**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERTLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe Quarterly Period ended March 31, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from          to         .**

**CommissionFile No. 000-30617**

**GlobalSCAPE, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **74-2785449**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **6000 Northwest Parkway, Suite 100** |   | ** ** |
|---------------------------------------|--------|------------|
| **San  Antonio, Texas**               |   | ** ** |
| (Address of  Principal                |   | **78249**  |
| Executive  Office)                    |   | (Zip Code) |

 

**(210) 308-8267**

(Registrant’s TelephoneNumber, Including Area Code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  x Yes   o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (Check one):

Large Acceleratedfiler o    Acceleratedfiler o    Non-Acceleratedfiler x

Indicate by check mark if the registrant is a shellcompany (as defined in Rule 12b-2 of the Act).   o Yes  x No

Asof May 8, 2007 there were 17,225,226 shares of common stock, par value $0.001per share, outstanding.

 

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**GlobalSCAPE Inc.**

**Quarterly Reporton Form 10-QFor the Quarter ended March 31, 2007**

**Index**
|                               | **Page**   |
|-------------------------------|------------|
| **Part I.**                   | ** ** | **Financial Information** |   |   |
| ** **                    | ** ** | ** ** |   |   |
| Item 1.                       |       | Interim Consolidated  Financial Statements (Unaudited) |   |   |
|                          |       | Consolidated Balance Sheets as of December 31, 2006  and March 31, 2007 | 1 |   |
|                          |       | Consolidated Statements of Operations for the three  months ended March 31, 2006 and 2007 | 3 |   |
|                          |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2006 and 2007 | 4 |   |
|                          |       | Notes to Consolidated Financial Statements | 5 |   |
|                          |       |   |   |   |
| Item 2.                       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11 |   |
|                          |       |   |   |   |
| Item 3.                       |       | Quantitative  and Qualitative Disclosures About Market Risk | 17 |   |
|                          |       |   |   |   |
| Item 4.                       |       | Controls and  Procedures | 17 |   |
|                          |       |   |   |   |
| **Part II.**                  | ** ** | **Other Information** |   |   |
|                          |       |   |   |   |
| Item 1.                       |       | Legal Proceedings | 18 |   |
|                          |       |   |   |   |
| Item 6.                       |       | Exhibits | 18 |   |
|                          |       |   |   |   |
| Signatures and Certifications | 19         |   |

 

***GlobalSCAPE®, CuteFTP Pro®, CuteZIP®,  and CuteMAP® are registeredtrademarks of GlobalSCAPE Texas, LP. CuteFTP, CuteHTML, GlobalSCAPE Secure FTPServer, GlobalSCAPE Transfer Engine, ContentXML, and Enhanced File TransferServer are trademarks of GlobalSCAPE Texas, LP. Other trademarks and tradenamesin this report are the property of their respective owners.***

#  

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**Part I. FinancialInformation**

**Item 1.**                          FinancialStatements

**GlobalSCAPE, Inc.**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                  | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                                  | ** ** | ** **            | ** ** | **(unaudited)**    | ** ** |
| Assets                                                                                                                                      |       |                  |       |               |       |
| Current assets:                                                                                                                             |       |                  |       |               |       |
| Cash and cash  equivalents                                                                                                                  |       | $                     | 4,632,666  |               | $          | 1,355,483 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $59,458 and $35,842 at  December 31, 2006 and March 31, 2007, respectively) |       | 1,592,846             |       | 1,608,412          |       |
| Federal income  tax receivable                                                                                                              |       | 73,525                |       | -                  |       |
| Prepaid expenses                                                                                                                            |       | 115,754               |       | 116,381            |       |
| Total current assets                                                                                                                        |       | 6,414,791             |       | 3,080,276          |       |
|                                                                                                                                        |       |                  |       |               |       |
| Property and equipment:                                                                                                                     |       |                  |       |               |       |
| Furniture and  fixtures                                                                                                                     |       | 343,702               |       | 343,702            |       |
| Software                                                                                                                                    |       | 323,161               |       | 359,231            |       |
| Equipment                                                                                                                                   |       | 720,107               |       | 756,465            |       |
| Leasehold  improvements                                                                                                                     |       | 191,090               |       | 191,090            |       |
|                                                                                                                                        |       | 1,578,060             |       | 1,650,488          |       |
| Accumulated depreciation  and amortization                                                                                                  |       | 1,345,881             |       | 1,377,466          |       |
| Net property and  equipment                                                                                                                 |       | 232,179               |       | 273,022            |       |
|                                                                                                                                        |       |                  |       |               |       |
| Other assets:                                                                                                                               |       |                  |       |               |       |
| Goodwill                                                                                                                                    |       | 9,653,059             |       | 9,653,059          |       |
| Deferred tax  asset                                                                                                                         |       | 8,724                 |       | 111,198            |       |
| Other                                                                                                                                       |       | 58,996                |       | 22,646             |       |
| Total other assets                                                                                                                          |       | 9,720,779             |       | 9,786,903          |       |
|                                                                                                                                        |       |                  |       |               |       |
| Total assets                                                                                                                                |       | $                     | 16,367,749 |               | $          | 13,140,201 |   |

