided in Section 4 below, in the event of the termination of your Board service for any reason, all unvested Restricted Stock Units shall be immediately forfeited without consideration.
4. Special Acceleration .
(a) To the extent the Restricted Stock Units are outstanding at the time of a Corporate Transaction or a Change in Control, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Corporate Transaction or the Change in Control, as the case may be, and shall become vested in full at that time.

(b) If your service on the Board ceases as a result of your death or Disability, to the extent the Restricted Stock Units are outstanding, such Restricted Stock Units shall automatically accelerate and shall become vested in full at that time.
(c) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
5. Settlement of Restricted Stock Units . To the extent you have not elected to defer settlement of the Restricted Stock Units, the Restricted Stock Units shall be automatically settled in Shares upon vesting of such Restricted Stock Units, provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless such issuance complies with all applicable law. To the extent you have elected to defer settlement of the Restricted Stock Units, the vested portion of the Restricted Stock Units shall be settled in Shares upon your separation from service within the meaning of Code Section 409A (“Separation from Service”), provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless such issuance complies with all applicable law.
6. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences. YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY RESTRICTED STOCK UNITS. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.
7. Non-Transferability of Restricted Stock Units . Restricted Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law.
8. Restriction on Transfer . Regardless of whether the transfer or issuance of the Shares to be issued pursuant to the Restricted Stock Units has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
 
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9. Stock Certificate Restrictive Legends . Stock certificates evidencing the Shares issued pursuant to the Restricted Stock Units may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
10. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Shares issued pursuant to the Restricted Stock Units may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
11. Voting and Other Rights . Subject to the terms of this Agreement, you shall not have any voting rights or any other rights and privileges of a shareholder of the Company unless and until the Restricted Stock Units are settled upon vesting.
12. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct the Company to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your service, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), compensation, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of these Restricted Stock Units under the Plan or with whom Shares acquired pursuant to these Restricted Stock Units or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
(b) Prior to the time that the Restricted Stock Units are settled upon vesting, you shall have no rights other than those of a general creditor of the Company. The Restricted Stock Units represent an unfunded and unsecured obligation of the Company.
(c) You may at any time withdraw the consents herein by contacting the Company’s local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from these Restricted Stock Units, and your ability to participate in the Plan.
 
3

13. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with these Restricted Stock Units or any other Award are derived solely from the discretionary decision of the Company to permit you to participate in the Plan and to benefit from a discretionary Award. By accepting these Restricted Stock Units, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to you. These Restricted Stock Units are not intended to be compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represents any portion of a your compensation or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor these Restricted Stock Units or any other Award granted under the Plan shall be deemed to give you a right to continue to serve on the Board of the Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or the Company’s shareholders, which rights are hereby expressly reserved by each, to terminate your service on the Board at any time, for any reason, with or without cause, in accordance with the provisions of applicable law, the Company’s Articles of Incorporation and Bylaws. You shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, these Restricted Stock Units or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) You agree that your rights hereunder shall be subject to set-off by the Company for any valid debts you owe the Company.
14. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
15. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
16. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
17. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
 
4

(Beginning Fiscal 2009)
NON-EMPLOYEE DIRECTOR ANNUAL RSU GRANT
CISCO SYSTEMS, INC.
STOCK UNIT AGREEMENT
This Stock Unit Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Unit Award are as follows:
Grantee:                                                                                                                                                                                                         
Grant Date:                                                                                                                                                                                                     
Grant Number:                                                                                                                                                                                              
Restricted Stock Units:                                                                                                                                                                               
Vest Date: The completion of one (1) year of Board service measured from the Grant Date.
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Stock Units . Pursuant to the Plan, the Company hereby grants to you, and you hereby accept from the Company, Restricted Stock Units, each of which is a bookkeeping entry representing the equivalent in value of one (1) Share, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Stock Units . So long as your service on the Board continues, the Restricted Stock Units shall vest in accordance with the following schedule: one-hundred percent (100%) of the total number of Restricted Stock Units granted pursuant to this Agreement shall vest on the Vest Date, unless otherwise provided by the Plan or Section 4 below.
3. Termination of Service . Except as provided in Section 4 below, in the event of the termination of your Board service for any reason, all unvested Restricted Stock Units shall be immediately forfeited without consideration.
4. Special Acceleration .
(a) To the extent the Restricted Stock Units are outstanding at the time of a Corporate Transaction or a Change in Control, such Restricted Stock Units shall automatically accelerate immediately prior to the effective date of the Corporate Transaction or the Change in Control, as the case may be, and shall become vested in full at that time.

(b) If your service on the Board ceases as a result of your death or Disability, to the extent the Restricted Stock Units are outstanding, such Restricted Stock Units shall automatically accelerate and shall become vested in full at that time.
(c) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
5. Settlement of Restricted Stock Units . To the extent you have not elected to defer settlement of the Restricted Stock Units, the Restricted Stock Units shall be automatically settled in Shares upon vesting of such Restricted Stock Units, provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless such issuance complies with all applicable law. To the extent you have elected to defer settlement of the Restricted Stock Units, the vested portion of the Restricted Stock Units shall be settled in Shares upon your separation from service within the meaning of Code Section 409A (“Separation from Service”), provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless such issuance complies with all applicable law.
6. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences. YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY RESTRICTED STOCK UNITS. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.
7. Non-Transferability of Restricted Stock Units . Restricted Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law.
8. Restriction on Transfer . Regardless of whether the transfer or issuance of the Shares to be issued pursuant to the Restricted Stock Units has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
 
2

9. Stock Certificate Restrictive Legends . Stock certificates evidencing the Shares issued pursuant to the Restricted Stock Units may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
10. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Shares issued pursuant to the Restricted Stock Units may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
11. Voting and Other Rights . Subject to the terms of this Agreement, you shall not have any voting rights or any other rights and privileges of a shareholder of the Company unless and until the Restricted Stock Units are settled upon vesting.
12. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct the Company to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your service, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), compensation, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of these Restricted Stock Units under the Plan or with whom Shares acquired pursuant to these Restricted Stock Units or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
(b) Prior to the time that the Restricted Stock Units are settled upon vesting, you shall have no rights other than those of a general creditor of the Company. The Restricted Stock Units represent an unfunded and unsecured obligation of the Company.
(c) You may at any time withdraw the consents herein by contacting the Company’s local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from these Restricted Stock Units, and your ability to participate in the Plan.
 
