2006			2005
Options to purchase common stock			16,384,000			20,302,000
Common shares issuable upon exercise of warrants			7,276,000			11,816,000
Common shares issuable upon conversion of Convertible Notes			68,000,000			60,000,000
Total			91,660,000			92,118,000

 RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” which clarifies accounting for and disclosure of uncertainty in tax positions. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN No. 48 on our consolidated financial statements.

In November 2005, the FASB issued final FASB Staff Position (“FSP”) FAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP provides an alternative method of calculating excess tax benefits from the method defined in SFAS No. 123R for share-based payments. A one-time election to adopt the transition method in this FSP is available to those entities adopting SFAS No. 123R using either the modified retrospective or modified prospective method. Up to one year from the initial adoption of SFAS No. 123R or the effective date of the FSP is provided to make this one-time election. However, until an entity makes its election, it must follow the guidance in SFAS No. 123R. The FSP is effective upon initial adoption of SFAS No. 123R and became effective for the Company in the first quarter of 2006. We are currently evaluating the allowable methods for calculating excess tax benefits and have not yet determined whether we will make a one-time election to adopt the transition method described in this FSP, nor the expected impact on our financial position or results of operations.

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In May 2005, the FASB issued SFAS No. 154, “Accounting for Changes and Error Corrections, a Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application to prior periods’ financial statements of changes in accounting principles. This statement also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or liquidity.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation", supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, “Statement of Cash Flows.” The statement eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. The statement also requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and generally requires all companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin 107 which describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123R with existing guidance. The Company has adopted SFAS No. 123R effective January 1, 2006, using the modified prospective application method in accordance with the statement. This application requires the Company to record compensation expense for all awards granted after the adoption date and for the unvested portion of awards that are outstanding at the date of adoption. The Company expects that the adoption of SFAS No. 123R will result in charges to operating expense of continuing operations of approximately $194,000, $77,000 and $19,000, in the years ended December 31, 2006, 2007 and 2008, related to the unvested portion of outstanding employee stock options at December 31, 2005.

RECLASSIFICATIONS

Certain 2005 amounts have been reclassified to conform to the 2006 presentation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the operations of SendTec have been accounted for in accordance with the provisions of SFAS No. 144 and the 2005 results of SendTec’s operations have been included in income from discontinued operations.

(2) BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. However, the Company has incurred net losses in the six months ended June 30, 2006 and in each fiscal year since its inception and has an accumulated deficit of $285,217,758 as of June 30, 2006.

As more fully discussed in Note 6, “Litigation,” the Company is a defendant in a number of lawsuits, including a lawsuit filed by Sprint Communications Company, L.P. on October 4, 2005, and a lawsuit filed by MySpace, Inc. on June 1, 2006. Additionally, the Company is currently a party to certain other legal proceedings and other claims and disputes arising in the ordinary course of business. Although uncertain at the present time, the legal costs of defending and settling such lawsuits, outstanding claims and disputes could be material and could utilize a significant portion of our cash resources and adversely affect our financial condition.

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Based upon the Company’s present cash resources and cash flow projections, management believes the Company has sufficient liquidity to operate as a going concern through at least the end of 2006. In order to assure the Company's financial viability beyond the end of 2006, management believes the Company must raise additional capital, complete the development of and successfully implement a new strategic business plan and successfully resolve the legal proceedings, claims and disputes discussed in the paragraph above. The Company’s new business plan may include making certain changes which transform its unprofitable businesses into profitable ones and/or selling, abandoning or otherwise disposing of businesses or components. Because of uncertainties regarding the future direction and financial performance of the Company, there can be no assurance that the Company will be able to continue as a going concern beyond the end of 2006.

 

(3) DISCONTINUED OPERATIONS - SENDTEC, INC.

On August 10, 2005, the Company entered into an Asset Purchase Agreement with RelationServe Media, Inc. ("RelationServe") whereby the Company agreed to sell all of the business and substantially all of the net assets of its SendTec marketing services subsidiary to RelationServe for $37,500,000 in cash, subject to certain net working capital adjustments. On August 23, 2005, the Company entered into Amendment No. 1 to the Asset Purchase Agreement with RelationServe (the “1st Amendment” and together with the original Asset Purchase Agreement, the “Purchase Agreement”). On October 31, 2005, the Company completed the asset sale. Including preliminary adjustments to the purchase price, related to excess working capital of SendTec as of the date of sale, the Company received an aggregate of approximately $39,900,000 in cash pursuant to the Purchase Agreement.

