United Online, the merger of two popular Internet service providers (ISPs) best known for their free access service, beat low expectations from Wall Street, announcing significant second quarter 2002 reductions in losses.

The ISPs pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) losses were reduced from $13.1 million in the first quarter to $2.6 million, an 80 percent drop. Net losses for the quarter dropped to $6 million, from $16.4 million in the previous quarter.

NetZero and Juno Online Services joined forces last year in a market that was turning on free ISPs who derived most of their revenues from advertisers, not subscribers. Going into the merger, both companies were facing rising debts and low revenues as online advertising took a turn for the worst.

The merger was a timely business decision, since both free ISP had POP servers throughout the country -- the merger cut POP costs dramatically as they did away with redundant coverage areas. Both also purged their employee rolls and streamlined operattions.

United Online's turn around can be attributed mainly to its focus to drive free customers to its NetZero Platinum premium service. By restricting the total number of hours (from 40 hours to 10) available to its free users and dropping POP servers in underserved areas, they were largely successful, culminating in cost reductions by 46 percent.

Officials also told analysts and investors the number of free users was reduced by 14 percent, boosting the number of paying customers. They also expected no further reductions in monthly hour caps or POP presence.

United Online ended the second quarter of 2002 with 1.46 million paying customers, a gain of 214,000 members since the first quarter. All told, the ISP has 5.6 million free and paying Internet access users.

Charles Hilliard, United Online chief financial officer, said the number of free users upgrading to premium services accounted for more than 50 percent of its new customers in the second quarter. He also noted that number is on the decline, as more and more new users are first-time United Online subscribers.

For now, the ISPs goal is becoming EBITDA cash-flow positive by the end of June, two quarters earlier than originally predicted when Juno and United Online were merged. So far, United Online has paid out $13.4 million in restructuring costs and expects to pay another $4.6 to $6.6 million over the next 15 months before it is free and clear of all merger-related costs.

Spurring its drive to increased revenues is Goldston's belief in United Online's low monthly fees, which run at $9.95 a month. That's significantly lower than pricier dial up ISPs like America Online, which charges more than $23 a month for monthly service.

Mark Goldston, United Online chairman, chief executive officer and president, took time to send a barb to analysts and peers who predicted the continued growth of broadband would signal the end of dial up.

"Many people were predicting the growth of broadband would drive people away from dial up," he said. "But if you look at it, dial up is a lot less expensive to maintain and the margins broadband brings are very small. We may only have 1.46 million paying customers right now, but we are in the right place to experience a lot of growth in the future."

Goldston would not write broadband off entirely for United Online, saying they would continue to watch the broadband market and enter if the conditions became more favorable.