#  

1

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**GlobalSCAPE,Inc.**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                              | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **            | ** ** | **(unaudited)**    | ** ** |
| Liabilities and  Stockholders’ Equity                                                                                                                                              |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                                    |       |                  |       |               |       |
| Accounts payable                                                                                                                                                                        |       | $                     | 371,093    |               | 267,804    |   |
| Accrued expenses                                                                                                                                                                        |       | 377,940               |       | 399,782            |       |
| Federal income  tax payable                                                                                                                                                             |       | -                     |       | 265,066            |       |
| Long-term debt,  current portion                                                                                                                                                        |       | 1,539,455             |       | -                  |       |
| Deferred revenue                                                                                                                                                                        |       | 1,377,037             |       | 1,542,228          |       |
| Total current  liabilities                                                                                                                                                              |       | 3,665,525             |       | 2,474,880          |       |
|                                                                                                                                                                                    |       |                  |       |               |       |
|                                                                                                                                                                                    |       |                  |       |               |       |
| Long-term liabilities:                                                                                                                                                                  |       |                  |       |               |       |
| Deferred  compensation                                                                                                                                                                  |       | 52,487                |       | 66,157             |       |
| Long-term debt,  non-current portion                                                                                                                                                    |       | 3,070,757             |       | -                  |       |
| Other long-term  liabilities                                                                                                                                                            |       | 5,941                 |       | 2,806              |       |
| Total long-term  liabilities                                                                                                                                                            |       | 3,129,185             |       | 68,963             |       |
|                                                                                                                                                                                    |       |                  |       |               |       |
| Total Liabilities                                                                                                                                                                       |       | 6,794,710             |       | 2,543,843          |       |
|                                                                                                                                                                                    |       |                  |       |               |       |
| Commitments and  contingencies                                                                                                                                                          |       |                  |       |               |       |
|                                                                                                                                                                                    |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                              |       |                  |       |               |       |
| Preferred stock,  par value $0.001 per share,10,000,000 authorized, no shares issued or  outstanding                                                                                    |       | -                     |       | -                  |       |
| Common stock,  par value $0.001 per share,40,000,000 shares authorized, 16,490,146 and  17,225,226 shares issued and outstanding at December 31, 2006 and March 31,  2007, respectively |       | 16,490                |       | 17,225             |       |
| Additional  paid-in capital                                                                                                                                                             |       | 6,363,520             |       | 6,912,890          |       |
| Retained  earnings                                                                                                                                                                      |       | 3,193,029             |       | 3,666,243          |       |
| Total stockholders’  equity                                                                                                                                                        |       | 9,573,039             |       | 10,596,358         |       |
| Total liabilities and stockholders’ equity                                                                                                                                         |       | $                     | 16,367,749 |               | $          | 13,140,201 |   |
|                                                                                                                                                                                         |            |                       |            |                    |            |  |  |

See accompanying notes.

#  

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**GlobalSCAPE,Inc.**

**ConsolidatedStatements of Operations(Unaudited)**
| ** **                                                                            | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Operating revenues:                                                                   |       |                                                 |       |   |   |
| Software product  revenues                                                            |       | $                                                    | 2,194,316  |   | $ | 2,946,822 |   |
| Maintenance and  support (net ofdeferred revenues)                                    |       | 220,607                                              |       | 676,325 |   |
| Total revenues                                                                        |       | 2,414,923                                            |       | 3,623,147 |   |
|                                                                                  |       |                                                 |       |   |   |
| Operating expenses:                                                                   |       |                                                 |       |   |   |
| Cost of revenues  (exclusive of depreciation and amortization shown separately below) |       | 141,411                                              |       | 58,942 |   |
| Selling, general  and administrative Expenses                                         |       | 1,210,737                                            |       | 2,298,146 |   |
| Research and  development expenses                                                    |       | 229,330                                              |       | 437,544 |   |
| Depreciation and  amortization                                                        |       | 21,237                                               |       | 31,585 |   |
| Total operating  expense                                                              |       | 1,602,715                                            |       | 2,826,217 |   |
| Income from operations                                                                |       | 812,208                                              |       | 796,930 |   |
|                                                                                  |       |                                                 |       |   |   |
| Other income (expense):                                                               |       |                                                 |       |   |   |
| Interest expense                                                                      |       | -                                                    |       | (66,274 | ) |
| Interest income                                                                       |       | 13,925                                               |       | 1,748 |   |
| Gain on sale of  assets                                                               |       | 427                                                  |       | — |   |
| Other income                                                                          |       | -                                                    |       | 1,624 |   |
| Total other  income (expense)                                                         |       | 14,352                                               |       | (62,902 | ) |
| Income before income  taxes                                                           |       | 826,560                                              |       | 734,028 |   |
|                                                                                  |       |                                                 |       |   |   |
| Income tax expense                                                                    |       | 277,628                                              |       | 260,814 |   |
|                                                                                  |       |                                                 |       |   |   |
| Net income                                                                            |       | $                                                    | 548,932    |   | $ | 473,214 |   |
|                                                                                  |       |                                                 |       |   |   |
| Net income per common  share- basic                                                   |       | $                                                    | 0.04       |   | $ | 0.03 |   |
| Net income per common  share- assuming dilution                                       |       | $                                                    | 0.03       |   | $ | 0.03 |   |
|                                                                                  |       |                                                 |       |   |   |
| Average shares  outstanding:                                                          |       |                                                 |       |   |   |
| Basic                                                                                 |       | 14,284,348                                           |       | 17,138,780 |   |
| Diluted                                                                               |       | 15,971,013                                           |       | 17,950,681 |   |

