<SUBMISSION>
<ACCESSION-NUMBER>0001095811-01-500424
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>3
<PERIOD>20010127
<FILING-DATE>20010312
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>CISCO SYSTEMS INC
<CIK>0000858877
<ASSIGNED-SIC>3576
<IRS-NUMBER>770059951
<STATE-OF-INCORPORATION>CA
<FISCAL-YEAR-END>0731
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-18225
<FILM-NUMBER>1566578
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>170 WEST TASMAN DR
<CITY>SAN JOSE
<STATE>CA
<ZIP>95134-1706
<PHONE>4085264000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>225 WEST TASMAN DR
<CITY>SAN JOSE
<STATE>CA
<ZIP>95134-1706
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f70305ore10-q.txt
<DESCRIPTION>FORM 10-Q QUARTER ENDED JANUARY 27, 2001
<TEXT>

<PAGE>   1
================================================================================

                                  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 JANUARY 27, 2001

                                       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)


<TABLE>
<S>                                                 <C>
                   CALIFORNIA                             77-0059951
        (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)             IDENTIFICATION NUMBER)
</TABLE>


                              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 filing requirements
for the past 90 days.

                                 YES [X] NO [ ]

As of February 23, 2001, 7,276,393,789 shares of the registrant's common stock
were outstanding.

================================================================================


<PAGE>   2
                               CISCO SYSTEMS, INC.

                FORM 10-Q FOR THE QUARTER ENDED JANUARY 27, 2001

                                      INDEX


<TABLE>
<CAPTION>
                                                                                         Page
<S>                                                                                      <C>
Part I.        Financial Information

Item 1.        Financial Statements

               a) Consolidated Statements of Operations for the three and six months
                  ended January 27, 2001 and January 29, 2000                              3

               b) Consolidated Balance Sheets at January 27, 2001 and July 29, 2000        4

               c) Consolidated Statements of Cash Flows for the six months ended
                  January 27, 2001 and January 29, 2000                                    5

               d) Notes to Consolidated Financial Statements                               6

Item 2.        Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                                      15

Item 3.        Quantitative and Qualitative Disclosures About Market Risk                 32

Part II.       Other Information

Item 2.        Changes in Securities and Use of Proceeds                                  33

Item 6.        Exhibits and Reports on Form 8-K                                           34

               Signature                                                                  35
</TABLE>


                                       2


<PAGE>   3
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                               CISCO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                       Three Months Ended              Six Months Ended
                                                   --------------------------      --------------------------
                                                   January 27,     January 29,     January 27,    January 29,
                                                      2001            2000            2001           2000
                                                   ----------      ----------      ----------      ----------
<S>                                                <C>             <C>             <C>             <C>
NET SALES                                          $    6,748      $    4,357      $   13,267      $    8,275
Cost of sales                                           2,581           1,539           4,959           2,927
                                                   ----------      ----------      ----------      ----------

     GROSS MARGIN                                       4,167           2,818           8,308           5,348

Operating expenses:
     Research and development                           1,012             602           1,959           1,143
     Sales and marketing                                1,434             933           2,796           1,751
     General and administrative                           196             147             392             259
     Amortization of goodwill and
      purchased intangible assets                         256              47             481              71
     In-process research and development                  237              43             746             424
                                                   ----------      ----------      ----------      ----------
       Total operating expenses                         3,135           1,772           6,374           3,648
                                                   ----------      ----------      ----------      ----------

OPERATING INCOME                                        1,032           1,046           1,934           1,700

Net gains realized on minority investments                  -              31             190              31
Interest and other income, net                            275             120             505             222
                                                   ----------      ----------      ----------      ----------

INCOME BEFORE PROVISION
   FOR INCOME TAXES                                     1,307           1,197           2,629           1,953
Provision for income taxes                                433             381             957             722
                                                   ----------      ----------      ----------      ----------

     NET INCOME                                    $      874      $      816      $    1,672      $    1,231
                                                   ==========      ==========      ==========      ==========

Net income per share--basic                        $     0.12      $     0.12      $     0.23      $     0.18
                                                   ==========      ==========      ==========      ==========

Net income per share--diluted                      $     0.12      $     0.11      $     0.22      $     0.17
                                                   ==========      ==========      ==========      ==========

Shares used in per-share calculation--basic             7,144           6,911           7,121           6,872
                                                   ==========      ==========      ==========      ==========

Shares used in per-share calculation--diluted           7,556           7,387           7,567           7,338
                                                   ==========      ==========      ==========      ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                       3


<PAGE>   4
                               CISCO SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS
                         (IN MILLIONS, EXCEPT PAR VALUE)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                        January 27,      July 29,
                                                                           2001            2000
                                                                        ----------      ----------
<S>                                                                     <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                             $    3,994      $    4,234
  Short-term investments                                                       788           1,291
  Accounts receivable, net of allowance for doubtful accounts
   of $89 at January 27, 2001 and $43 at July 29, 2000                       3,512           2,299
  Inventories, net                                                           2,533           1,232
  Deferred tax assets                                                        1,162           1,091
  Lease receivables                                                            454             588
  Prepaid expenses and other current assets                                    469             375
                                                                        ----------      ----------

    Total current assets                                                    12,912          11,110

Investments                                                                 12,007          13,688
Restricted investments                                                       1,162           1,286
Property and equipment, net                                                  2,211           1,426
Goodwill and purchased intangible assets, net                                4,696           4,087
Lease receivables                                                              516             527
Other assets                                                                 2,377             746
                                                                        ----------      ----------

    TOTAL ASSETS                                                        $   35,881      $   32,870
                                                                        ==========      ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                      $      942      $      739
  Income taxes payable                                                         287             233
  Accrued compensation                                                       1,312           1,317
  Deferred revenue                                                           1,994           1,386
  Other accrued liabilities                                                  1,800           1,521
                                                                        ----------      ----------

    Total current liabilities                                                6,335           5,196

Deferred tax liabilities                                                         -           1,132
Minority interest                                                               48              45

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; 7,241 and 7,138 shares issued and
   outstanding at January 27, 2001 and July 29, 2000, respectively          18,203          14,609
  Retained earnings                                                         10,030           8,358
  Accumulated other comprehensive income                                     1,265           3,530
                                                                        ----------      ----------
    Total shareholders' equity                                              29,498          26,497
                                                                        ----------      ----------

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $   35,881      $   32,870
                                                                        ==========      ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                       4


<PAGE>   5
                               CISCO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (IN MILLIONS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                            Six Months Ended
                                                                       ---------------------------
                                                                       January 27,      January 29,
                                                                          2001             2000
                                                                       ----------       ----------
<S>                                                                    <C>              <C>
Cash flows from operating activities:
  Net income                                                           $    1,672       $    1,231
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Depreciation and amortization                                             974              308
    Provision for doubtful accounts                                            52               13
    Provision for inventory reserves                                          338              154
    Deferred income taxes                                                    (661)            (113)
    Tax benefits from employee stock plans                                  1,662              697
    Adjustment to conform fiscal year ends of pooled acquisitions               -              (18)
    In-process research and development                                       637              424
    Net gains on minority investments and provision for losses                 43                -
    Change in operating assets and liabilities:
     Accounts receivable                                                   (1,261)            (477)
     Inventories                                                           (1,637)            (195)
     Prepaid expenses and other current assets                                (93)             (43)
     Accounts payable                                                         193              (33)
     Income taxes payable                                                      54               91
     Accrued compensation                                                      (5)             133
     Deferred revenue                                                         608              222
     Other accrued liabilities                                                250              303
                                                                       ----------       ----------
      Net cash provided by operating activities                             2,826            2,697
                                                                       ----------       ----------

Cash flows from investing activities:
  Purchases of short-term investments                                      (1,975)            (417)
  Sales and maturities of short-term investments                            2,818            1,227
  Purchases of investments                                                 (9,866)          (5,988)
  Sales and maturities of investments                                       7,793            5,800
  Purchases of restricted investments                                        (489)            (158)
  Sales and maturities of restricted investments                              705              123
  Acquisition of property and equipment                                    (1,208)            (414)
  Acquisition of businesses, net of cash and cash equivalents                 (24)             (11)
  Net change in lease receivables                                             145             (262)
  Purchases of minority investments                                          (806)            (125)
  Other                                                                      (855)            (310)
                                                                       ----------       ----------
      Net cash used in investing activities                                (3,762)            (535)
                                                                       ----------       ----------

Cash flows from financing activities:
  Issuance of common stock                                                    698              669
  Other                                                                        (2)               6
                                                                       ----------       ----------
      Net cash provided by financing activities                               696              675
                                                                       ----------       ----------

Net increase (decrease) in cash and cash equivalents                         (240)           2,837
Cash and cash equivalents, beginning of period                              4,234              913
                                                                       ----------       ----------

Cash and cash equivalents, end of period                               $    3,994       $    3,750
                                                                       ==========       ==========
</TABLE>


See Notes to Consolidated Financial Statements.


                                       5


<PAGE>   6
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.      DESCRIPTION OF BUSINESS

Cisco Systems, Inc. (together with its subsidiaries, "Cisco" or the "Company")
is the worldwide leader in networking for the Internet. Cisco hardware,
software, and service offerings are used to create Internet solutions so that
individuals, companies, and countries have seamless access to information --
regardless of differences in time and place. Cisco solutions provide competitive
advantage to its customers through more efficient and timely exchange of
information, which in turn leads to cost savings, process efficiencies, and
closer relationships with their customers, prospects, business partners,
suppliers, and employees. These solutions form the networking foundation for
companies, universities, utilities, and government agencies worldwide.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The Company's fiscal year is the 52-week or 53-week period ending on the last
Saturday in July. Fiscal 2001 and 2000 are 52-week fiscal years.

Basis of Presentation

The accompanying financial data as of January 27, 2001 and for the three and six
months ended January 27, 2001 and January 29, 2000 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 generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The July 29, 2000 Consolidated Balance Sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. 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 29, 2000.

In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present a fair statement of financial
position as of January 27, 2001, results of operations for the three and six
months ended January 27, 2001 and January 29, 2000, and cash flows for the six
months ended January 27, 2001 and January 29, 2000 have been made. The results
of operations for the three and six months ended January 27, 2001 are not
necessarily indicative of the operating results for the full fiscal year or any
future periods.

Certain amounts from the previous periods have been reclassified to conform with
the current period presentation.


                                       6


<PAGE>   7
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Computation of Net Income per Share

Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive
common-equivalent shares outstanding during the period. Dilutive
common-equivalent shares primarily consist of employee stock options.

Recent Accounting Pronouncement

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. At this time, management does not expect
the adoption of SAB 101 to have a material effect on the Company's operations or
financial position. The Company is required to adopt SAB 101 in the fourth
quarter of fiscal 2001.

3.      BUSINESS COMBINATIONS

Purchase Combinations

During the first six months of fiscal 2001, the Company completed a number of
purchase acquisitions. The Consolidated Financial Statements include the
operating results of each business from the date of acquisition. Pro forma
results of operations have not been presented because the effects of these
acquisitions were not material on either an individual or an aggregate basis.

The amounts allocated to in-process research and development ("in-process R&D")
were determined through established valuation techniques in the high-technology
communications equipment industry and were expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. Amounts allocated to goodwill and purchased intangible assets are
amortized on a straight-line basis over periods not exceeding five years.


                                       7


<PAGE>   8
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The following is a summary of purchase transactions completed in the first six
months of fiscal 2001 (in millions):


<TABLE>
<CAPTION>
                                                  In-Process                          Form of Consideration
Acquired Company              Consideration       R&D Expense                     and Other Notes to Acquisition
----------------              -------------       -----------             ------------------------------------------------
<S>                           <C>                 <C>                     <C>
IPmobile, Inc.                     $ 422            $ 181                 Cash of $4; common stock and options
                                                                          assumed; goodwill and other intangibles recorded
                                                                          of $157
NuSpeed, Inc.                      $ 463            $ 164                 Cash of $4; common stock and options
                                                                          assumed; goodwill and other intangibles recorded
                                                                          of $214
IPCell Technologies, Inc.          $ 213            $  75                 Cash of $16; common stock and options
                                                                          assumed; $5 in liabilities assumed; goodwill and
                                                                          other intangibles recorded of $102
PixStream Incorporated             $ 395            $  67                 Common stock and options assumed; $2 in
                                                                          liabilities assumed; goodwill and other intangibles
                                                                          recorded of $315
Other                              $ 756            $ 259                 Cash of $181; common stock and options
                                                                          assumed; $22 in liabilities assumed;
                                                                          goodwill and other intangibles recorded of $308
</TABLE>


Other Purchase Combinations Completed as of January 27, 2001

During the six months ended January 27, 2001, the Company acquired Netiverse,
Inc.; HyNEX, Ltd.; Komodo Technology, Inc.; Vovida Networks, Inc.; and the
broadband subscriber management business of CAIS Software Solutions, Inc. for a
total purchase price of $756 million, paid in common stock and cash. Total
in-process R&D related to these acquisitions amounted to $259 million.

