The handheld maker confirmed the problem Monday but would offer no details about when it began, what caused it or when it will be fixed.
"We are aware of the problem and are working with suppliers to resolve the issue," spokeswoman Julia Rodriguez said.
Rodriguez would not confirm the number of customers affected but said it was a "small group."
One new subscriber described his woes in an e-mail. "I purchased a Palm VIIx over the weekend and have been trying to activate the Palm.net subscription service for the past three days now but have been unsuccessful," he wrote Monday. "So you can buy their product but can't activate the thing to really use it."
The glitch that is temporarily preventing Palm VII or VIIx owners from activating their accounts is the latest knock for the Palm VII line, originally heralded as the next generation in handhelds. The company's only handhelds with built-in wireless access, Palm VII devices have not been nearly as popular as the company's other models.
The disruption in service also follows a price cut earlier this month on the Palm VIIx. On May 11, Palm cut the VIIx's price from $299 to $199. With a mail-in rebate for subscribing to the Palm.net service for one year, VIIx owners get an additional $100 off.
Palm first introduced Palm.net and the Palm VII--then priced at $599--in early 1999. As of last quarter, Palm had about 190,000 Palm.net subscribers. IDC analyst Kevin Burden said Palm has probably sold about 300,000 Palm VII and Palm VIIx handhelds, but that many people have stopped using the wireless Internet access.
"For a majority of people, the novelty wears off quickly," Burden said. "Wireless service is still pretty expensive. As the Palm VII always has been, it will be for those consumers who view the wireless Internet as ready and compelling."
Palm.net is both the portal and the Internet service provider to Palm owners with wireless access. However, Palm.net's ISP is exclusively for the Palm VII line. Companies such as GoAmerica and OmniSky also offer Internet access for handheld devices, including Palm models with add-on wireless service, such as the Palm V.
Palm.net offers information such as news, stock quotes and sports scores. It costs $9.99 per month for limited access or $44.99 per month for unlimited access.
Despite the lack of success with the Palm VII series, analysts say Palm's future must include wireless devices and service for its products to be more than simply organizers.
"If you are just selling devices, you will be commoditized," J.P. Morgan H&Q analyst Paul Coster said.
The Palm.net glitch isn't the company's only problem right now.
Last week, the company halved its revenue outlook for the current quarter and announced the dissolution of a deal to acquire Extended Systems.
The No. 1 handheld maker has also spent time looking over its shoulder as Palm OS licensee Handspring has snatched up Palm's market share.
The two are embroiled in a price war as Palm tries to reduce its excess inventory. Slow sales are not helping the glut, and the Palm's new m500 line is unlikely to bring relief anytime soon as the dates for volume shipment have been pushed back to late June.
The company is also facing issues with the rate at which it is spending its cash. Although Palm was already expected to burn through half its cash, some analysts now question whether it might run out of money as soon as November. Last week, Palm Chief Financial Officer Judy Bruner would not provide a direct answer as to how quickly the company could burn through its cash, but acknowledged it faces a crunch.
"I agree that cash will be tight," Bruner said on a conference call after Thursday's revenue warning. "It is very possible that we will seek to raise additional capital."
Palm did receive a boost Monday, when UBS Warburg analyst Don Young upgraded the company's stock to "strong buy" from "buy." Young said that at $5 per share, Palm is "a very appealing and defensive valuation for a company with great growth prospects and a strong intellectual-property position." Young set a price target of $11.
On Monday, Palm shares closed up 89 cents, or 18 percent, at $5.94.