 

See accompanying notes.

#  

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**GlobalSCAPE,Inc.**

**ConsolidatedStatements of Cash Flows(Unaudited)**
| ** **                                                                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Operating Activities:                                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 548,932    |   | $ | 473,214 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                 |       |   |   |
|                                                                               |       |                                                 |       |   |   |
| Bad debt expense                                                                   |       | 1,797                                                |       | (11,995 | ) |
| Depreciation and  amortization                                                     |       | 21,237                                               |       | 31,585 |   |
| Amortization of  deferred loan costs                                               |       | -                                                    |       | 36,345 |   |
| Gain on  disposition of assets                                                     |       | (427                                                 | )          | - |   |
| Stock-based  compensation                                                          |       | 47,816                                               |       | 223,347 |   |
| Deferred taxes                                                                     |       | 2,587                                                |       | (102,474 | ) |
|                                                                               |       |                                                 |       |   |   |
| Changes in  operating assets and liabilities:                                      |       |                                                 |       |   |   |
| Accounts  receivable                                                               |       | (328,922                                             | )          | (3,571 | ) |
| Prepaid expenses                                                                   |       | (2,921                                               | )          | (627 | ) |
| Accounts payable                                                                   |       | (18,656                                              | )          | (103,289 | ) |
| Accrued expenses                                                                   |       | 26,439                                               |       | 21,842 |   |
| Federal income  tax payable                                                        |       | 154,710                                              |       | 338,591 |   |
| Deferred  revenues                                                                 |       | 157,700                                              |       | 165,191 |   |
| Deferred  compensation                                                             |       | 6,734                                                |       | 13,670 |   |
| Other long-term  liabilities                                                       |       | (2,805                                               | )          | (3,130 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net cash provided by  operating activities                                         |       | 614,221                                              |       | 1,078,699 |   |
|                                                                               |       |                                                 |       |   |   |
| Investing Activities:                                                              |       |                                                 |       |   |   |
| Proceeds from  sale of property and equipment                                      |       | 427                                                  |       | - |   |
| Purchase of  property and equipment                                                |       | (34,039                                              | )          | (72,428 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net cash used in  investing activities                                             |       | (33,612                                              | )          | (72,428 | ) |
|                                                                               |       |                                                 |       |   |   |
| Financing Activities:                                                              |       |                                                 |       |   |   |
| Issuance of  common stock                                                          |       | 19,068                                               |       | 326,758 |   |
| Bank borrowings                                                                    |       | -                                                    |       | (4,610,212 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net cash provided by  financing activities                                         |       | 19,068                                               |       | (4,283,454 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net increase (decrease)  in cash                                                   |       | 599,677                                              |       | (3,277,183 | ) |
|                                                                               |       |                                                 |       |   |   |
| Cash at beginning of  period                                                       |       | 2,029,473                                            |       | 4,632,666 |   |
|                                                                               |       |                                                 |       |   |   |
| Cash at end of period                                                              |       | $                                                    | 2,629,150  |   | $ | 1,355,483 |   |

 

Supplemental disclosures:

 
| Interest paid     |   | - |    | $      | 29,929 |   |
|-------------------|--------|---|---------|--------|--------|--------|
| Income taxes paid |   | $ | 120,330 |   | $      | 14,132 |   |
|                   |        |   |         |        |        |        |  |

 

See accompanying notes.

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**GlobalSCAPE, Inc.**

**Notes toConsolidated Financial Statements**

# **Nature of Business**

GlobalSCAPE, Inc.(GlobalSCAPE), founded in April 1996, develops and distributes secure filemanagement software that enables users to safely send data over the internet.Our software is used worldwide across a wide range of industries. Through theend of 2006, we had sold approximately 1.6 million software licenses and ourcustomer base includes individual consumers, small to medium-sized businesses,as well as some of the largest corporations in the world.

Our file transferproducts provide for the privacy of critical information such as medicalrecords, financial data, customer files and other similar documents. Inaddition, these products provide for compliance with government regulationsrelating to the protection of information while allowing users to reduce ITcosts, increase efficiency, track and audit transactions and automateprocesses.

