Palm ( PALM) said it expects fiscal third-quarter sales to come in below Wall Street's expectations because of reduced demand for its products and later-than-expected shipments of its Treo Pro phone.

The Sunnyvale, Calif.- based handset device maker said it expects fiscal third-quarter revenue in a range of $85 million to $90 million, compared to the average analyst estimate of $157.8 million, according to Thomson Reuters. That figure compares to the $191.6 million in revenue Palm saw in the fiscal second quarter and $312.1 million in the year-ago period.

Palm blamed the decline in sales on reduced demand for its maturing legacy smartphone products, the challenging economic environment and later-than-expected shipments of the Treo Pro in the U.S. The company also said it expects declining revenues and continued margin pressure from its legacy product lines in the fiscal fourth quarter.

On the positive side, Palm's CEO Ed Colligan said the company still expects to ship the new Palm Pre in the first half of 2009, although Palm has "a difficult transition period to work through."

"Despite the challenging market environment, the extraordinary response to the Palm Pre and the new Palm webOS reaffirms our confidence in our long-term prospects and our ability to reestablish Palm as the leading innovator in the growing smartphone market," Colligan said in statement.

Palm added that cash used in operations for the fiscal third quarter is expected to be between $95 million and $100 million. The company's cash, cash equivalents and short-term investments balance is expected to be between $215 million and $220 million at the end of the third quarter.

Additionally, Palm said that it intends to strengthen its working capital position given the woeful economic conditions and the opportunity it has with the forthcoming launch of the Palm Pre. As such, the company said it is evaluating options, including the exercise of its right to direct the remarketing of a portion of the common shares underlying the preferred stock and warrant units owned by Elevation Partners.

In December, Elevation Partners upped its stake in Palm by pouring another $100 million into the company in return for new preferred shares that are convertible into Palm common shares at $3.25 each. Elevation also received warrants to buy 7 million common shares at that same price.

After rising 0.8% during Tuesday's session, shares of Palm were down 10.5% in after-hours trading to $6.60.

Among other smartphone names, Apple ( AAPL) was down 1.2% in late trading, Research In Motion ( RIMM) fell 2% and Nokia ( NOK) was flat.

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