Total in-process R&D expense for the six months ended January 27, 2001 and
January 29, 2000 was $746 million and $424 million, respectively. The in-process
R&D expense that was attributable to stock consideration for the same periods
was $637 million and $424 million, respectively.


                                       8


<PAGE>   9
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

4.      BALANCE SHEET DETAIL

The following tables provide details of selected balance sheet items (in
millions):


<TABLE>
<CAPTION>
                                                    January 27,       July 29,
                                                       2001             2000
                                                    ----------       ----------
<S>                                                 <C>              <C>
Inventories, net:
Raw materials                                       $      941       $      145
Work in process                                            902              472
Finished goods                                             610              496
Demonstration systems                                       80              119
                                                    ----------       ----------
   Total                                            $    2,533       $    1,232
                                                    ==========       ==========

Goodwill and purchased intangible assets, net:
Goodwill                                            $    3,645       $    2,937
Purchased intangible assets                              1,950            1,558
                                                    ----------       ----------
                                                         5,595            4,495
Less, accumulated amortization                            (899)            (408)
                                                    ----------       ----------
   Total                                            $    4,696       $    4,087
                                                    ==========       ==========

Other assets:
Minority investments, net                           $      765       $      181
Inventory financing                                        645               25
Lease deposit                                              320                -
Structured loans, net                                      186              205
Other                                                      461              335
                                                    ----------       ----------
   Total                                            $    2,377       $      746
                                                    ==========       ==========
</TABLE>


                                       9


<PAGE>   10
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The following table presents the details of the amortization of goodwill and
purchased intangible assets (in millions):


<TABLE>
<CAPTION>
                                              Three Months Ended                Six Months Ended
                                         ---------------------------        --------------------------
                                         January 27,      January 29,      January 27,      January 29,
                                            2001             2000             2001             2000
                                         ----------       ----------       ----------       ----------
<S>                                      <C>              <C>              <C>              <C>
Reported as:
   Cost of sales                         $        6       $        6       $       10       $       12
   Operating expenses                           256               47              481               71
                                         ----------       ----------       ----------       ----------
    Total                                $      262       $       53       $      491       $       83
                                         ==========       ==========       ==========       ==========
</TABLE>


5.      COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of tax, are as follows (in
millions):


<TABLE>
<CAPTION>
                                              Three Months Ended                 Six Months Ended
                                         ---------------------------       ---------------------------
                                         January 27,      January 29,      January 27,      January 29,
                                            2001             2000             2001             2000
                                         ----------       ----------       ----------       ----------
<S>                                      <C>              <C>              <C>              <C>
Net income                               $      874       $      816       $    1,672       $    1,231
Other comprehensive income (loss):
  Change in net unrealized gains
   on investments                            (1,134)             999           (2,263)           1,519
  Change in accumulated translation
   adjustments                                   17               (2)              (2)               4
                                         ----------       ----------       ----------       ----------
   Total                                 $     (243)      $    1,813       $     (593)      $    2,754
                                         ==========       ==========       ==========       ==========
</TABLE>


6.      INCOME TAXES

The Company received net income tax refunds of $118 million for the six months
ended January 27, 2001 and paid income taxes of $174 million for the six months
ended January 29, 2000. The Company's income taxes currently payable for federal
and state purposes have been reduced by the tax benefits of employee stock
option transactions. This benefit totaled $1.66 billion and $697 million in the
first six months of fiscal 2001 and 2000, respectively, and was credited
directly to shareholders' equity. In addition, the Company's valuation allowance
against gross deferred tax assets attributable to employee stock option
transactions has been increased by $479 million in the first six months of
fiscal 2001 and was reflected as a debit to shareholders' equity.


                                       10


<PAGE>   11
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

7.      SEGMENT INFORMATION AND MAJOR CUSTOMERS

The Company's operations involve the design, development, manufacturing,
marketing, and technical support of networking products and services. The
Company offers end-to-end networking solutions for its customers. Cisco products
include routers, LAN and ATM switches, dial-up access servers, and
network-management software. These products, integrated by the Cisco IOS(R)
software, link geographically dispersed LANs, WANs, and IBM networks.

The Company conducts business globally and is managed geographically. The
Company's management relies on an internal management system that provides sales
and standard cost information by geographic theater. Sales are attributed to a
theater based on the ordering location of the customer. The Company's management
makes financial decisions and allocates resources based on the information it
receives from this internal management system. The Company does not allocate
research and development, sales and marketing, or general and administrative
expenses to its geographic theaters, as management does not use this information
to measure the performance of the operating segments. Management does not
believe that allocating these expenses is material in evaluating a geographic
theater's performance. Information from this internal management system differs
from the amounts reported under generally accepted accounting principles due to
certain corporate level adjustments not included in the internal management
system. These corporate level adjustments are primarily sales adjustments
relating to reserves for leases and structured loans, deferred revenue, two-tier
distribution, and other timing differences. Based on established criteria, the
Company has four reportable segments: the Americas; Europe, the Middle East, and
Africa ("EMEA"); Asia Pacific; and Japan.


                                       11


<PAGE>   12
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Summarized financial information by segment for the three and six months ended
January 27, 2001 and January 29, 2000, as taken from the internal management
system discussed above, is as follows (in millions):


<TABLE>
<CAPTION>
                                              Three Months Ended                 Six Months Ended
                                         ---------------------------       ---------------------------
                                         January 27,      January 29,      January 27,      January 29,
                                            2001             2000             2001             2000
                                         ----------       ----------       ----------       ----------
<S>                                      <C>              <C>              <C>              <C>
Net sales:
  Americas                               $    4,197       $    2,879       $    8,829       $    5,541
  EMEA                                        1,991            1,082            3,836            2,102
  Asia Pacific                                  731              351            1,400              634
  Japan                                         434              182              918              339
  Sales adjustments                            (605)            (137)          (1,716)            (341)
                                         ----------       ----------       ----------       ----------
   Total                                 $    6,748       $    4,357       $   13,267       $    8,275
                                         ==========       ==========       ==========       ==========

Gross margin:
  Americas                               $    3,003       $    2,117       $    6,376       $    4,057
  EMEA                                        1,513              801            2,897            1,566
  Asia Pacific                                  504              259              986              467
  Japan                                         334              144              721              269
                                         ----------       ----------       ----------       ----------
   Standard margin                            5,354            3,321           10,980            6,359
  Sales adjustments                            (605)            (137)          (1,716)            (341)
  Cost of sales adjustments                      63               72              356              125
  Production overhead                          (147)            (106)            (301)            (189)
  Manufacturing variances and other
   related costs                               (498)            (332)          (1,011)            (606)
                                         ----------       ----------       ----------       ----------
   Total                                 $    4,167       $    2,818       $    8,308       $    5,348
                                         ==========       ==========       ==========       ==========
</TABLE>


The net sales and standard margins by geographic theater differ from the amounts
recognized under generally accepted accounting principles because the Company
does not allocate certain sales adjustments, cost of sales adjustments,
production overhead, and manufacturing variances and other related costs to the
theaters. The above table reconciles the net sales and standard margins by
geographic theater to net sales and gross margin as reported in the Consolidated
Statements of Operations by including such adjustments.


                                       12


<PAGE>   13
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The following table presents net sales for groups of similar products and
services (in millions):


<TABLE>
<CAPTION>
                                           Three Months Ended               Six Months Ended
                                      ---------------------------     ---------------------------
                                      January 27,     January 29,     January 27,     January 29,
                                         2001            2000            2001            2000
                                      ----------      ----------      ----------      ----------
<S>                                   <C>             <C>             <C>             <C>
Routers                               $    2,375      $    1,688      $    5,193      $    3,286
Switches                                   3,283           1,702           6,092           3,278
Access                                       616             507           1,426             982
Other                                      1,079             597           2,272           1,070
Sales adjustments                           (605)           (137)         (1,716)           (341)
                                      ----------      ----------      ----------      ----------
  Total                               $    6,748      $    4,357      $   13,267      $    8,275
                                      ==========      ==========      ==========      ==========
</TABLE>


Substantially all of the Company's assets at January 27, 2001 and July 29, 2000
were attributable to U.S. operations. No single customer accounted for 10% or
more of net sales during the three and six months ended January 27, 2001 and
January 29, 2000.

8.      NET INCOME PER SHARE

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


<TABLE>
<CAPTION>
                                          Three Months Ended               Six Months Ended
                                      --------------------------      --------------------------
                                      January 27,     January 29,     January 27,     January 29,
                                         2001            2000            2001            2000
                                      ----------      ----------      ----------      ----------
<S>                                   <C>             <C>             <C>             <C>
Net income                            $      874      $      816      $    1,672      $    1,231
                                      ==========      ==========      ==========      ==========

Weighted-average shares--basic             7,144           6,911           7,121           6,872
Effect of dilutive securities                412             476             446             466
                                      ----------      ----------      ----------      ----------
Weighted-average shares--diluted           7,556           7,387           7,567           7,338
                                      ==========      ==========      ==========      ==========

Net income per share--basic           $     0.12      $     0.12      $     0.23      $     0.18
                                      ==========      ==========      ==========      ==========

Net income per share--diluted         $     0.12      $     0.11      $     0.22      $     0.17
                                      ==========      ==========      ==========      ==========
</TABLE>


                                       13


<PAGE>   14
                               CISCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

9.      SUBSEQUENT EVENTS

Business Combinations

In February 2001, the Company acquired Active Voice Corporation; Radiata, Inc.;
and ExiO Communications, Inc. for a total purchase price of approximately $746
million, payable in common stock and cash. These acquisitions will be accounted
for using the purchase method.

Investment in KPMG Consulting, Inc.

In January 2000, the Company purchased five million shares of Series A
Mandatorily Redeemable Convertible Preferred Stock ("Preferred Stock") in KPMG
Consulting, Inc. totaling $1.05 billion. In February 2001, 1.4 million shares of
Preferred Stock were repurchased by KPMG LLP for $378 million and 2.5 million
shares of Preferred Stock were repurchased by KPMG Consulting, Inc. for $525
million. The remaining portion of the Preferred Stock was converted to 9.9% of
the outstanding common stock of KPMG Consulting, Inc. upon the completion of its
initial public offering.

Minority Interest

In February 2001, the Company purchased a portion of the minority interest of
Cisco Systems, K.K. (Japan) for approximately $275 million. As a result, the
Company has increased its ownership to 84.2% of the voting rights.

Workforce Reduction

In March 2001, the Company announced measures to reduce its workforce. As a
result of this workforce reduction, the Company expects to incur a one-time
charge of $300 to $400 million by the end of the fourth quarter of fiscal 2001.


                                       14



<PAGE>   15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Quarterly
Report, and in other documents we file with the Securities and Exchange
Commission.

Net sales in the second quarter of fiscal 2001 were $6.75 billion, compared with
$4.36 billion in the second quarter of fiscal 2000, an increase of 54.9%. Net
sales in the first six months of fiscal 2001 were $13.27 billion, compared with
$8.27 billion in the first six months of fiscal 2000, an increase of 60.3%. The
increases in net sales were primarily a result of increased unit sales of
switch, router, and access products; growth in the sales of add-on boards that
provide increased functionality; increased sales of optical transport products;
and increased maintenance, service, and support sales (see Note 7 to the
Consolidated Financial Statements). Net sales in the second quarter of fiscal
2001 were $6.75 billion, compared with $6.52 billion in the first quarter of
fiscal 2001, an increase of 3.5%.