Through Availl Inc.(Availl), our wholly-owned subsidiary which we acquired in September 2006, wealso provide Wide-Area Files Systems (WAFS) and Continuous Data Protection(CDP) software.  This addition expandsGlobalSCAPE’s technology base into data replication, acceleration of filetransfer, sharing/collaboration and continuous data backup and recovery.  We believe that our expanded product offeringuniquely positions us to provide comprehensive, secure transfer, sharing, andreplication of files that need to be transmitted inside the user’s firewall todistributed offices, or outside the user’s firewall to business and tradingpartners.

During the three months ended March 31, 2007, approximately 67% of ourrevenues were generated from customers within the United States, with theremaining 33% concentrated mostly in Western Europe, Canada and Australia.Virtually all of our revenues were derived from sales of software licenses andsupport agreements. The combined sales of CuteFTP Home and CuteFTP Proaccounted for 50% and 30% of our revenues in 2005 and 2006, respectively, and35% and 24% of our revenues in the first quarter of 2006 and 2007,respectively.  The combined sales of ourSecure Server and Enhanced File Transfer products grew from 43% of our revenuesin 2005 to 61% in 2006, and represented 62% and 55% of our revenues for thethree months ended March 31, 2006 and 2007, respectively.  Sales of the WAFS and CDP productsrepresented 7% of our 2006 annual revenue and 22% of our revenues for the firstquarter of 2007.

***CorporateStructure***

Prior to September22, 2006, all of the Company’s operations were conducted by GlobalSCAPE Texas,LP, a Texas limited partnership.  Thepartners of GlobalSCAPE Texas, LP are two Nevada limited liability companies,which are both wholly-owned subsidiaries of GlobalSCAPE, Inc., a Delawarecorporation.

On September 22,2006, GlobalSCAPE acquired one hundred percent (100%) of the issued andoutstanding capital stock of Availl, a privately held corporation, pursuant toan Agreement and Plan of Merger with Availl and its stockholders.  The purchase price was $9.65 million of which$7.65 million was paid in cash and $2.0 million was paid in shares ofGlobalSCAPE common stock.

Availl willcontinue to operate as a wholly-owned subsidiary of GlobalSCAPE, Inc. based inAndover, Massachusetts.   GlobalSCAPE,Inc. is a holding company and conducts no operations; however, the stock ofGlobalSCAPE, Inc. is quoted on the OTC Bulletin Board.  References to “GlobalSCAPE” or the “Company”refer collectively to GlobalSCAPE Texas, LP, its partners and Availl unlessotherwise indicated.

5

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**Basis of Presentation**

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with Rule 10-01 ofRegulation S-X, “Interim Financial Statements.” Accordingly, they do not include all information and footnotes requiredunder generally accepted accounting principles for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normally recurring accruals)considered necessary for a fair presentation have been made.  The results of operations for any interimperiod are not necessarily indicative of the results to be expected for thefull year.

The consolidated balance sheet at December31, 2006 has been derived from the audited consolidated financial statements atthat date but does not include all the information and footnotes required bygenerally accepted accounting principles for complete consolidated financialstatements.  For further information,refer to the consolidated financial statements and footnotes included inGlobalSCAPE’s Annual Report on Form 10-K for the year ended December 31, 2006.

# **Principles of Consolidation**

The consolidated financial statements includeall subsidiaries.  All inter-companytransactions and balances have been eliminated.

# **Liquidity**

The use of capital resources is drivenprincipally by the need to enhance existing products and to develop or acquirenew products.  The amount of suchexpenditures has a direct impact on the ability to offer enhanced and newproducts to customers.  The Company’sprincipal source of funds is cash flow from operations which, in turn, ishighly dependent on sales revenue.  AtDecember 31, 2006, the Company had cash available of $4.6 million.  During the three months ended March 31, 2007, the Companygenerated $1.1 million of cash from operations, which was used along with otherfunds in the early payoff of the term loan from the Availl acquisition.  We continue to generate cash in excessof our operational needs.

The Company entered into a loan agreementwith Silicon Valley Bank on September 22, 2006 which involved a $5,000,000 termloan agreement which we used to finance part of the cash portion of thepurchase price for Availl.  The term loanhas been fully repaid as of March 31, 2007. The loan agreement also establisheda $750,000 revolving line of credit for two years at an interest rate of primeplus 1.00%.

As of March 31,2007, the Company had cash and cash equivalents of $1.4 million and had networking capital of $605,000.  Managementbelieves this level of working capital, together with availability under theCompany’s revolving credit facility with Silicon Valley Bank and the excesscash generated by the profitable operation of the business, is adequate tofinance the Company’s current level of operations.

***Reclassifications***

***Certain prior period amounts havebeen reclassified to conform to the current period presentation. Thesereclassifications had no impact on operating income as previously reported.***

***Sale / Disposal of Assets***

***During***the first quarter of 2006, the Companydisposed of equipment with an original purchase price of $15,362 and recognizeda gain of $427 related to the disposal of these assets.  The Company had no asset disposals in thethree months ending March 31, 2007.

