In an embarrassing setback for Palm, the handheld pioneer has scrapped its Foleo project, a two-and-a-half-pound "smart phone companion".

In a posting on Palm's blog, Palm CEO Ed Colligan wrote that he decided to cancel Foleo "in its current configuration" so the company could focus on its next generation software platform, currently under development, plus the new smartphone models that will run it. That software is some part of the PalmOS running atop a Linux kernel.

"Because we were nearly at the point of shipping Foleo, this was a very tough decision," Colligan wrote. "Yet I am convinced this is the right thing to do. Foleo is based on a second platform and a separate development environment, and we need to focus our effort on one platform."

He got that part right, says analyst Jack Gold, principal at J.Gold Associates, a Northborough, Mass., consultancy specializing in mobile computing and wireless. "They are way behind on getting a new and updated OS and devices to market to compete with RIM, Nokia and others, including Microsoft," he says. "They do not have unlimited resources.... I hope this announcement was Colligan saying they will put all of their forces into getting out the new OS and devices. That is what they need to do, and soon."

Colligan indicated that Palm's market research showed Foleo facing a tough sell to a skeptical audience. "Our own evaluation and early market feedback were telling us that we still have a number of improvements to make Foleo a world-class product, and we can not afford to make those improvements on a platform that is not central to our core focus."

He hinted that Foleo in some form could reappear. "Palm founder and tech guru Jeff Hawkins and I still believe that the market category defined by Foleo has enormous potential," Colligan wrote. "When we do Foleo II it will be based on our new platform, and we think it will deliver on the promises of this new category."

But he added "we're not going to speculate now on timing for a next Foleo, we just know we need to get our core platform and smartphones done first."

The cancellation comes with a hefty cost: Colligan said Palm will take a "limited charge" of US$10 million to earnings. "This is a lot of money, but it is a small price relative to the costs that would be required to support two platforms going forward," he wrote.

Precisely what the "market category defined by Foleo" was became a subject of debate from the day the product was announced last May. Palm has been successful with its Treo smartphone line, available for both Palm OS and Windows Mobile, but had not introduced any comparable breakout products since.

The Linux-based Foleo was presented as a smartphone companion, linked wirelessly to the Treo via a Bluetooth connection. It boasted a 10-inch screen, a full keyboard, a Wi-Fi option, and a Secure Digital card slot as well as a Compact Flash slot for storing data. And a $500 price tag, after a $100 rebate offer.

But from the outset, Palm executives seemed to flounder in explaining what it was for and who would use it. In an audio interview posted on the Palm site, Hawkins explained that the Foleo is not a laptop and doesn't pretend to be one, and that "It's not a product for everyone." The Foleo is "so light and small" that users will carry it around with them the same way they carry their Treos around everywhere, especially if they do a lot of e-mail and need a bigger screen and full keyboard, according to Hawkins.

Network World Cool Tools Editor Keith Shaw pointed out that the very features that distinguished Foleo from the Treo moved it into the category of ultramobile PCs or even a notebook. "It's these additional features that move Palm into muddier waters," he wrote at the time. "If the device were just a way for heavy-use Treo owners to see their e-mail on a larger display and to have full-size keyboards for longer messages, that would be great (and it would cost a lot less than US$500). But with the additional features that move it into laptop territory mean you've got a device that's not really a laptop but will be compared to full-featured notebooks."

Todd Kort, a Gartner analyst, in a report published a few days after the Foleo introduction recommended customers instead to simply buy an external keyboard that costs around $80, weighs just 300 grams and "meets much of the same user needs as the Foleo."

Palm has said that its new smartphone platform will handle voice and data traffic at the same time, while preserving the instant-on and instant application-switching features of the PalmOS.

But with the spectacular success of Apple's iPhone, Palm's next generation, whenever it appears, may look pale in comparison.