Following are extracts from Cisco Systems 2000 and 2002 Annual Reports. In your own words, describe the effects of ESOs on Cisco’s taxes from 2000 to 2002. The Company has provided a valuation...

Following are extracts from Cisco Systems 2000 and 2002 Annual Reports. In your own words, describe the effects of ESOs on Cisco’s taxes from 2000 to 2002.

The Company has provided a valuation allowance on certain of its deferred tax assets because of uncertainty regarding their realizability due to expectation of future employee stock option exercises. Deferred tax assets of approximately $963 million at July 29, 2000, pertain to certain tax credits and net operating loss carry forwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these credits and losses will be accounted for as a credit to shareholders’ equity rather than as a reduction of the income tax provision.