In accordance with the terms of an escrow agreement established as a source to secure the Company’s indemnification obligations under the Purchase Agreement, $1,000,000 of the purchase price and an aggregate of 2,272,727 shares of theglobe’s unregistered Common Stock (valued at $750,000 pursuant to the terms of the Purchase Agreement based upon the average closing price of the stock in the 10 day period preceding the closing of the sale) were placed into escrow as of the date of sale. On March 31, 2006, a partial release of $750,000 of the escrowed cash was made to the Company pursuant to the terms of the escrow agreement, less $318,750 of cash due to RelationServe in final settlement of the purchase price net working capital adjustments.

Periods Ended June 30, 2005		Three Months			Six Months
Net revenue, net of intercompany eliminations		$	9,354,642		$	18,144,886
Income from operations		$	1,079,354		$	1,725,128
Provision for income taxes			409,052			665,526
Income from discontinued operations, net of tax		$	670,302		$	1,059,602

 

(4) ACQUISITION OF TRALLIANCE CORPORATION

On February 25, 2003, the Company entered into a Loan and Purchase Option Agreement, as amended, with Tralliance, an Internet related business venture, pursuant to which it agreed to fund, in the form of a loan, at the discretion of the Company, Tralliance's operating expenses and obtained the option to acquire all of the outstanding capital stock of Tralliance in exchange for, when and if exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000 unregistered restricted shares of the Company's Common Stock (the "Option"). The Loan was secured by a lien on the assets of the venture. On May 5, 2005, Tralliance and the Internet Corporation for Assigned Names and Numbers ("ICANN") entered into an agreement designating Tralliance as the registry for the ".travel" top-level domain. On May 9, 2005, the Company exercised its option to acquire all of the outstanding capital stock of Tralliance. The purchase price consisted of the issuance of 2,000,000 shares of the Company’s Common Stock, warrants to acquire 475,000 shares of the Company’s Common Stock and $40,000 in cash. The warrants are exercisable for a period of five years at an exercise price of $0.11 per share. As part of the transaction, 10,000 shares of the Company’s Common Stock were also issued to a third party in payment of a finder's fee resulting from the acquisition. The Common Stock issued as a result of the acquisition of Tralliance is entitled to certain "piggy-back" registration rights. In addition, as part of the transaction, the Company agreed to pay approximately $154,000 in outstanding liabilities of Tralliance immediately after the closing of the acquisition.

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Cash		$	54,000
Other current assets			6,000
Intangible assets			790,000
Assumed liabilities			(370,000	)
Deferred tax liability			(226,000	)
		$	254,000

 

Upon acquisition, the existing CEO and CFO of Tralliance (the “Executives”) entered into employment agreements, which include certain non-compete provisions, whereby each would agree to remain in the employ of Tralliance for a period of two years in exchange for annual base compensation totaling $200,000 to each officer. In addition, the Executives participate in an annual bonus pool based upon the pre-tax income of the venture for a period of five years beginning May 1, 2005.

The value assigned to the intangible assets acquired is being amortized on a straight-line basis over a five year estimated useful life. Annual amortization expense of the intangible assets is estimated to be: $188,211 in 2006; $158,047 for each of 2007 through 2009 and $52,683 in 2010. The related accumulated amortization as of June 30, 2006 and December 31, 2005 was $184,388 and $75,201, respectively. Amortization expense totaled $39,512 and $109,187 for the three and six months ended June 30, 2006, respectively.

Advances to Tralliance totaled $1,281,500 prior to its acquisition by the Company. Due to the uncertainty of the ultimate collectibility of the Loan, the Company had historically provided a reserve equal to the full amount of the funds advanced to Tralliance. For the three and six months ended June 30, 2005, additions to the reserve of $50,000 and $280,000 were included in other expense in the accompanying condensed consolidated statement of operations.

PRO FORMA RESULTS:		Three Months			Six Months
Period ended June 30, 2005
Net revenue		$	632,000		$	1,280,000
Net loss			(6,497,000	)		(10,472,000	)
Basic and diluted net loss per common share		$	(0.04	)	$	(0.06	)

 

(5) STOCK OPTION PLANS

We have several stock option plans under which nonqualified stock options may be granted to officers, directors, other employees, consultants and advisors of the Company. In general, options granted under the Company’s stock option plans expire after a ten-year period and generally vest no later than three years from the date of grant. Incentive options granted to stockholders who own greater than 10% of the total combined voting power of all classes of stock of the Company must be issued at 110% of the fair market value of the stock on the date the options are granted. As of June 30, 2006, there were approximately 6,636,000 shares available for grant under the Company’s stock option plans.