3

13. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with these Restricted Stock Units or any other Award are derived solely from the discretionary decision of the Company to permit you to participate in the Plan and to benefit from a discretionary Award. By accepting these Restricted Stock Units, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to you. These Restricted Stock Units are not intended to be compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represents any portion of a your compensation or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor these Restricted Stock Units or any other Award granted under the Plan shall be deemed to give you a right to continue to serve on the Board of the Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or the Company’s shareholders, which rights are hereby expressly reserved by each, to terminate your service on the Board at any time, for any reason, with or without cause, in accordance with the provisions of applicable law, the Company’s Articles of Incorporation and Bylaws. You shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, these Restricted Stock Units or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) You agree that your rights hereunder shall be subject to set-off by the Company for any valid debts you owe the Company.
14. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
15. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
16. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
17. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
 
4

(Prior to Fiscal 2009)
NON-EMPLOYEE DIRECTOR INITIAL GRANT
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the “Option”) made to purchase shares of Cisco Systems, Inc. (the “Company”) common stock:
Optionee:                                                                                                                                                                                                   
Grant Date:                                                                                                                                                                                                   
Type of Option: Nonstatutory Stock Option
Grant Number:                                                                                                                                                                            
Number of Option Shares:                                                                                                                                                        shares
Exercise Price: $              per share
Expiration Date:                                                                                                                                                                            
Date Exercisable: Immediately Exercisable
Vesting Schedule
The Option Shares shall initially be unvested and subject to repurchase by the Company at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Company’s repurchase right shall accordingly lapse, with respect to, the Option Shares in a series of four (4) successive equal annual installments upon Optionee’s completion of each year of service as a member of the Board over the four (4) year period measured from the Grant Date. In no event shall any additional Option Shares vest after Optionee’s cessation of Board service.
REPURCHASE RIGHT . OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE COMPANY, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE’S TERMINATION OF SERVICE AS A MEMBER OF THE BOARD PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE.
Optionee understands and agrees that the Option is offered subject to and in accordance with the terms of the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto.
No Service Contract . Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue to serve on the Board for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or the Company’s shareholders, which rights are hereby expressly reserved by each, to terminate Optionee’s service on the Board at any time, for any reason, with or without cause, and in accordance with the provisions of applicable law.

Definitions . All capitalized terms in this Notice shall have the meaning assigned to them in this Notice,  the attached Stock Option Agreement or the Plan.
DATED:                          ,         

CISCO SYSTEMS, INC.	
		
By:	 	 	
Title:	 	 	

OPTIONEE	
 
2

STOCK OPTION AGREEMENT
Recitals
A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and Consultants and other independent advisors who provide services to the Company (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Company (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company’s grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement, the attached Notice of Grant of Stock Option (the “ Notice”), or the Plan.
NOW, THEREFORE , it is hereby agreed as follows:
1. Grant of Option . The Company hereby grants to Optionee, as of the Grant Date, a Nonstatutory Stock Option to purchase up to the number of Option Shares specified in the Notice. The Option Shares shall be purchasable from time to time during the Option term specified in Paragraph 2 at the Exercise Price specified in the Notice.
2. Option Term . This Option shall have a maximum term of nine (9) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 4, 5, 6 or 7.
3. Non-Transferability . This Option shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. Notwithstanding the foregoing, should the Optionee die while holding this Option, then this Option shall be transferred in accordance with Optionee’s will or the laws of descent and distribution.
4. Exercisability/Vesting .
(a) This Option shall be immediately exercisable for any or all of the Option Shares, whether or not the Option Shares are vested in accordance with the Vesting Schedule set forth in the Notice, and shall remain so exercisable until the Expiration Date or the sooner termination of the Option term under this Paragraph 4 or Paragraph 5, 6 or 7.
(b) Optionee shall, in accordance with the Vesting Schedule set forth in the Notice, vest in the Option Shares in a series of installments over his or her period of Board service. Vesting in the Option Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event, however, shall any additional Option Shares vest following Optionee’s cessation of service as a Board member.
(c) As an administrative matter, the exercisable portion of this Option may only be exercised until the close of the Nasdaq Global Select Market on the Expiration Date or

the earlier termination date under Paragraph 5, 6 or 7 or, if such date is not a trading day on the Nasdaq Global Select Market, the last trading day before such date. Any later attempt to exercise this Option will not be honored. For example, if Optionee ceases to remain in service as provided in Paragraph 5(a) and the date twelve (12) months from the date of cessation is Monday, July 4 (a holiday on which the Nasdaq Global Select Market is closed), Optionee must exercise the exercisable portion of this Option by 4 pm Eastern Daylight Time on Friday, July 1.
5. Cessation of Board Service . Should Optionee’s service as a Board member cease while this Option remains outstanding, then the Option term specified in Paragraph 2 shall terminate (and this Option shall cease to be outstanding) prior to the Expiration Date in accordance with the following provisions:
(a) Should Optionee cease to serve as a Board member for any reason (other than death or Disability) while this Option is outstanding, then the period for exercising this Option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Board service, but in no event shall this Option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this Option may not be exercised in the aggregate for more than the number of Option Shares (if any) in which Optionee is vested on the date of his or her cessation of Board service. Upon the earlier of (i) the expiration of such twelve (12)-month period or (ii) the specified Expiration Date, the Option shall terminate and cease to be exercisable with respect to any vested Option Shares for which the Option has not been exercised.
(b) Should Optionee die during the twelve (12)-month period following his or her cessation of Board service and hold this Option at the time of his or her death, then the personal representative of Optionee’s estate or the person or persons to whom the Option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this Option for any or all of the Option Shares in which Optionee is vested at the time of Optionee’s cessation of Board service (less any Option Shares purchased by Optionee after such cessation of Board service but prior to death). Such right of exercise shall terminate, and this Option shall accordingly cease to be exercisable for such vested Option Shares, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s cessation of Board service or (ii) the specified Expiration Date.
(c) Should Optionee cease service as a Board member by reason of death or Disability, then all Option Shares at the time subject to this Option but not otherwise vested shall immediately vest in full so that Optionee (or the personal representative of Optionee’s estate or the person or persons to whom the Option is transferred upon Optionee’s death) shall have the right to exercise this Option for any or all of the Option Shares as fully-vested shares of Common Stock at any time prior to the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s cessation of Board service or (ii) the specified Expiration Date.
(d) Upon Optionee’s cessation of Board service for any reason other than death or Disability, this Option shall immediately terminate and cease to be
 
