Updated from 1:04 p.m. EST

National Semiconductor ( NSM) outpaced the Street's earnings and revenue expectations Thursday, boosting sales 22% year over year in its fiscal third quarter.

The Santa Clara, Calif. chipmaker said sales for the three months ended Feb. 26 totaled $547.7 million, exceeding the range it projected in December of $527.6 million to $544 million in sales. Analysts polled by Thomson First Call had forecast that National's top line would be $536.6 million.

During the same period last year, National generated $449.2 million in sales.

National earned $130.1 million in net income, or 37 cents a share in the third quarter of 2006, vs. Wall Street expectations of 32 cents EPS.

The company also pushed its gross margin up to 60.7%, compared with 52.7% in the year ago period, thanks to its increasing focus on high-priced analog chips, and improvements in manufacturing volume and efficiencies.

But with the company having achieved its previously set gross margin target of 60%, some investors may have felt National's growth story has run its course.

Shares of National closed down 85 cents, off 3%, to $27.18.

In a conference call with analysts following the announcement, CEO Brian Halla said the company was fully capable of achieving further gross margin gains by continuing to focus on analog products and by growing the top line. Halla declined to provide new margin targets at this time, promising to unveil the company's new business model at the end of the quarter.

"Check back at the end of this quarter to find out where we think we can go for here," said Halla.

National's strong financial results come in the wake of a couple of semiconductor updates which left investors less than enthused. On Friday, Intel ( INTC) warned Wall Street that sales in the current quarter would be less than it had initially projected. Texas Instruments ( TXN) announced Monday that it was bumping up the low-end of its profit range for the current quarter, and tightening its sales forecast. But while strong, the new guidance was not as high as some investors had hoped, prompting TI's stock to lose ground.

During the conference call, Halla tried to differentiate National from other segments of the semiconductor business. "Intel is not the spokesman for our part of the industry, as we continue to see increasing strength for demand for our products," he said, noting that conditions in the analog business appear healthy in 2006.

While National's fiscal third quarter typically suffers from a seasonal sales slowdown, particularly in the cell phone handset market where National sells many of its chips, the company said it was able to offset the decline from broader markets served through its distribution channel.

Total bookings exceed billings in the third quarter, a sign of strong demand going forward. National said it anticipates revenue for the current quarter to be up 2% to 4%, putting National's fourth-quarter sales at a $558.6 million to $596.6 million range, ahead of the average analyst projection of $557.3 million.

With this revenue range, gross margin rate is also expected to improve slightly, the company said.

The company said distributor inventory levels crept up slightly to just over 10 weeks during the quarter, compared with slightly less than 10 weeks of inventory at the end of the second quarter, adding to concerns among some analysts that an industrywide chip glut could be piling up.

According to National President Don Macleod though, distributor inventory was still relatively low, and the uptick was the result of better-than-expected sales among its distributors. Macleod said the company is being vigilant to ensure that distributors are not aggressively ordering more chips than their demand levels can support, noting that the company has even turned down certain orders where it couldn't identify legitimate demand.

"Our view is that we're going to discipline distributor activity through this quarter," said Macleod.