Despite experiencing a boost in its Treo smartphone shipments, Palm experienced a 12% drop in revenue during its fiscal second quarter. The company is facing fierce competition in the sector.

Net income came in at $12.8 million, or 12 cents per diluted share. In the same quarter a year ago, net income was $260.9 million, or $2.51 per diluted share. The second quarter of fiscal year 2006, however included a partial reversal of a deferred tax-asset valuation allowance of $226.3 million, according to the company. Revenue was logged at $392.9 million, down from $444.6 million in the year earlier period.

Palm reported Treo smartphone unit sales of 617,000, which marks a new record for the company. Also, when compared to last year's shipments, Palm experienced a 42% increase in shipments.

Palm was hurt by the delay of its expected five-band Treo 750. The device is currently available in Austria, France, Germany, Ireland, Italy, Netherlands, Spain, Switzerland and the UK. It also is available in five countries in Asia Pacific: Hong Kong, Indonesia, Malaysia, New Zealand and Singapore.

Looking ahead, Palm expects to post revenue between $400 million and $410 million. If the company forecast is correct, revenue totals will fall below analysts' expectations, which have called for fiscal third-quarter revenue of $416.6 million.

Following Palm's latest financial results, Needham & Co. downgraded Palm from a buy to a hold. The downgraded was spurred by expected delays in Treo shipments.