The slowdown continues at

Pre-Paid Legal Services

(PPD)

.

During the first quarter, Pre-Paid added fewer new customers and sales associates than it did a year ago. The company -- once known for its explosive growth -- saw additions in both key categories dip by roughly 11% during the period.

The company added 178,820 new customers, down from 200,780 in the first quarter of 2002. And it recruited 29,755 new sales associates -- most of whom double as new members -- compared to 33,493 new recruits a year ago.

Short-sellers, who have placed huge bets against the company's stock, called the year-over-year decline in new membership sales the worst they've ever seen. Nevertheless, Pre-Paid CEO Harland Stonecipher said he was pleased with the company's results, which were slightly better than the devastating numbers turned in a quarter earlier.

"Given some of the marketing changes we made in the fourth quarter of 2002 to improve the quality of business, particularly relating to restrictions we put in place regarding business stemming from the Internet, we are encouraged by the number of new memberships written in the first quarter of 2003," Stonecipher said.

Scratch and Sniff

Pre-Paid ended the quarter with 8.3% more customers than it had a year ago. But the company's customer base barely budged since the end of 2002. Even after adding nearly 180,000 new members, the company saw its total membership base grow by only 12,263 during the first quarter.

Pre-Paid's stock slipped 17 cents to $17.31 ahead of Wednesday's update. The stock has lost more than 40% of its value since late last year, when a bullish report by now-defunct Gotham Partners triggered a rally right before the company's weak fourth-quarter results.

Company critics have continued to sniff trouble ever since. After combing through Pre-Paid's recent annual report, they pointed to a continued decline in customer retention and an increasing dependence on sales associates for business. They've even challenged the true satisfaction of Pre-Paid customers touted as company fans.

In a recent letter to shareholders, Stonecipher included fan mail from three of the company's 1.4 million customers to showcase the value of the company's product. The first letter was sent by an "impressed" customer in Alabama, where Pre-Paid faces a coming wave of trials filed by less happy policyholders. Christie Johnson wrote in to say that she would highly recommend Pre-Paid's coverage for anyone, although she recently told

TheStreet.com

that she has since dropped her own policy because it got too expensive.

The second fan letter was signed by Nathaniel DeVice, who called himself "one happy PPL member" in Charlotte, N.C. An exhaustive search through multiple databases revealed nobody by that name in North Carolina -- or anywhere else in the country.

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TheStreet.com

contacted the North Carolina law firm praised in DeVice's letter, but the senior partner there declined to confirm that DeVice was even a client.

TheStreet.com's

final correspondence with the law firm -- essentially questioning DeVice's existence -- went unanswered.

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The last fan letter, employing the "priceless" theme coined by MasterCard, came from Canadian customer Sharon Raymond, who estimated the value of her Pre-Paid membership at more than $4,000.

"Initially, when I heard of a legal membership, my first response was, 'No, I don't need a lawyer,' " Raymond's letter begins. "Within the next three minutes, I was astounded to realize that was exactly what I needed."

Raymond goes on to detail more than eight different occasions when her Pre-Paid membership came in handy. What she omits, however, is one potential reason for her excitement about the product.

"She's a Pre-Paid Legal associate," confirmed Raymond's area coordinator, Maggie McLaren. "I have a copy of that letter."

Pre-Paid critics have long accused the company of embellishing good news and downplaying -- or outright hiding -- less favorable information. For example, critics immediately pounced on a recent Pre-Paid press release announcing the replacement of an independent board member.

Last month, Pre-Paid revealed that its newest board member -- Primerica President John Addison -- had stepped down from the board "due to increased demands on his time" by his employer. Simultaneously, Pre-Paid introduced longtime insurance professional Steven Hague as Addison's replacement.

But critics question Hague's true independence. Together with two other Pre-Paid directors, Hague also serves on the board of

Advantage Marketing Systems

(AMM)

, a company with close ties to Pre-Paid.

Pre-Paid could not meet new board independence regulations if Hague were considered anything less than an outsider.