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outstanding with respect to any and all Option Shares in which Optionee is not otherwise at that time vested in accordance with the normal Vesting Schedule set forth in the Notice or the special vesting acceleration provisions of Paragraph 6 or 7 below.
6. Corporate Transaction .
(a) In the event of a Corporate Transaction, all Option Shares at the time subject to this Option but not otherwise vested shall automatically vest so that this Option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Option Shares at the time subject to this Option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, this Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company.
(b) If this Option is assumed in connection with a Corporate Transaction, then this Option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the Option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same.
7. Change In Control/Hostile Take-Over .
(a) All Option Shares subject to this Option at the time of a Change In Control but not otherwise vested shall automatically vest so that this Option shall, immediately prior to the effective date of such Change In Control, become fully exercisable for all of the Option Shares at the time subject to this Option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. This Option shall remain exercisable for such fully-vested Option Shares until the earliest to occur of (i) the specified Expiration Date, (ii) the sooner termination of this Option in accordance with Paragraph 4, 5 or 6 or (iii) the surrender of this Option under Paragraph 7(b).
(b) Optionee shall have an unconditional right (exercisable during the thirty (30)-day period immediately following the consummation of a “Hostile Take-Over” (as defined below)) to surrender this Option to the Company in exchange for a cash distribution from the Company in an amount equal to the excess of (i) the “Take-Over Price” (as defined below) of the Option Shares at the time subject to the surrendered Option (whether or not those Option Shares are otherwise at the time vested) over (ii) the aggregate Exercise Price payable for such shares. This Paragraph 7(b) limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the Option term and may not be assigned or transferred by Optionee. For purposes of this Option, “Hostile Take-Over” shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than thirty five percent (35%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the
 
3

Company’s shareholders which the Board does not recommend such shareholders to accept. Further, for purposes of this Option, “Take-Over Price” shall mean the greater of (i) the Fair Market Value on the date the Option is surrendered to the Company in connection with a Hostile Take-Over, or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over.
(c) To exercise the Paragraph 7(b) limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Company with written notice of the option surrender in which there is specified the number of Option Shares as to which the Option is being surrendered. Such notice must be accompanied by the return of Optionee’s copy of this Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date. Upon receipt of such cash distribution, this Option shall be cancelled with respect to the shares subject to the surrendered Option (or the surrendered portion), and Optionee shall cease to have any further right to acquire those Option Shares under this Agreement. The Option shall, however, remain outstanding for the balance of the Option Shares (if any) in accordance with the terms and provisions of this Agreement, and the Company shall accordingly issue a new stock option agreement (substantially in the same form as this Agreement) for those remaining Option Shares.
8. Adjustment in Option Shares . In the event of a subdivision of the outstanding Shares, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Shares (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, appropriate adjustments shall be made to (i) the total number and/or kind of shares or securities subject to this Option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.
9. Shareholder Rights . The holder of this Option shall not have any shareholder rights with respect to the Option Shares until such person shall have exercised the Option, paid the Exercise Price and become a holder of record of the purchased Shares.
10. Manner of Exercising Option .
(a) In order to exercise this Option with respect to all or any part of the Option Shares for which this Option is at the time exercisable, Optionee (or any other person or persons exercising the Option) must take the following actions:
(i) Pay the aggregate Exercise Price for the purchased Shares in one or more of the following forms:
(A) cash or check which, in the Company’s sole discretion, shall be made payable to a Company-designated brokerage firm or the Company; and
(B) as permitted by applicable law, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the Option) shall concurrently provide irrevocable written instructions (I) to a Company-designated
 
4

brokerage firm (or in the case of an executive officer or Board member of the Company, an Optionee-designated brokerage firm) to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased Shares plus, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates and (II) to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.
(ii) Furnish to the Company appropriate documentation that the person or persons exercising the Option (if other than Optionee) have the right to exercise this Option.
(iii) Make appropriate arrangements with the Company (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all tax withholding requirements applicable to the Option exercise.
(iv) To the extent that the option is exercised for one or more unvested Option Shares, Optionee (or other person exercising the option) shall deliver to the Secretary of the Company a purchase agreement for those unvested Option Shares.
(b) As soon as practical after the exercise date, the Company shall issue to or on behalf of Optionee (or any other person or persons exercising this Option) the purchased Option Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company), subject to the appropriate legends and/or stop transfer instructions.
(c) In no event may this Option be exercised for any fractional Shares.
11. No Impairment of Rights . This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. In addition, nothing in this Agreement shall in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the shareholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law.
12. Compliance with Laws and Regulations .
(a) The exercise of this Option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Company and Optionee with all applicable laws, regulations and rules relating thereto, including all applicable regulations of any stock exchange (or the Nasdaq Global Select Market, if applicable) on which the Shares may be listed for trading at the time of such exercise and issuance.
(b) The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Shares pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Shares as to which such approval shall not have been obtained. The Company, however, shall use its best efforts to obtain all such approvals.
 
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13. Successors and Assigns . Except to the extent otherwise provided in Paragraphs 3, 5, 6 and 7, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.
14. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to the Optionee at the address maintained for the Optionee in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
15. Construction . The Notice, this Agreement, and the Option evidenced hereby (a) are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan, and (b) constitute the entire agreement between Optionee and the Company on the subject matter hereof and supercede all proposals, written or oral, and all other communications between the parties related to the subject matter. All decisions of the Committee with respect to any question or issue arising under the Notice, this Agreement or the Plan shall be conclusive and binding on all persons having an interest in this Option.
16. Governing Law . The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to the conflict of laws principles thereof.
17. Excess Shares . If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of Shares which may without shareholder approval be issued under the Plan, then this Option shall be void with respect to those excess shares, unless shareholder approval of an amendment sufficiently increasing the number of Shares issuable under the Plan is obtained in accordance with the provisions of the Plan and all applicable laws, regulations and rules.
18. Further Instruments . The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
 
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(Prior to Fiscal 2009)
NON-EMPLOYEE DIRECTOR ANNUAL GRANT
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the “Option”) made to purchase shares of Cisco Systems, Inc. (the “Company”) common stock:
Optionee:                                                                                                                                                                                                   
Grant Date:                                                                                                                                                                                                   
Type of Option: Nonstatutory Stock Option
 
Grant	Number:                                                                                                                                                                            	
Number of Option Shares:                                                                                                                                                                  shares
Exercise Price: $              per share
Expiration Date:                                                                                                                                                                            
Date Exercisable: Immediately Exercisable
Vesting Schedule
The Option Shares shall initially be unvested and subject to repurchase by the Company at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Company’s repurchase right shall accordingly lapse, with respect to, the Option Shares in a series of two (2) successive equal annual installments upon Optionee’s completion of each year of service as a member of the Board over the two (2) year period measured from the Grant Date. In no event shall any additional Option Shares vest after Optionee’s cessation of Board service.
REPURCHASE RIGHT . OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE COMPANY, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE’S TERMINATION OF SERVICE AS A MEMBER OF THE BOARD PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE.
Optionee understands and agrees that the Option is offered subject to and in accordance with the terms of the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto.
No Service Contract . Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue to serve on the Board for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or the Company’s shareholders, which rights are hereby expressly reserved by each, to terminate Optionee’s service on the Board at any time, for any reason, with or without cause, and in accordance with the provisions of applicable law.

Definitions . All capitalized terms in this Notice shall have the meaning assigned to them in this Notice,  the attached Stock Option Agreement or the Plan.
DATED:                          ,         

CISCO SYSTEMS, INC.	
		