**Goodwill**

As of March 31,2007, GlobalSCAPE had goodwill in the amount of $9.7 million associated with theacquisition of Availl.  This acquisitionwas accounted for using the purchase method of accounting. See 

6

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Acquisitions notefor a description of the acquisition. In accordance with SFAS No. 142 *Goodwill and Other Intangible Assets*, the Company willassess the impairment of goodwill annually in the fourth quarter, or morefrequently if other indicators of potential impairment arise.

No allocation has been made to intangible assets as ofMarch 31, 2007.  Management willdetermine the proper value of intangible assets acquired from Availl, Inc. andallocate a portion of the goodwill to intangible assets within the next sixmonths.

**Acquisitions**

On September 22, 2006, the Company completed theacquisition of all of the issued and outstanding shares of Availl, a privatelyheld provider of Wide Area Files Systems (WAFS) and Continuous Data Protection(CDP) software, for $7.65 million in cash and $2.0 million in the form of716,846 shares of GlobalSCAPE common stock. The Company incurred directacquisition costs of approximately $127,000. In connection with theacquisition, $850,000 of the cash consideration in this acquisition was placedinto an escrow account for purposes of settling indemnification claims for theeighteen-month period following the closing. In accordance with EITF Issue No.99-12, *Determination of the Measurement Datefor the Market Price of Acquirer Securities Issued in a Purchase BusinessCombination*, the Company has used $2.79 as the per share amount tovalue the common stock consideration paid to Availl shareholders (representingthe average of the closing prices of GlobalSCAPE’s common stock for the thirtydays before the date of the closing of the merger, September 22, 2006).Pursuant to the terms of the acquisition, the Company granted stock options tothe former Availl stockholders who were also employees under the GlobalSCAPE,Inc. 2000 Stock Option Plan. Exercising the options under this plan iscontingent upon the individual’s continued employment with the Company and willbe vested over three years in three annual installments.

The Availl acquisition was accounted for using thepurchase method of accounting. The purchase price was paid on theSeptember 22, 2006 closing date. The value of assets and liabilities was estimated based on purchaseprice and future intended use.

Goodwill represents the excess of the purchase priceover the fair value of the net identifiable assets acquired. This premium paidfor the acquisitions is based on management’s belief that the acquiredtechnologies, businesses and engineering talent were of strategic importance inthe Company’s growth strategy. Operating results from the acquired business isincluded in the condensed consolidated statements of operations from the dateof acquisition.

A summary of the purchase price allocation is asfollows:

| Purchase price -                                           |   |      |      |
|------------------------------------------------------------|--------|-----------|-----------|
| Cash paid                                                  |   | $         | 7,650,000 |   |
| Stock issued                                               |   | 2,000,000 |      |
| Legal and other acquisition costs                          |   | 126,931   |      |
|                                                       |   |      |      |
| Acquisition  costs                                         |   | 9,776,931 |      |
| Net fair value  of assets acquired and liabilities assumed |   | (123,872  | )         |
|                                                       |   |      |      |
| Goodwill  acquired                                         |   | $         | 9,653,059 |   |

 

The net fair value of assets acquired and liabilities assumed of Availlat the acquisition date was as follows:

| Cash                                                       |   | $        | 191,276 |   |
|------------------------------------------------------------|--------|----------|---------|--------|
| Accounts  receivable, net                                  |   | 553,798  |    |
| Fixed assets                                               |   | 26,411   |    |
| Other assets                                               |   | 13,555   |    |
| Accounts payable  and accrued expenses                     |   | (226,719 | )       |
| Deferred tax  liability                                    |   | (71,693  | )       |
| Deferred revenue                                           |   | (362,756 | )       |
|                                                       |   |     |    |
| Net fair value of  assets acquired and liabilities assumed |   | $        | 123,872 |   |

 

7

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# **Stock-Based Compensation**

GlobalSCAPE has stock-based compensation plansavailable to grant incentive stock options to employees. Under the GlobalSCAPE,Inc. 2000 Stock Option Plan (the Plan), which was approved by the Board ofDirectors and became effective on May 17, 2001, a maximum of 3,660,000 sharesof GlobalSCAPE common stock may be awarded. During the three monthsended March 31, 2007, no stock options were granted.

The exercise price, term and other conditionsapplicable to each stock option granted under the stock plans are determined bythe Board of Directors. The exercise price of stock options is set on the grantdate and may not be less than the fair market value per share of our stock onthat date. The options generally become exercisable over a three-year periodand expire after ten years.

