PDA investors, it's time to take a cold shower.

Three months ago, the market was hot and heavy for

Handspring

(HAND)

, with its little Treo combination phone/organizer device. They were crazed with frustration that

Palm

(PALM)

only had an email-style personal digital assistant out for the corporate market, with no consumer or voice potential.

Research in Motion

(RIMM)

was lavished with affection for adding calling to the coveted BlackBerry device.

Now that earnings, or the lack of them, have been reported, the tiny amounts of revenue generated from the earth-shattering, knee-knocking convergence of telephone networks and personal organizers has become clear.

It's not all the handheld-device makers' fault, of course. As RIM plainly explained, it has the carrier partners it needs, but their networks are not rolling out the kind of futuristic voice-plus-data services that call for RIM devices.

Both RIM and Handspring pushed back their profitability projections to give the carriers time to get their 2.5G and 3G acts together. Yet for the latter half of 2001, Wall Street was increasingly under the impression that 2.5G networks would launch later than expected. Slow timing, however, didn't factor into investors' late-winter enthusiasm that a 400 million-device market was opening to their little PDA underdogs.

The resulting sliver of the mobile-phone business accessible to PDA makers turned out to be small. Handspring was expected to start raking in the revenues as the Treo gained steam, but after last quarter's missed estimates, Wall Street now forecasts a more than 10% revenue decline for Handspring from the third to fourth quarters of fiscal 2002.

That means Treo's head start on competitors from RIM to handset overlord

Nokia

(NOK) - Get Report

could be wiped out. Of course, the company will gain experience it can roll into a second version of the Treo, but it would like to sell the original Treo hand over fist while collecting that necessary intelligence.

"The potential for the category has not changed, but with any product, the longer it takes for a product to take off, the shorter the life of that product," says Bill Crawford of US Bancorp Piper Jaffray. He thinks Handspring and RIM "have done a good job getting to market first, but if the market's not there?" -- the window of opportunity still closes.

Likewise, RIM, with its killer email product now phone-capable, has a less dominating lead over new rival Palm, which wants to sell email devices into the enterprise. But Palm's device won't make phone calls! Wall Street expects a voice-enabled device by the third or fourth quarter, however, and in a situation in which IT officers aren't spending much of anything, Palm's getting valuable catch-up time.

Additionally, in the frenzy of product announcements, investors got a little ahead of the major transitions being made by a consumer-electronic product company such as Handspring moving to a carrier-partner world reliant on someone else's marketing. RIM has been trumpeting its move from a device- and server-oriented company to one that garners revenue from services, software and a cut of the devices sold through partners. No wonder Palm's revenues were predictable and to the upside of estimates: Palm was doing its same old job, and investors didn't anticipate any miracles from the turnaround candidate.

The Truth Dawns
Investors are discovering that handheld sales haven't matched the hype about convergence

Who could've guessed that Palm would now be the company pegged by consensus estimates to hit break-even again first, in just two quarters? Handspring's profitability is now pegged four quarters into the future, while RIM is forecast to have six quarters to go. Handspring shares are down 61% year to date, with RIM down 28% and Palm shares 24% lighter in the same period.

Now the outlook for PDA-maker fortunes in the next-generation handsets is much cooler. Crawford calmly explains, "In a new category we wouldn't expect the mainstream to go jumping on this type of device. It has a normal adoption curve applied to it."

What happened to pull a sector from the beginning stages of glory to gloom and doom? Moderated expectations have settled in. It's time to sober up and take a more realistic look at the bacchanal ahead.