By now, most system builders selling desktop systems have realized there's an oversupply of some Intel processors. But the size of the swell may come as a surprise.

Research firm iSuppli reported July 31 that worldwide surplus semiconductor inventory--driven primarily by processors and chipsets from Intel--ballooned to $2 billion in the second quarter. That's up 77.6 percent from the first quarter and marks the highest level since excess inventory bulged to $1.6 billion during a troublesome glut in the third quarter of 2004.

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The numbers illuminate what many in the U.S. channel have seen for at least the past quarter: drastic price cuts, more gray market activity and cautious buying. Yet they also indicate a complex product transition period for Intel.

The Santa Clara, Calif., chip maker moved up several product launches this year to stave off market share increases from rival Advanced Micro Devices. The most recent launch was Intel's Core 2 Duo desktop processors. Since that product shipped earlier than expected, Intel had to clear out excess supply of older chips, many in the system builder industry have said. Recent deep discounts knocked some Pentium 4 processors to as low as $74--a more than 50 percent reduction, in some cases--and Celerons to as low as $39. Sunnyvale, Calif.-based AMD countered with its own price cuts.

During Intel's second-quarter earnings call last month, company executives acknowledged the high inventory levels and addressed concerns raised by financial analysts. Intel's inventory position in the second quarter increased to $4.33 billion, up 21 percent from $3.57 billion in the first quarter. But executives said the company believes the inventory levels are adequate and will dissipate as demand rises in the second half.

An Intel spokesman offered this observation to CRN: "We are comfortable with our own inventory projections, which reflect the upside of delivering our new Intel Core 2 Duo product lines earlier than expected during the second quarter."

Some system builders said privately that gray-market activity has been on the rise with some of Intel's processors, particularly the P4 line. And most agreed that the excess supply and cost cutting mean big bargains for system builders, even though it can make managing inventory tougher.

Joe Toste, vice president of marketing at Equus Computer, a system builder in Minneapolis, said solution providers can use discounted products as a competitive advantage against aggressive price tactics of top-tier suppliers. "If you don't need to go all the way to dual core, the P4s are pretty-capable value machines," he said.