Effective January 1, 2006, we adopted the provisionsof Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No.123R) requiring that compensation cost relating toshare-based payment transactions be recognized in the financial statements. Thecost is measured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod (generally the vesting period of the equity award). Prior to January 1,2006, we accounted for share-based compensation to employees in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB No. 25), and related interpretations. We also followed thedisclosure requirements of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation”, as amended by Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”. We adopted SFAS No. 123R using themodified prospective method and, accordingly, financial statement amounts forprior periods presented in this Form 10-Q have not been restated to reflect thefair value method of recognizing compensation cost relating to non-qualifiedstock options.

There was $223,000 ofcompensation cost related to non-qualified stock options recognized inoperating results in the three months ended March 31, 2007.

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option-pricing model. Expectedvolatility is based on historical volatility of GlobalSCAPE stock. We used thesimplified method to derive an expected term. The expected term represents anestimate of the time options are expected to remain outstanding. The risk-freerate for periods within the contractual life of the option is based on the U.S.treasury yield curve in effect at the time of grant. The following table setsforth the assumptions used to determine compensation cost for our non-qualifiedstock options consistent with the requirements of SFAS No. 123R.

 
| ** **                      | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
|                            |       |                                                       |       |
| Expected  volatility            |       | 98                                                         | %          |
| Expected annual  dividend yield |       | 0                                                          | %          |
| Risk free rate  of return       |       | 4.67                                                       | %          |
| Expected option term  (years)   |       | 6.01                                                       |       |

#  

8

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The following table summarizes information about stockoption activity for the three months ended March 31, 2007:
| ** **                        | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value ($M)** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| Outstanding at December  31, 2006 |       | 2,480,640               |       | $                                      | 1.16       |                                                             | 7.25       |                                      | $          | 4.3 |   |
|                              |       |                    |       |                                   |       |                                                             |       |                                      |       |
| Granted                           |       | -                       |       |                                   |       |                                                             |       |                                      |       |
|                              |       |                    |       |                                   |       |                                                             |       |                                      |       |
| Exercised                         |       | (735,080                | )          | $                                      | .445       |                                                             |       |                                      | $          | 1.9 |   |
|                              |       |                    |       |                                   |       |                                                             |       |                                      |       |
| Lapsed or  canceled               |       | -                       |       |                                   |       |                                                             |       |                                      |       |
|                              |       |                    |       |                                   |       |                                                             |       |                                      |       |
| Outstanding at March  31, 2007    |       | 1,745,560               |       | $                                      | 1.47       |                                                             | 7.25       |                                      | $          | 2.5 |   |
|                              |       |                    |       |                                   |       |                                                             |       |                                      |       |
| Exercisable at March  31, 2007    |       | 630,980                 |       | $                                      | .76        |                                                             | 7.63       |                                      | $          | 1.4 |   |

 

There were no options granted during the three monthsended March 31, 2007.  The totalintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options on the date of exercise) exercisedduring the three months ended March 31, 2007 was $1.9 million. During the threemonths ended March 31, 2007, the amount of cash received from the exercise ofstock options was $327,000 with no associated tax benefit. The followingtable summarizes information about nonvested stock option awards as of March31, 2007 and changes for the three months ended March 31, 2007.
| ** **                       | ** ** | **Number  Of  Options** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| Non-vested at December  31, 2006 |       | 1,180,580               |       | $                                                           | 1.52       |   |
| Granted                          |       | -                       |       | -                                                           |       |
| Vested                           |       | 66,000                  |       | 1.23                                                        |       |
| Forfeited                        |       | -                       |       | -                                                           |       |
|                             |       |                    |       |                                                        |       |
| Non-vested at March 31, 2007     |       | 1,114,580               |       | $                                                           | 1.54       |   |

At March 31, 2007, there was $1.3 million of totalunrecognized compensation cost related to non-vested non-qualified stock optionawards which is expected to be recognized over a weighted-average period ofthree years. There were 66,000 options that became vested during the threemonths ended March 31, 2007.

**Common Stock and Warrants**

On November 13, 2006, GlobalSCAPE enteredinto a securities purchase agreement with accredited investors, who paid it anaggregate of $3.4 million in gross proceeds in consideration for 1,352,000shares of GlobalSCAPE common stock at a price of $2.50 per share.  The Company also granted warrants to purchase1,352,000 shares of its common stock to the investors with an exercise price of$3.15 per share, subject to certain adjustments. The exercise price will not,in any event, be adjusted to a price of less than $2.81 per share except in theevent of stock dividends, stock splits or similar events.  The warrants have a 

9

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5-year term and will be exercisable beginningMay 15, 2007.  As part of thistransaction, GlobalSCAPE filed a registration statement to register the resaleof these shares by the investors.  Theregistration statement was declared effective by the SEC on April 16, 2007.