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A total of 2,215,000 stock options were granted during the six months ended June 30, 2006, with a weighted-average fair value of $0.18. During the six months ended June 30, 2005, a total of 5,584,750 stock options were issued with a weighted-average fair value of $0.10.

Stock option exercises during the six months ended June 30, 2006 and 2005, resulted in cash inflows to the Company of $18,420 and $3,094, respectively. The corresponding intrinsic value as of exercise date of the 349,474 and 218,226 stock options exercised during the six months ended June 30, 2006 and 2005, was $119,628 and $46,369, respectively.

 

		Total Options			Weighted Average Exercise Price
Outstanding at January 1, 2006			15,373,103		$	0.46
Granted			2,215,000			0.23
Exercised			(349,474	)		0.05
Canceled			(855,009	)		0.63
Outstanding at June 30, 2006			16,383,620		$	0.43
Options exercisable at June 30, 2006			13,598,881		$	0.46

The weighted-average remaining contractual terms of stock options outstanding and stock options exercisable at June 30, 2006 was 7.6 years and 7.2 years, respectively. The aggregate intrinsic value of options outstanding and stock options exercisable at June 30, 2006 was approximately $853,000 and $797,000, respectively.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation", supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, “Statement of Cash Flows.” The statement eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. The statement also requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and generally requires all companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. The Company adopted SFAS No. 123R effective January 1, 2006, using the modified prospective application method in accordance with the statement. This application requires the Company to record compensation expense for all awards granted to employees and directors after the adoption date and for the unvested portion of awards that are outstanding at the date of adoption. The Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2006, reflect the impact of SFAS No. 123R. In accordance with the modified prospective application method, the Company’s condensed consolidated financial statements for prior periods have not been restated to reflect and do not include the impact of SFAS No. 123R.

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		Three Months			Six Months
Periods Ended June 30, 2005
Net loss - as reported		$	(6,453,219	)	$	(10,418,792	)
Add: Stock-based employee compensation
included in net loss as reported			159,589			367,870
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards			(538,370	)		(835,078	)
Net loss - pro forma		$	(6,832,000	)	$	(10,886,000	)
Basic net loss per share - as reported		$	(0.04	)	$	(0.06	)
Basic net loss per share - pro forma		$	(0.04	)	$	(0.06	)

 

Stock compensation cost is recognized on a straight-line basis over the vesting period. Stock compensation expense totaling $284,099 was charged to continuing operations during the six months ended June 30, 2006, including $103,283 of expense resulting from the vesting of non-employee stock options granted in prior years and approximately $5,619 from the accelerated vesting of stock options issued to terminated employees. A total of $175,197 of the total stock compensation expense charged to continuing operations for the first six months of 2006 resulted from the adoption of SFAS No. 123R. During the six months ended June 30, 2005, stock compensation expense of $178,157 charged to continuing operations included $138,503 of expense related to non-employee stock options and $28,000 of expense related to the accelerated vesting of stock options issued to a terminated employee.

Stock compensation expense totaling $157,816 and $329,310 for the three and six months ended June 30, 2005, was charged to income from the discontinued operations of the Company’s SendTec subsidiary. The expense resulted primarily from the deferred compensation attributable to the issuance of stock options in the Company’s acquisition of SendTec.

At June 30, 2006, there was approximately $510,000 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years.

The Company estimates the fair value of each stock option at the grant date by using the Black Scholes option-pricing model with the following weighted-average assumptions used for grants in 2006: no dividend yield; an expected life of three years; 120 - 150% expected volatility and a risk free interest rate of 4.00 - 5.00%. The risk free interest rate is based on the U.S. Treasury yield in effect at the time of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of the Company’s stock price, over a time period that is consistent with the expected life of the option.

(6) LITIGATION  

On and after August 3, 2001 and as of the date of this filing, the Company is aware that six putative shareholder class action lawsuits were filed against the Company, certain of its current and former officers and directors (the “Individual Defendants”), and several investment banks that were the underwriters of the Company's initial public offering. The lawsuits were filed in the United States District Court for the Southern District of New York.

The lawsuits purport to be class actions filed on behalf of purchasers of the stock of the Company during the period from November 12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company's initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for the Company's initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. On December 5, 2001, an amended complaint was filed in one of the actions, alleging the same conduct described above in connection with the Company's November 23, 1998 initial public offering and its May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed in the Southern District of New York on April 19, 2002. The action seeks damages in an unspecified amount. On February 19, 2003, a motion to dismiss all claims against the Company was denied by the Court. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The Underwriter Defendants sought leave to appeal the class certification decision and the Second Circuit has accepted the appeal. Plaintiffs have not yet moved to certify a class in theglobe.com case.

