Updated from Oct. 2

Chipmaker

AMD

(AMD) - Get Report

was falling sharply Thursday after Wednesday evening's warning that its third-quarter sales will fall 17% below the levels of the prior quarter.

The company said revenue would come in about $500 million, due to softness in the PC market. Previously, AMD had forecast that revenue would grow modestly from the $600 million it booked last quarter.

In recent trading, AMD was falling $1.87, or 34.8%, to $3.50.

With AMD admitting to a big shortfall in sales, investors are likely to wonder if

Intel

(INTC) - Get Report

has any unhappy surprises in store. But though this may be a quarter Intel will be happy to put behind it, the microprocessor giant is in a stronger position than its relatively tiny rival. On a moderately negative day for the

Nasdaq

, Intel was down a dime, or 0.7%, to $14.20 in recent trading.

UBS Warburg analyst Thomas Thornhill wrote today that AMD likely will lose market share over the next several quarters to Intel's higher-performance Pentium 4. A weak holiday season for PCs is likely to hurt AMD more than Intel, Thornhill wrote. Thornhill, who lowered his estimates for AMD, rates the company reduce. His firm has not done recent banking for AMD.

"Some of AMD's problems are due to competitive pressure from Intel," says Banc of America analyst Doug Lee. Banc of America hasn't done banking foreither company. "Intel's been gaining some share as well as putting pressure on prices."

AMD's revenue warning was based on a combination of weaker shipments and a lackluster market putting pressure on prices, says Lee. "But I think Intel'stotally fine. I think

AMD's preannouncement was very specific to AMD."

"The preannouncement of weakness isn't a huge surprise, though the magnitude is a bit of a shocker," says Needham analyst Dan Scovel, who owns shares in AMD. Needham hasn't done banking for either company. "Will Intel have to do it? I think it's touch-and-go. They might be able to come in at the low end of their range."

Intel already has reined in guidance: In early September, the company lopped the top off of its sales outlook, saying it now expects revenue to range between flat to up 6% from last quarter's level of $6.3 billion. Before the midquarter update, it had expected revenue to grow as much as 10%.

Scovel says that by virtue of its size, Intel can't escape the pressures weighing down microprocessors. "Intel is the market. In that sense, it doesn't have anywhere to hide," he says.

On the other hand, Intel has a stronger product offering right now, so some of AMD's pains "are certainly gains at Intel, to a degree," he says.

Another plus:

Dell

(DELL) - Get Report

doesn't buy chips from AMD, meaning strong business at the boxmaker will solely benefit Intel. Just yesterday, Dell raised its revenue forecast for the quarter under way.

Another Painful Loss

Based on its latest projection, AMD said today that it "anticipates a substantial operating loss," though Wall Street already had baked that into itsprojections. According to Thomson Financial/First Call, analysts currently expect a loss of 49 cents a share on revenues of $614 million.

Last quarter, sales of AMD's microprocessors tanked by 35% and the company whiffed earnings expectations by a long shot.

In a prepared statement, CFO Robert Rivet said AMD had worked to lower processor inventory in the PC supply chain, presumably through discounting efforts. "The aggressive actions we took to lower the total inventory and align the mix with current opportunities had a significant negative impact on our third-quarter processor sales in units, revenues and ASPs," hesaid.

On the plus side, the company said its flash memory business has been improving and will show sequential sales growth for the second consecutivequarter.

AMD will report earnings on Oct. 16.