We manage our business on four geographic theaters: the Americas; Europe, the
Middle East, and Africa ("EMEA"); Asia Pacific; and Japan. Summarized financial
information by theater for the first three and six months of fiscal 2001 and
2000 is summarized in the following table (in millions):


<TABLE>
<CAPTION>
                             Three Months Ended                 Six Months Ended
                         ---------------------------       ---------------------------
                         January 27,      January 29,      January 27,      January 29,
                            2001             2000             2001             2000
                         ----------       ----------       ----------       ----------
<S>                      <C>              <C>              <C>              <C>
Net sales:
  Americas               $    4,197       $    2,879       $    8,829       $    5,541
  EMEA                        1,991            1,082            3,836            2,102
  Asia Pacific                  731              351            1,400              634
  Japan                         434              182              918              339
  Sales adjustments            (605)            (137)          (1,716)            (341)
                         ----------       ----------       ----------       ----------
    Total                $    6,748       $    4,357       $   13,267       $    8,275
                         ==========       ==========       ==========       ==========
</TABLE>


Gross margin in the second quarter of fiscal 2001 was 61.8%, compared with 64.7%
in the second quarter of fiscal 2000. Gross margin in the first six months of
fiscal 2001 was 62.6%, compared with 64.6% in the first six months of fiscal
2000.


                                       15


<PAGE>   16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following table shows the standard margins for each theater:


<TABLE>
<CAPTION>
                              Three Months Ended                 Six Months Ended
                         ---------------------------       ---------------------------
                         January 27,      January 29,      January 27,      January 29,
                            2001             2000             2001             2000
                         ----------       ----------       ----------       ----------
<S>                      <C>              <C>              <C>              <C>
Standard margin:
  Americas                  71.6%            73.5%            72.2%            73.2%
  EMEA                      76.0%            74.0%            75.5%            74.5%
  Asia Pacific              68.9%            73.8%            70.4%            73.7%
  Japan                     77.0%            79.1%            78.5%            79.4%
</TABLE>


The net sales and standard margins by geographic theater differ from the amounts
recognized under generally accepted accounting principles because we do not
allocate certain sales adjustments, cost of sales adjustments, production
overhead, and manufacturing variances and other related costs to the theaters.
Sales adjustments relate to reserves for leases and structured loans, deferred
revenue, two-tier distribution, and other timing differences.

Standard margins decreased for three geographic theaters as compared with the
second quarter and first six months of fiscal 2000. The decreases in the overall
gross margin were primarily due to shifts in product mix; introduction of new
products, which generally have lower margins when first released; higher
production-related costs and inventory reserves; the continued pricing pressure
seen from competitors in certain product areas; and the above-mentioned sales
adjustments, which were not included in the standard margins.

We expect gross margin may be adversely affected by increases in material or
labor costs, heightened price competition, increasing levels of services, higher
inventory balances, inventory financing, introduction of new products for new
high-growth markets, and changes in channels of distribution or in the mix of
products sold, in particular, optical and access products. We believe gross
margin may be additionally impacted due to constraints relating to certain
component shortages that exist or have existed in the supply chain.

We recently introduced several new products, with additional new products
scheduled to be released in the future. Increase in demand would result in
increased manufacturing capacity, which in turn could result in higher inventory
balances. In addition, certain portions of our vendor base are or have been
capacity-constrained and this has resulted in increased cost pressure on certain
components and increased levels of inventories due to longer term purchase
commitments, which we have entered into to maintain or reduce lead times. We
also provide inventory financing to certain of our suppliers. Inventory
purchases and commitments are based upon future sales forecast. Due to the
current slow down in the economy, our current inventory levels are higher than
our current sales forecasts which could result in obsolescence charges or loss
of cost savings on future inventory purchases, and thus gross margin may be
adversely affected. If product or related warranty costs associated with our
products are greater than we


                                       16


<PAGE>   17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

have experienced, gross margin may be adversely affected. Our gross margin may
also be impacted by geographic mix, as well as the mix of configurations within
each product group. We continue to expand into third-party or
indirect-distribution channels, which generally results in a lower gross margin.
These distribution channels are generally given privileges to return inventory.
In addition, increasing third-party and indirect-distribution channels generally
results in greater difficulty in forecasting the mix of our product, and to a
certain degree, the timing of orders from our customers. Downward pressures on
our gross margin may be further impacted by other factors, such as increased
percentage of net sales from lower margin businesses (for example, service
provider markets), which could adversely affect our future operating results.

Research and development ("R&D") expenses in the second quarter of fiscal 2001
were $1.01 billion, compared with $602 million in the second quarter of fiscal
2000, an increase of 68.1%. R&D expenses, as a percentage of net sales,
increased to 15.0% in the second quarter of fiscal 2001, compared with 13.8% in
the second quarter of fiscal 2000. R&D expenses in the first six months of
fiscal 2001 were $1.96 billion, compared with $1.14 billion in the first six
months of fiscal 2000, an increase of 71.4%. R&D expenses, as a percentage of
net sales, increased to 14.8% in the first six months of fiscal 2001, compared
with 13.8% in the first six months of fiscal 2000. The increases reflected our
ongoing R&D efforts in a wide variety of areas such as data, voice, and video
integration, digital subscriber line ("DSL") technologies, cable modem
technology, wireless access, dial access, enterprise switching, optical
transport, content networking, security, network management, and high-end
routing and switching technologies, among others. A significant portion of the
increase was due to the addition of new personnel, partly through acquisitions,
as well as higher expenditures on prototypes and depreciation on additional lab
equipment. We also continued to purchase technology in order to bring a broad
range of products to the 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 are expensed as
incurred. We expect that R&D expenses will continue to increase in absolute
dollars as we continue to invest in technology to address potential market
opportunities in future periods.

Sales and marketing expenses in the second quarter of fiscal 2001 were $1.43
billion, compared with $933 million in the second quarter of fiscal 2000, an
increase of 53.7%. Sales and marketing expenses, as a percentage of net sales,
remained relatively constant at 21.3% in the second quarter of fiscal 2001,
compared with 21.4% in the second quarter of fiscal 2000. Sales and marketing
expenses in the first six months of fiscal 2001 were $2.80 billion, compared
with $1.75 billion in the first six months of fiscal 2000, an increase of 59.7%.
Sales and marketing expenses, as a percentage of net sales, remained relatively
constant at 21.1% in the first six months of fiscal 2001, compared with 21.2% in
the first six months of fiscal 2000. The increases in sales and marketing
expense in absolute dollars were principally due to an increase in the size of
our direct sales force and related commissions, additional marketing and
advertising investments associated with existing and new product introductions,
the expansion of distribution channels and markets, and general corporate
branding. The increases also reflected our efforts to invest in certain key
areas, such as expansion of our end-to-end networking strategy and service
provider coverage, in order to be positioned to take advantage of future market
opportunities.


                                       17


<PAGE>   18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

We expect that sales and marketing expenses will continue to increase in
absolute dollars in future periods.

General and administrative ("G&A") expenses in the second quarter of fiscal 2001
were $196 million, compared with $147 million in the second quarter of fiscal
2000, an increase of 33.3%. G&A expenses, as a percentage of net sales,
decreased to 2.9% in the second quarter of fiscal 2001, compared with 3.4% in
the second quarter of fiscal 2000. G&A expenses in the first six months of
fiscal 2001 were $392 million, compared with $259 million in the first six
months of fiscal 2000, an increase of 51.4%. G&A expenses, as a percentage of
net sales, decreased to 3.0% in the first six months of fiscal 2001, compared
with 3.1% in the first six months of fiscal 2000. The increases in G&A expenses
in absolute dollars were primarily related to the addition of new personnel and
investments in infrastructure. We intend to keep G&A expenses relatively
constant as a percentage of net sales; however, this depends on the level of
acquisition activity and our growth, among other factors.

Amortization of goodwill and purchased intangible assets included in operating
expenses was $256 million in the second quarter of fiscal 2001, compared with
$47 million in the second quarter of fiscal 2000. Amortization of goodwill and
purchased intangible assets included in operating expenses was $481 million in
the first six months of fiscal 2001, compared with $71 million in the first six
months of fiscal 2000. Amortization of goodwill and purchased intangible assets
primarily relates to various purchase acquisitions (see Note 3 and Note 4 to the
Consolidated Financial Statements). We expect amortization of goodwill and
purchased intangibles assets to continue to increase as we acquire companies and
technologies.

The amount expensed to in-process research and development ("in-process R&D")
arose from the purchase acquisitions (see Note 3 to the Consolidated Financial
Statements).

The fair values of the existing products and patents, as well as the technology
currently under development, were determined using the income approach, which
discounts expected future cash flows to present value. The discount rates used
in the present value calculations were typically derived from a weighted-average
cost of capital analysis and venture capital surveys, adjusted upward to reflect
additional risks inherent in the development life cycle. These risk factors have
increased the overall discount rate for acquisitions in the current year. We
consider the pricing model for products related to these acquisitions to be
standard within the high-technology communications equipment industry. However,
we do not expect to achieve a material amount of expense reductions or synergies
as a result of integrating the acquired in-process technology. Therefore, the
valuation assumptions do not include significant anticipated cost savings.

The development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products, and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing, and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in a loss of market share or a lost


                                       18


<PAGE>   19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

opportunity to capitalize on emerging markets and could have a material adverse
impact on our business and operating results.

The following table summarizes the significant assumptions underlying the
valuations for our significant purchase acquisitions completed in fiscal 2001
and 2000 (in millions, except percentages):


<TABLE>
<CAPTION>
                                                       Estimated Cost to     Risk-Adjusted
                                                   Complete Technology at  Discount Rate for
Acquired Company                                     Time of Acquisition     In-Process R&D
----------------                                   ----------------------  -----------------
<S>                                                <C>                     <C>
FISCAL 2001
-----------
IPmobile, Inc.                                              $   15               42.5 %
NuSpeed, Inc.                                               $    6               40.0 %
IPCell Technologies, Inc.                                   $   10               30.0 %
PixStream Incorporated                                      $    2               35.0 %
FISCAL 2000
-----------
Monterey Networks, Inc.                                     $    4               30.0 %
The optical systems business of Pirelli S.p.A.              $    5               20.0 %
Aironet Wireless Communications, Inc.                       $    3               23.5 %
Atlantech Technologies                                      $    6               37.5 %
JetCell, Inc.                                               $    7               30.5 %
PentaCom, Ltd.                                              $   13               30.0 %
Qeyton Systems                                              $    6               35.0 %
</TABLE>


Regarding our purchase acquisitions completed in fiscal 2001 and 2000, actual
results to date have been consistent, in all material respects, with our
assumptions at the time of the acquisitions. The assumptions primarily consist
of an expected completion date for the in-process projects, estimated costs to
complete the projects, and revenue and expense projections once the products
have entered the market. Failure to achieve the expected levels of revenue and
net income from these products will negatively impact the return on investment
expected at the time that the acquisitions were completed and potentially result
in impairment of any other assets related to the development activities.

There were no net gains realized on minority investments in the second quarter
of fiscal 2001, compared with $31 million in the second quarter of fiscal 2000.
Net gains realized on minority investments were $190 million in the first six
months of fiscal 2001, compared with $31 million in the first six months of
fiscal 2000.

Interest and other income, net, was $275 million in the second quarter of fiscal
2001, compared with $120 million in the second quarter of fiscal 2000. Interest
and other income, net, was $505 million in the first six months of fiscal 2001,
compared with $222 million in the first six months of fiscal 2000. The increases
were primarily due to interest income related to the general increase in cash
and investments generated from our operations.

The effective tax rate was 33.1% for the second quarter of fiscal 2001 and 36.4%
for the first six months of fiscal 2001, which included the impact of
nondeductible in-process R&D and


                                       19


<PAGE>   20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

acquisition-related costs. Our future effective tax rates could be adversely
affected if earnings are lower than anticipated in countries where we have lower
effective rates or by unfavorable changes in tax laws and regulations.

Liquidity and Capital Resources

Cash and cash equivalents, short-term investments, and investments were $17.95
billion at January 27, 2001, a decrease of $2.55 billion from July 29, 2000. The
decrease was primarily a result of a net unrealized loss on publicly held
investments of $3.51 billion ($2.26 billion, net of tax). Cash used in investing
activities of $3.76 billion, which includes $1.21 billion in capital
expenditures and $806 million in purchases of minority investments, was
essentially offset by cash provided by operating activities of $2.83 billion and
financing activities of $696 million.

