CORRECTED-UPDATE 2-Toshiba Q1 profit falls 88 pct, strong yen bites

(Changes to sales from OP in summary and to sales from operating profit in 5th paragraph)

* Yen drags sales down by Y81 bln, quake shaves off Y90 bln

* Sees strong demand for smartphone chips in Q2

* Says will speed up chip shrinkage to offset strong yen

* Shares end down 0.5 pct before announcement

By Mayumi Negishi

TOKYO, July 28 (Reuters) - Toshiba Corp , the world's No.2 maker of flash memory chips, said quarterly operating profit fell 88 percent as the earthquake hit its power operations and a strong yen bit into earnings, and it kept its annual forecast in line with expectations.

The maker of laptops, nuclear reactors and rice cookers is under pressure to shift to smaller and more powerful chips, as it steels itself for a stronger yen in an already tough global market that beat down profits at bigger rival Samsung Electronics by 26 percent.

Toshiba reported an operating profit of 4.12 billion yen ($53 million) for April-June, as halts of quake-related system chip production and the currency rate hurt its bread-and-butter chip business, despite strong demand for NAND flash memory chips.

Weak sales of PCs and TVs in Europe and the United States on the yen's rise were partially offset by strong demand for displays used in smartphones and cost-cutting, it said, but its social infrastructure business widened its loss.

Toshiba, which supplies chips to Apple Inc , said the yen's strength dragged down sales by 81 billion yen, while the quake hurt earnings by 90 billion yen.

It plans to speed up plans to shrink its chips to pack more power on each sliver of silicon and lower per-chip costs to better compete. But this could speed up price falls, which fell by a quarterly 10 percent.

Its net profit was 470 million yen, up 0.9 percent from a year earlier, while sales fell 8.6 percent to 1.33 trillion yen.

"We have begun discussing possible contingencies should the yen strengthen beyond 70 yen to the dollar, but nothing has been decided," Toshiba Executive Vice President Makoto Kubo told reporters.

"Raising prices is not an option in many businesses."

Toshiba, which also competes with Hynix Semiconductor Inc in semiconductors and with GE and Areva in nuclear reactors, kept its annual forecast for an operating profit of 300 billion yen, in line with a consensus estimate of 21 analysts polled by ThomsonReuters Starmine.     Toshiba's profits compared favourably with the first-quarter losses at IT services rivals NEC Corp and Fujitsu Ltd .

NEC, Japan's top personal computer maker, narrowed its operating loss to 19.44 billion yen from 23.23 billion yen a year ago, while Fujitsu, Japan's largest IT vendor, swung to an operating loss of 17.14 billion yen from a 10 billion yen profit.

Both NEC and Fujitsu kept their full-year forecasts unchanged.

Prior to the announcement, shares in Toshiba closed down 0.5 percent, against a 1 percent fall in Tokyo's electrical machinery subindex . NEC fell 2.2 percent while Fujitsu dropped 1.5 percent.

($1 = 77.965 Japanese Yen) (Additional reporting by Yuko Takeo, Editing by Vinu Pilakkott and Chris Gallagher)