Palm this week made a decision to shut down all but one of its retail stores, as the company awaits a settlement of a class-action lawsuit related to malfunctioning Treo 600 and Treo 650 smartphones.

Palm has eight standalone stores and 26 "stores within stores" at Airport Wireless retail locations in various airports. All stores, except for one located at Palm in Sunnyvale, Calif., will close in the third quarter of this year, the company confirmed. Palm will continue selling its products through carrier stores, resellers, and online.

The smartphone maker didn't disclose specifics about its decision. But it issued a statement saying that the company will focus on core business initiatives and consolidating resources to better compete in the mobile market.

Earlier this week, Palm also issued a legal notice alerting customers who purchased a Treo 600 or a Treo 650 smartphone that they may be eligible for a refund as part of a class-action settlement.

The lawsuit, which was filed in 2005, alleges that Treo 600 and Treo 650 smartphones have defects and failed at unacceptable rates. Palm, however, denies the allegations and has agreed to a settlement to avoid costly litigation, the company stated in the legal notice.

The U.S. District Court for the Northern District of California will hold a hearing on May 2 to consider whether to approve the settlement. If the settlement is approved, Treo 600 and Treo 650 users will be eligible for a cash rebate on either smartphones that have been repaired or replaced two or more times. Palm would pay a $75 rebate for the Treo 600 and $50 for the Treo 650.

Additionally, Palm is offering to repair hardware defects for those who purchased a Treo 600 or Treo 650 smartphone and haven't repaired it more than two times, even those with an expired warranty.

For those who may be eligible, a detailed notice and claim form are available here.

In the second quarter of fiscal year 2008, ended Nov. 30, Palm reported a quarterly loss of $9.63 million, compared with a $12.8 million profit a year earlier. Palm hopes that its new Palm Centro and the introduction of more Windows Mobile-based smartphones will be its ticket to recovery. But with the looming settlement, the company is facing yet another financial hurdle.