# **Earnings per Common Share**

Basic and diluted net income per common shareis presented in conformity with Statement of Financial Accounting Standards No.128, “Earnings Per Share” (SFAS 128) for all periods presented. Basic earningsper share is based on the weighted effect of all common shares issued andoutstanding, and is calculated by dividing net income (loss) available tocommon stockholders by the weighted average shares outstanding during theperiod. Diluted earnings per share is calculated by dividing net income (loss)available to common stockholders by the weighted average number of commonshares used in the basic earnings per share calculation plus the number ofcommon shares that would be issued assuming conversion of all potentiallydilutive common shares outstanding. Below is a reconciliation of the numerators and denominators of basicand diluted earnings per share for each of the periods presented:

|                                                         | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| **Numerators**                                          |       |                                                 |       |   |   |
| Numerators for  basic and diluted earnings per share:   |       |                                                 |       |   |   |
| Net income                                              |       | $                                                    | 548,932    |   | $ | 473,214 |   |
|                                                    |       |                                                 |       |   |   |
| **Denominators**                                        |       |                                                 |       |   |   |
| Denominators for  basic and diluted earnings per share: |       |                                                 |       |   |   |
| Weighted average shares outstanding — basic        |       | 14,284,348                                           |       | 17,138,780 |   |
|                                                    |       |                                                 |       |   |   |
| **Dilutive  potential common shares**                   |       |                                                 |       |   |   |
| Stock options  (1)                                      |       | 1,686,665                                            |       | 811,901 |   |
| Denominator for  dilutive earnings per share            |       | 15,971,013                                           |       | 17,950,681 |   |
| Net income per  common share                            |       | $                                                    | 0.04       |   | $ | 0.03 |   |
| Net income per common  share — assuming dilution   |       | $                                                    | 0.03       |   | $ | 0.03 |   |

----

(1)             Forthe three months ended March 31, 2006, 160,000 options have not been includedin dilutive shares, as the effect would be anti-dilutive.

#  

10

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**Item 2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

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

**Overview**

We develop and distribute secure filemanagement software for individuals and business users to safely send data overthe internet and Wide-Area File System (WAFS) collaboration and Continuous DataProtection (CDP) products.  Our filemanagement products guarantee the privacy of critical information such asfinancial data, medical records, customer files and other similardocuments.  In addition, these productsensure compliance with government regulations relating to the protection ofinformation while allowing users to reduce IT costs, increase efficiency, trackand audit transactions and automate processes. Our WAFS and CDP products provide data replication, acceleration of filetransfer, sharing/collaboration and continuous data backup and recovery to ourcustomers.  We believe that we areuniquely positioned to provide secure transfer, sharing, and replication offiles that need to be transmitted inside the user’s firewall to distributedoffices, or outside the user’s firewall to business and trading partners.

The following is a brief description of our products:

·                  File Management Products — Our FileManagement products are best known for the “CuteFTP” product line. Theyprimarily consist of products that help users securely move and copy files onthe internet. A substantial portion of our revenues are derived from licensingour File Management products. Some of our products encrypt the transfers forsecurity using technology similar to a Web browser. The products consist ofthree product categories: client, server and compression transfer. Our FileManagement product line includes CuteFTP Home, Cute FTP Professional, SecureFTPServer, and Enhanced File Transfer.

·                  Wide-Area File System (WAFS) Products— Our WAFS products provide a file sharing and collaboration solution overmultiple sites.  By keeping all dataupdated on each location’s file server, each site has instant access to thevery latest version.  Our WAFS productshelp 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 (CDP)Products — Our CDP products consolidate remote backup for file servers.  As files change, the servers backup in realtime to the customer’s backup site which can be at the same or a remotelocation.   The backup server can keepany number of past versions of each file (and deleted files) which gives thecustomer instant restore, as well as the ability to perform point-in-timesnapshots.

Our strategy is to continue enhancing ourfile transfer products to meet the demands of both individual and enterpriseusers, while improving the security features of our current product line, andto expand into growing markets through the acquisition of compatible companiesand products.  We acquired Availl, aleading provider of Wide-Area File System (WAFS) collaboration and ContinuousData Protection (CDP) products as part of this strategy.  This acquisition expanded our technology baseinto data replication, acceleration of file transfer, sharing/collaboration andcontinuous data backup and recovery.  Webelieve that these new products give us entry into two large and rapidlygrowing markets.

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

11

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transferring information across the internet,but also through the aggressive exploitation of the data replication andprotection markets.  Based upon estimatesby Gartner, Inc., and other consulting groups in our markets, we believe thatthe WAN optimization/WAFS market is currently $300 million annually and growingat 20% - 30% per year, and the CDP market is of similar size but in the earlystages of adoption and growing rapidly. In addition, we believe that the WAFS and CDP products are highlycomplementary to our traditional Secure File Transfer products facilitatingcross sales and new customer penetration.