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The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. On April 20, 2006, JPMorgan Chase and the plaintiffs reached a preliminary agreement for a settlement for $425 million. The JPMorgan Chase settlement has not yet been approved by the Court. However, if it is finally approved, then the maximum amount that the issuers’ insurers will be potentially liable for is $575 million. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and the company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company's insurance carriers should arise, the Company's maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. However, if the JPMorgan Chase settlement is finally approved, the Company’s maximum financial obligation to the plaintiffs will be less than $2 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. Those modifications have been made. On March 20, 2006, the Underwriter Defendants submitted objections to the settlement to the Court. The Court held a hearing regarding these and other objections to the settlement at a fairness hearing on April 24, 2006, but it has not yet issued a ruling. There is no assurance that the court will grant final approval to the settlement. If the settlement agreement is not approved and the Company is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

 

On October 4, 2005, Sprint Communications Company, L.P. (“Sprint”) filed a Complaint in the United States District Court for the District of Kansas against theglobe, theglobe’s subsidiary, tglo.com (formerly known as voiceglo Holdings, Inc. or “voiceglo”), and Vonage Holdings Corp. (“Vonage”). On October 12, 2005, Sprint filed a First Amended Complaint naming Vonage America, Inc. (“Vonage America”) as an additional defendant. Neither theglobe nor voiceglo has any affiliation with Vonage or Vonage America. Sprint alleges that theglobe and voiceglo have made unauthorized use of “inventions” described and claimed in seven patents held by Sprint. Sprint seeks monetary and injunctive relief for this alleged infringement. On November 21, 2005, theglobe and voiceglo filed an Answer to Sprint’s First Amended Complaint, denying infringement and interposing affirmative defenses, including that each of the asserted patents is invalid. voiceglo has counterclaimed against Sprint for a declaratory judgment of non-infringement and invalidity. On January 18, 2006, the court issued a Scheduling Order calling for, among other things, discovery to be completed by December 29, 2006, and for trial to commence August 7, 2007. It is not possible to predict the outcome of this litigation with any certainty or whether a decision adverse to theglobe or voiceglo would have a material adverse affect on our developing VoIP business and the financial condition, results of operations, and prospects of theglobe generally.

On June 1, 2006, MySpace, Inc. (“MySpace”), a Delaware corporation, filed a lawsuit in the United States District Court for the Central District of California against theglobe.com, inc. (the “Company”). We were served with the lawsuit on June 6, 2006. MySpace alleges that the Company sent unsolicited and unauthorized commercial email messages to MySpace members using MySpace user accounts improperly established by the Company, that the user accounts were used in a false and misleading fashion and that the Company's alleged activities constituted violations of the CAN-SPAM Act, the Lanham Act and California Business & Professions Code § 17529.5, as well as trademark infringement, false advertising, breach of contract, breach of the covenant of good faith and fair dealing, and unfair competition. MySpace seeks monetary penalties, damages and injunctive relief for these alleged violations. It asserts entitlement to recover "a minimum of" $62.3 million of damages, in addition to three times the amount of MySpace's actual damages and/or disgorgement of the Company's purported profits from alleged violations of the Lanham Act, punitive damages and attorneys’ fees. On July 24, 2006, the Company filed its Answer to the Complaint, denying liability for each claim and asserting various affirmative defenses. It is not possible at this early date to predict the outcome of this litigation nor any reasonable estimate of the possible range of any loss or damage to us. An adverse outcome could materially and adversely affect our results of operations and financial position and may utilize a significant portion of our cash resources.

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The Company is currently a party to certain other legal proceedings, claims and disputes arising in the ordinary course of business. The Company currently believes that the ultimate outcome of these other matters, individually and in the aggregate, will not have a material adverse affect on the Company's financial position, results of operations or cash flows. However, because of the nature and inherent uncertainties of legal proceedings, should the outcome of these matters be unfavorable, the Company's business, financial condition, results of operations and cash flows could be materially and adversely affected.

(7) SEGMENTS AND GEOGRAPHIC INFORMATION

The Company applies the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for operating segments of a company. SFAS No. 131 requires disclosures of selected segment-related financial information about products, major customers and geographic areas. Effective with the May 9, 2005 acquisition of Tralliance, the Company was organized in four operating segments for purposes of making operating decisions and assessing performance: the computer games division, the Internet services division, the VoIP telephony services division and the marketing services division. The computer games division currently consists of the operations of the Company's Computer Games magazine publication and the associated website and the operations of Chips & Bits, Inc., its games distribution business. The Internet services division consists of the newly acquired operations of Tralliance. The VoIP telephony services division is principally involved in the development of communications and other web-based services over the Internet for use by consumers. The marketing services division consisted of the discontinued operations of the Company's subsidiary, SendTec which was sold effective October 31, 2005 and has been excluded from the segment data presented below.

