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Updated from 4:34 p.m. EST

If Wall Street wanted a clean bill of health on IT spending,

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

wasn't able to deliver.

The technology bellwether told investors Tuesday evening that a "challenging" information technology spending environment could push sales lower next quarter.

The San Jose company posted solid second-quarter earnings, demonstrating a tight rein on costs to overcome slow IT spending. But the company told Wall Street on a postclose conference call that sales for the third quarter could fall as much as 2%-3% sequentially, as war looms and customers remain unable to forecast their own spending needs.

Few observers could fault Cisco's finely tuned business, which yielded among other things, gross margins at a company record 70.4%, up from 69.3% in the first quarter.

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"Old man Cisco just keeps on rolling," says CIBC World Markets analyst Steve Kamman, who has a hold on the stock. CIBC has no banking ties to Cisco, which dropped 9 cents in after-hours trading to $13.11.

Powerless

But while Cisco managed to keep reforming its own business, it remains powerless in getting other companies to buy more networking gear.

CEO John Chambers gave analysts on a conference call a rather downbeat forecast for the near future, as uncertainty about the economy and international stability forces customers to stay conservative on spending.

The takeaway for some investors was that old sinking feeling.

"If I owned this stock, I'd probably not sleep too soundly, knowing that tomorrow a lot of analysts will probably have to take their numbers down a bit," says one New York hedge fund manager who is short Cisco. "I'd be concerned. I mean they've done the best they can do. They are a machine, but this stock isn't cheap and that top line number is not getting better."

Analysts polled by Multex expect third quarter sales to be $4.7 billion, the high end of Cisco's new revenue range. "Those numbers will have to come down," said one sell-side analyst who asked not to be identified. "Anybody who missed the message needs to go back to body-language-reading school."

Upside

For the fiscal second quarter ended Jan. 25, Cisco posted net income of $991 million, or 14 cents a share, up from the year-ago $660 million, or 9 cents a share. On a pro forma basis, excluding certain expenses, the latest-quarter profit was 15 cents a share; Wall Street analysts surveyed by Thomson Financial/First Call had expected the maker of communications gear to post second-quarter EPS of 13 cents.

In keeping with weak industrywide IT spending, though, Cisco said second-quarter sales fell from a year ago, dropping 2% to $4.71 billion from $4.82 billion a year earlier. The sales figure was broadly in line with expectations.

Said one investor: "I'd feel more comfortable if they had 50% margins instead of 70%. At least then they'd have somewhere to go."