Intel, they said, was trying to do too much and in the process had taken its eye off its main profit engine: the chips that power personal computers.

Now, the company is encountering falling demand for everything from processors to networking chips and has missed its own sales forecasts for three quarters in a row. Sales in the first quarter are expected to drop 25% from the fourth quarter, and some analysts and investors don't think a recovery in demand will come in time to push sales and earnings above 2000 levels.

The slump has slammed Intel's stock. Its shares were trading at $28.50 Thursday on the Nasdaq Stock Market, compared with a 52-week high of $75.81.

Taken together, the execution lessons of last year and the harsh economic realities of this year have forced Intel to sharply change course: Acknowledging that the company "screwed up" in 2000 by underestimating demand and rushing out faulty products that had to be recalled, Craig Barrett, Intel's chief executive, has shut down or spun off a number of the company's service businesses and honed its focus to its flagship microprocessor business, which generates more than 80per cent of its profit and sales. The company also is sticking with bets on its emerging units that make chips for the growing networking and communications markets. Still, Intel just this week said it would consolidate two of the networking businesses to put more emphasis on the chips and systems for speeding data flow and also announced the reshuffling of executives. The most telling move is the departure of senior executive Gerry Parker, the 32-year veteran of Intel responsible for the New Business Group. He is retiring in May, and areplacement hasn't been named, which raises questions about what happens to the units he oversees, including Intel Online Services, which houses and manages hardware and software that power other companies' Web sites.

Intel had planned to invest nearly $1 billion in Intel Online Services. But the company says sales at the unit, its biggest services venture, were disappointing last year, and it is scaling back investment to match diminished demand. Mr Barrett says he remains optimistic about the business of such "managed hosting" of Web sites, but analyst Rob Enderle of Giga Information Group says he expects Intel Online Services to be gone by year end. "It requires a huge effort to do something that is not your core competency - it's substantially different from building chips," Mr Enderle says.

Already, Intel has shed some underperforming new units. Late last year, it spun off its interactive media-services division, which provided "content security" for entertainment and video services, by combining the unit with Excalibur Technologies to form Convera Corp.

Early this year, it phased out iCat, a business that managed Web sites for smaller companies. And last month, Intel closed its streaming-media network that hosted and distributed video and audio content for companies; it had planned to spend $200 million to build the business when it announced it last May. Getting it right in chips is crucial in the current environment.

That is why allocations that won't be touched include $4.3 billion for research and development and $7.5 billion for new chip-making plants, even as the company cuts spending in other areas.

"We're prioritising our investments - you allocate your resources into the areas of highest return," Mr Barrett says. To do that, Intel is fine-tuning its chip business and seeking new growth opportunities in networking and communications chips, both through acquisitions and investments in new products. The company still expects to invest about $1 billion in new start-ups and just completed its $748 million acquisition of Xircom Inc, which makes cards that connect laptop users to a corporate network. Today, the best indication that Intel is succeeding in this effort is its ability to make delivery dates for new products. There had been rumors that McKinley, the code name for a microprocessor that will offer computing power on a par with supercomputers, would be delayed, but Intel reaffirmed its delivery date and showed off samples of the chip last month. New chips for laptop PCs and faster chips for desktop computers have been coming off the lines on schedule as well.

The Wall Stret Journal