The chief operating decision maker evaluates performance, makes operating decisions and allocates resources based on financial data of each segment. Where appropriate, the Company charges specific costs to each segment where they can be identified. Certain items are maintained at the Company's corporate headquarters ("Corporate") and are not presently allocated to the segments. Corporate expenses primarily include personnel costs related to executives and certain support staff and professional fees. Corporate assets principally consist of cash and cash equivalents. Subsequent to its acquisition on September 1, 2004, SendTec provided various intersegment marketing services to the Company's VoIP telephony services division. Prior to the acquisition of SendTec, there were no intersegment transactions. The accounting policies of the segments are the same as those for the Company as a whole.

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
NET REVENUE FROM CONTINUING OPERATIONS:
Computer games		$	459,917		$	555,383		$	826,837		$	1,116,775
Internet services			362,674			—			676,287			—
VoIP telephony services			7,182			76,293			27,806			163,385
		$	829,773		$	631,676		$	1,530,930		$	1,280,160

 

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		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
OPERATING LOSS FROM CONTINUING OPERATIONS:
Computer games		$	(183,639	)	$	(663,584	)	$	(487,852	)	$	(978,738	)
Internet services			(500,995	)		(213,574	)		(1,482,117	)		(213,574	)
VoIP telephony services			(2,360,354	)		(2,804,855	)		(5,033,461	)		(6,127,717	)
Corporate expenses			(690,333	)		(751,696	)		(1,467,560	)		(1,474,872	)
Operating loss from continuing operations			(3,735,321	)		(4,433,709	)		(8,470,990	)		(8,794,901	)
Other income (expense), net			(47,363	)		(3,099,638	)		143,693			(3,333,443	)
Loss from continuing operations before income tax		$	(3,782,684	)	$	(7,533,347	)	$	(8,327,297	)	$	(12,128,344	)
DEPRECIATION AND AMORTIZATION OF CONTINUING OPERATIONS:
Computer games		$	6,986		$	7,719		$	13,974		$	15,438
Internet services			49,032			18,800			127,758			18,800
VoIP telephony services			213,772			279,943			494,300			548,576
Corporate expenses			8,267			9,578			16,825			19,157
		$	278,057		$	316,040		$	652,857		$	601,971

		June 30, 2006			December 31, 2005
IDENTIFIABLE ASSETS:
Computer games		$	389,496		$	637,417
Internet services			712,188			1,161,344
VoIP telephony services			605,464			1,817,809
Corporate assets*			10,196,190			17,794,871
		$	11,903,338		$	21,411,441

 

* Corporate assets include cash held at subsidiaries for purposes of the presentation above.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms. In addition, these forward-looking statements include, but are not limited to, statements regarding:

●	implementing our business plans;

●	marketing and commercialization of our existing products and services, as well as those products and services under development;

●	plans for future products and services and for enhancements of existing products and services;

●	our ability to implement cost-reduction programs;

●	potential governmental regulation and taxation;

●	the outcome of pending litigation;

●	our intellectual property;

●	our estimates of future revenue and profitability;

●	our estimates or expectations of continued losses;

●	our expectations regarding future expenses, including cost of revenue, product development, sales and marketing, and general and administrative expenses;

●	difficulty or inability to raise additional financing, if needed, on terms acceptable to us;

●	our estimates regarding our capital requirements and our needs for additional financing;

●	attracting and retaining customers and employees;

●	rapid technological changes in our industry and relevant markets;

●	sources of revenue and anticipated revenue;

●	plans for future acquisitions and entering new lines of business;

●	plans for divestitures or spin-offs of certain businesses or assets;

●	competition in our market; and

●	our ability to continue to operate as a going concern.

These statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not required to and do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur. Actual results, levels of activity, performance, achievements and events may vary significantly from those implied by the forward-looking statements. A description of risks that could cause our results to vary appears under "Risk Factors" and elsewhere in this Form 10-Q. The following discussion should be read together in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and the audited consolidated financial statements and notes to those statements contained in the Annual Report on Form 10-K for the year ended December 31, 2005.