Accounts receivable increased 52.8% from July 29, 2000 to January 27, 2001. Days
sales outstanding in receivables increased to 47 days at January 27, 2001 from
37 days at July 29, 2000. The increase in accounts receivable and days sales
outstanding was due, in part, to growth in net sales and non-linear shipments
combined with conditions in a number of markets resulting in longer payment
terms.

Inventories increased 105.6% from July 29, 2000 to January 27, 2001. Inventory
turns decreased to 4.6 times at January 27, 2001 from 7.8 times at July 29,
2000. The increase in inventory levels reflected new product introductions and
increased purchases to secure the supply of certain components with long lead
times, combined with the decrease in demand of products due to certain
unfavorable economic conditions. Inventory management remains an area of focus
as we balance the need to maintain strategic inventory levels to ensure
competitive lead times versus the risk of inventory obsolescence because of
rapidly changing technology and customer requirements.

At January 27, 2001, we had a line of credit totaling $500 million, which
expires in July 2002. There have been no borrowings under this agreement.

We have entered into certain lease agreements in San Jose, California, where our
headquarters operations are established, and in Boxborough, Massachusetts;
Littleton, Massachusetts; Salem, New Hampshire; Richardson, Texas; and Research
Triangle Park, North Carolina, where we have expanded certain R&D and
customer-support activities. In connection with these transactions, we pledged
$1.16 billion of our investments as collateral for certain obligations of the
leases. We anticipate that we will occupy more leased property in the future
that will require similar pledged securities; however, we do not expect the
impact of this activity to be material to our liquidity position.

We believe that our current cash and cash equivalents, short-term investments,
line of credit, and cash generated from operations will satisfy our expected
working capital, capital expenditure, and investment requirements at least
through the next 12 months.


                                       20


<PAGE>   21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the
forward-looking statements contained in this Quarterly Report.

YOU SHOULD EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS

The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have in the past
been, and will continue to be, subject to quarterly fluctuations as a result of
a number of factors. These factors include:


-       The integration of people, operations, and products from acquired
        businesses and technologies;

-       Increased competition in the networking industry;

-       The overall trend toward industry consolidation;

-       The introduction and market acceptance of new technologies and
        standards, including switch routers, Gigabit Ethernet switching, Tag
        Switching (currently also known as multiprotocol label switching
        ["MPLS"]), optical transport, Packet over SONET, VSR optics, Dynamic
        Packet Transport, wireless, content networking, and data, voice, and
        video capabilities;

-       Variations in sales channels, product costs, or mix of products sold;

-       The timing of orders and manufacturing lead times;

-       The trend towards sales of integrated network solutions;

-       The timing and amount of employer payroll tax to be paid on employees'
        gains on stock options exercised;

-       Overall information technology spending, especially service provider
        capital spending in the data or IP segment; and

-       Changes in general economic conditions and specific economic conditions
        in the computer and networking industries.

Any of the above factors could have a material adverse impact on our operations
and financial results. For example, from time to time, we have made acquisitions
that result 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. Additionally, as a further example,
the dollar amounts of large orders for our products have been increasing and
therefore the operating results for a quarter could be materially adversely
affected if a number of large orders are either not received or are delayed, for
example, due to cancellations, delays, or deferrals by customers.


                                       21


<PAGE>   22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

WE HAVE AND WILL CONTINUE TO INVEST IN NEW AND EXISTING MARKET OPPORTUNITIES

We have made significant investments in headcount, inventory, manufacturing
capacity, and product development through internal efforts and acquisitions, as
a result of growth in existing opportunities and new or emerging opportunities
in our target markets over the past year. We will continue to invest in these
markets either through additional investments or through re-alignment of
existing resources.

With increased levels of spending, an inability to meet expected revenue levels
in a particular quarter could have a material, negative impact on our operating
results for that period as we will not be able to react quickly enough to scale
back expenses.

SINCE OUR GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER ARE
DIFFICULT TO PREDICT

We expect that in the future, our net sales may grow at a slower rate than
experienced in previous periods and that on a quarter-to-quarter basis, our
growth in net sales may be significantly lower than our historical quarterly
growth rate. As a consequence, operating results for a particular quarter are
extremely difficult to predict. Our ability to meet financial expectations could
be hampered if the non-linear sales pattern seen in our second quarter of fiscal
2001 recurs in future periods. We generally have had at least one quarter of the
fiscal year when backlog has been reduced. Although such reductions have not
occurred consistently in recent years, they are difficult to predict and may
occur in the future. In addition, in response to customer demand, we continue to
attempt to reduce our product manufacturing lead times, 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 going forward. On the other hand, for certain
products, lead times are longer than our goal. If we cannot reduce manufacturing
lead times for such products, our customers may place the same orders within our
various sales channels, cancel orders, or not place further orders if shorter
lead times are available from other manufacturers.

WE EXPECT GROSS MARGIN TO DECLINE OVER TIME

We expect gross margin may be adversely affected by increases in material or
labor costs, heightened price competition, increasing levels of services, higher
inventory balances, inventory financing, introduction of new products for new
high-growth markets, and changes in channels of distribution or in the mix of
products sold, in particular, optical and access products. We believe gross
margin may be additionally impacted due to constraints relating to certain
component shortages that exist or have existed in the supply chain.

We recently introduced several new products, with additional new products
scheduled to be released in the future. Increase in demand would result in
increased manufacturing capacity,


                                       22


<PAGE>   23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

which in turn could result in higher inventory balances. In addition, certain
portions of our vendor base are or have been capacity-constrained and this has
resulted in increased cost pressure on certain components and increased levels
of inventories due to longer term purchase commitments, which we have entered
into to maintain or reduce lead times. We also provide inventory financing to
certain of our suppliers. Inventory purchases and commitments are based upon
future sales forecast. Due to the current slow down in the economy, our current
inventory levels are higher than our current sales forecasts, which could result
in obsolescence charges or loss of cost savings on future inventory purchases
and thus gross margin may be adversely affected. If product or related warranty
costs associated with our products are greater than we have experienced, gross
margin may be adversely affected. Our gross margin may also be impacted by
geographic mix, as well as the mix of configurations within each product group.
We continue to expand into third-party or indirect-distribution channels, which
generally results in a lower gross margin. These distribution channels are
generally given privileges to return inventory. In addition, increasing
third-party and indirect-distribution channels generally results in greater
difficulty in forecasting the mix of our product, and to a certain degree, the
timing of orders from our customers. Downward pressures on our gross margin may
be further impacted by other factors, such as increased percentage of net sales
from lower margin businesses (for example, service provider markets), which
could adversely affect our future operating results.

We also expect that our operating margin may decrease as we have continued to
hire additional personnel and experienced increases in overall operating
expenses to support our business. We plan our operating expense levels based
primarily on forecasted revenue levels. Because these expenses are relatively
fixed in the short-term, a shortfall in revenue could lead to operating results
being below expectations.

WE ARE DEPENDENT UPON ADEQUATE COMPONENT SUPPLY AND MANUFACTURING CAPACITY

Our growth and ability to meet customer demands also depend in part on our
ability to obtain timely deliveries of parts from our suppliers. We have
experienced component shortages in the past that have adversely affected our
operations. Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurance that we will not encounter these problems
in the future. Although we generally use standard parts and components for our
products, certain components are presently available only from a single source
or limited sources.


                                       23


<PAGE>   24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

While our suppliers have performed effectively and been relatively flexible to
date, we believe that we will be faced with the following challenges going
forward:

-       New markets that we participate in may grow quickly and thus, consume
        significant component capacity;

-       As we continue to acquire companies and new technologies, we are
        dependent, at least initially, on unfamiliar supply chains or relatively
        small supply partners; and

-       We face competition for certain components, which are supply
        constrained, from existing competitors and companies in other markets.

Manufacturing capacity and component supply constraints could be significant
issues for us. To mitigate the component supply constraints that exist or have
existed, we have built inventory levels for certain components with long lead
times, entered into certain longer term commitments for certain other components
and provided inventory financing. A reduction or interruption in supply, a
significant increase in the price of one or more components, or a decrease in
demand of products would adversely affect our business, operating results and
financial condition, perhaps materially, and could materially damage customer
relationships.

WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS

As a result of recent unfavorable economic conditions and reduced capital
spending, sales in the United States have declined as a percentage of our total
revenue. In particular, sales to service providers, e-commerce and Internet
businesses, and the manufacturing industry in the United States were impacted
during the second quarter of fiscal 2001. If the economic conditions in the
United States worsen or if a wider or global economic slowdown occurs, we may
experience a material adverse impact on our business, operating results, and
financial condition.

WE COMPETE IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET

We compete in the Internet infrastructure market, providing solutions for
transporting data, voice, and video traffic across intranets, extranets, and the
Internet. The market is characterized by rapid growth, converging technologies,
and a conversion to New World solutions that offer superior advantages. These
market factors represent both an opportunity and a competitive threat to us. We
compete with numerous vendors in each product category. We expect that the
overall number of competitors providing niche product solutions will increase
due to the market's long-term attractive growth. On the other hand, we expect
the number of vendors supplying end-to-end networking solutions will decrease,
due to the rapid pace of acquisitions in the industry. We believe our primary
competition comes from nimble start-ups and young companies offering innovative
niche solutions.


                                       24


<PAGE>   25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

Our competitors include Alcatel, Ciena, Ericsson, Extreme, Foundry, Juniper,
Lucent, Nortel, Redback, Siemens AG, and Sycamore. Some of our competitors
compete across many of our product lines, while others do not offer as wide a
breadth of solutions. Several of our current and potential competitors have
greater financial, marketing, and technical resources than we do.

The principal competitive factors in the markets in which we presently compete
and may compete in the future are:

-       Price;

-       Ability to provide financing;

-       Performance;

-       The ability to provide end-to-end networking solutions and support;

-       Conformance to standards;

-       The ability to provide value-added features such as security,
        reliability, and investment protection; and

-       Market presence.

We also face competition from customers we license technology to and suppliers
from whom we transfer technology. Networking's inherent nature requires
inter-operability. As such, we must cooperate and at the same time compete with
these companies. Our inability to effectively manage these complicated
relationships with customers and suppliers, or the uncontrollable and
unpredictable acts of others, could have a material adverse effect on our
business, operating results, and financial condition.

WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS

The networking business is highly competitive, and as such, our growth is
dependent upon market growth, our ability to enhance our existing products, and
our ability to introduce new products on a timely basis. One of the ways we have
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:

-       Difficulties in integrating the operations, technologies, and products
        of the acquired companies;

-       The risk of diverting management's attention from normal daily
        operations of the business;

-       Potential difficulties in completing projects associated with in-process
        research and development;

-       Risks of entering markets in which we have no or limited direct prior
        experience and where competitors in such markets have stronger market
        positions;


                                       25


<PAGE>   26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

-       Initial dependence on unfamiliar supply chains or relatively small
        supply partners;

-       Insufficient revenues to offset increased expenses associated with
        acquisitions; and

-       The potential loss of key employees of the acquired companies.

Mergers and acquisitions of high-technology companies are inherently risky, 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. We must also manage any growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions we
made could harm our business and operating results in a material way.

WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY

As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures have related to nondollar-denominated sales
in Japan, Canada, and Australia and nondollar-denominated operating expenses in
Europe, Latin America, and Asia where we sell primarily in U.S. dollars.
Additionally, we have continued to see our exposures to emerging market
currencies, such as the Korean won, increase because of our expanding presence
in these markets and their extreme currency volatility. We will continue to
monitor our exposure and may hedge against these or any other emerging market
currencies as necessary.

The increasing use of the euro as a common currency for members of the European
Union could impact our foreign exchange exposure. We are currently hedging
against fluctuations with the euro and will continue to evaluate the impact of
the euro on our future foreign exchange exposure as well as on our internal
systems. At the present time, we hedge only those currency exposures associated
with certain assets and liabilities denominated in nonfunctional currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by us is intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and liabilities.

WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT
EXPOSURES IN WEAKENED MARKETS

A portion of our sales is derived through our partners in two-tier distribution
channels. These partners/customers are generally given privileges to return
inventory, receive credits for changes in selling prices, and participate in
cooperative marketing programs. We maintain appropriate accruals and allowances
for such exposures. However, such partners tend to have access to more limited
financial resources than other resellers and end-user customers and therefore
represent potential sources of increased credit risk. We are experiencing
increased demands for customer financing, including loan financing and leasing
solutions. We expect demands for customer


                                       26


<PAGE>   27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

financing to continue. We believe customer financing is a competitive factor in
obtaining business, particularly in supplying customers involved in significant
infrastructure projects. Our loan financing arrangements may include not only
financing the acquisition of our products but also providing additional funds
for soft costs associated with network installation and integration of our
products and for working capital purposes. Due to the current slow down in the
economy, the credit risks relating to these partners/customers have increased.
Although we have programs in place to monitor and mitigate the associated risk,
there can be no assurance that such programs will be effective in reducing our
credit risks. We also continue to monitor increased credit exposures from
weakened financial conditions in certain geographic regions, and the impact that
such conditions may have on the worldwide economy. We have experienced losses
due to customers failing to meet their obligations. Although these losses have
not been significant, future losses, if incurred, could harm our business and
have a material adverse effect on our operating results and financial condition.

WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES

For additional information regarding the sensitivity of and risks associated
with the market value of portfolio investments and interest rates, see Item 3
"Quantitative and Qualitative Disclosures About Market Risk" contained in this
Quarterly Report.

WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB

Recent actions and comments from the SEC have indicated they are reviewing the
current valuation methodology of in-process research and development related to
business combinations. We believe we are in compliance with all of the existing
rules and related guidance as applicable to our business operations. However,
the SEC may change these rules or issue new guidance applicable to our business
in the future. There can be no assurance that the SEC will not seek to reduce
the amount of in-process research and development previously expensed by us.
This would result in the restatement of our previously filed financial
statements and could have a material adverse effect on our operating results and
financial condition for periods subsequent to the acquisitions. Additionally,
FASB has announced that it plans to rescind the pooling of interests method of
acquisition accounting. If this occurs, it could alter our acquisition strategy
and impair our ability to acquire companies.

OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT

Our success is dependent upon our proprietary technology. We generally rely upon
patents, copyrights, trademarks, and trade secret laws to establish and maintain
our proprietary rights in our technology and products. We have a program to file
applications for and obtain patents in the United States and in selected foreign
countries where a potential market for our products


                                       27


<PAGE>   28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

exists. We have been issued a number of patents; other patent applications are
currently pending. There can be no assurance that any of these patents will not
be challenged, invalidated, or circumvented, or that any rights granted
thereunder will provide competitive advantages to us. In addition, there can be
no assurance that patents will be issued from pending applications, or that
claims allowed on any future patents will be sufficiently broad to protect our
technology. Furthermore, the laws of some foreign countries may not permit the
protection of our proprietary rights to the same extent as do the laws of the
United States. Although we believe the protection afforded by its patents,
patent applications, copyrights, and trademarks has value, the rapidly changing
technology in the networking industry makes our future success dependent
primarily on the innovative skills, technological expertise, and management
abilities of our employees rather than on patent, copyright, and trademark
protection.

Many of our products are designed to include software or other intellectual
property licensed from third-parties. While it may be necessary in the future to
seek or renew licenses relating to various aspects of our products, we believe
that based upon past experience and standard industry practice, such licenses
generally could be obtained on commercially reasonable terms. Because of the
existence of a large number of patents in the networking field and the rapid
rate of issuance of new patents, it is not economically practical to determine
in advance whether a product or any of its components infringe patent rights of
others. From time to time, we receive notices from or are sued by third-parties
regarding patent claims. If infringement is alleged, we believe that, based upon
industry practice, any necessary license or rights under such patents may be
obtained on terms that would not have a material adverse effect on our business,
operating results, or financial condition. Nevertheless, there can be no
assurance that the necessary licenses would be available on acceptable terms, if
at all, or that we would prevail in any such challenge. 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 could have a material
adverse effect on our business, operating results, and financial condition.

WE FACE RISKS FROM THE UNCERTAINTIES OF REGULATION OF THE INTERNET

There are currently few laws or regulations that 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
on such technology as voice over the Internet, encryption technology, and access
charges for Internet service providers. We also could be materially adversely
affected by the continuing deregulation of the telecommunications industry. 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.


                                       28


<PAGE>   29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS
TO RISKS

As we focus on new market opportunities, such as transporting data, voice, and
video traffic across the same network, we will increasingly compete with large
telecommunications equipment suppliers such as Alcatel, Ericsson, Lucent,
Nortel, and Siemens AG, among others, and several well-funded start-up
companies. Several of our current and potential competitors may have greater
financial, marketing, and technical 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 experienced in
the past. We have not entered into a material amount of labor intensive service
contracts, which require significant production or customization. However, we
expect that demand for these types of service contracts will 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.
Further, provision of greater levels of services by us may result in less
favorable timing of revenue recognition than we have historically experienced.

THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND FLOODS

Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
certain of our facilities, which include one of our manufacturing facilities,
are located near rivers that have experienced flooding in the past. A
significant natural disaster, such as an earthquake or a flood, could have a
material adverse impact on our business, operating results, and financial
condition.

WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING
PRODUCTS, AND ARE SUBJECT TO RAPID CHANGES IN TECHNOLOGY AND THE MARKET

Our operating results will depend to a significant extent on our ability to
reduce the costs to produce existing products and to develop and introduce new
products into existing and emerging markets. The success of new products is
dependent on several factors, including proper new product definition, product
cost, timely completion and introduction of new products, differentiation of new
products from those of our competitors, and market acceptance of these products.
The markets for our products are characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions, and evolving
methods of building and operating networks. There can be no assurance that we
will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, and achieve market acceptance of our
products or that products and technologies developed by others will not render
our products or technologies obsolete or noncompetitive.


                                       29


<PAGE>   30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES

We have increased the number of our strategic alliances with large and complex
organizations and our ecosystem partners. 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 will 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 strategic
alliances 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.

THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION

There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
that industry consolidation may provide stronger competitors that are better
able to compete as sole-source vendors for customers. This could lead to more
variability in operating results as we compete to be a single vendor solution
and could have a material adverse effect on our business, operating results, and
financial condition.

SALES TO THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION

Sales to the service provider market have been characterized by large and often
sporadic purchases. Sales activity in this industry depends upon the stage of
completion of expanding network infrastructures, the availability of funding,
and the extent that service providers are affected by regulatory, economic and
business conditions in the country of operations. A decline or delay in sales
orders from this industry could have a material adverse effect on our business,
operating results, and financial condition.

WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATION AND
TARIFFS

Changes in domestic and international telecommunications requirements could
affect the sales of our products. In particular, we believe it is possible that
there may be significant changes in domestic telecommunications regulation in
the near future 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


                                       30


<PAGE>   31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                  RISK FACTORS

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.

OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS

We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; service provider and
government spending patterns; and natural disasters. Any or all of these factors
could have a material adverse impact on our future international business.

OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET-BASED SYSTEMS

We believe that there will be performance problems with Internet communications
in the future, which could receive a high degree of publicity and visibility. As
we are a large supplier of equipment for the Internet infrastructure, customers'
perceptions of our products and the marketplace's perception of us as a supplier
of networking products may be materially adversely affected, regardless of
whether or not these problems are due to the performance of our products. Such
an event could also result in a material adverse effect on the market price of
our common stock and could materially adversely affect our business, operating
results, and financial condition.

In addition, spending on Internet infrastructure has increased significantly
over the past several years based upon the growth of the Internet. There can be
no assurance that spending on this infrastructure will continue at these
historical rates. If there is a significant decrease in spending, we may
experience a material adverse impact on our business, operating results, and
financial condition.

OUR STOCK PRICE MAY BE VOLATILE

Our common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results, the
published expectations of analysts, and as a result of announcements by our
competitors and us. 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, may materially adversely affect the market price of our
common stock in the future. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of who have been granted stock options.


                                       31


<PAGE>   32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 the balance sheet at fair value with unrealized
gains or losses, net of tax, reported as a separate component of accumulated
other comprehensive income. Part of this portfolio includes minority equity
investments in several publicly traded companies, the values of which are
subject to market price volatility. For example, as a result of recent market
price volatility of our publicly traded equity investments, we experienced a
$2.26 billion after-tax unrealized loss during the first six months of fiscal
2001 on these investments. We have also invested in numerous privately held
companies, many of which can still be considered in the start-up or development
stages. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial investment in
these companies. We also have certain real estate lease commitments with
payments tied to short-term interest rates. At any time, a sharp rise in
interest rates could have a material adverse impact on the fair value of our
investment portfolio while increasing the costs associated with our lease
commitments. Conversely, declines in interest rates could have a material impact
on interest earnings for our investment portfolio. We do not currently hedge
these interest rate exposures.

Readers are referred to pages 23 to 24 of the fiscal 2000 Annual Report to
Shareholders for a more detailed discussion of quantitative and qualitative
disclosures about market risk.

The following analysis presents the hypothetical changes in fair values of
public equity investments that are sensitive to changes in the stock market.
These equity securities are held for purposes other than trading. The modeling
technique used measures the hypothetical change in fair values arising from
selected hypothetical changes in each stock's price. Stock price fluctuations of
plus or minus 15%, plus or minus 35%, and plus or minus 50% were selected based
on the probability of their occurrence. The following table estimates the fair
value of the publicly traded corporate equities at a 12-month horizon (in
millions):


<TABLE>
<CAPTION>
                                  Valuation of Securities                                         Valuation of Securities
                                    Given X% Decrease                   Fair Value                  Given X% Increase
                                   in Each Stock's Price                   as of                 in Each Stock's Price
                        ------------------------------------------       Jan. 27,       ------------------------------------------
                           (50%)           (35%)           (15%)           2001             15%             35%            50%
                        ----------      ----------      ----------      ----------      ----------      ----------      ----------
<S>                     <C>             <C>             <C>             <C>             <C>             <C>             <C>
Corporate equities      $    1,780      $    2,313      $    3,025      $    3,559      $    4,093      $    4,805      $    5,339
</TABLE>


Our equity portfolio consists of securities with characteristics that most
closely match the S&P Index or companies traded on the NASDAQ National Market.
The NASDAQ Composite Index has shown a 15% movement in each of the last three
years and a 35% and 50% movement in at least one of the last three years.


                                       32


<PAGE>   33
PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)     During the quarter ended January 27, 2001, the Company issued an
        aggregate of approximately 12.1 million shares of its common stock in
        connection with the purchase of the capital stock of IPCell
        Technologies, Inc.; PixStream Incorporated; and Vovida Networks, Inc.
        The shares were issued pursuant to exemptions under Section 3(a)(10) and
        4(2) of the Securities Act of 1933, as amended. In the case of issuances
        in reliance on Section 3(a)(10), an appropriate governmental authority
        approved the terms of the issuance following a fairness hearing. In the
        case of issuances in reliance on Section 4(2), the issuances were
        effected without general solicitation or advertising, and each purchaser
        was an accredited investor or a sophisticated investor with access to
        information regarding the Company, its business, and its common stock.


                                       33


<PAGE>   34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits:

                3.1     Restated Articles of Incorporation of Cisco Systems,
                        Inc., as currently in effect.

                3.2     Amended and Restated Bylaws of Cisco Systems, Inc., as
                        currently in effect.

        (b) Reports on Form 8-K

The Company filed eight reports on Form 8-K during the quarter ended January 27,
2001. Information regarding the items reported on is as follows:


<TABLE>
<CAPTION>
Date                           Item Reported On
----                           ----------------
<S>                            <C>
November 6, 2000               The Company announced the completion of the
                               acquisition of IPCell Technologies, Inc.

November 7, 2000               The Company reported its first quarter results
                               for the period ending October 28, 2000.

November 13, 2000              The Company announced the completion of the
                               acquisition of Vovida Networks, Inc.

November 15, 2000              The Company announced the acquisition of Radiata,
                               Inc.

November 15, 2000              The Company announced the acquisition of Active
                               Voice Corporation.

December 19, 2000              The Company provided certain detail regarding its
                               provision for losses included in the cash flow
                               statement in its Quarterly Report on Form 10-Q
                               for its first quarter of fiscal 2001 ended
                               October 28, 2000 filed with the SEC on December
                               12, 2000.

December 21, 2000              The Company announced the acquisition of ExiO
                               Communications, Inc.

