Cisco Systems Inc. (CSCO) on Tuesday reported that quarterly profit surged 41 percent to a new company record due to rising demand from corporate customers for its networking gear, but investors were spooked by a rise in inventories.

Inventories are closely watched at the world's largest maker of equipment that directs Internet and other network traffic. A rise in inventories was one of the first signs of trouble before the telecom bubble burst in 2001.

Cisco said inventories rose 9 percent in its fiscal fourth quarter from the prior quarter. Its stock fell about 3 percent in after-hours trade late on Tuesday afternoon.

"Overall the quarter was on target and if you are searching for something negative, inventories were a little higher than I'd like to see," said Justin McNichols, portfolio manager with Osborne Partners Capital Management, a San Francisco asset management firm that owns Cisco shares.

Cisco reported a net profit of $1.4 billion, or 20 cents a share, for the fiscal fourth quarter ended July 31, compared with $982 million, or 14 cents a share, in the year-earlier quarter.

Excluding one-time items, Cisco earned 21 cents a share, beating the average analyst estimate of 20 cents a share.

Investors see Cisco as a benchmark for corporate and government spending because about 75 percent of its revenue comes from those customers. The rest comes from the telecom sector.

Sales in the quarter rose 26 percent from last year to $5.93 billion, and 5.4 percent from the prior quarter, compared with analysts' average estimate for sales of $5.89 billion, according to Reuters Estimates.

The San Jose, Calif.-based company said in May that fourth-quarter sales would rise 3 percent to 5 percent from the prior quarter's $5.62 billion.

Cisco's inventory rose slightly in the fourth quarter to $1.2 billion from $1.1 billion in the previous quarter. In Cisco's third quarter, some investors voiced concern with a 20 percent rise in inventories from the previous period.

Cisco took a $2.2 billion charge in 2001 to write off excess inventory, but executives said in May they previously told investors third-quarter inventories would rise and it was not a major issue.

Cisco Chief Executive John Chambers (search) in May voiced rising optimism about business trends, but said CEOs remain cautious about hiring. Information technology (search) spending budgets will rise this year, but at a lower rate than Cisco would like to see given the current stage of the economic recovery, he said then.

However, Cisco's confidence in the improving global economy led it to announce in May plans to increase its work force by 3 percent, or 1,000 jobs, through the rest of the year. It was the first quarter in three years it had recorded a net rise in jobs.

Cisco also said on Tuesday that its compensation committee reinstituted Chambers' annual salary of $350,000 -- the same amount it was in April 2001 -- effective Aug. 1 of this year. In May 2001, Chambers requested a yearly salary of $1 and no bonus after the dot-com and telecommunications bubbles burst.

Cisco shares fell to $19.90 in after-hours trading on INET on Tuesday, compared with their closing price of $20.46 on the Nasdaq.