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The week in review: Network misconnections

Analysts and investors grow pessimistic about a quick recovery in the networking sector as more equipment makers reveal that earnings for the short term will be even more dour than thought.

Analysts and investors grew pessimistic about a quick recovery in the networking sector as more equipment makers revealed that earnings for the short term will be even more dour than thought.

In its second earnings warning in as many months, optical equipment maker Nortel Networks said first-quarter earnings and revenue numbers will not meet previous expectations. The company now expects to report a loss between 10 cents and 12 cents a share on revenue of $6.1 billion to $6.2 billion. Nortel had earlier expected to report an operating loss of 4 cents per share on revenue of $6.3 billion. Nortel last cautioned investors of troubles Feb. 15.

As more network equipment makers warn of trouble ahead, analysts wonder what the future holds for industry bellwether Cisco Systems. Based on Cisco's stock movement, Wall Street believes the company may be the next to issue bad news. The stock hit a new 52-week low this week.

But not all signs reflected the gloomy warnings. After three repricings, shares of Agere Systems, Lucent Technologies' chip spinoff, finished its first day of trading slightly higher than its $6 offering price on heavy volume. The IPO of Agere ended an exhaustive effort by Lucent to complete the deal in the face of a gloomy stock market and an uncertain outlook for the optical industry.

And Cabletron Systems said it sees no reason for analysts to change their fiscal first-quarter expectations. "I am very pleased with our fourth-quarter momentum and continue to be optimistic about our future prospects," Cabletron CEO Piyush Patel said. Executives of the holding company for network equipment and services vendors said they remain comfortable with consensus earnings estimates for its fiscal first-quarter ending in May. Analysts surveyed by earnings tracking company First Call predict a first-quarter profit of 8 cents per share for Cabletron.

CEO search engine
Former BMG Entertainment head Strauss Zelnick has turned down an opportunity to take the helm at Yahoo, citing major challenges facing the company, sources close to the matter told CNET News.com this week. The refusal, which came less than a week into a high-profile executive search to replace outgoing Chief Yahoo Tim Koogle, underscores the difficulties the company faces in filling its top position from outside the company. Yahoo this month began searching for seasoned chief executives in the media and technology industries to turn the company around.

Novell's outgoing chief executive Eric Schmidt has invested an undisclosed sum in Web search engine Google and signed up for a part-time gig as chairman of the up-and-coming company. Google co-founder Sergey Brin will relinquish his chairman title, although he will remain as president. Co-founder Larry Page will remain in his role as chief executive. Analysts said the announcement indicates that the closely held company is beginning to leave behind its image as an immature dot-com.

Besides high-level vacancies, high-tech companies also may have to face a morale issue in the ranks as well. Employees are getting smacked with exceptionally large tax bills this year because of a collision between how stock options get taxed under federal law and the slide in the stock market. Under the Alternative Minimum Tax, tech workers who purchased options in 2000 but didn't sell them that year have to pay taxes in 2001 on the shares' value on the date they were purchased--even if the stock has since plummeted, as so many did in the last year. Many people are paying taxes on what are now worthless options. Some executives are looking at tax bills of more than $3 million dollars.

Windows shopping
Microsoft announced the second test version of its Windows XP operating system and the first version that shows off the new look and feel of the software. Beta 2, which Microsoft said will be given to roughly 500,000 testers, adds a brighter interface with more graphics and colors as well as built-in support to simplify tasks such as online photo printing and managing music files. Windows XP will come in three flavors: one for home computers, another for most business uses, and a third aimed at machines running Intel's 64-bit Itanium family of chips.

PC enthusiasts looking to grab an early copy of Windows XP may be in for a big surprise, however. Many will need more computing horsepower to run the operating system. Microsoft's Web site recommends a minimum 300MHz Pentium II processor and 128MB of RAM to run the Windows XP beta, up from a 133MHz processor and 64MB of memory for Windows 2000. Although many PCs come with 128MB now, machines sold a year ago, especially budget PCs, typically came with much less memory.

With the next version of its consumer Windows operating system, Microsoft is trying to make computers less daunting and less prone to crashes. To reach that goal, Microsoft not only needs to clean up its own code, but also all the third-party drivers--little bits of software that help the system communicate with peripherals and other add-ons. When computer owners using Windows XP try to install new hardware or software with drivers that have not passed Microsoft certification, they will get an ominous warning message.

Sweet and sour Apples
Apple Computer's Mac OS X launch shook the earth for many of the company's die-hard fans last weekend. But aftershocks may cause some Mac enthusiasts unexpected trouble. Limited hardware support and a potentially flawed firmware upgrade could sour some people's first experiences with Apple's first complete overhaul of its OS since its 1984 introduction. Common problems include connections to SCSI devices and external hardware from Classic mode, something Apple had prepared people for. In addition, many Mac OS X owners must reboot back to Mac OS 9.1 to use America Online.

Less than a week after OS X's release, Apple is preparing an update to the new operating system to fix some bugs. It's unclear whether the Mac OS X update--which CNET News.com obtained--is a final or a beta version. Apple would not comment on the update circulating on the Web, other than to say it is pirated. It is the company's policy not to discuss products before their release. After applying the update, the OS version changes from 10.0 to 10.0.1, or build 4L5.

Apple bucked sluggish retail notebook sales in February, with sales up 31 percent year over year. Apple's Titanium PowerBook G4 led the rally, accounting for 52 percent of the company's notebook sales, according to a new report from NPD Intelect. February was the first full month of Titanium sales. Apple started shipping the notebook Jan. 31. Industrywide, retail notebook sales grew a paltry 2.3 percent in February, compared with the same period last year, according to NPD Intelect. "With the retail notebook market darker than expected, the one bright spot was Apple Computer," one analyst said.

Also of note
As publicity surrounding the dot-com demise spreads, crowds are flocking to asset-liquidation sales--and bids are going up...Kozmo.com prematurely ended a five-year deal it had with Starbucks, hauling away hundreds of video drop-off boxes the online delivery service had put in local cafes...Online publishers can't sell enough ads to make ends meet, so they're taking a stab at another way to make money that many had once rejected: subscriptions...Transmeta has won a major foothold in the corporate market, with Fujitsu choosing its chips to power 12,000 laptops that will be used by a Japanese insurance company...Bill Gates showcased Microsoft's new Web-surfing computer tablet that is expected to incorporate chip technology from Intel, as well as from upstart Transmeta...Gateway has closed 27 of its Country stores as the company looks to cut costs.

View all this week's News.com headlines.