Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. “Forward looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” and “intend.”  Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission. GlobalSCAPE’s actual results could differ materially from those discussed in any forward-looking statements included in this Quarterly Report.

Overview

We develop and distribute secure file management software for individuals and business users to safely send data over the internet and Wide-Area File System (“WAFS”) collaboration and Continuous Data Protection (“CDP”) products. Our file management products guarantee the privacy of critical information such as financial data, medical records, customer files and other similar documents. In addition, these products ensure compliance with government regulations relating to the protection of information while allowing users to reduce IT costs, increase efficiency, track and audit transactions and automate processes. Our WAFS and CDP products provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers. We believe that we are uniquely positioned to provide secure transfer, sharing, and replication of files that need to be transmitted inside the user’s firewall to distributed offices, or outside the user’s firewall to business and trading partners.

The following is a brief description of our products:

•       File Management Products — Our File Management products are best known for the “CuteFTP” product line. They primarily consist of products that help users securely move and copy files on the internet. A substantial portion of our revenues are derived from licensing our File Management products. Some of our products encrypt the transfers for security using technology similar to a Web browser. The products consist of three product categories: client, server and compression transfer. Our File Management product line includes CuteFTP Home, Cute FTP Professional, SecureFTP Server, and Enhanced File Transfer.

•       Wide-Area File System Products — Our WAFS products provide a file sharing and collaboration solution over multiple sites. By keeping all data updated on each location’s file server, each site has instant access to the very latest version. Our WAFS products help ensure that no one can ever open an old file version without user conflicts. Changes made to data on any server are mirrored on all other servers.

•       Continuous Data Protection Products — Our CDP products consolidate remote backup for file servers. As files change, the servers backup in real time to the customer’s backup site which can be at the same or a remote location. The backup server can keep any number of past versions of each file (and deleted files) which gives the customer instant restore, as well as the ability to perform point-in-time snapshots.

Our strategy is to continue enhancing our file transfer products to meet the demands of both individual and enterprise users, while improving the security features of our current product line, and to expand into growing markets through the acquisition of compatible companies and products. We acquired Availl, a leading provider of WAFS collaboration and CDP products, as part of this strategy. This acquisition expanded our technology base into data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery. We believe that these new products give us entry into two large and rapidly growing markets.

We believe that our continued growth will come not only through the further development of our SecureFTP Server and Enhanced File Transfer products and the growing demand for file security when

12

transferring information across the internet, but also through the aggressive exploitation of the data replication and protection markets. Based upon estimates by Gartner, Inc., and other consulting groups in our markets, we believe that the WAN optimization/WAFS market is currently $300 million annually and growing at 20% - 30% per year, and the CDP market is of similar size, but in the early stages of adoption and growing rapidly. In addition, we believe that the WAFS and CDP products are highly complementary to our traditional Secure File Transfer products facilitating cross sales and new customer penetration.

Liquidity and Capital Resources

Our capital requirements principally relate to our need to enhance our existing products and to develop or acquire new products. The amount of our capital expenditures has a direct impact on our ability to offer enhanced and new products to our customers. We rely heavily on cash flows from operations to fund our capital expenditures and prior to 2006, these cash flows were significantly dependent upon sales of CuteFTP Home and CuteFTP Professional, which accounted for 50% and 30% of our revenues in the years ended December 31, 2005 and 2006, respectively, and 33% and 18% for the nine months end September 30, 2006 and 2007, respectively. Much of the percentage decline of revenues from the sale of these two products was caused by continued significant increases in the sales of our other products in 2006, particularly, SecureFTP Server and Enhanced File Transfer, which collectively accounted for 61% of our revenues in the year ended December 31, 2006, and 63 % and 67 % for the nine months ended September 30, 2006 and 2007, respectively. Revenues in total increased 87% when comparing the nine months ended September 30, 2006 and 2007.

Our principal sources of capital are cash on hand, cash flow from operations and availability under our revolving line of credit. At September 30, 2007, we had cash on hand of $4.6 million and we continue to generate cash in excess of our operational needs. To the extent that sales decline, our cash flow from operations will also decline. If sales or liquidity decline, management may substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate research and development expenditures. We may also sell equity securities or enter into other credit arrangements in order to finance future acquisitions or licensing activities.