By:	 	 	
Title:	 	 	

OPTIONEE	
 
2

STOCK OPTION AGREEMENT
Recitals
A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and Consultants and other independent advisors who provide services to the Company (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Company (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company’s grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement, the attached Notice of Grant of Stock Option (the “ Notice”), or the Plan.
NOW, THEREFORE , it is hereby agreed as follows:
1. Grant of Option . The Company hereby grants to Optionee, as of the Grant Date, a Nonstatutory Stock Option to purchase up to the number of Option Shares specified in the Notice. The Option Shares shall be purchasable from time to time during the Option term specified in Paragraph 2 at the Exercise Price specified in the Notice.
2. Option Term . This Option shall have a maximum term of nine (9) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 4, 5, 6 or 7.
3. Non-Transferability . This Option shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. Notwithstanding the foregoing, should the Optionee die while holding this Option, then this Option shall be transferred in accordance with Optionee’s will or the laws of descent and distribution.
4. Exercisability/Vesting .
(a) This Option shall be immediately exercisable for any or all of the Option Shares, whether or not the Option Shares are vested in accordance with the Vesting Schedule set forth in the Notice, and shall remain so exercisable until the Expiration Date or the sooner termination of the Option term under this Paragraph 4 or Paragraph 5, 6 or 7.
(b) Optionee shall, in accordance with the Vesting Schedule set forth in the Notice, vest in the Option Shares in a series of installments over his or her period of Board service. Vesting in the Option Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event, however, shall any additional Option Shares vest following Optionee’s cessation of service as a Board member.
(c) As an administrative matter, the exercisable portion of this Option may only be exercised until the close of the Nasdaq Global Select Market on the Expiration Date or

the earlier termination date under Paragraph 5, 6 or 7 or, if such date is not a trading day on the Nasdaq Global Select Market, the last trading day before such date. Any later attempt to exercise this Option will not be honored. For example, if Optionee ceases to remain in service as provided in Paragraph 5(a) and the date twelve (12) months from the date of cessation is Monday, July 4 (a holiday on which the Nasdaq Global Select Market is closed), Optionee must exercise the exercisable portion of this Option by 4 pm Eastern Daylight Time on Friday, July 1.
5. Cessation of Board Service . Should Optionee’s service as a Board member cease while this Option remains outstanding, then the Option term specified in Paragraph 2 shall terminate (and this Option shall cease to be outstanding) prior to the Expiration Date in accordance with the following provisions:
(a) Should Optionee cease to serve as a Board member for any reason (other than death or Disability) while this Option is outstanding, then the period for exercising this Option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Board service, but in no event shall this Option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this Option may not be exercised in the aggregate for more than the number of Option Shares (if any) in which Optionee is vested on the date of his or her cessation of Board service. Upon the earlier of (i) the expiration of such twelve (12)-month period or (ii) the specified Expiration Date, the Option shall terminate and cease to be exercisable with respect to any vested Option Shares for which the Option has not been exercised.
(b) Should Optionee die during the twelve (12)-month period following his or her cessation of Board service and hold this Option at the time of his or her death, then the personal representative of Optionee’s estate or the person or persons to whom the Option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this Option for any or all of the Option Shares in which Optionee is vested at the time of Optionee’s cessation of Board service (less any Option Shares purchased by Optionee after such cessation of Board service but prior to death). Such right of exercise shall terminate, and this Option shall accordingly cease to be exercisable for such vested Option Shares, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s cessation of Board service or (ii) the specified Expiration Date.
(c) Should Optionee cease service as a Board member by reason of death or Disability, then all Option Shares at the time subject to this Option but not otherwise vested shall immediately vest in full so that Optionee (or the personal representative of Optionee’s estate or the person or persons to whom the Option is transferred upon Optionee’s death) shall have the right to exercise this Option for any or all of the Option Shares as fully-vested shares of Common Stock at any time prior to the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s cessation of Board service or (ii) the specified Expiration Date.
(d) Upon Optionee’s cessation of Board service for any reason other than death or Disability, this Option shall immediately terminate and cease to be
 
2

outstanding with respect to any and all Option Shares in which Optionee is not otherwise at that time vested in accordance with the normal Vesting Schedule set forth in the Notice or the special vesting acceleration provisions of Paragraph 6 or 7 below.
6. Corporate Transaction .
(a) In the event of a Corporate Transaction, all Option Shares at the time subject to this Option but not otherwise vested shall automatically vest so that this Option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Option Shares at the time subject to this Option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, this Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company.
(b) If this Option is assumed in connection with a Corporate Transaction, then this Option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the Option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same.
7. Change In Control/Hostile Take-Over .
(a) All Option Shares subject to this Option at the time of a Change In Control but not otherwise vested shall automatically vest so that this Option shall, immediately prior to the effective date of such Change In Control, become fully exercisable for all of the Option Shares at the time subject to this Option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. This Option shall remain exercisable for such fully-vested Option Shares until the earliest to occur of (i) the specified Expiration Date, (ii) the sooner termination of this Option in accordance with Paragraph 4, 5 or 6 or (iii) the surrender of this Option under Paragraph 7(b).
(b) Optionee shall have an unconditional right (exercisable during the thirty (30)-day period immediately following the consummation of a “Hostile Take-Over” (as defined below)) to surrender this Option to the Company in exchange for a cash distribution from the Company in an amount equal to the excess of (i) the “Take-Over Price” (as defined below) of the Option Shares at the time subject to the surrendered Option (whether or not those Option Shares are otherwise at the time vested) over (ii) the aggregate Exercise Price payable for such shares. This Paragraph 7(b) limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the Option term and may not be assigned or transferred by Optionee. For purposes of this Option, “Hostile Take-Over” shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than thirty five percent (35%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the
 
3

Company’s shareholders which the Board does not recommend such shareholders to accept. Further, for purposes of this Option, “Take-Over Price” shall mean the greater of (i) the Fair Market Value on the date the Option is surrendered to the Company in connection with a Hostile Take-Over, or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over.
(c) To exercise the Paragraph 7(b) limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Company with written notice of the option surrender in which there is specified the number of Option Shares as to which the Option is being surrendered. Such notice must be accompanied by the return of Optionee’s copy of this Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date. Upon receipt of such cash distribution, this Option shall be cancelled with respect to the shares subject to the surrendered Option (or the surrendered portion), and Optionee shall cease to have any further right to acquire those Option Shares under this Agreement. The Option shall, however, remain outstanding for the balance of the Option Shares (if any) in accordance with the terms and provisions of this Agreement, and the Company shall accordingly issue a new stock option agreement (substantially in the same form as this Agreement) for those remaining Option Shares.
8. Adjustment in Option Shares . In the event of a subdivision of the outstanding Shares, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Shares (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, appropriate adjustments shall be made to (i) the total number and/or kind of shares or securities subject to this Option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.
9. Shareholder Rights . The holder of this Option shall not have any shareholder rights with respect to the Option Shares until such person shall have exercised the Option, paid the Exercise Price and become a holder of record of the purchased Shares.
10. Manner of Exercising Option .
(a) In order to exercise this Option with respect to all or any part of the Option Shares for which this Option is at the time exercisable, Optionee (or any other person or persons exercising the Option) must take the following actions:
(i) Pay the aggregate Exercise Price for the purchased Shares in one or more of the following forms:
(A) cash or check which, in the Company’s sole discretion, shall be made payable to a Company-designated brokerage firm or the Company; and
(B) as permitted by applicable law, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the Option) shall concurrently provide irrevocable written instructions (I) to a Company-designated
 