December 27, 2000              The Company announced the completion of the
                               acquisition of PixStream Incorporated.
</TABLE>


                                       34


<PAGE>   35
                                    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: March 12, 2001                  By    /s/        Larry R. Carter
                                         ------------------------------------
                                      Larry R. Carter, Senior Vice
                                      President, Finance and
                                      Administration, Chief Financial
                                      Officer and Secretary


                                       35


<PAGE>   36
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit
Number         Description
------         -----------
<S>            <C>
3.1            Restated Articles of Incorporation of Cisco Systems, Inc., as
               currently in effect.

3.2            Amended and Restated Bylaws of Cisco Systems, Inc., as currently
               in effect.
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>2
<FILENAME>f70305orex3-1.txt
<DESCRIPTION>EXHIBIT 3.1
<TEXT>

<PAGE>   1

                                                                     EXHIBIT 3.1


                       RESTATED ARTICLES OF INCORPORATION
                             OF CISCO SYSTEMS, INC.,
                            A CALIFORNIA CORPORATION



        The undersigned, John T. Chambers and Larry R. Carter, hereby certify
that:

        ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.

        TWO: The Restated Articles of Incorporation of said corporation shall be
amended and restated in its entirety to read in full as follows:

                                    ARTICLE I

        The name of this corporation is Cisco Systems, Inc.

                                   ARTICLE II

        The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.

                                   ARTICLE III

        The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.

                                   ARTICLE IV

        (A) CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that the corporation is authorized to issue
is Twenty Billion Five Million (20,005,000,000) shares. Twenty Billion
(20,000,000,000) shares shall be Common Stock, par value of $0.001, and Five
Million (5,000,000) shares shall be Preferred Stock.

        (B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by these Restated Articles of Incorporation may be
issued from time to time in series. The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon series of Preferred Stock, and the number of shares constituting
any such series and the designation thereof, or of any of them. Subject to
compliance with applicable protective voting rights that have been or may be
granted to the Preferred Stock or any series thereof in any Certificate of
Determination or the corporation's Articles of Incorporation ("Protective
Provisions"), but notwithstanding any other rights of the

<PAGE>   2

Preferred Stock or any series thereof, the rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class or series of Preferred Stock or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors also is authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.

        1. REPURCHASE OF SHARES. In connection with repurchases by this
corporation of its Common Stock pursuant to its agreements with certain of the
holders thereof, Sections 502 and 503 of the California General Corporation Law
shall not apply in whole or in part with respect to such repurchases.

        (C) COMMON STOCK.

        1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.

        2. LIQUIDATION RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to liquidation,
upon the liquidation, dissolution or winding up of the corporation, the assets
of the corporation shall be distributed to the holders of the Common Stock.

        3. REDEMPTION. The Common Stock is not redeemable.

        4. VOTING RIGHTS. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.

        (D) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. The shares of such
series shall be designated as "Series A Junior Participating Stock" (the "Series
A Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be one million two hundred thousand (1,200,000). Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding plus
the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock. The rights,
preferences, privileges, and restrictions granted and imposed on the Series A
Preferred Stock are as set forth below in this Article VII.

<PAGE>   3

        1. DIVIDENDS AND DISTRIBUTIONS.

        (A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, each holder of a share of Series A
Preferred Stock, in preference to the holders of shares of Common Stock, par
value $.001 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, Ten Thousand (10,000) times the
aggregate per share amount of all cash dividends, and Ten Thousand (10,000)
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a share or fraction of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

        (B) The Corporation shall declare a dividend or distribution on the
shares of Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Distribution Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $.000001 per
share of Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.

        (C) Dividends shall begin to accrue and be cumulative on each
outstanding share of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such share of Series A
Preferred Stock, unless the date of issue of such share is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such share shall begin to accrue from the date of issue of such share, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such

<PAGE>   4

dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.

        2. VOTING RIGHTS. The holders of shares of Series A Preferred Stock
shall have the following voting rights:

        (A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to Ten
Thousand (10,000) votes on all matters submitted to a vote of the shareholders
of the Corporation. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.

        (B) Except as otherwise provided herein, in any other Certificate of
Determination creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.

        (C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.

        3. CERTAIN RESTRICTIONS.

        (A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:

        (i) declare or pay dividends, or make any other distributions, on any
        shares of stock ranking junior (either as to dividends or upon
        liquidation, dissolution or winding up) to the Series A Preferred Stock;

<PAGE>   5

        (ii) declare or pay dividends, or make any other distributions, on any
        shares of stock ranking on a parity (either as to dividends or upon
        liquidation, dissolution or winding up) with the Series A Preferred
        Stock, except dividends paid ratably on the shares of Series A Preferred
        Stock and all such parity stock on which dividends are payable or in
        arrears in proportion to the total amounts to which the holders of all
        such shares are then entitled;

        (iii) redeem or purchase or otherwise acquire for consideration shares
        of any stock ranking junior (either as to dividends or upon liquidation,
        dissolution or winding up) to the Series A Preferred Stock, provided
        that the Corporation may at any time redeem, purchase or otherwise
        acquire shares of any such junior stock in exchange for shares of any
        stock of the Corporation ranking junior (either as to dividends or upon
        dissolution, liquidation or winding up) to the Series A Preferred Stock;
        or

        (iv) redeem or purchase or otherwise acquire for consideration any
        shares of Series A Preferred Stock, or any shares of stock ranking on a
        parity with the Series A Preferred Stock, except in accordance with a
        purchase offer made in writing or by publication (as determined by the
        Board of Directors) to all holders of such shares upon such terms as the
        Board of Directors, after consideration of the respective annual
        dividend rates and other relative rights and preferences of the
        respective series and classes, shall determine in good faith will result
        in fair and equitable treatment among the respective series or classes.

        (B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.

        4. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other Certificate of Determination creating a series of
Preferred Stock or any similar stock or as otherwise required by law.

        5. LIQUIDATION, DISSOLUTION OR WINDING UP.

        (A) Upon any liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (1) to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received Ten Thousand Dollars ($10,000) per
share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, provided that the
holders of shares of Series A Preferred Stock shall be entitled to receive an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 10,000 times the

<PAGE>   6

aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.

        (B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.

        (C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.

        6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to Ten Thousand (10,000) times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged. In the event
the Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction,

<PAGE>   7

the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

        7. NO REDEMPTION. The shares of Series A Preferred Stock shall not be
redeemable.

        8. RANK. The Series A Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of any
other class of the Corporation's Preferred Stock.

        9. AMENDMENT. The Restated Articles of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series A Preferred Stock, voting together
as a single class.

                                    ARTICLE V

        (A) The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.

        (B) The corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code,

<PAGE>   8

subject only to applicable limits set forth in Section 204 of the California
Corporations Code with respect to actions for breach of duty to the corporation
and its shareholders.

                                   ARTICLE VI

        Shareholders of this corporation shall not be entitled to cumulate their
votes at any election of directors of this corporation. The corporation's common
stock is qualified for trading on the Nasdaq National Market and there were at
least 800 holders of its equity securities as of the record date of the most
recent annual shareholders meeting.







        THREE: The foregoing restatement of the Restated Articles of
Incorporation, as amended, has been duly approved by the Board of Directors of
said corporation and does not require shareholder approval pursuant to section
910(b) of the California Corporations Code.


        IN WITNESS WHEREOF, the undersigned have executed these Restated
Articles of Incorporation on the 15th of November, 2000.



                                       /s/ JOHN T. CHAMBERS
                                       -----------------------------------------
                                       John T. Chambers, President




                                       /s/ LARRY R. CARTER
                                       -----------------------------------------
                                       Larry R. Carter, Secretary

<PAGE>   9

        The undersigned certifies under penalty of perjury that they have read
the foregoing Restated Articles of Incorporation and know the contents thereof,
and that the statements therein are true.

        Executed at San Jose, California, on November 15, 2000.



                                       /s/ John T. Chambers
                                       -----------------------------------------
                                       John T. Chambers



                                       /s/ Larry R. Carter
                                       -----------------------------------------
                                       Larry R. Carter
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>3
<FILENAME>f70305orex3-2.txt
<DESCRIPTION>EXHIBIT 3.2
<TEXT>

<PAGE>   1

                                                                     EXHIBIT 3.2


                           AMENDED AND RESTATED BYLAWS

                                       OF

                               CISCO SYSTEMS, INC.

                 (AS AMENDED MARCH 10, 1985, DECEMBER 10, 1987,
               OCTOBER 11, 1988, DECEMBER 20, 1989, JULY 31, 1996,
              JUNE 8, 1998, NOVEMBER 10, 1999 and JANUARY 9, 2001)


                                   Article 1.

                                    - OFFICES

        Section 1.01 The principal executive offices of Cisco Systems, Inc. (the
"Corporation") shall be at such place inside or outside the State of California
as the Board of Directors may determine from time to time.

        Section 1.02 The Corporation may also have offices at such other places
as the Board of Directors may from time to time designate, or as the business of
the Corporation may require

                                   Article 2.

                            - SHAREHOLDERS' MEETINGS

        Section 2.01 Annual Meetings. The annual meeting of the shareholders of
the Corporation for the election of directors to succeed those whose terms
expire and for the transaction of such other business as may properly come
before the meeting shall be held each year on the second Thursday in November at
10:00 a.m. at the principal office of the Corporation, or at such other time and
place as may be determined by the Board of Directors.

        Section 2.02 Special Meetings. Special meetings of the shareholders may
be called at any time by the Chairman of the Board, by the President, by the
Board of Directors, or by one or more shareholders holding not less than ten
percent (10%) of the voting power of the Corporation on the record date
established pursuant to Article 5, Section 5.01 of these Bylaws. The person or
persons calling any such meeting shall concurrently specify the purpose of such
meeting and the business proposed to be transacted at such meeting. In
connection with any special meeting called in accordance with the provisions of
this Article 2, Section 2.02, upon request in writing sent by registered mail to
the Chairman of the Board, the President, a Vice President or the Secretary of
the Corporation, or delivered to any such officer in person, by the person or
persons calling such meeting (such request, if sent by a shareholder or
shareholders, to include the information required by Article 2, Section 2.12 of
these Bylaws), it shall be the duty of such officer, subject to the immediately
succeeding sentence, to cause notice of such meeting to be given in accordance
with Article 2, Section 2.04 of these Bylaws as promptly as reasonably
practicable and, in connection therewith, to establish the place and, subject to
Section 601(c) of the California Corporations' Code, the date and hour of such
meeting. Within five (5) business

<PAGE>   2

days after receiving such a request from a shareholder or shareholders of the
Corporation, the Board of Directors shall determine whether such shareholder or
shareholders have satisfied the requirements for calling a special meeting of
the shareholders and notify the requesting party or parties of its finding.


        Section 2.03 Place. All meetings of the shareholders shall be at any
place within or without the State of California designated either by the Board
of Directors or the President of the Corporation. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the Corporation.

        Section 2.04 Notice. Notice of meetings of the shareholders of the
Corporation shall be given in writing to each shareholder entitled to vote,
either personally or by first-class mail (unless the Corporation has 500 or more
shareholders determined as provided by the California Corporations Code on the
record date for the meeting, in which case notice may be sent by third-class
mail) or other means of written communication, charges prepaid, addressed to the
shareholder at his address appearing on the books of the Corporation or given by
the shareholder to the Corporation for the purpose of notice. Notice of any such
meeting of shareholders shall be sent to each shareholder entitled thereto not
less than ten (10) days (or, if sent by third-class mail, thirty (30) days) nor
more than sixty (60) days before the meeting. Said notice shall state the place,
date and hour of the meeting and, (1) in the case of special meetings, the
purpose of the meeting and the business proposed to be transacted, or (2) in the
case of annual meetings, those matters which the Board of Directors, at the time
of the mailing of the notice, intends to present for action by the shareholders,
and (3) in the case of any meeting at which directors are to be elected, the
names of the nominees intended at the time of the mailing of the notice to be
presented by management for election.

        Section 2.05 Adjourned Meetings. Any shareholders' meeting may be
adjourned from time to time by (1) the vote of the holders of a majority of the
voting shares present at the meeting either in person or by proxy or (2) the
presiding officer of the meeting. Written notice of the place, date and hour of
any adjourned meeting need not be given if such place, date and hour are
announced at the meeting at which the adjournment is taken; provided, however,
that if the adjournment is for more than forty-five (45) days or, if after the
adjournment, a new record date is fixed for the adjourned meeting, written
notice of the place, date and hour of the adjourned meeting must be given in
conformity with Article 2, Section 2.04 of these Bylaws. At any adjourned
meeting, any business may be transacted which properly could have been
transacted at the original meeting.

