Pre-Paid Legal Services

(PPD)

keeps unleashing record numbers, but the company's second-quarter earnings may not have been quite as strong as a quick glance might have indicated.

The company boasted of an 81% jump in net income for the latest period and noted a 71% increase in cash flow for the first half of 2002. The stock rose 4% to $18.79 Tuesday morning, following Monday evening's earnings release.

But the Oklahoma-based company, which sells legal service plans through multilevel marketing, overlooked less favorable figures. The earnings report highlights a rancorous debate about this volatile stock between the company's fans, who argue that Pre-Paid is a strong growth story, and its critics, who point out that regulators have repeatedly forced the company to tone down aggressive accounting maneuvers.

In its most recent release, Pre-Paid offered quarterly breakouts on every pertinent earnings figure except cash flow. The company posted cash flow of $23.5 million for the first six months of 2002 -- but $18.1 million of that rolled in during in the first quarter. At $5.4 million, second-quarter cash flow fell 70% from first-quarter levels.

In fact, as healthy as the first-half numbers were, the second quarter lagged behind the first period in almost every category.¿

The company posted net income of $8.5 million, down 4.5% from $8.9 million in the first quarter. Earnings per share also slipped, dropping from 43 cents to 42 cents, despite the company's repurchase of 238,500 shares during the second quarter.

Still, Pre-Paid easily beat the earnings estimates it offered to

Dow Jones

less than a week ago. On Friday -- three days before the scheduled release of its second-quarter numbers -- Pre-Paid Chief Financial Officer Steve Williams told the newswire that earnings should be at least 33 cents a share.

The company's actual reported earnings came in 27% higher than that. The news may have surprised some investors, but it confounded no analysts, since Pre-Paid is followed by no major brokerage firms.

Let the debate go on.