4

brokerage firm (or in the case of an executive officer or Board member of the Company, an Optionee-designated brokerage firm) to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased Shares plus, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates and (II) to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.
(ii) Furnish to the Company appropriate documentation that the person or persons exercising the Option (if other than Optionee) have the right to exercise this Option.
(iii) Make appropriate arrangements with the Company (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all tax withholding requirements applicable to the Option exercise.
(iv) To the extent that the option is exercised for one or more unvested Option Shares, Optionee (or other person exercising the option) shall deliver to the Secretary of the Company a purchase agreement for those unvested Option Shares.
(b) As soon as practical after the exercise date, the Company shall issue to or on behalf of Optionee (or any other person or persons exercising this Option) the purchased Option Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company), subject to the appropriate legends and/or stop transfer instructions.
(c) In no event may this Option be exercised for any fractional Shares.
11. No Impairment of Rights . This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. In addition, nothing in this Agreement shall in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the shareholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law.
12. Compliance with Laws and Regulations .
(a) The exercise of this Option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Company and Optionee with all applicable laws, regulations and rules relating thereto, including all applicable regulations of any stock exchange (or the Nasdaq Global Select Market, if applicable) on which the Shares may be listed for trading at the time of such exercise and issuance.
(b) The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Shares pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Shares as to which such approval shall not have been obtained. The Company, however, shall use its best efforts to obtain all such approvals.
 
5

13. Successors and Assigns . Except to the extent otherwise provided in Paragraphs 3, 5, 6 and 7, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.
14. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to the Optionee at the address maintained for the Optionee in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
15. Construction . The Notice, this Agreement, and the Option evidenced hereby (a) are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan, and (b) constitute the entire agreement between Optionee and the Company on the subject matter hereof and supercede all proposals, written or oral, and all other communications between the parties related to the subject matter. All decisions of the Committee with respect to any question or issue arising under the Notice, this Agreement or the Plan shall be conclusive and binding on all persons having an interest in this Option.
16. Governing Law . The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to the conflict of laws principles thereof.
17. Excess Shares . If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of Shares which may without shareholder approval be issued under the Plan, then this Option shall be void with respect to those excess shares, unless shareholder approval of an amendment sufficiently increasing the number of Shares issuable under the Plan is obtained in accordance with the provisions of the Plan and all applicable laws, regulations and rules.
18. Further Instruments . The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
 
6

NON-EMPLOYEE DIRECTOR STOCK GRANT
CISCO SYSTEMS, INC.
STOCK GRANT AGREEMENT
This Stock Grant Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Grant Award are as follows:

Grantee:	 	 	
		
Grant Date:	 	 	
		
Grant Number:	 	 	
		
Restricted Shares:  	 	 	
		
Vest Date:	 	The completion of one (1) year of Board service measured from the Grant Date.	
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Shares . Pursuant to the Plan, the Company hereby transfers to you, and you hereby accept from the Company, a Stock Grant Award consisting of the Restricted Shares, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Shares . So long as your service on the Board continues, the Restricted Shares shall vest in accordance with the following schedule: one-hundred percent (100%) of the total number of Restricted Shares issued pursuant to this Agreement shall vest on the Vest Date, unless otherwise provided by the Plan or Section 3 below. Except as provided in Section 3 below, in the event of the termination of your Board service for any reason, all unvested Restricted Shares shall be immediately forfeited without consideration. For purposes of facilitating the enforcement of the provisions of this Section 2, the Company may issue stop-transfer instructions on the Restricted Shares to the Company’s transfer agent, or otherwise hold the Restricted Shares in escrow, until the Restricted Shares have vested and you have satisfied all applicable obligations with respect to the Restricted Shares, including any applicable tax withholding obligations set forth in Section 5 below. Any new, substituted or additional securities or other property which is issued or distributed with respect to the unvested Restricted Shares shall be subject to the same terms and conditions as are applicable to the unvested Restricted Shares under this Agreement and the Plan.

3. Special Acceleration .
(a) To the extent the Restricted Shares are outstanding at the time of a Corporate Transaction or a Change in Control, but not otherwise fully vested, such Restricted Shares shall automatically accelerate immediately prior to the effective date of the Corporate Transaction or the Change in Control, as the case may be, and shall become vested in full at that time.
(b) If your service on the Board ceases as a result of your death or Disability then, to the extent the Restricted Shares are outstanding, but not otherwise fully vested, such Restricted Shares shall automatically accelerate and shall become vested in full at that time.
(c) This Stock Grant Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.
4. Restriction on Election to Recognize Income in the Year of Grant . Under Section 83 of the Code, the Fair Market Value of the Restricted Shares on the date the Restricted Shares vest will be taxable as ordinary income at that time. You understand, acknowledge and agree that, as a condition to the grant of this Award, you may not elect to be taxed at the time the Restricted Shares are acquired by filing an election under Section 83(b) of the Code with the Internal Revenue Service.
5. Withholding Taxes . You agree to make arrangements satisfactory to the Company for the satisfaction of any applicable withholding tax obligations that arise in connection with the Restricted Shares which, at the sole discretion of the Company, may include (i) having the Company withhold Shares from the Restricted Shares held in escrow, or (ii) any other arrangement approved by the Company, in any case, equal in value to the amount necessary to satisfy any such withholding tax obligation. Such Shares shall be valued based on the Fair Market Value as of the day prior to the date that the amount of tax to be withheld is to be determined under applicable law. The Company shall not be required to release the Restricted Shares from the stop-transfer instructions or escrow unless and until such obligations are satisfied.
6. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences. YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY STOCK GRANT AWARD. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.
7. Non-Transferability of Restricted Shares . Restricted Shares which have not vested pursuant to Section 2 above shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by the operation of law. However, this Section 7 shall not
 
