Palm (NASDAQ:PALM) reported earnings for its second fiscal quarter yesterday. Let's see how the maker of portable computing devices and smartphones fared.

The company saw an 18% increase in net revenues for the quarter, coming in at $444.6 million. Operating income jumped 14% to $34.8 million. Net income increased a whopping 956% to $260.9 million ($5.02 per diluted share) versus $24.7 million ($0.48 per diluted share) one year ago!

OK, let's hold on a moment. It would be great for shareholders if this were the end of the net-income story, but it isn't. The amazing appreciation on the bottom line was due to a significant tax benefit of $226.3 million. Looking at income before that benefit -- as well as before charges related to restructuring, amortization, stock compensation, and income tax provision -- reveals that Palm earned, on a non-GAAP basis, $24.4 million ($0.47 per diluted share), compared with $27.2 million ($0.53 per diluted share) last year.

If you read Foolish colleague Rich Smith's forecast analysis of Palm's quarter, then you were amply prepared for this complexity. You were also cognizant of the solution. When there is a battle between numbers according to generally accepted accounting principles and those not according to GAAP, Fools immediately call to mind a cliche that is as valuable as it is hackneyed: Cash is king.

So let's go to the condensed consolidated statements of cash flows. I am going to take the actual net operating cash that the company captured (which adds back all of the charges taken on the bottom line) and subtract the capital expenditures that all companies are obliged to invest in. That will tell me how much money Palm is now "free" to use for shareholder value initiatives. By my calculation, Palm increased its free cash flow number by nearly 16% to $21.8 million. Investors should perceive this result in a positive light, especially considering that the company grew free cash flow by 46% last quarter.

If you judge Palm on its revenue and free-cash growth, then you have to like what you read. Those considering Palm as an investment idea will not only recognize the free-cash generation value but will also note the brand equity created by its 36% stateside market share in the converged device space. Nevertheless, as Nathan Parmelee pointed out, the company may not have the vital requirement that Warren Buffet makes of his investment prospects: a sustainable moat of protection against vigorous competition -- in this case, from the likes of Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) on the PDA side and Nokia (NYSE:NOK), Research In Motion (NASDAQ:RIMM), and Motorola (NYSE:MOT) on the converged-device side.

Potential buyers in this sector would serve themselves well by musing carefully on the competitive advantages of Palm. For now, though, Palm is definitely bringing in the cash.

More Takes on Palm:

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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.