Updated from 4:57 p.m. EDT

Nortel

(NT)

says it will hit profitability when quarterly revenue reaches $3.2 billion. Only one problem, the networking gearmaker's sales in the latest quarter totaled $2.77 billion, and equipment spending is still coming down.

Despite the bleak outlook for the industry, CEO Frank Dunn promised analysts on an earnings conference call after the close that Nortel will be profitable by next year. He also said the sales growth will likely come from a shift in market share toward Nortel.

Some investors found the prediction a bit difficult to swallow whole. Nortel hasn't had a stellar track record in the prediction game. This is the company, after all, that had to preannounce seven shortfalls in the past 20 months, and has projected four sequentially lowered breakeven points in that time frame.

As Nortel observers point out, any real hopes for profitability likely depend on continued staff cuts. The winded gearmaker has slashed jobs in seven rounds to date, and at a total headcount of 48,000, is less than half its peak size in 2000.

Dunn says he has the ability to bring that break-even level down lower, and he will monitor it, but he doesn't have plans to start another round of cutbacks.

Nortel took a $100 million charge in the latest quarter related to uncollected payments for equipment sold to faltering telcos, including big customer

WorldCom

(WCOME)

. Executives declined to predict whether that charge would be recurring or growing in future quarters.

On the bright side, undrawn loan commitments to customers fell to $1.6 billion in the second quarter, down from more than $2 billion in recent quarters. Nortel executives said they expect only half of that money to be drawn this year.

Nortel was deeply involved in vendor financing during and even after the Internet construction boom. Investors have long feared the implications of that practice of lending to flimsy, cash-hungry customers. In some circles, an $800 million overhang is considered modest given the runaway potential of the IOU collections.

For the second quarter, Nortel met its earnings target, but came in slightly below its previously lowered revenue goals, and projected more of the same in the third quarter.

Using U.S. generally accepted accounting principles, the company lost $697 million, or 20 cents a share, in the latest quarter, compared with a loss of $19.4 billion, or $6.08 a share, in the year-ago quarter, which included more than $13 billion in charges.

Excluding one-time charges, the company had a loss of 9 cents, an improvement from its 48-cent loss a year ago and bettering its 14-cent deficit in the first quarter. Revenue for the second quarter totaled $2.77 billion, or 40% below last year's tally. Analysts had expected $2.8 billion in revenue, according to Multex.

The gearmaker allayed fears it was feeling the liquidity crunch that has seized much of the industry, saying it had $4.9 billion in cash as of the end of the quarter, which includes the proceeds of a recent $1.5 billion convertible bond offering.

Nortel's shares were flat at $1.31 on the Instinet platform following the close, after finishing the regular session down 4 cents. The stock is 85% below its 52-week high.