2

preclude you from designating a beneficiary who will receive any vested Restricted Shares in the event of the your death, nor shall it preclude a transfer of vested Restricted Shares by will or by the laws of descent and distribution.
8. Restriction on Transfer . Regardless of whether the transfer or issuance of the Restricted Shares has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Restricted Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
9. Stock Certificate Restrictive Legends . Stock certificates evidencing the Restricted Shares may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
10. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Restricted Shares may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
11. Voting and Other Rights . Subject to the terms of this Agreement, you shall have all the rights and privileges of a shareholder of the Company while the Restricted Shares are subject to stop-transfer instructions, or otherwise held in escrow, including the right to vote and to receive dividends (if any).
12. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct the Company to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your service, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), compensation, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of this Stock Grant Award under the Plan or with whom Shares acquired pursuant to this Stock Grant Award or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
 
3

(b) You may at any time withdraw the consents herein by contacting your local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from this Stock Grant Award, and your ability to participate in the Plan.
13. No Entitlement or Claims for Compensation .
(a) Your rights, if any, in respect of or in connection with this Stock Grant Award or any other Award is derived solely from the discretionary decision of the Company to permit you to participate in the Plan and to benefit from a discretionary Award. By accepting this Stock Grant Award, you expressly acknowledge that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards to you. This Stock Grant Award is not intended to be compensation of a continuing or recurring nature, or part of your normal or expected compensation, and in no way represents any portion of a your salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.
(b) Neither the Plan nor this Stock Grant Award or any other Award granted under the Plan shall be deemed to give you a right to remain an Employee, Consultant or director of the Company, a Parent, a Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries and Affiliates reserve the right to terminate your Service at any time, with or without cause, and for any reason, subject to applicable laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and you shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan, this Stock Grant Award or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.
(c) You agree that the Company may require that Restricted Shares be held by a broker designated by the Company. In addition, you agree that your rights hereunder shall be subject to set-off by the Company for any valid debts you owe the Company.
14. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
15. Notices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
16. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
17. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.
 
4

DATED:                          ,         

CISCO SYSTEMS, INC.	
		
By:	 	 	
Title:	 	 	

GRANTEE	
 
5

NON-EMPLOYEE DIRECTOR STOCK UNIT
IN LIEU OF ANNUAL RETAINER
CISCO SYSTEMS, INC.
STOCK UNIT AGREEMENT
This Stock Unit Agreement (the “Agreement”) is made and entered into as of the Grant Date (as defined below) by and between Cisco Systems, Inc., a California corporation (the “Company”), and you pursuant to the Cisco Systems, Inc. 2005 Stock Incentive Plan (the “Plan”). The material terms of this Stock Unit Award are as follows:

Grantee:	  	 	  		  		
							
Grant Date:	  	 	  		  		
							
Grant Number:	  	 	  		  		
							
Restricted Stock Units:	  	 	  		  		
To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail.
In consideration of the mutual agreements herein contained and intending to be legally bound hereby, the parties agree as follows:
1. Restricted Stock Units . Pursuant to the Plan, the Company hereby grants to you, and you hereby accept from the Company, Restricted Stock Units, each of which is a bookkeeping entry representing the equivalent in value of one (1) Share, on the terms and conditions set forth herein and in the Plan.
2. Vesting of Restricted Stock Units . One-hundred percent (100%) of the total number of Restricted Stock Units granted pursuant to this Agreement shall vest on the Grant Date.
3. Settlement of Restricted Stock Units . Restricted Stock Units shall be automatically settled in Shares upon your separation from service within the meaning of Code Section 409A (“Separation from Service”), provided that the Company shall have no obligation to issue Shares pursuant to this Agreement unless and until you have satisfied any applicable tax withholding obligations and such issuance otherwise complies with all applicable law.
4. Tax Advice . You represent, warrant and acknowledge that the Company has made no warranties or representations to you with respect to the income tax consequences of the transactions contemplated by this Agreement, and you are in no manner relying on the Company or the Company’s representatives for an assessment of such tax consequences. YOU UNDERSTAND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING ANY RESTRICTED STOCK UNITS. NOTHING STATED HEREIN IS INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING TAXPAYER PENALTIES.

5. Non-Transferability of Restricted Stock Units . Restricted Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. However, this Section 5 shall not preclude you from designating a beneficiary who will receive vested Shares pursuant to this award in the event of your death, nor shall it preclude a transfer of vested Shares pursuant to this award by will or by the laws of descent and distribution.
6. Restriction on Transfer . Regardless of whether the transfer or issuance of the Shares to be issued pursuant to the Restricted Stock Units has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose additional restrictions upon the sale, pledge, or other transfer of the Shares (including the placement of appropriate legends on stock certificates and the issuance of stop-transfer instructions to the Company’s transfer agent) if, in the judgment of the Company and the Company’s counsel, such restrictions are necessary in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law.
7. Stock Certificate Restrictive Legends . Stock certificates evidencing the Shares issued pursuant to the Restricted Stock Units may bear such restrictive legends as the Company and the Company’s counsel deem necessary under applicable law or pursuant to this Agreement.
8. Representations, Warranties, Covenants, and Acknowledgments . You hereby agree that in the event the Company and the Company’s counsel deem it necessary or advisable in the exercise of their discretion, the transfer or issuance of the Shares issued pursuant to the Restricted Stock Units may be conditioned upon you making certain representations, warranties, and acknowledgments relating to compliance with applicable securities laws.
9. Voting and Other Rights . Subject to the terms of this Agreement, you shall not have any voting rights or any other rights and privileges of a shareholder of the Company unless and until the Restricted Stock Units are settled in Shares upon your Separation from Service.
10. Authorization to Release Necessary Personal Information .
(a) You hereby authorize and direct the Company to collect, use and transfer in electronic or other form, any personal information (the “Data”) regarding your service, the nature and amount of your compensation and the facts and conditions of your participation in the Plan (including, but not limited to, your name, home address, telephone number, date of birth, social security number (or any other social or national identification number), compensation, nationality, job title, number of Shares held and the details of all Awards or any other entitlement to Shares awarded, cancelled, exercised, vested, unvested or outstanding) for the purpose of implementing, administering and managing your participation in the Plan. You understand that the Data may be transferred to the Company or any of its Subsidiaries, or to any third parties assisting in the implementation, administration and management of the Plan, including any requisite transfer to a broker or other third party assisting with the administration of these Restricted Stock Units under the Plan or with whom Shares acquired pursuant to these Restricted Stock Units or cash from the sale of such shares may be deposited. You acknowledge that recipients of the Data may be located in different countries, and those countries may have data privacy laws and protections different from those in the country of your residence. Furthermore, you acknowledge and understand that the transfer of the Data to the Company or any of its Subsidiaries, or to any third parties is necessary for your participation in the Plan.
 
2

(b) Prior to the time that the Restricted Stock Units are settled in Shares upon your Separation from Service, you shall have no rights other than those of a general creditor of the Company. The Restricted Stock Units represent an unfunded and unsecured obligation of the Company.
(c) You may at any time withdraw the consents herein by contacting the Company’s local human resources representative in writing. You further acknowledge that withdrawal of consent may affect your ability to exercise or realize benefits from these Restricted Stock Units, and your ability to participate in the Plan.
11. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof.
12. N otices . Any notice required or permitted under the terms of this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to you at the address maintained for you in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
13. Binding Effect . Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto.
14. Severability . If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the full extent possible.

