May 4 - At any hour of the day, the equivalent population of a small city is typing, talking and gawking at each other on the online service of New York City-based PalTalk.

I know this because PalTalk recently sent an e-mail asking if it could show me “Why our service is catching on like wildfire in the instant messaging arena.” I was curious. America Online, Apple, Yahoo and Microsoft have each signed up millions of users to their ad-supported messaging software. They do much of what PalTalk charges for, at the conveniently low price of absolutely free.

But since 1998, PalTalk has stayed a step ahead of the game, allowing users to combine audio and video conferencing with traditional text messages. Attach a camera and microphone to a PC hooked up to the Internet and you’ve got a videophone—cutting-edge technology that only feels old because we saw it 40 years ago on “Star Trek” and “The Jetsons.”

Chief marketing officer Michael Levit showed me the newest version, PalTalk 8.0, which is available in a beta version at PalTalk.com and will be officially released this month. The updates allow PalTalk to interface with most other instant-messaging services, so you can use it to chat with buddies on AIM or Yahoo Messenger. They also add another subscription tier to the service, PalTalk Extreme. For $60 a year, subscribers not only avoid the ads but also enjoy higher-quality video.

To demonstrate, Levit pinged PalTalk employees around the world. Crisp, clear video images of “Karolyn” in Tasmania, “Swift” in London, “Medianoche” in Mexico and “Storm” in Greece flickered onto my computer screen, filling it like the famous opening of “The Brady Bunch.” Though we were all thousands of miles apart, we talked and watched each other in real time. Levit also pinged PalTalk CEO Jason Katz at his summer home in Florida. We could hear something sizzling on the stove behind him as he spoke. “The big guys tend not to innovate,” Katz said. “We innovate quickly and are completely focused on this area.”

It was definitely cool, but in recent years the larger messaging services have added video chat too. So how does a seven-year-old company with 30 full-time employees manage to survive the wrenching dot-com bust and recruit 3.5 million users to the service?

Levit explained that the core of the service is PalTalk’s community. On a typical day, 30,000 users are typing and talking in forums about politics, finance and relationships. Up to 500 users can crowd into a single topic forum at one time. We toured the service and visited discussions about stock trading, dating and language study. “You can find a little bit of almost everything,” Levit said.

Everything? Often, recurring events drive users online, he said. A priest delivers a sermon on the service every Sunday and hundreds of users gather to watch and listen. Filmmakers stream their films to their friends. About half of PalTalk’s members are American. While there are users from all over the world, the other half is largely concentrated in the Middle East, since a PalTalk partner has aggressively hawked the service in those countries, where phone rates are high and free speech is restricted.