By Matthew Fordahl
The Associated Press

SAN JOSE, Calif. - Jumping into the competitive home networking market, Cisco Systems Inc. said Thursday that it was buying The Linksys Group Inc. in a $500 million stock deal that would make it the leader in that burgeoning segment of the industry.

Cisco already dominates the network equipment market for large companies and service providers, with a business that still draws high profits despite a sales slump that has hammered all gear manufacturers over the past two years.

With Linksys, Cisco will enter a dicey environment in which profit margins are slim and prices constantly driven downward by stiff competition from rivals including Microsoft Corp., Netgear, D-Link and Intel Corp.

Still, Cisco executives think that the growing adoption of consumer high-speed Internet connections as well as increasing prevalence of more than one computer in homes will drive demand for reliable networking equipment for the home.

"Home networking is quickly becoming a mass market," said Charlie Giancarlo, Cisco's senior vice president of corporate development. "This is the right time and the right way to enter it."

Privately held Linksys, based in Irvine, Calif., has one of the most extensive lines of routers and other equipment used in home networks. It markets 70 devices, which are sold to consumers at retail stores and online.

Linksys had sales of $429 million last year, a 24 percent growth rate over 2001. The company has been on Inc. magazine's list of the fastest growing private companies in the United States for five consecutive years.

Networking equipment sales to small and home offices are expected to grow from $3.7 billion in 2002 to $7.5 billion in 2006, according to data compiled by the research firms Dell'Oro Group and Synergy.

The number of homes with broadband is increasing by 35 percent each year, and the number of networked homes by 51 percent annually, said Dan Scheinman, Cisco's senior vice president of corporate development.

Though chief executive John Chambers has been a vocal supporter of consumer broadband and has criticized rollout delays, Cisco has offered few products geared for the home.

Cisco's routers and switches are found in the back rooms of large corporations and government agencies.

Linksys will be operated as a division of Cisco and the brand will be continued. Founded in 1988, it has 308 employees. Cisco said there are no plans to cut the work force.

A Linksys spokeswoman did not return calls seeking comment.