DATED:	 	 	

CISCO SYSTEMS, INC.	
		
By:	 	 	
Title:	 	 	

GRANTEE	
 
3

NON-EMPLOYEE DIRECTOR ELECTION UNDER THE
CISCO SYSTEMS, INC. 2005 STOCK INCENTIVE PLAN
INITIAL EQUITY AWARD
I,                                                           , being a prospective newly elected or appointed non-employee member of the Board of Directors of Cisco Systems, Inc. (the “Company”) hereby elect to defer the settlement of my total initial restricted stock unit award anticipated to be granted under the 2005 Stock Incentive Plan (the “Plan”) on                          in connection with my initial election or appointment as a non-employee member of the Board of Directors of the Company.
This election will be effective only if received by                                                           on or before                                                           [the date of the non-employee director’s election or appointment].
If I do not elect to defer the settlement of my initial restricted stock unit grant, the restricted stock unit grant will be automatically settled in shares of the Company’s common stock on, or as soon as practicable after, the below described vesting dates of the restricted stock unit grant.
Fifty percent (50%) of my initial restricted stock unit grant will vest upon the completion of one year of Board service measured from my initial appointment or election date and the remaining fifty percent (50%) will vest upon my completion of one year of Board service thereafter (subject to acceleration in certain cases), as more fully set forth in the Stock Unit Agreement. I understand that if my “separation from service” within the meaning of Section 409A of the Internal Revenue Code (“Separation from Service”) occurs before my restricted stock unit grant vests, any unvested portion will be forfeited.
I understand that if I elect to defer the settlement of my initial restricted stock unit grant, any vested portion of my stock unit grant will not be settled in shares of the Company’s common stock upon the above mentioned vesting dates, but instead will be settled in shares of the Company’s common stock on, or as soon as practicable after, my Separation from Service (which generally will be the date my service as a member of the Board of Directors of the Company terminates).
I understand that my receipt of shares of the Company’s common stock pursuant to any stock unit grant will be taxed as ordinary income to me based on the value of the shares on the date the stock unit grant is settled and I receive shares of the Company’s common stock.

 	 		 	 	
Signature of Non-Employee Director	 		 		 	Date	
* Because individual circumstances vary, Cisco Systems, Inc. can not provide tax advice and you should consult with your own tax advisor regarding the income tax consequences of your potential elections.

NON-EMPLOYEE DIRECTOR ELECTION UNDER THE
CISCO SYSTEMS, INC. 2005 STOCK INCENTIVE PLAN
ANNUAL RETAINER & EQUITY AWARD
ANNUAL RETAINER
I,                                                           , being a non-employee member of the Board of Directors of Cisco Systems, Inc. (the “Company”) hereby elect to receive (complete either (a) or (b) below):
 
(a)	         % (insert 0% OR a percentage between 25% and 100%) of my total annual retainer for the next year of Board service commencing at the next annual meeting of shareholders;	
 
(b)	$              (insert $0 OR a dollar amount between $18,750 and $75,000) of my total annual retainer for the next year of Board service commencing at the next annual meeting of shareholders;	
in the form of (check either (i) or  (ii) below):
(i)              a fully vested deferred stock unit grant which will be granted under the 2005 Stock Incentive Plan (the “Plan”) on November       , 200    based on the closing value of the Company’s common stock on that date;
(ii)              a fully vested stock grant which will be granted under the Plan on November       , 200    based on the closing value of the Company’s common stock on that date.
I understand that this election will be effective only if received by                                      on or before                      [December 31, [PRECEDING YEAR]].
I further understand that I will receive my annual retainer in the form of cash to the extent that I do not elect to receive it in the form of a stock unit grant or stock grant under the Plan on, or as soon as practicable after, the date of the annual meeting of shareholders on                      , 20      .
I understand that, if I elect to receive a stock unit grant, any such stock unit grant will be settled in shares of the Company’s common stock on, or as soon as practicable after, my “separation from service” within the meaning of Section 409A of the Internal Revenue Code (which generally will be the date my service as a member of the Board of Directors of the Company terminates).
I further understand that my receipt of shares of the Company’s common stock pursuant to any stock unit grant will be taxed as ordinary income to me based on the value of the shares on the date the stock unit grant is settled and I receive shares of the Company’s common stock.
I understand that, if I elect to receive a stock grant, I will receive the shares representing any such stock grant on, or as soon as practicable after, the date of the annual shareholder meeting and that my receipt of a stock grant will be taxed as ordinary income to me based on the value of the shares on the date of grant.

ANNUAL EQUITY AWARD
I further (check one) (i)           ELECT or (ii)           DO NOT ELECT to defer the settlement of my total annual restricted stock unit award anticipated to be granted under the 2005 Stock Incentive Plan (the “Plan”) on                      , 20      immediately following the Company’s 20      Annual Meeting of Shareholders.
I understand that this election will be effective only if received by                                      on or before                      [December 31, [PRECEDING YEAR]].
If I do not elect to defer the settlement of my annual restricted stock unit grant, the above-mentioned restricted stock unit grant will be automatically settled in shares of the Company’s common stock on, or as soon as practicable after, the vesting of the restricted stock unit grant upon the completion of one year of Board service following the date of grant (subject to acceleration in certain cases), as more fully set forth in the Stock Unit Agreement. I understand that if my “separation from service” within the meaning of Section 409A of the Internal Revenue Code (“Separation from Service”) occurs before my restricted stock unit grant vests, the grant will be forfeited.
I understand that if I elect to defer the settlement of the above-mentioned annual restricted stock unit grant, any vested portion of my restricted stock unit grant will not be settled in shares of the Company’s common stock upon the above-described vesting date, but instead will be settled in shares of the Company’s common stock on, or as soon as practicable after, my Separation from Service (which generally will be the date my service as a member of the Board of Directors of the Company terminates).
I understand that my receipt of shares of the Company’s common stock pursuant to any stock unit grant will be taxed as ordinary income to me based on the value of the shares on the date the stock unit grant is settled and I receive shares of the Company’s common stock.

 	 		 	 	
Signature of Non-Employee Director	 		 		 	Date	
* Because individual circumstances vary, Cisco Systems, Inc. can not provide tax advice and you should consult with your own tax advisor regarding the income tax consequences of your potential elections.