        Section 2.06 Quorum. The presence in person or by proxy of the persons
entitled to vote a majority of the shares entitled to vote at any meeting
constitutes a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum or, if required by the California Corporations Code or the
Articles of Incorporation of the Corporation, the vote of a greater number or
voting by classes.



                                       2
<PAGE>   3

        In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but no other
business may be transacted, except as provided above.

        Section 2.07 Consent to Shareholder Action. Any action which may be
taken at any meeting of shareholders may be taken without a meeting and without
prior notice, if a consent in writing, setting forth the action so taken, shall
be signed by the holders of outstanding shares on the record date established
pursuant to Article 5, Section 5.01 of these Bylaws having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted; provided, however, that (1) unless the consents of all shareholders
entitled to vote have been solicited in writing, notice of any shareholder
approval without a meeting by less than unanimous written consent shall be given
as required by the California Corporations Code, and (2) directors may not be
elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.

        Any written consent may be revoked by a writing received by the
Secretary of the Corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.

        Section 2.08 Waiver of Notice. The transactions of any meeting of
shareholders, however called and noticed, and whenever held, shall be as valid
as though had at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting, or an approval of the minutes thereof. All such waivers, consents, or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

        Section 2.09 Voting. At any meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote in person, or by
proxy appointed in a writing subscribed by such shareholder and bearing a date
not more than eleven (11) months prior to said meeting, unless the writing
states that it is irrevocable and satisfies Section 705(e) of the California
Corporations Code, in which event it is irrevocable for the period specified in
said writing and said Section 705(e). The voting at meetings of shareholders
need not be by ballot, but any qualified shareholder before the voting begins
may demand that voting be by ballot, each of which shall state the name of the
shareholder or proxy voting and the number of shares voted by such shareholder
or proxy.

        Section 2.10 Record Dates. In the event the Board of Directors fixes a
day for the determination of shareholders of record entitled to vote as provided
in Article 5, Section 5.01 of these Bylaws, then, subject to the provisions of
the General Corporation Law of the State of California, only persons in whose
name shares entitled to vote stand on the stock records of the Corporation at
the close of business on such day shall be entitled to vote.



                                       3
<PAGE>   4

        If no record date is fixed:

        The record date for determining shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;

        In order that the Corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting or request a special
meeting of the shareholders, the Board of Directors shall fix a record date,
which record date shall not precede the date upon which the resolution fixing
such record date is adopted by the Board of Directors. Any shareholder of record
seeking to have the shareholders authorize or take corporate action by written
consent or request a special meeting of the shareholders shall, by written
notice to the Secretary, request the Board of Directors to fix a record date.
The Board of Directors shall promptly, but in no event later than twenty-eight
(28) days after the date on which such request is received, adopt a resolution
fixing the record date; and

        The record date for determining shareholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto, or the sixtieth (60th) day prior to the date of
such other action, whichever is later.

        A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days.

        Section 2.11 Order of Business.

        The Chairman of the Board, or such other officer of the Corporation
designated by a majority of the Board of Directors, will call meetings of the
shareholders to order and will act as presiding officer thereof. Unless
otherwise determined by the Board of Directors prior to the meeting, the
presiding officer of the meeting of the shareholders will also determine the
order of business and have the authority in his or her sole discretion to
regulate the conduct of any such meeting, including without limitation by (i)
imposing restrictions on the persons (other than shareholders of the Corporation
or their duly appointed proxies) who may attend any such shareholders' meeting,
(ii) ascertaining whether any shareholder or his proxy may be excluded from any
meeting of the shareholders based upon any determination by the presiding
officer, in his or her sole discretion, that any such person has unduly
disrupted or is likely to disrupt the proceedings thereat, and (iii) determining
the circumstances in which any person may make a statement or ask questions at
any meeting of the shareholders.

        At an annual meeting of the shareholders, only such business will be
conducted or considered as is properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (ii) otherwise properly brought before the meeting by
the presiding officer or by or at the direction of a majority of the Board of
Directors, or (iii) otherwise properly requested to be brought before the
meeting by a shareholder of the



                                       4
<PAGE>   5

Corporation in accordance with the immediately succeeding sentence. For business
to be properly requested by a shareholder to be brought before an annual
meeting, the shareholder must (i) be a shareholder of record at the time of the
giving of the notice of such annual meeting by or at the direction of the Board
of Directors, (ii) be entitled to vote at such meeting, and (iii) have given
timely written notice thereof to the Secretary in accordance with Article 2,
Section 2.12 of these Bylaws.

        Nominations of persons for election as Directors of the Corporation may
be made at an annual meeting of shareholders only (i) by or at the direction of
the Board of Directors or (ii) by any shareholder who is a shareholder of record
at the time of the giving of the notice of such annual meeting by or at the
direction of the Board of Directors, who is entitled to vote for the election of
directors at such meeting and who has given timely written notice thereof to the
Secretary in accordance with Article 2, Section 2.12 of these Bylaws. Only
persons who are nominated in accordance with this Article 2, Section 2.11 will
be eligible for election at a meeting of shareholders as Directors of the
Corporation.

        At a special meeting of shareholders, only such business may be
conducted or considered as is properly brought before the meeting. To be
properly brought before a special meeting, business must be (i) specified in the
notice of the meeting (or any supplement thereto) given by or at the direction
of the Chairman of the Board, the President, a Vice President or the Secretary
or (ii) otherwise properly brought before the meeting by the presiding officer
or by or at the direction of a majority of the Board of Directors.

        The determination of whether any business sought to be brought before
any annual or special meeting of the shareholders is properly brought before
such meeting in accordance with this Article 2, Section 2.11, and whether any
nomination of a person for election as a Director of the Corporation at any
annual meeting of the shareholders was properly made in accordance with this
Article 2, Section 2.11, will be made by the presiding officer of such meeting.
If the presiding officer determines that any business is not properly brought
before such meeting, or any nomination was not properly made, he or she will so
declare to the meeting and any such business will not be conducted or considered
and any such nomination will be disregarded.

        Section 2.12 Advance Notice of Shareholder Proposals and Director
Nominations. To be timely for purposes of Article 2, Section 2.11 of these
Bylaws, a shareholder's notice must be addressed to the Secretary and delivered
or mailed to and received at the principal executive offices of the Corporation
not less than sixty (60) nor more than ninety (90) calendar days prior to the
anniversary date of the date (as specified in the Corporation's proxy materials
for its immediately preceding annual meeting of shareholders) on which the
Corporation first mailed its proxy materials for its immediately preceding
annual meeting of shareholders ; provided, however, that in the event the annual
meeting is called for a date that is not within thirty (30) calendar days of the
anniversary date of the date on which the immediately preceding annual meeting
of shareholders was called, to be timely, notice by the shareholder must be so
received not later than the close of business on the tenth (10th) calendar day
following the day on which public announcement of the date of the annual meeting
is first made. In no event will the public announcement of an adjournment of an
annual meeting of



                                       5
<PAGE>   6

shareholders commence a new time period for the giving of a shareholder's not as
provided above.

        In the case of a request by a shareholder for business to be brought
before any annual meeting of shareholders, a shareholder's notice to the
Secretary must set forth as to each matter the shareholder proposes to bring
before the annual meeting (i) a description in reasonable detail of the business
desired to brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business and the
beneficial owner, if any, on whose behalf the proposal is made, (iii) the class
and number of shares of the Corporation that are owned beneficially and of
record by the shareholder proposing such business and by the beneficial owner,
if any, on whose behalf the proposal is made, and (iv) any material interest of
such shareholder proposing such business and the beneficial owner, if any, on
whose behalf the proposal is made in such business.

        In the case of a nomination by a shareholder of a person for election as
a director of the Corporation at any annual meeting of shareholders, a
shareholder notice to the Secretary must set forth (i) the shareholders intent
to nominate one or more persons for election as a director of the Corporation,
the name of each such nominee proposed by the shareholder giving the notice, and
the reason for making such nomination at the annual meeting, (ii) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such nomination and the beneficial owner, if any, on whose behalf the nomination
is proposed, (iii) the class and number of shares of the Corporation that are
owned beneficially and of record by the shareholder proposing such nomination
and by the beneficial owner, if any, on whose behalf the nomination is proposed,
and (iv) any material interest of such shareholder proposing such nomination and
the beneficial owner, if any, on whose behalf the proposal is made, (v) a
description of all arrangements or understandings between or among any of (A)
the shareholder giving the notice, (B) each nominee, and (C) any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder giving the notice, (vi) such other
information regarding each nominee proposed by the shareholder giving the notice
as would be required to be included in a proxy statement filed in accordance
with the proxy rules of the Securities and Exchange Commission had the nominee
been nominated, or intended to be nominated, by the Board, and (vii) the signed
consent of each nominee proposed by the shareholder giving the notice to serve
as a director of the Company if so elected.

        Any shareholder or shareholders seeking to call a special meeting
pursuant to Article 2, Section 2.02 of these Bylaws shall provide information
comparable to that required by the preceding paragraphs, to the extent
applicable, in any request made pursuant to such Article and Section.

        Notwithstanding the provisions of Sections 2.11 and 2.12 of this Article
2, a shareholder must also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in Sections 2.11 and 2.12 of
this Article 2. Nothing in Sections 2.11 and 2.12 of this Article 2 will be
deemed to affect any rights of shareholders to request inclusion of proposals in
the



                                       6
<PAGE>   7

Corporation's proxy statement in accordance with the provisions of Rule 14a-8
under the Securities Exchange Act of 1934, as amended.

        For purposes of this Article 2, Section 2.12, "public announcement"
means disclosure in a press release reported by the Dow Jones News Service,
Associated Press, or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or
furnished to shareholders.

                                   Article 3.

                              - BOARD OF DIRECTORS

        Section 3.01 Powers. Subject to any limitations in the Restated Articles
of Incorporation or these Amended and Restated Bylaws and to any provision of
the California Corporations Code requiring shareholder authorization or approval
for a particular action, the business and affairs of the Corporation shall be
managed and all corporate powers shall be exercised by, or under the direction
of, the Board of Directors. The Board of Directors may delegate the management
of the day-to-day operation of the business of the Corporation to a management
company or other person provided that the business and affairs of the
Corporation shall be managed, and all corporate powers shall be exercised, under
the ultimate direction of the Board of Directors.

        Section 3.02 Number and Qualification of Directors. The number of
authorized directors of this Corporation shall be not less than eight (8) nor
more than fifteen (15), the exact number of directors to be fixed from time to
time within such range by a duly adopted resolution of the Board of Directors or
shareholders.

        Directors shall hold office until the next annual meeting of
shareholders and until their respective successors are elected. If any such
annual meeting is not held, or the directors are not elected thereat, the
directors may be elected at any special meeting of shareholders held for that
purpose. Directors need not be shareholders.

        Section 3.03 Regular Meetings. A regular annual meeting of the Board of
Directors shall be held without other notice than this Bylaw provision
immediately after, and at the same place as, the annual meeting of shareholders.
The Board of Directors may provide for other regular meetings from time to time
by resolution.

        Section 3.04 Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, the President
of the Corporation or any two (2) directors. Written notice of the time and
place of all special meetings of the Board of Directors shall be delivered
personally or by telephone or telegraph to each director at least forty-eight
(48) hours before the meeting, or sent to each director by first-class mail,
postage prepaid, at least four (4) days before the meeting. Such notice need not
specify the purpose of the meeting. Notice of any meeting of the Board of
Directors need not be given to any director who signs a waiver of notice,
whether before or after the meeting, or who attends the meeting without
protesting prior thereto or at its commencement, the lack of notice to such
director.



                                       7
<PAGE>   8

        Section 3.05 Place of Meetings. Meetings of the Board of Directors may
be held at any place within or without the State of California, which has been
designated in the notice, or if not stated in the notice or there is no notice,
the principal executive office of the Corporation or as designated by the
resolution duly adopted by the Board of Directors.

        Section 3.06 Participation by Telephone. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.