At September 30, 2007, we had $750,000 of availability under our revolving line of credit. Borrowings under our revolving credit facility bear interest at 1.00% above the Bank’s prime rate and mature on September 22, 2008. Interest payments are due on the first day of each calendar month.

The revolving credit facility is secured by substantially all of the assets of GlobalSCAPE and its subsidiaries including Availl. The loan agreement contains customary covenants including covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, maintenance of inventory, payment of taxes, maintaining insurance, and protection of intellectual property rights. GlobalSCAPE and its subsidiaries are also prohibited from selling any of their assets other than in the ordinary course of business, acquiring any other entities, changing the types of business they are engaged in, incurring indebtedness other than that permitted by the loan agreement, incurring any liens on their assets other than those permitted by the loan agreement, making certain investments or paying any dividends on, or acquiring, any shares of their capital stock. The loan agreement contains two financial covenants. GlobalSCAPE and its subsidiaries must maintain:

•       a ratio of (A) EBITDA less the sum of (i) cash taxes paid and (ii) non-financed capital expenditures (excluding non-cash stock options and taxes already accrued), to (B) the sum of (i) principal plus (ii) interest paid to Bank, of at least 1.5 to 1.00; and

•       a ratio of total funded debt to EBITDA of not more than 2.00 to 1.00.

At September 30, 2007, we were in compliance with these covenants.

The loan agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, certain bankruptcy and insolvency events, the breach of other agreements creating indebtedness of

13

$50,000 or more and the entry of a judgment of $50,000 or more against GlobalSCAPE or any of its subsidiaries.

Net cash provided by operating activities was approximately $4.9 million for the nine months ended September 30, 2007 as compared to $2.0 million in the nine months ended September 30, 2006. Cash provided by operations for the nine months ended September 30, 2007 was primarily the result of increasing sales of the software products without a corresponding increase in operating expenses.

Net cash used in investing activities for the nine months ended September 30, 2006 and 2007 was $7.7 million and $148,171, respectively. Of all the cash used in 2006, $7.6 million was for the acquisition of Availl and the balance used was primarily for the purchase of computer equipment and software. The cash used in 2007 was primarily $148,000 spent for computer equipment.

Net cash provided by (used in) financing activities during the nine months ended September 30, 2006 and 2007 were $5.0 million and ($4.8 million) respectively. In 2006, the increase in cash provided from financing activities was attributable to the proceeds from the term loan in connection with the acquisition of Availl and the issuance of stock from exercised options. In 2007, the decrease in cash from financing activities was the result of the repayment of the term loan with Silicon Valley Bank of $4.6 million and the repurchase of treasury stock of $527,528, which was partially offset by the issuance of common stock from employee stock options of $334,453.

As of September 30, 2007, we had in excess of $4.5 million in cash and cash equivalents, total current assets of $6.4 million and total current liabilities of $3.3 million, resulting in working capital of $3.1 million. The primary component of current liabilities at September 30, 2007 was $2.0 million of deferred revenues which will be recognized over the remaining term (generally one to twelve months) of the maintenance and support contracts. At September 30, 2007, our principal commitments consisted of obligations outstanding under operating leases as well as accrued expenses, federal income tax and trade accounts payable. We plan to continue to expend significant resources on product development in future periods and may also use our cash to acquire or license technology, products or businesses related to our current business.

The facilities that we currently occupy are expected to be sufficient for the remainder of 2007. Consequently, we do not anticipate significant expenditures for leasehold improvements or furniture for our current facility in 2007. Our lease on the current facility will expire in mid-2008. On September 21, 2007, the Company obtained new office space through a new lease agreement for 21,495 square feet. The term of the new agreement is for 132 months, and the basic monthly rental ranges from $27,317 to $30,003 over the life of the lease. We believe that we will occupy this space by July of 2008.

On May 21, 2007, the Board of Directors approved a plan to repurchase up to $3.0 million of GlobalSCAPE common stock. The repurchase plan is designed to increase shareholders’ value and reduce the dilutive effect of GlobalSCAPE’s stock option plans. As of September 30, 2007, the company had repurchased a total of 159,873 shares at an average cost of $3.35 per share for a total cost of $527,528. We base our level of stock repurchases on internal cash management decisions and this level may fluctuate from quarter to quarter. At September 30, 2007, approximately $2.5 million remained available for repurchase under the existing repurchase authorization.

14

(1) Amounts for 2007 reflect the future minimum payments for the remaining three months of the fiscal year.