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OVERVIEW

As of June 30, 2006, theglobe.com, inc. (the "Company" or "theglobe") managed three primary lines of business. One line of business consists of our historical network of three wholly-owned operations, each of which specializes in the games business by delivering games information and selling games in the United States and abroad. These operations are: our print publication business, which consists of Computer Games magazine; our online website business, which consists of our Computer Games Online website (www.cgonline.com), which is the online counterpart to our magazine publication; and our Chips & Bits, Inc. (www.chipsbits.com) games distribution company ("Chips & Bits"). The second line of business consists of our Internet services business, Tralliance Corporation (“Tralliance”), a company which is the registry for the “.travel” top-level Internet domain. We acquired Tralliance on May 9, 2005. Our third line of business, Voice over Internet Protocol ("VoIP") telephony services, includes tglo.com, inc. (formerly known as voiceglo Holdings, Inc.), a wholly-owned subsidiary of theglobe that offers VoIP-based phone services. The term VoIP refers to a category of hardware and software that enables people to use the Internet to make phone calls.

 

We sold the business and substantially all of the net assets of our marketing services technology business, SendTec, Inc. (“SendTec”) on October 31, 2005. The results of operations of SendTec have been reflected as “discontinued operations” within our condensed consolidated financial statements for the 2005 periods.

As of June 30, 2006, sources of our revenue from continuing operations were derived principally from the operations of our computer games related businesses and our Internet services business. Our VoIP products and services have yet to produce any significant revenue.

BASIS OF PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We received a report from our independent accountants, relating to our December 31, 2005 audited financial statements, containing a paragraph stating that our recurring losses from operations and our accumulated deficit subject the Company to certain liquidity and profitability considerations. The Company continues to incur substantial consolidated net losses and management believes the Company will continue to be unprofitable and use cash in its operations for the foreseeable future. Based upon the Company’s present cash resources and cash flow projections, management believes that the Company has sufficient liquidity to operate as a going concern through at least the end of 2006. See “Future and Critical Need for Capital” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further details.

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, our condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

DESCRIPTION OF BUSINESS---CONTINUING OPERATIONS

OUR COMPUTER GAMES BUSINESS

In February 2000, the Company entered the computer games business by acquiring Computer Games Magazine, its associated website, CGOnline, and Chips & Bits, a games distribution business.

Computer Games Magazine is a consumer print magazine for personal computer (“PC”) gamers. As a leading consumer print publication specializing in PC games, Computer Games Magazine boasts: a reputation for being a reliable, trusted, and engaging games magazine; more editorial, tips and hints than most other similar magazines; a knowledgeable editorial staff providing increased editorial integrity and content; and broad-based editorial coverage.

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CGOnline ( www.cgonline.com ) is the online counterpart to Computer Games magazine. CGOnline is a source of free computer games news and information for the sophisticated gamer, featuring news, reviews and previews. Features of CGOnline include: game industry news; truthful, concise reviews; first looks, tips and hints; multiple content links; thousands of archived files; and easy access to game buying.

Chips & Bits ( www.chipsbits.com ) is a games distribution business that attracts customers in the United States and abroad. Chips & Bits covers all the major game platforms available, including Macintosh, Windows-based PCs, Sony PlayStation, Sony PlayStation2, Microsoft’s Xbox, Nintendo 64, Nintendo’s GameCube, Nintendo’s Game Boy, and Sega Dreamcast, among others.

We recently announced plans to publish a new quarterly print publication dedicated solely to “massively multiplayer online” games (“MMO games”), and an associated website. The first issue of the magazine is scheduled to be released in September 2006. The new magazine will include in-depth features on the culture of MMO games, focusing on players, guilds and communities. The editorial staff of Computer Games Magazine will produce the content for the new magazine keeping the same style and credibility which is associated with the Computer Games Magazine publication.

OUR INTERNET SERVICES BUSINESS

Tralliance was incorporated in 2002 to develop products and services to enhance online commerce between consumers and the travel and tourism industries, including administration of the “.travel” top-level domain. In February 2003, theglobe entered into a Loan and Purchase Option Agreement, as amended, with Tralliance in which theglobe agreed to fund, in the form of a loan, at the discretion of theglobe, Tralliance’s operating expenses and obtained the option to acquire all of the outstanding capital stock of Tralliance. On May 5, 2005, the Internet Corporation for Assigned Names and Numbers (“ICANN”) and Tralliance entered into a contract whereby Tralliance was designated as the exclusive registry for the “.travel” top-level domain for an initial period of ten years. Renewal of the ICANN contract beyond the initial ten year term is conditioned upon the negotiation of renewal terms reasonably acceptable to ICANN. Additionally, we have agreed to engage in good faith negotiations at regular intervals throughout the term of our contract (at least once every three years) regarding possible changes to the provisions of the contract, including changes in the fees and payments that we are required to make to ICANN. In the event that we materially and fundamentally breach the contract and fail to cure such breach within thirty days of notice, ICANN has the right to immediately terminate our contract. Effective May 9, 2005, theglobe exercised its option to purchase Tralliance.