        Section 3.07 Quorum. A quorum at all meetings of the Board of Directors
shall be a majority of the authorized directors. In the absence of a quorum a
majority of the directors present may adjourn any meeting to another time and
place. If a meeting is adjourned for more than twenty-four (24) hours, notice of
any adjournment to another time or place shall be given prior to the time of the
reconvened meeting to the directors who were not present at the time of
adjournment.

        Section 3.08 Action at Meeting. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present is the act of the Board of Directors. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.

        Section 3.09 Waiver of Notice. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

        Section 3.10 Action Without Meeting. Any action required or permitted to
be taken by the Board of Directors may be taken without a meeting, if all
members of the Board individually or collectively consent in writing to such
action. Such written consent or consents shall be filed with the minutes of the
proceedings of the Board of Directors. Such action by written consent shall have
the same force and effect as a unanimous vote of such directors.

        Section 3.11 Removal. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony.

        The entire Board of Directors or any individual director may be removed
from office without cause by a vote of shareholders holding a majority of the
outstanding shares entitled to vote at an election of directors; provided,
however, that unless the entire Board of Directors is removed, no individual
director may be removed when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such director if voted
cumulatively at an election at which the same total number of votes cast were
cast (or, if such action is taken by written consent, all shares entitled to
vote were voted) and the entire



                                       8
<PAGE>   9

number of directors authorized at the time of the director's most recent
election were then being elected.

        In the event an office of a director is so declared vacant or in case
the Board of Directors or any one or more directors be so removed, new directors
may be elected at the same meeting.

        Section 3.12 Resignations. Any director may resign effective upon giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board of Directors of the Corporation, unless the notice specifies a later time
for the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.

        Section 3.13 Vacancies. Except for a vacancy created by the removal of a
director, all vacancies in the Board of Directors, whether caused by
resignation, death or otherwise, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and each
director so elected shall hold office until his successor is elected at an
annual, regular or special meeting of the shareholders. Vacancies created by the
removal of a director may be filled only by approval of the shareholders.

        Section 3.14 Compensation. No stated salary shall be paid directors, as
such, for their services, but, by resolution of the Board of Directors, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of such Board; provided that nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.

        Section 3.15 Committees. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Corporation, except with
respect to (a) the approval of any action requiring shareholders' approval or
approval of the outstanding shares, (b) the filling of vacancies on the Board of
Directors or any committee, (c) the fixing of compensation of directors for
serving on the Board of Directors or a committee, (d) the adoption, amendment or
repeal of Bylaws, (e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable, (f) a
distribution to shareholders, except at a rate or in a periodic amount or within
a price range determined by the Board of Directors, and (g) the appointment of
other committees of the Board of Directors or the members thereof.



                                       9
<PAGE>   10

                                   Article 4.

                                   - OFFICERS

        Section 4.01 Number and Term. The officers of the Corporation shall be a
President, one or more Vice Presidents, a Secretary and a Chief Financial
Officer, all of which shall be chosen by the Board of Directors. The Corporation
may also have a Chairman of the Board who shall be chosen by the Board of
Directors. In addition, the Board of Directors may appoint such other officers
as may be deemed expedient for the proper conduct of the business of the
Corporation, each of whom shall have such authority and perform such duties as
the Board of Directors may from time to time determine. The officers to be
appointed by the Board of Directors shall be chosen annually at the regular
meeting of the Board of Directors held after the annual meeting of shareholders
and shall serve at the pleasure of the Board of Directors. If officers are not
chosen at such meeting of the Board of Directors, they shall be chosen as soon
thereafter as shall be convenient. Each officer shall hold office until his
successor shall have been duly chosen or until his removal or resignation.

        Section 4.02 Inability to Act. In the case of absence or inability to
act of any officer of the Corporation and of any person herein authorized to act
in his place, the Board of Directors may from time to time delegate the powers
or duties of such officer to any other officer, or any director or other person
whom it may select.

        Section 4.03 Removal and Resignation. Any officer chosen by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of all the members of the Board of Directors.

        Any officer chosen by the Board of Directors may resign at any time by
giving written notice of said resignation to the Corporation. Unless a different
time is specified therein, such resignation shall be effective upon its receipt
by the Chairman of the Board, the President, the Secretary or the Board of
Directors.

        Section 4.04 Vacancies. A vacancy in any office because of any cause may
be filled by the Board of Directors for the unexpired portion of the term.

        Section 4.05 Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board of Directors.

        Section 4.06 President. The President shall be the general manager and
chief executive officer of the Corporation, subject to the control of the Board
of Directors, and as such shall preside at all meetings of shareholders, shall
have general supervision of the affairs of the Corporation, shall sign or
countersign or authorize another officer to sign all certificates, contracts,
and other instruments of the Corporation as authorized by the Board of
Directors, shall make reports to the Board of Directors and shareholders, and
shall have all such other authority and perform all such other duties as are
incident to such office or as may be delegated or assigned from time to time by
the Board of Directors.

        Section 4.07 Vice President. In the absence of the President, or in the
event of such officer's death, disability or refusal to act, the Vice President,
or in the event there is more



                                       10
<PAGE>   11

than one Vice President, the Vice Presidents in the order designated at the time
of their selection, or in the absence of any such designation, then in the order
of their selection, shall perform the duties of President, and when so acting,
shall have all the powers and be subject to all restrictions upon the President.
Each Vice President shall have all such other authority and perform all such
other duties as are incident to such office or as may be delegated or assigned
from time to time by the President or by the Board of Directors.

        Section 4.08 Secretary. The Secretary shall see that notices for all
meetings are given in accordance with the provisions of these Bylaws and as
required by law, shall keep minutes of all meetings, shall have charge of the
seal and the corporate books, and shall have all such other authority and
perform all such other duties as are incident to such office or as may be
delegated or assigned from time to time by the President or by the Board of
Directors.

        The Assistant Secretary or the Assistant Secretaries, in the order of
their seniority, shall, in the absence or disability of the Secretary, or in the
event of such officer's refusal to act, perform the duties of Secretary and,
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary. Each Assistant Secretary shall have all such
other authority and perform all such other duties as are incident to such office
or as may be assigned or delegated from time to time by the President or by the
Board of Directors.

        Section 4.09 Chief Financial Officer. The Chief Financial Officer shall
have all such authority and perform all such duties as are incident to such
office or as may be delegated or assigned from time to time by the President or
by the Board of Directors.

        Section 4.10 Treasurer. The Treasurer shall have custody of all moneys
and securities of the Corporation and shall keep regular books of account. Such
officer shall disburse the funds of the Corporation in payment of the just
demands against the Corporation, or as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render to the Board of
Directors from time to time as may be required of such officer, an account of
all transactions as Treasurer and of the financial condition of the Corporation.
Such officer shall have all such other authority and perform all such other
duties as are incident to such office or as may be delegated or assigned by the
President or by the Board of Directors.

        The Assistant Treasurer or the Assistant Treasurers, in the order of
their seniority, shall, in the absence or disability of the Treasurer, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers of the Treasurer, and shall have all such other authority and perform all
such other duties as are incident to such office or as may be delegated or
assigned from time to time by the by the President or by the Board of Directors.

        Section 4.11 Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that such officer is also a director
of the Corporation.

        Section 4.12 Officers Holding More than One Office. Any two or more
offices may be held by the same person.

        Section 4.13 Approval of Loans to Directors and Officers. The
Corporation may, upon the approval of the Board of Directors alone, make loans
of money or property to, or



                                       11
<PAGE>   12

guarantee the obligations of, any director or officer of the Corporation or its
parent or subsidiary, or adopt an employee benefit plan or plans authorizing
such loans or guaranties provided that (i) the Board of Directors determines
that such a loan or guaranty or plan may reasonably be expected to benefit the
Corporation, (ii) the Corporation has outstanding shares held of record by 100
or more persons (determined as provided in Section 605 of the California
Corporations Code) on the date of approval by the Board of Directors, and (iii)
the approval of the Board of Directors is by a vote sufficient without counting
the vote of any interested director or directors.

                                   Article 5.

                                 - MISCELLANEOUS

        Section 5.01 Record Date and Closing of Stock Books. The Board of
Directors may fix a time in the future as a record date for the determination of
the shareholders entitled to notice of and to vote at any meeting of
shareholders or entitled to receive payment of any dividend or distribution, or
any allotment of rights, or to exercise rights in respect to any other lawful
action. The record date so fixed shall not be more than sixty (60) nor less than
ten (10) days prior to the date of the meeting or event for the purposes of
which it is fixed. When a record date is so fixed, only shareholders of record
at the close of business on that date are entitled to notice of and to vote at
the meeting or to receive the dividend, distribution, or allotment of rights, or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after the record date.

        In the event that no record date is fixed by the Board of Directors, the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders will be at the close of business on the calendar day
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the calendar day next preceding the day on which the
meeting is held. A determination of shareholders of record entitled to notice of
or to vote at a meeting of the shareholders will apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.

        The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of a period of not more than
sixty (60) days prior to the date of a shareholders' meeting, the date when the
right to any dividend, distribution, or allotment of rights vests, or the
effective date of any change, conversion or exchange of shares.

        Section 5.02 Certificates. Certificates of stock shall be issued in
numerical order and each shareholder shall be entitled to a certificate signed
in the name of the Corporation by the Chairman of the Board or the President or
a Vice President, and the Chief Financial Officer, the Secretary or an Assistant
Secretary, certifying to the number of shares owned by such shareholder. Any or
all of the signatures on the certificate may be facsimile. Prior to the due
presentment for registration of transfer in the stock transfer book of the
Corporation, the registered owner shall be treated as the person exclusively
entitled to vote, to receive notifications and otherwise to exercise all the
rights and powers of an owner, except as expressly provided otherwise by the
laws of the State of California.



                                       12
<PAGE>   13

        The Secretary may direct a new certificate or certificates to be issued
in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact, satisfactory to the Secretary, by the person claiming
the certificate of stock to be lost, stolen or destroyed. As a condition
precedent to the issuance of a new certificate or certificates, the Secretary
may require the owners of such lost, stolen or destroyed certificate or
certificates to give the Corporation a bond in such sum and with such surety or
sureties as the Secretary may direct as indemnity against any claims that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed or the issuance of the new certificate.

        Section 5.03 Representation of Shares in Other Corporations. Shares of
other corporations standing in the name of this Corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
Corporation by the Chairman of the Board, the President or any Vice President
and the Chief Financial Officer or the Secretary or an Assistant Secretary.

        Section 5.04 Fiscal Year. The fiscal year of the Corporation shall end
on the last Saturday of July.

        Section 5.05 Annual Reports. The Annual Report to shareholders,
described in the California Corporations Code, is expressly waived and dispensed
with.

        Section 5.06 Amendments. Bylaws may be adopted, amended, or repealed by
the vote or the written consent of shareholders entitled to exercise a majority
of the voting power of the Corporation. Subject to the right of shareholders to
adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended, or repealed by
the Board of Directors, except that a Bylaw amendment thereof changing the
authorized number of directors may be adopted by the Board of Directors only if
these Bylaws permit an indefinite number of directors and the Bylaw or amendment
thereof adopted by the Board of Directors changes the authorized number of
directors within the limits specified in these Bylaws.

        Section 5.07 Indemnification of Corporate Agents.

        (a) The Corporation shall indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
by such person by reason of such person's having been made or having threatened
to be made a party to a proceeding to the fullest extent permissible by the
provisions of Section 317 of the California Corporations Code. The terms
"agent," "proceeding" and "expenses" made in this Section 7 shall have the same
meaning as such terms in said Section 317.

        (b) Expenses reasonably incurred by an agent of the Corporation in
defending a civil or criminal action, suit or proceeding by reason of the fact
that he or she is or was an agent of the Corporation (or was serving at the
Corporation's request as a director or officer of another corporation) shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such agent to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized by relevant sections
of the General Corporation Law of California.



                                       13
<PAGE>   14

        (c) Notwithstanding the foregoing, the Corporation shall not be required
to advance such expenses to an agent who is party to an action, suit or
proceeding brought by the Corporation and approved by a majority of the Board of
Directors which alleges willful misappropriation of corporate assets by such
agent, wrongful disclosure of confidential information, or any other willful and
deliberate breach in bad faith of such agent's duty to the Corporation or its
shareholders.



                                       14
</TEXT>
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