Critical Accounting Policies

Uncertain Tax Issues

Effective at the beginning of the first quarter of 2007, the Company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”  FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48, the Company has not changed any of its tax accrual estimates. The Company files U.S. federal and U.S. state tax returns.

There were no other changes in our critical accounting policies from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2006 during the nine months ended September 30, 2007.

Inflation

Increases in inflation generally result in higher interest rates and operating costs. Our greatest exposure is to the cost of salaries and general and administrative expenses. To date we believe that inflation has not had a significant impact on our operations.

Seasonality

Historically, our internet sales have been subject to seasonal variations. We experience significantly less sales volume during national holidays and weekends when compared to normal business days. In the fourth quarter of 2005, our sales revenues decreased approximately 5% over the prior quarter. However, this trend did not exist in 2006 as internet sales increased in the fourth quarter by 7% over the third quarter of the same year. Over the past two calendar years the total dollar value of internet sales has remained relatively flat while sales of our file transfer server products have increased by 130% growing to become 61% of total sales. As a result of this change in mix of products and the apparent lessoning of the internet sales seasonality in 2006, we do not expect seasonality to have a significant impact on sales in 2007. In the nine months ended September 30, 2007, seasonality had no material effect on internet sales volume.

15

Revenue. We derive revenues primarily from software sales. Revenues are comprised of the gross selling price of software, including shipping charges and the earned portion of support and maintenance agreements. For the three months ended September 30, 2007, total revenues increased by $1.3 million or approximately 50% from the same quarter in 2006 due to an increase in revenues from sales of our Wide-Area File Systems, SecureFTP Server and Enhanced File Transfer products.

The following table reflects revenue by product including the related maintenance and support for each product:

Our Wide-Area File Systems and Continuous Data Protection products accounted for approximately 17.5% of total revenue for the third quarter of 2007. There were no sales for these products in the same quarter of 2006 because we did not begin selling these products until after completing the Availl acquisition in September 2006. The WAFS/CDP revenues have not increased as originally anticipated due to management’s decision to delay the aggressive marketing of those products to our existing customer base and to the market in general as we had initially planned. The amount of time required to make improvements to our WAFS and CDP products that we believe are necessary has been greater than we had expected. We believe that good progress is currently being made on the product improvements and we anticipate a more aggressive sales effort for these products in 2008.

Sales of our SecureFTP Server and Enhanced File Transfer products grew by 39% in the three months ended September 30, 2007 to $2.4 million, from $1.7 million in the same period in 2006. These

16

products represented approximately 62% of our total revenues in the three months ending September 30, 2007 as compared to 66% in the same period in 2006. Revenues from CuteFTP Home and CuteFTP Professional decreased by 4% as compared to the quarter ended September 30, 2006 and accounted for approximately 29% and 19% of total revenues for the three months ended September 30, 2006 and 2007, respectively.

We believe that our reliance on the CuteFTP products will continue to decline as we emphasize sales of our more complex enterprise products. In addition, because of the more complex nature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP, purchasers require increased maintenance and support. As a result, our maintenance and support revenues increased by 42% from the second quarter of 2006 to the same period in 2007, and from $693,038 in 2006 to $981,316 in 2007, net of deferred revenue. Maintenance and support pricing is reflective of the license cost of the products and the additional support it takes to maintain and support the products and customers. With higher maintenance and support revenues, we will recognize additional deferred revenue as we earn the revenue over the life of the maintenance and support agreement.

Cost of Revenues. Cost of revenues consists primarily of royalties and production, packaging and shipping costs for boxed copies of software products. Cost of revenues decreased by approximately $60,000 or 41% between periods from $146,000 for the three months ended September 30, 2006 to $86,000 for the three months ended September 30, 2007. Royalties that we pay on software products licensed from third parties, which we resell, are expensed as a cost of sale when the software product is sold or earlier if the recoverability of any prepaid royalties is in doubt. Cost of revenues as a percent of total revenues was 6% for the three months ended September 30, 2006 as compared to 2% for the same period in 2007.