 

The establishment of the “.travel” top-level domain enables businesses, organizations, governmental agencies and other enterprises that operate within the travel and tourism industry to establish a unique Internet domain name from which to communicate and conduct commerce. An Internet domain name is made up of a top-level domain and a second-level domain. For example, in the domain name “companyX.travel”, “companyX” is the second-level domain and “.travel” is the top-level domain. As the registry for the “.travel” top-level domain, Tralliance is responsible for maintaining the master database of all second-level “.travel” domain names and their corresponding Internet Protocol (“IP”) addresses.

To facilitate the “.travel” domain name registration process, Tralliance has entered into contracts with a number of registrars. These registrars act as intermediaries between Tralliance and customers (referred to as registrants) seeking to register “.travel” domain names. The registrars handle the billing and collection of registration fees, customer service and technical management of the registration database. Registrants can register “.travel” domain names for terms of one year (minimum) up to 10 years (maximum). The registrars retain a portion of the registration fee collected by them as their compensation and remit the remainder, presently $80 per domain name per year, of the registration fee to Tralliance.

In order to register a “.travel” domain name, a registrant must first be verified as being eligible (“authenticated”) by virtue of being a valid participant in the travel industry. Additionally, eligibility data is required to be updated and reviewed annually, subsequent to initial registration. Once authenticated, a registrant is only permitted to register “.travel” domain names that are associated with the registrant’s business or organization. Tralliance has entered into contracts with a number of travel associations or other independent organizations (“authentication providers”) whereby, in consideration for the payment of fixed and/or variable fees, all required authentication procedures are performed by such authentication providers. Tralliance has also outsourced various other registry operations, database maintenance and policy formulation functions to certain other independent businesses or organizations in consideration for the payment of certain fixed and/or variable fees.

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In launching the “.travel” top-level domain registry, Tralliance adopted a phased approach consisting of three distinct stages. During the third quarter of 2005, Tralliance implemented phase one, which consisted of a pre-authentication of a limited group of potential registrants. During the fourth quarter of 2005, Tralliance implemented phase two, which involved the registration of the limited group of registrants who had been pre-authenticated. It was during this limited registration phase that Tralliance initially began collecting registration fees from its “.travel” registrars. In January 2006, Tralliance commenced the final phase of its launch, which culminated in live “.travel” registry operations.

During the first quarter of 2006, Tralliance also began to offer consumers access to the beta version of the “.travel” directory (the “Directory”). The Directory is a global online resource of travel data designed to precisely match the travel products and services of authenticated “.travel” registrants with consumers on a worldwide basis. Users can access the Directory via the Tralliance website, or by typing www.directory.travel into their web browser. All authenticated “.travel” registrants are offered the opportunity to include their specific travel profiles and products in the Directory, free of charge. It is anticipated that the Directory will become more useful to consumers over time, as additional travel businesses and organizations become “.travel” registrants and load their travel profiles into the Directory.

Tralliance is also exploring other means of enhancing its services to both “.travel” registrants and travel consumers, as well as providing enhanced revenue generating opportunities.

OUR VOIP TELEPHONY BUSINESS

During the third quarter of 2003, the Company launched its first suite of consumer and business level VoIP services. The Company launched its browser-based VoIP product during the first quarter of 2004. These services allowed consumers and enterprises to communicate using VoIP technology for dramatically reduced pricing compared to traditional telephony networks. The services also offered traditional telephony features such as voicemail, caller ID, call forwarding, and call waiting for no additional cost to the consumer, as well as incremental services that were not supported by the public switched telephone network ("PSTN") like the ability to use numbers remotely and voicemail to email services. In the fourth quarter of 2004, the Company announced an "instant messenger" or "IM" related application which enabled users to chat via voice or text across multiple platforms using their preferred instant messenger service. During the second quarter of 2005, the Company released a number of new VoIP products and features which allowed users to communicate via mobile phones, traditional land line phones and/or computers. During the fourth quarter of 2005, the Company launched its new tglo.com website ( www.tglo.com ).

The Company’s retail VoIP service plans had included both “peer-to-peer” plans, for which subscribers were able to place calls free of charge over the Internet to other subscribers’ Internet connections, and “paid” plans which involved interconnection with the PSTN and for which subscribers were charged certain fixed and/or variable service charges.

