Palm, maker of the Pre and Pixi smartphones, is facing desperate times.

American Banking News has reported that Palm's production halt continues as it is unable to sell the stockpile of webOS handsets it has built up.  There's no official word from Palm, but the announcement seems likely to be true as Palm stock plunged 30 percent to around $4 a share following the news.

Palm has a rich history and helped to launch the PDA and smartphone movements.  Lately, it has struggled to keep up with Apple iPhone and Research in Motion Blackberry smartphones.  And smartphones have largely killed the market for PDAs, so Palm can no longer seek refuge in that market. 

In 2008, Palm saw the writing on the wall and made an ambitious bid to retake the market.  After much investment, it unveiled webOS, its new smartphone operating system.  In June 2009, the Palm Pre launched on Sprint, America's third largest wireless carrier.  

Commentary on the smartphone and its OS was mixed, but overall was somewhat positive.  The interface was much like the iPhone, but it lacked the iPhone's extensive app library and used slower interpreted code for apps (as opposed to native code).  Perks, though, included multitasking and a physical keyboard.

Since the launch of the Pre, Palm has done its best to beef up its offerings, releasing the cheaper Palm Pixi handset and the Palm Pre Plus on Verizon, the nation's largest network (Sprint was the first to get the Pixi).  It also released a new software development kit that allowed native application code via the Simple Direct MediaLayer.  The results were impressive -- Palm devs were able to quickly port both Doom and Quake to the phone, a feat impossible with interpreted code.

For all that effort, Palm's sales continued to slip as it saw Apple and RIM post gains.  People simply didn't seem interested in the Palm handsets.  

Over The Air in February reported that Palm had shut down its production of webOS handsets.  Palm claimed at the time that the shutdown was temporary -- just a closure for the Chinese New Year.

Now it appears that the shutdown was not just for the holidays.  Palm's poor sales, showcased by its miserable Q1 2010 calendar quarter (its fiscal Q3 2010), are catching up to it and it is developing a large overstock of webOS phones.  According to Morgan Stanley Analyst Ehud Geldblum, Palm this quarter produced 960,000 phones, but amazingly has only sold 408,000 of them.  The total overstock is estimated to be 1.5 million units, following a 29 percent drop in sales in the first quarter of this year, which ends at the end of this month.  Palm's revenue has reportedly dropped $22M USD over the current quarter.

To put Palm's unfortunate failure in context, Google's Android sold 5.5 million units in Q4 2009 and Apple moved 7.5 million iPhones.  That means that Palm's sales for entire quarter are approximately the number of units Apple or Google sell in a single week.

Even if Palm was incredibly able to continue the sales pace of its Pre and Pixi (which is perhaps possible given its new Verizon contact), it would take nearly a year before it could sell off its stock.  By then new Android handsets would have arrived, a new iPhone, and Windows Mobile 7 -- all while Palm is stuck trying to unload increasingly dated handsets.

Palm will likely be forced to turn to deep discounting.  At first blush this might seem happy news for the consumer, but ultimately it is not a good thing as it will hurt Palm badly, which in turn will hurt Palm's ability to promote a successful app market for consumers.

Despite all the bad news surrounding Palm these days, there was a bit of good news for the company today. AT&T announced that both the Pre Plus and the Pixi Plus will be heading to its network “soon”.