Updated From 5:17 p.m. EDT

Texas Instruments ( TXN) turned in record profit margins in the second quarter, even as its bottom line was bruised by the lingering effects of the chip industry's recent downturn.

The chipmaker said Monday that sales increased 7% sequentially to $3.42 billion in the three months ended June 30, in line with analysts' expectations. On a year-over-year basis, TI's sales were down 7%, due to what it said was lower demand across a broad range of products.

TI posted a net income of $610 million, or 42 cents a share, also in line with the average analyst expectation, according to Thomson Financial.

At this time a year ago, TI posted a net income of $2.39 billion, or $1.50 a share, although those results included gains from the sale of its sensors and controls business. Excluding those gains, TI's net income last year was $739 million, or 47 cents a share.

After hours, shares recently fell 3.3%, or $1.28, to $36.90.

"Our attention to customers and growing focus on analog continue to help us deliver stronger financial results," CEO Rich Templeton said in a statement. "Moreover, we see even greater opportunities ahead as the market regains momentum."

Templeton said the company sees potential to expand its profit margins, and noted that TI expects to meet is recently issued profitability goals of 55% gross margins and 30% operating margins within the next few years.

In the second quarter, TI's gross margin was a record 52.1%, vs. 51.6% at this time last year.

High-performance analog chips, one of TI's most profitable products, enjoyed brisk sales in the quarter, with revenue up 11% year over year and 6% sequentially. Overall analog chip sales were down 3% from last year.

Digital signal processor sales grew 7% sequentially, thanks to higher demand for products used in cell phones, although revenue was 5% lower than at this time last year.

TI said the quarter's results signaled that the chip market was rebounding from the inventory correction that began in mid-2006.

"We believe our markets are regaining momentum as the market inventory correction continues to move behind us," said CFO Kevin March in a postearnings conference call. He said that inventory at customers and distributors were at acceptable levels.

But TI's sales outlook, and its order book, lacked the sizzle that some investors might have expected to accompany the chip market's recovery.

TI said its book-to-bill ratio was 1.0 in the second quarter. While a book to bill of 1.0 or higher is considered a good indication of future demand, TI's book-to-bill registered only a modest uptick from the .99 level in the first quarter.

And TI's sales guidance in the range of $3.49 billion to $3.79 billion, had a midpoint that was below Wall Street's $3.7 billion expectation.

In an interview with TheStreet.com, TI's March said that Wall Street's estimates didn't reflect TI's June announcement to sell its DSL business to Infineon Technologies ( IFX).

Only one month's worth of the DSL's business's roughly $50 million a quarter in sales is now expected to count toward TI's third-quarter's results, March said, which explains the shortfall in the guidance relative to the Street.

And while March acknowledged that the recovery from the chip industry downturn is not setting the world on fire, he said some of that owed to changes in the dynamics of the industry. Instead of placing large chip orders ahead of time, for example, customers are currently just ordering what they need -- a better reflection of true demand, said March.

"When we look at this, we don't think of it as being disappointing at all. In fact it looks to us like a very orderly and healthy return to normal," said March.

TI projected third-quarter EPS between 46 cents and 52 cents. Analysts were looking for EPS of 49 cents.