Intel beat analyst expectations in what was an otherwise dismal second quarter, with net income down 76 percent from a year ago. In a statement released Tuesday, the chipmaker reported net income, excluding acquisition-related costs, of £608m, or 8.5 pence a share. Analysts polled by First Call expected around 7 pence a share. The earnings figure was a 76 percent drop from the same period a year ago and a 22 percent decline from the first quarter of 2001. Intel said a lower-than-expected tax rate helped boost earnings by about a penny a share. Revenue for the quarter totalled £4.5bn, down 24 percent from the same period a year ago and down 5 percent from the first quarter of 2001. Executives blamed the drop largely on weak sales of communications chips and flash memory, used in devices such as handheld computers and cell phones. "Our microprocessor business performed better than expected, with sequential growth in units, while our communications and flash businesses remained soft," CEO Craig Barrett said in the statement. Including acquisition-related costs, second-quarter earnings came to £140m, or 2 pence a share, down more than 90 percent year-over-year. Intel expects business to remain flat or improve slightly, with the statement predicting third-quarter revenue of £4.4bn to £4.85bn, in line with First Call estimates for third-quarter earnings of 8.5 pence a share on revenues of £4.64bn. Earnings are expected to climb to 10 pence and revenue to £5.03bn in the fourth quarter, according to First Call. For the year, analysts expect the chipmaker to post earnings per share of 38 pence on revenue of £19bn. Intel proclaimed that its processor sales are now back to normal. "We are confident that Intel Architecture business has returned to seasonal patterns," CFO Andy Bryant said during a conference call with analysts following the announcement. Intel expects "seasonal growth in unit volumes" and revenues. However, it's other businesses, which include sales of communications chips such as flash memory for cellular phones remain soft, he said. "Our (second-quarter) volumes increased from (the first quarter) by approximately 6 percent...growing by over 1 million units," said Paul Otellini, executive vice president and general manager of Intel's Architecture Group Intel shares dropped 98 cents, or 3.3 percent, to $28.92 in early after-hours trading on the Island ECN after the report. In regular trading Tuesday, they gained 77 cents, or 2.6 percent, to close at $29.90. The California-based chipmaker posted one of its worst quarters in years for its first quarter of 2001, reporting earnings excluding one-time costs of £780m, or just over 11 pence share, a drop of 64 percent from the same period a year earlier. Revenue came to £4.8bn. Intel executives warned then that price cuts would further depress revenue for the second quarter. Intel has held firm to its forecasts since then, despite several analysts trimming revenue forecasts amid signs the PC slump will continue longer than expected. The chipmaker faced a tough proposition in the second quarter: Sell fewer chips for more money or more chips for less money. Intel chose the latter, when it rolled several price cuts into on sweeping price move on its Pentium 4 processor line in late April. As a result, Intel says it sold more processors and chipsets than in the first quarter, but its average selling price for processors took a hit. Intel said in the release that economic conditions make it particularly difficult to predict product demand and other related matters. With second-quarter earnings out of the way, analysts are already beginning to speculate on Intel's third-quarter performance. Paul Leming, an analyst with ABN Amro, cut his forecast in a report released on Tuesday morning. "One way or the other, the very weak environment in the semiconductor industry is going to take its toll on Intel's earnings," he wrote. Most analysts' opinions are more mixed, with many questions yet to be answered. One issue is whether Intel will continue the price war with rival Advanced Micro Devices that has pushed down the average selling price of processors. Analysts have said the war may wind down, as both companies look to shore up revenue and average selling prices. But it may be hard to step away from the discount route. Intel on Monday cut prices on mobile and desktop Pentium III chips. The largest price reductions, 37 percent, came on mobile Pentium III chips; the company is expected to introduce the faster Pentium III-M later this month. AMD has yet to respond to the latest cuts, but analysts say both chipmakers are selling their respective 1.4GHz chips for less than £70 in volume, a possible signal that the chipmakers are willing to reduce prices faster than ever before to boost sales. Questions also surround the expected recovery of the PC market and when it might begin. Many analysts believe the recovery won't start until the end of the third quarter at the earliest. Pentium 4 sales hang in the balance. About 3 million chips and several price cuts later, Intel is expected to begin selling a much more significant number of Pentium 4s with the third-quarter introduction of the 845 chipset, which will allow the Pentium 4 to work with standard SDRAM memory. Current Pentium 4s only work with more expensive RDRAM memory based on proprietary Rambus designs. Intel said it has accelerated the transition away from its Pentium III processors to its newer Pentium 4 chip. "The combination of a strong product family, solid manufacturing performance, and early availability of the new Intel 845 chipset platform allows Intel to aggressively ramp the Pentium 4 processor into all mainstream PC price points by the end of the year," Barrett said in the earnings statement. Sales of flash memory for cellular phones and other such devices, though a smaller percentage of Intel's sales than rival AMD's, will also play a role in third-quarter results. However, AMD said last week that it did not expect flash to recover until the fourth quarter. Should Pentium 4 sales take off and sales of flash memory and other communications-oriented chips stabilize, Intel should post healthier results for the third quarter. If not, conditions could go from bad to worse. See Chips Central for the latest on processors and the semiconductor industry. 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