CISCO SYSTEMS, INC.
VESTING ACCELERATION POLICY
FOR
DEATH AND TERMINAL ILLNESS
AS
AMENDED JULY 26, 2007
Unless and until the Compensation & Management Development Committee of the Board of Directors of Cisco Systems, Inc. determines otherwise, the following policy shall be applied to all equity awards issued under any equity plan maintained Cisco or any Cisco subsidiary, including equity awards and/or equity plans assumed by Cisco in connection with its acquisition of companies, and held by any employee of Cisco or any Cisco subsidiary (each such award shall be referred to herein as an “equity award”), except to the extent that the application of such policy would be prohibited by the applicable equity plan, equity award agreement or any applicable law, rule or regulation.
For purposes of this policy:
 
 	•	 	the value of stock options and stock appreciation rights is based on the difference between the exercise price of the equity awards and the closing price of Cisco’s stock on the date of the employee’s death or terminal illness, as applicable, or if such day is not a trading day, the last trading day prior to the date of death or terminal illness, as applicable; and	
 
 	•	 	the value of stock grants, stock units, and unvested shares previously acquired pursuant to equity awards (such shares are referred to herein as “unvested equity award shares”) is based on the difference between the purchase price, if any, and the closing price of Cisco’s stock on the date of the employee’s death or terminal illness, as applicable, or if such day is not a trading day, the last trading day prior to the date of death or terminal illness, as applicable.	
ACCELERATION UPON DEATH OF EMPLOYEE
Upon the death of an employee, Cisco will accelerate the vesting of the employee’s outstanding equity awards and any unvested equity award shares up to a specified limit based on the value of the equity awards and/or shares on the date of death. The limit on the amount of accelerated vesting is the greater of: (a) one-hundred percent (100%) of the unvested equity awards and/or unvested equity award shares up to a total value of $10 million; or (b) up to one year of vesting from the date of death as to all unvested equity awards and/or unvested equity award shares. For example, if an employee held unvested options for 100,000 shares with an exercise price of $1 which would vest in four annual installments of 25,000 shares, and the closing price of Cisco’s stock on the date of the employee’s death was $101, all 100,000 of the shares would become vested (100,000 shares x $100 (the difference between $101 and $1) = $10,000,000).
ACCELERATION UPON TERMINAL ILLNESS OF EMPLOYEE
Upon the terminal illness of an employee, Cisco will accelerate the vesting of the employee’s outstanding equity awards and any unvested equity award shares up to a specified limit based on the value of the equity awards and/or shares on the date of the terminal illness. An employee will be considered terminally ill upon the approval by Cisco’s employee life insurance provider of the accelerated life insurance benefit which indicates 12 months or less to live. The date of terminal illness will be the date the determination is made by Cisco’s employee life insurance provider. The limit on the amount of accelerated vesting is the greater of: (a) one-hundred percent (100%) of the unvested equity awards and/or unvested equity award shares up to a total value of $10 million; or (b) up to one year of vesting from the date of the terminal illness as to all unvested equity awards and/or unvested equity award shares. For example, if an employee holds unvested options for 100,000 shares with an exercise price of $1 which would vest in four annual installments of 25,000 shares, and the closing price of Cisco’s stock on the date that the employee is determined to be terminally ill was $101, all 100,000 of the shares would become vested (100,000 shares x $100 (the difference between $101 and $1) = $10,000,000).

CISCO SYSTEMS, INC.
VESTING POLICY
FOR
LEAVES OF ABSENCE
Unless and until the Compensation & Management Development Committee of the Board of Directors of Cisco Systems, Inc. determines otherwise, the following policy shall be applied to all equity awards issued under any equity plan maintained Cisco or any Cisco subsidiary, including equity awards and/or equity plans assumed by Cisco in connection with its acquisition of companies, and held by any employee of Cisco or any Cisco subsidiary (each such award shall be referred to herein as an “equity award”), except to the extent that the application of such policy would be prohibited by the applicable equity plan, equity award agreement or any applicable law, rule or regulation.
(Effective until approximately November 2008)
SUSPENSION OF VESTING UPON AUTHORIZED LEAVE OF ABSENCE
The exercise or vesting schedule in effect for any outstanding equity award and any unvested shares previously acquired pursuant to any equity award (such shares referred to herein as “unvested equity award shares”) held by an employee at the time of the employee’s commencement of an authorized leave of absence shall be suspended as of the first day of the authorized leave of absence, and the equity award and any unvested equity shares shall not vest and/or become exercisable for any additional shares during the period the employee remains on such leave of absence.
(Effective in or around November 2008)
90 DAYS CONTINUED VESTING ON AUTHORIZED LEAVES OF ABSENCE
The exercise or vesting schedule in effect for any outstanding equity award and any unvested shares previously acquired pursuant to any equity award (such shares referred to herein as “unvested equity award shares”) held by an employee at the time of the employee’s commencement of an authorized leave of absence shall continue to vest and/or become exercisable in accordance with the vesting schedule set forth in the applicable equity award agreement during the period the employee remains on such authorized leave of absence; provided that, in no event shall any employee be entitled to vest for more than 90 days of authorized leaves of absence during any rolling 12-month period (the “LOA Limit”).
If an employee exceeds the LOA Limit during any rolling 12-month period, the unvested equity award shares held by such an employee shall be suspended immediately following the expiration of the LOA Limit and the equity award and any unvested equity shares shall not vest and/or become exercisable for any additional shares during the remainder of the rolling 12-month period.

CISCO SYSTEMS, INC.
TRANSFER POLICY
FOR
DIVORCE
Unless and until the Compensation & Management Development Committee of the Board of Directors of Cisco Systems, Inc. determines otherwise, the following policy shall be applied to all equity awards issued under any equity plan maintained Cisco or any Cisco subsidiary, including equity awards and/or equity plans assumed by Cisco in connection with its acquisition of companies, and held by any employee of Cisco or any Cisco subsidiary (each such award shall be referred to herein as an “equity award”), except to the extent that the application of such policy would be prohibited by the applicable equity plan, equity award agreement or any applicable law, rule or regulation.
PROHIBITION ON TRANSFER OF EQUITY AWARDS UPON DIVORCE
Equity awards and any unvested shares acquired pursuant to equity awards shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process in connection with the divorce of the holder of such equity award or shares.

Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John T. Chambers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cisco Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 17, 2008

/s/ John T. Chambers	
John T. Chambers	
Chairman and Chief Executive Officer
(Principal Executive Officer)	

Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank A. Calderoni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cisco Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 17, 2008

/s/ Frank A. Calderoni	
Frank A. Calderoni	
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)	

Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John T. Chambers, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
 	•	 	the Quarterly Report on Form 10-Q of the Company for the quarter ended October 25, 2008, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	•	 	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
Date: November 17, 2008

/s/ John T. Chambers	
John T. Chambers	
Chairman and Chief Executive Officer
(Principal Executive Officer)	

Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank A. Calderoni, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
 	•	 	the Quarterly Report on Form 10-Q of the Company for the quarter ended October 25, 2008, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	•	 	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
Date: November 17, 2008

/s/ Frank A. Calderoni	
Frank A. Calderoni	
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)