During 2003 through 2005, the Company attempted to market and distribute its VoIP retail products through various direct and indirect sales channels including Internet advertising, structured customer referral programs, network marketing, television infomercials and partnerships with third party national retailers. None of the marketing and sales programs implemented during these years were successful in generating a significant number of “paid” plan customers or revenue. The Company’s marketing efforts during this period of time achieved only limited successes in developing a “peer-to-peer” subscriber base of free service plan users.

During 2006, the Company re-focused its efforts on VoIP product development, as well as the design and development of complementary interactive, web-based features. During the second quarter of 2006, the Company discontinued offering service to its small existing “paid” plan customer base in anticipation of the release of a new VoIP product offering resulting from its most recent development efforts. The new VoIP product offering will include various interactive, web-based features and functionality, including “peer-to-peer” calling, available to all subscribers at no charge. Subscribers will also be offered the ability to place outgoing calls to the PSTN at competitive per minute rates. The Company currently plans to launch the new VoIP product offering in September 2006.

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At the present time, the Company intends to devote substantially all of its near-term development and marketing efforts to completing and releasing its new VoIP product offering, expanding its “peer-to-peer”, or free service plan, subscriber base and developing ways to monetize its “peer-to-peer” subscriber base. We currently derive no revenue from our existing VoIP subscriber base. The Company currently plans to add new subscribers mainly through various Internet advertising campaigns and also by entering into marketing arrangements with other third party website enterprises. 

DESCRIPTION OF BUSINESS---DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS OF OUR MARKETING SERVICES BUSINESS

As a result of our sale of the business and substantially all of the net assets of SendTec, our former marketing services technology business, on October 31, 2005, the results of operations of SendTec have been reported separately as “Discontinued Operations” for the three and six months ended June 30, 2005.

On September 1, 2004, the Company acquired SendTec, a direct response marketing services and technology company. SendTec provided clients a complete offering of direct marketing products and services to help their clients market their products both on the Internet (“online”) and through traditional media channels such as television, radio and print advertising (“offline”). SendTec was organized into two primary product line divisions: the DirectNet Advertising Division, which provided digital marketing services; and the Creative South Division, which provided creative production and media buying services. Additionally, its proprietary iFactz technology provided software tracking solutions that benefited both the DirectNet Advertising and Creative South businesses.

RESULTS OF OPERATIONS

The nature of our business has significantly changed from 2005 to 2006. On October 31, 2005, we completed the sale of substantially all of the net assets and the business of SendTec, our former marketing services technology business. Also, on May 9, 2005, the Company entered into another line of business, Internet services, when it exercised its option to acquire Tralliance, a company which had recently been designated as the registry for the ".travel" top-level Internet domain. The results of Tralliance have been included in the Company's consolidated operating results from its date of acquisition. Primarily, as a result of the acquisition of Tralliance and the sale of SendTec, our results of operations for the three and six months ended June 30, 2006, are not necessarily comparable to our results of operations for the three and six months ended June 30, 2005.

THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO

THE THREE MONTHS ENDED JUNE 30, 2005

CONTINUING OPERATIONS

NET REVENUE. Net revenue totaled $830 thousand for the three months ended June 30, 2006 as compared to $632 thousand for the three months ended June 30, 2005, an increase of approximately $198 thousand, or 31%, from the prior year period.

 

NET REVENUE BY BUSINESS SEGMENT:

Three months ended June 30,		2006			2005
Computer games		$	459,917		$	555,383
Internet services			362,674			—
VoIP telephony services			7,182			76,293
		$	829,773		$	631,676

 

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Advertising revenue from the sale of print advertisements in the magazines published by our computer games business declined $48 thousand, or 13%, in the 2006 second quarter as compared to the same quarter of the prior year. Net revenue attributable to subscription and newsstand sales of our magazines declined approximately $16 thousand, or 14%, as compared to the second quarter of 2005. Now Playing Magazine, which began distribution in March 2005, was sold by the Company in January 2006. Revenue attributable to Now Playing magazine during the second quarter of 2005 totaled approximately $68 thousand. Sales of electronic games and related products through Chips & Bits, Inc., our Internet-based retail distribution subsidiary, decreased approximately $32 thousand, or 47%, in the 2006 second quarter as compared to the second quarter of 2005.

Our Internet services business, Tralliance, contributed $363 thousand in net revenue during the second quarter of 2006. Tralliance, which was acquired in May 2005, began collecting fees for Internet domain name registrations in October 2005. Net revenue attributable to domain name registrations is recognized as revenue on a straight-line basis over the term of the registrations.