Updated from 5:14 p.m. EDT

Weak demand and continuing challenges in the wireless business held

Texas Instruments

(TXN) - Get Report

second-quarter financial results at the low-end of its expectations.

The company also offered a forecast for the current quarter that lagged Wall Street expectations.

TI said that demand slowed unexpectedly in June, as its chip distributor customers reduced their inventory levels and did not replenish them late in the quarter. That robbed TI of some expected revenue, and left it holding bigger stockpiles of its own chips than the company would like.

In a statement, CEO Rich Templeton blamed the lower-than-expected demand on "a mix of reasons," including a weaker economic environment, as well as changes in ordering patterns as customers rely on TI's ability to deliver products within shorter time frames.

TI shares were down $3.04, or 10.6%, to $25.48 in after-hours trading.

In a post-earnings conference call Monday, TI executives said the cutbacks in distributor orders were for a variety of products, including digital signal processors and microcontrollers -- chips which are used in everything from cell phones to industrial equipment.

The weak distributor demand represents a new crack in TI's business. Last month, TI warned last month that sales of its wireless chips in 2008 would be below 2007 levels.

The company did not say much to dispel the gloomy wireless outlook Monday, despite last week's positive earnings report from

Nokia

(NOK) - Get Report

, the world's No.1 maker of cell phone handsets and TI's largest customer.

"We have a lot of other customers, and they didn't necessarily all perform at same level of success that Nokia performed at," TI Finance Chief Kevin March told TheStreet.com.

TI if facing increasing competition in the cell phone market as rival chipmakers such as

Broadcom

(BRCM)

,

STMicroelectronics

(STM) - Get Report

and

Infineon

( IFX) makes inroads into its customer base.

TI executives maintained that the company's slowing wireless sales is not due to any loss of market share within Nokia. The only significant customer in which TI's lost market share is currently hurting revenue is

Ericsson

(ERIC) - Get Report

, executives stressed.

In the three months ended June 30, TI's wireless sales declined 12% year over year to $903 million.

The company reported overall revenue of $3.35 billion, down 2% year over year, and below the $3.4 billion that was the midpoint of TI's guided range.

TI's inventory increased by $73 million in the first quarter. And under-utilization of its factories, as well as rising costs of semiconductor raw materials, such as gold, pinched the company's profitability: TI's gross margin was 52.2% in the second quarter vs. 53.7% in the first quarter.

TI posted net income of $588 million, or 44 cents a share, vs. $610 million, or 42 cents a share at this time last year.

Wall Street was looking for 45 cents EPS, which was the midpoint of the range that TI provided in its financial forecast for the second quarter.

As more chipmakers target the cell phone market, TI has shifted many of its resources to focusing on analog chips, which the company believes will be its main growth driver going forward.

The company reorganized the way its reports sales results in the first quarter, creating a new analog business category for the first time. According to TI, sales of analog chips increased 10% year over year to $1.29 billion.

"Our core areas of analog and embedded processing delivered solid revenue growth," said CEO Templeton. "These technologies are critical to thousands of different types of electronic equipment, making them some of the most attractive markets in the semiconductor industry," he said.

In the current quarter, TI projected that sales will range between $3.26 billion and $3.54 billion, with EPS between 41 cents and 47 cents.

That outlook falls short of the average analyst expectation, which calls for TI to bring in $3.56 billion in revenue and 51 cents EPS.