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 $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.