Updated from 4:37 p.m. EDT


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beat Wall Street's bottom-line target as the semiconductor bellwether said demand for laptop computer chips is strong, although shares fell after hours as investors zeroed in on gross margins and sales.

Gross margins for the quarter came up a bit shy of hopes -- 56.4% vs. an expectation of 57%, and the company didn't lift its full-year margin targets. Shares recently dropped 2.4% to $28.02 on Instinet in late trading after ending the regular session up 1.7% to $28.71.

"The stock was priced to perfection," said analyst Apjit Walia of RBC Capital Markets, adding that it would have taken an exceptional quarter and very bullish targets to drive the stock further. He acknowledged second-quarter revenue and margins could have been better, but he remains optimistic about the third quarter based on Intel's current targets.

For the quarter ended July 2, Intel reported net income of $2 billion, or 33 cents a share, on sales of $9.23 billion. During the same quarter last year, Intel earned $1.76 billion, or 27 cents a share, on sales of $8.05 billion. Intel's bottom line was helped by a 2 cent-a-share benefit for the reversal of previous tax accruals.

Analysts had expected earnings of 32 cents a share on sales of $9.22 billion, on average, according to Thomson First Call.

During a

midquarter update in early June, Intel boosted its sales target to between $9.1 billion and $9.3 billion and gross margins to around 57%, up from earlier targets for sales of $8.6 billion to $9.2 billion and margins around 56%.

At that time, Intel said results were tracking seasonal expectations, with an upside in notebooks. Also, Intel said its bottom line would benefit from a reduced tax rate of 26% and gains from equity investments and interest around $100 million.

On a product basis, Intel shipped a record amount of microprocessors in the second quarter, while average selling prices edged lower. Chipset units rose and motherboard units slipped. Flash memory units rose to record levels but on lower prices. Wireless connectivity units rose and wired connectivity units fell.

On a revenue basis, digital enterprise sales, consisting of consumer and business desktop processors, chipsets and networking processors, declined sequentially to $6 billion from $6.3 billion and operating income dropped to $1.99 billion from $2.37 billion.

Mobility group sales, consisting of laptop chips and related chipsets, flash memory and wireless connectivity products, rose to $3.15 billion from $3 billion, and operating income improved to $1.14 billion from $1.1 billion.

Consumer electronics chips and chipsets logged revenue of $80 million up from $62 million while the operating loss grew to $483 million from $433 million.

For the third quarter, Intel predicted sales between $9.6 billion and $10.2 billion and gross margins of 60%. Analysts had expected 36 cents a share on sales of $9.76 billion. RBC's Walia had forecast third-quarter sales of $10.2 billion heading into Tuesday and he still expects Intel to hit his target. "By the midquarter update, I think $10.2

billion will become more realistic," he said. RBC has provided Intel with nonsecurities services in the past year.

Expenses are expected to jump to between $2.8 billion and $2.9 billion from $2.5 billion in the second quarter due to increased spending on research and development.

Also, Intel boosted its capital budget for the year to $5.9 billion from a previous range of $5.4 billion to $5.8 billion, but the new forecast did not boost the stocks of chip-equipment companies, such as

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