This morning, Level 3 Communications Inc. (NASDAQ: LVLT) confessed to a second-quarter loss of $134 million, or 8 cents per share, roughly tripling its year-ago loss of $42 million, or 3 cents per share. Revenue for the period slipped 12% to $942 million. The results were mixed, as far as analysts' expectations were concerned; Wall Street was looking for a slightly wider quarterly loss of 9 cents per share on more robust revenue of $959.4 million.

"The economy continued to be challenging in the second quarter for wireline service providers," said James Crowe, the company's CEO. "As expected, sequential revenue pressure continued in the second quarter, although at a significantly moderated rate. We did see improvements in sales and churn, however, they were not as much as we expected."

Anti-naked short selling conspiracy theorists receive a boost when Overstock.com (NASDAQ: OSTK) announced that the SEC had closed its formal investigation of the company without recommending any enforcement action.

In a familiarly self-congratulatory press release, CEO Patrick Byrne opined that "I believe that this inquiry was initiated, and persisted, because of false allegations made by a cohesive group of short sellers and a few financial journalists who dutifully serve them. In this case, I believe these folks fomented the SEC investigation against Overstock.com then tried to claim that the existence of an SEC investigation was evidence of wrong doing. We knew that was false."

But who cares what the SEC thinks about Overstock! Remember, this is the same agency that signed off on Enron's perversion of mark-to-market accounting. Instead, let's look at what Patrick Byrne said in 2004, as recently noted by Tracy Coenen: "Well, first of all, I'm all about GAAP. I have been so critical of the companies that do -- I don't believe in one-time charges; I don't believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they're a crook."

Overstock's latest earnings release contains the word EBITDA seven times. So regardless of what the SEC thinks, Patrick Byrne considers himself a crook.

The CEO of a small-cap research company called RedChip has started his own blog about small-cap stocks. While I'm not very familiar with the company or his background, his initial post is interesting in its discussion on non-GAAP financial metrics, which rose to prominence during the Internet bubble.

For the uninitiated, non-GAAP metrics are any of the ways of reporting earnings that a company might use in addition to their regular GAAP (generally accepted accounting principles) earnings. EBITDA (earnings before interest, taxes, depreciation, and amortization) is probably the most common non-GAAP measure of earnings. Non-GAAP earnings allow room for all kinds of voodoo. For instance, a company could borrow money at 15% interest, and earn a 5% return on invested capital. While paying 15% to earn 5% is bad business, it is profitable based on EBITDA, because EBITDA is calculated without taking into account interest charges.

Dave Gentry goes on to retell an old joke about accounting attributed to Abraham Lincoln: How many legs does a dog have if you call the tail a leg? Answer: four, because a tail is not a leg. Companies can report earnings in all kinds of ways but, ultimately, it's the real state of the business that matters.

I don't know whether RedChip's future blog posts will be any good. But if they're as interesting as this one, it's worth bookmarking.