Selling, General and Administrative.   Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, rents, bad debt and professional fees.  For the three months ended September 30, 2006 and 2007, selling, general and administrative expenses were $1.3 million and $2.5 million, respectively, an increase of $1.2 million.  Of this increase, 45% or $538,000 was attributable to Availl.  In addition to the new Availl expenses, salaries and fringe benefit costs increased by 5% as we have hired new employees in order to support current and projected growth.  Commissions and bonuses increased by 85% as a result of the increase in revenues and income before taxes.  In the three months ended September 30, 2006 and 2007, we expensed $84,000 and $323,000 respectively, for stock based compensation related to the granting of stock options to employees and directors as required by FAS123R. In addition, we incurred a one-time fee of $75,750 for joining the American Stock Exchange.

Research and Development.   Research and development expenses increased by $141,000 or 147% between periods, from $302,000 to $443,000.  The increase was due largely to Availl’s R&D cost in 2007 which were not included in the same period of 2006, plus additional expenditures for external development resources and hiring of additional personnel needed to support the Availl products.

Depreciation and Amortization.   Depreciation and amortization expense consists of depreciation expense related to our fixed assets and amortization of capitalized development costs. Depreciation and amortization expense increased from $25,000 to $39,000, an increase of approximately 56%.  This increase was the result of acquiring $148,000 of equipment and software acquired during the first nine months of 2007, and the corresponding depreciation of these assets.

Other Income, Expense.   We earned $21,000 and $43,000 in interest income during the third quarter of 2006 and 2007 respectively from investing our excess cash.  For the three months ended September 30, 2006 and 2007, interest expense increased from $0 to $2,000, respectively.  The interest expense incurred during 2007 was paid on deferred income per an employment agreement between GlobalSCAPE and one of its key executives.

Income Taxes.   The provision for federal income taxes for the quarter ended September 30, 2006 and 2007 respectively was $295,000 and $141,000. The decrease in federal income taxes versus last year is the result of $158,436 of nonrecurring Research & Development Credits and Extraterritorial Income

17

Exclusion accumulated from prior periods.   These net credits were discovered and calculated in the third quarter of 2007, so they are also being recognized in this quarter as a reduction to tax expense. There is also a fee of $40,924 recorded in SG&A related to these credits.

Beginning January 1, 2007, the state of Texas imposed a new margin tax equal to 1% of the Company’s revenue less compensation expense (based on Texas source income).  In the three months ended September 30, 2007, this tax plus the Massachusetts state tax for Availl equaled approximately $21,000 .

Net Income.   GlobalSCAPE recorded net income of $538,000 and $703,000 for the three months ended September 30, 2006 and 2007, respectively.  The $165,000 increase in net income is positively affected by approximately $46,000 by the net of some one-time items such as tax credits and the American Stock Exchange fees. Without the positive impact of these one-time items, net income would be 17% of revenue in the 2007 quarter compared to 21% of revenue in the 2006 quarter. In general, the reduction of Net Income as a percentage of revenue is due to the additional expenses incurred by bringing the Availl products to market.

Revenue. We derive revenues primarily from software sales. Revenues are comprised of the gross selling price of software, including shipping charges and the earned portion of support and maintenance agreements. For the nine months ended September 30, 2006 and 2007, total revenues increased by $6.5 million or approximately 87% from $7.5 million to $13.9 million due to the increase in revenues from sales of our Wide-Area File Systems, SecureFTP Server and Enhanced File Transfer products, a major portion of which was a $2.8 million order from the US Army. Unit volume increased with approximately 137,000 licenses and support agreements sold in the nine months ended September 30, 2006 versus 208,000 sold in the same period in 2007. The 52% increase in unit volumes resulted from the large number of individual licenses and support agreements associated with the US Army order.

18

The following table reflects revenue by product including the related maintenance and support for each product.

Sales of our SecureFTP Server and Enhanced File Transfer products grew by 98% in the nine months ended September 30, 2007 to $9.3 million from $4.7 million in the same period in 2006, and represented approximately 67% of our total revenues in the first nine months of 2007 as compared to 63% in the same period in 2006. The increase in revenues from these products was the result of increased emphasis of our internal sales group on the enterprise level software needs of businesses and the US Army order which was heavily weighted in the SecureFTP Server product.

Our Wide-Area File Systems and Continuous Data Protection products, which we began selling after completing the Availl acquisition in September 2006, accounted for approximately 16% of total revenue for the nine months ended September 30, 2007. The WAFS/CDP revenues have not increased as originally anticipated due to management’s decision to delay the aggressive marketing of those products to our existing customer base and to the market in general as we had initially planned. The amount of time required to make improvements to our WAFS and CDP products that we believe are necessary has been greater than we had expected. We believe that good progress is currently being made on the product improvements and we anticipate a more aggressive sales effort for these products in 2008.

