Positive economic signs tempered by lingering pessimism.A smattering of positive financial news has optimists wondering if perhaps the worst is over for the beleaguered network industry.On Wall Street, recent gains have pushed the Dow Jones Industrial Average, Nasdaq and Standard & Poor's 500 indexes up more than 20% in less than two months.\u00a0Nortel and\u00a0Hewlett-Packard have announced big customer wins, and\u00a0Cisco said its backlog - orders received but not yet counted as revenue - is growing. On the job front, the Labor Department reported last week that the number of new people filing for unemployment benefits fell for the third consecutive week to its lowest level in nearly two years. There is even a glimmer of hope in the telecom equipment market, particularly in metropolitan optical networks, according to researchers at Infonetics.But analysts caution against reading too much into these modest gains, which might not prove sustainable.Gary Little, general partner with Morgenthaler Ventures, says that many companies have piled a lot of their ugly financial numbers into their recent filings, looking to start next year with a clean slate. That could result in some near-term stronger financial showings, he says. "But I'd look for three or so quarters of predictable revenue growth pulling along profits before you'll see IT budgets loosening up.""The bright spots are still a very, very diffuse light," says Al Case, senior vice president at Gartner. "The exciting news is that we're not going backwards."For their part, many vendors are taking a conservative, albeit cautiously optimistic, stance.Cisco CEO John Chambers last week told analysts at the company's annual meeting that the gear maker's business will grow, although he stopped short of providing specific predictions for the current quarter. He highlighted new markets Cisco is targeting, including\u00a0storage, network\u00a0security and\u00a0wireless LANs."Two years ago I was perhaps the pessimist in the industry. I thought, unfortunately, we were headed into a 100-year flood," Chambers told his audience. "Today, I'm the optimist."At HP's analyst conference last week, CEO Carly Fiorina said HP is showing better than predicted performance in some areas of its business, including the expectation of $3 billion in cost savings for fiscal year 2003 as a result of the Compaq acquisition. HP had expected a total closer to $2.4 billion, Fiorina said.A bright spot in HP's fiscal 2002 earnings is managed services, where revenue increased 14% over year-ago figures. Among the large outsourcing deals HP landed is a seven-year, $1.5 billion contract with the Canadian Imperial Bank of Commerce to manage its IT infrastructure, announced in September. HP also has won more than $920 million in services contracts in recent months, including deals with the State Treasury of Slovakia, Swedish Parliament and Michelin.Nonetheless, Fiorina said she would not raise financial forecasts because of an uncertain economy. "I am not here to raise guidance," Fiorina said. "The reason we are not going to raise guidance today is because the economy continues to be uncertain, and we want to make sure we are not getting ahead of ourselves."Analysts aren't predicting corporate IT spending will resume significant growth soon.Gartner projects corporate IT spending will be flat in 2003, Case says. Companies deployed huge amounts of technology during the boom time and they now need to connect their infrastructure and application investments, he says. In the near term, companies will concentrate spending on storage, security and application integration, he says.Other projects that will be funded are PC upgrades, as the average age of corporate PCs is older than three years, and server consolidation projects, Case says.However, the bottom line is that 2003 spending is about a reprioritization rather than increase in IT dollars, Case says.And for the rest of 2002, the hoped-for, year-end flush might not materialize. A Goldman Sachs survey released this month found that about 60% of IT managers surveyed expect to underspend their budgets. They also say spending will remain subdued until the second half of next year, at the earliest.For instance, IT spending is being carefully controlled at Prudential Insurance, according to Edward Mann, vice president of network planning. "The only stuff we're spending money on that doesn't have immediate [return on investment] is security," Mann says.Vendors hoping that companies will have leftover IT money to spend before year-end should look elsewhere, he says. There is no surplus, and this is a particularly tight year. "In a good year, you didn't have to justify it as much, but even in a good year it wasn't a blank check," he says.Areas Prudential is spending on include antivirus software to combat attacks such as last year's Code Red and Nimda worms, he says. This will protect Prudential from expensive efforts to undo damage that viruses might cause.The firm also is concentrating on switching over some of its branch-office WAN connections from frame relay to a less-expensive IP Security VPN that uses the Internet as its backbone. "If we can prove immediate cost reduction, we can spend the money to save the money," Mann says.VPN technology is the brightest spot in IT spending, says Jeff Wilson, director of research for Infonetics. Between the first two quarters of 2002, it was up 3%. Between the second and third quarters it was up 4%. Wilson projects that in the fourth quarter it will go up another 10%."VPN gear is absolutely an immediate return," he says. One company he points to is NetScreen Technologies, as its revenue has gained steadily over the past four quarters since it issued public stock. "It's purely because they're offering the combination of VPN and firewall," he says.The strength of VPN spending might also be in response to federal security initiatives. "The government is putting pressure on anybody in the private sector that is in charge of critical infrastructure, like finance or utilities," Wilson says.Businesses also are spending on new technologies, not to put them into production, but to find out whether they work well enough to buy in bulk next year, says Frank Dzubeck, principal with Communications Network Architects and a Network World columnist. "It's less, 'We gotta buy,' than, 'We gotta see if this really works,' " he says. Dzubeck points to Web services software, blade servers, storage-area networks and grid computing as technologies corporations are investigating and will start deploying toward the end of next year.The bright spot in carrier spending is that sales of metropolitan optical gear for service providers is projected to increase 7% over the next year, according to Michael Howard, principal analyst and co-founder of Infonetics. The best that could be said for these metropolitan optical sales in the past quarter is that they declined least among the different categories of optical gear at between 4% and 5%.While he did not have numbers available yet, Howard says sales of metropolitan Ethernet interfaces to carrier SONET\/SDH gear will increase as providers try to offer new Ethernet services without swapping out their current metropolitan backbones. This bodes well for Alcatel, Cisco, Nortel, Siemens and Tellabs, he says.In the carrier arena, Nortel recently announced a $280 million contract to supply service provider China Unicom with digital wireless network infrastructure equipment.Paul Levine, general partner with Morgenthaler Ventures, describes Nortel's China Unicom win as "a wake-up call" to industry watchers and investors. "It may have gotten people thinking, 'Hey, maybe there is life beyond WorldCom' for these equipment companies. What about the rest of the world where not everyone already has cell phone service?"IDG News Service correspondent Ashlee Vance contributed to this story.