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Palm says smartphone sales fell dramatically in its fiscal third quarter, as the company lost ground against Apple and phones built on Google's Android operating system.

The company on Thursday reported that it shipped 960,000 smartphones to stores and distributors in the quarter ended Feb. 26, an increase of 23% over the same period a year ago. However, the number of phones actually sold to people plummeted 29% to 408,000 units. By comparison, Apple sold 8.7 million iPhones in its most recent quarter.

Palm's latest numbers confirmed the company's warning in February that sales to consumers and orders from carriers were lower-than-expected.

On Thursday, Jon Rubinstein, chairman and chief executive of Palm, remained upbeat, saying Palm could still recover.

"Our recent underperformance has been very disappointing, but the potential for Palm remains strong," Rubenstein said in a statement.

Indeed, Palm reported revenue of $350 million for the quarter, which was above the company's forecast last month of between $285 million and $310 million. However, the company reported a loss of $22 million, or 13 cents a share. If an accounting effect due to a drop in stock price were excluded, then Palm's losses would be $102.8 million, or 61 cents a share. The company a year ago reported a loss of $98 million, or 89 cents a share.

Palm's earnings report drove its stock price down almost 13.5%, or 77 cents, to $4.88 a share in after hours trading. The stock had ended the day in regular trading up more than 5%.

Palm, a smartphone pioneer, had hoped to gain market share following the release a year ago of a new operating system, called webOS, that was the foundation of a new line of smartphones, led by the Pre. Instead, Palm has lost share to smartphones built on Google's Android operating system, a relative newcomer in the market.

The Pre has been generally well-received, but as one reviewer put it, "it needs to be a smash."

Some analysts have said the window of opportunity for Palm may be closing, as Android phones continue to gain ground, RIM's BlackBerry retains its hold on the corporate market and Apple's iPhone grows stronger in the consumer market.