Revenues from CuteFTP Home and CuteFTP Professional increased by 5% as compared to the nine months ended September 30, 2006 and accounted for approximately 33% and 18% of total revenues for the nine months ended September 30, 2006 and 2007, respectively. We believe that our reliance on the CuteFTP products will continue to decline as we emphasize sales of our more complex enterprise products.

Because of the more complex nature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP, purchasers require increased maintenance and support. As a result, our maintenance and support sales increased by 168% from the first nine months of 2006 to the same period in 2007 from $1.1 million in 2006 to $3.0 million in 2007, net of the deferred revenue adjustment. Maintenance and support pricing is reflective of the license cost of the products and the additional support it takes to maintain and support the products and customers. With higher maintenance and support revenues, we will recognize additional deferred revenue as we earn the revenue over the life of the maintenance and support agreement.

Cost of Revenues. Cost of revenues consists primarily of royalties and production, packaging and shipping costs for boxed copies of software products. Cost of revenues decreased $168,000 or 45% between periods from $372,000 for the nine

19

months ended September 30, 2006 to $205,000 for the nine months ended September 30, 2007. Royalties that we pay on software products licensed from third parties, which we resell, are expensed as a cost of sale when the software product is sold or earlier if the recoverability of any prepaid royalties is in doubt. Cost of revenues as a percent of total revenues was 5% for the nine months ended September 30, 2006 as compared to 1% for the same period in 2007.

Selling, General and Administrative.   Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, rents, bad debt and professional fees.  For the nine months ended September 30, 2006 and 2007, selling, general and administrative expenses were $3.9 million and $7.5 million, respectively, an increase of $3.6 million.  Of this increase, 41% or $1.6 million was attributable to Availl.  Of the non-Availl expenses, salaries and fringe benefit costs increased 13% as we have hired new employees in order to support current and projected growth.  Commissions and bonuses increased 75% as a result of the increase in revenues and income before taxes.  In the nine months ended September 30, 2006 and 2007, we expensed $205,000 and $759,000 respectively, for stock based compensation related to the granting of stock options to employees and directors as required by FAS123R.

Research and Development.   Research and development expenses increased $633,000 or 79% between periods, from $799,000 to $1.4 million.  The increase was due largely to Availl’s R&D cost in 2007 which were not included in the same period of 2006, plus additional expenditures for external development resources and hiring of additional personnel needed to support the Availl products.

Depreciation and Amortization.   Depreciation and amortization expense consists of depreciation expense related to our fixed assets and amortization of capitalized development costs. Depreciation and amortization expense increased from $70,000 to $105,000, an increase of approximately 50%.  This increase was due primarily to the purchase of $148,000 of equipment and software during the first nine months of 2007, and the corresponding depreciation of those assets.

Other Income, Expense.   For the nine months ended September 30, 2006 and 2007, interest expense increased from $0 to $33,000, respectively.  The interest expense incurred during 2007 was paid on the term loan related to the acquisition of Availl. We earned $58,000 and $56,000 in interest during the first nine months of 2006 and 2007, respectively, from investing our excess cash.

Income Taxes.   The provision for federal income taxes for the nine months ended September 30, 2006 and 2007 respectively was $814,000 and $1.4 million. The increase in federal income taxes versus last year is the result of increased income upon which tax is due.   Beginning January 1, 2007, the state of Texas imposed a new margin tax equal to 1% of the Company’s revenue less compensation expense (based on Texas source income).  In the nine months ended September 30, 2007, this tax plus the Massachusetts state tax for Availl equaled approximately $87,000 .

Net Income.   GlobalSCAPE recorded net income of $1.6 million and $3.3 million for the nine months ended September 30, 2006 and 2007, respectively.  The $1.7 million increase in net income was attained even though the Company incurred substantial increases in SG&A and R&D expenses related to Availl, plus had an additional expense of $554,000 over the nine months in 2006 in compensation expense as required by FAS 123R for grants of employee and directors stock options.

(VAT) on electronic purchases. These taxes are charged to our non-business customers in the EU and, in our case, are remitted quarterly in pound sterling. We expect that the impact of this currency translation will not be material to our business.