##### **Liquidityand Capital Resources**

Our capital requirements principally relateto our need to enhance our existing products and to develop or acquire newproducts.  The amount of our capitalexpenditures has a direct impact on our ability to offer enhanced and newproducts to our customers.  We relyheavily on cash flows from operations and prior to 2006, these cash flows weresignificantly 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.  The salesof these products have remained relatively flat over the prior two years whilebecoming an increasingly smaller portion of our total revenue.  Much of the percentage decline of revenuesfrom the sale of these two products was caused by significant increases in thesales of other products in 2006, namely, SecureFTP Server and Enhanced FileTransfer, which collectively accounted for 43% and 61% of our revenues in theyears ended December 31, 2005 and 2006, respectively, and 62 % and 55 % for thethree months ended March 31, 2006 and 2007, respectively.  Revenues in total increased 64% whencomparing 2006 to 2005 and 50% when comparing the three months ended March 31,2006 and 2007.  Sales of CuteFTP Home andCuteFTP Professional were $856,000 and $878,000 for the three months endedMarch 31, 2006 and 2007 respectively. While the sales were virtually unchanged, the percent they represent ofthe sales of all products continued to decline from 35% for the first quarter of2006 to 24% for the first quarter of 2007, demonstrating the shift of salesvolume to our other products which now includes WAFS and CDP.

Our principal sources of capital are cash onhand and cash flow from operations and availability under our revolving line ofcredit.  At March 31, 2007, we had cashon hand of $1.4 million and we continue to generate cash in excess of ouroperational needs.  To the extent thatsales decline, our cash flow from operations will also decline.  If sales decline or our liquidity otherwiserequires, management may substantially reduce personnel and personnel-relatedcosts, reduce or substantially eliminate capital expenditures and/or reduce orsubstantially eliminate research and development expenditures. We may also sellequity securities or enter into other credit arrangements in order to financefuture acquisitions or licensing activities.

At March 31, 2007, we had $750,000 of availability under our revolvingline of credit.  Borrowings under ourrevolving credit facility bear interest at 1.00% above the Bank’s prime rateand 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 theassets of GlobalSCAPE and its subsidiaries including Availl.  The loan agreement contains customarycovenants including covenants relating to maintaining legal existence and goodstanding, complying with applicable laws, delivery of financial statements,maintenance of inventory, payment of taxes, maintaining insurance, andprotection of intellectual property rights. GlobalSCAPE and its subsidiaries are also prohibited from selling any oftheir assets other than in the ordinary course of business, acquiring any otherentities, changing the types of business they are engaged in, incurringindebtedness other than that permitted by the loan agreement, incurring anyliens on their assets other than those permitted by the loan agreement, makingcertain investments or paying any dividends on, or acquiring, any shares oftheir capital stock.  The loan agreementcontains 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 capitalexpenditures (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 1.5to 1.00; and

·                  a ratio of totalfunded debt to EBITDA of not more than 2.00 to 1.00.

12

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GlobalSCAPE was not in compliance with the first ratio as of December31, 2006, but received a waiver of this covenant from the lender.  At March 31, 2007, we were in compliance withthese covenants.

The loan agreement also contains customary events of default includingthe failure to make payments of principal and interest, the breach of anycovenants, the occurrence of a material adverse change, certain bankruptcy andinsolvency events, the breach of other agreements creating indebtedness of$50,000 or more and the entry of a judgment of $50,000 or more againstGlobalSCAPE or any of its subsidiaries.

Net cash provided by operating activities was$1.1 million for the three months ended March 31, 2007 as compared to $614,000in the three months ended March 31, 2006. Cash provided by operations for the three months ended March 31, 2007,was primarily the result of net income, plus an increase in stock-basedcompensation, federal income tax payable and deferred revenue, offset by adecrease in accounts payable and an increase in deferred tax assets.

Net cash used in investing activities for thethree months ended March 31, 2006 and 2007 was ($34,000) and ($72,000),respectively.  In both periods, the cashused in investing activity was primarily for the purchase of computer equipmentand software.

Net cash provided in financing activitiesduring the three months ended March 31, 2006 and 2007 were $19,000 and ($4.3 million)****** respectively. In 2006, the increase in cash provided from financing activities wasfrom issuance of stock from exercised options. In 2007, the decrease in cash from financing activities was primarilythe result of the payoff of the term loan with Silicon Valley Bank.

As of March 31, 2007, we had $1.4 million incash and cash equivalents, total current assets of $3.1 million and currentliabilities of $2.5 million, resulting in working capital of $605,000.  The primary component of current liabilitiesat March 31, 2007 was $1.5 million of deferred revenues which will berecognized over the remaining term (generally one to twelve months) of themaintenance and support contracts.  AtMarch 31, 2007, our principal commitments consisted of obligations outstandingunder operating leases as well as royalty agreements with third parties, federalincome tax and trade accounts payable.  The commitments related to royalty agreements are contingent on salesvolumes.  We plan to continue to expendsignificant resources on product development in future periods and may also useour cash to acquire or license technology, products or businesses related toour current business. The facilities that we currently occupy are expected tobe sufficient for our growth over the next twelve months.  Consequently, we do not anticipatesignificant expenditures for leasehold improvements or furniture for 2007.

**Contractual Obligations**

The following table sets forth the future minimum payments requiredunder contractual commitments at March 31, 2007:
| ** **                       | ** ** | **Payments Due by Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                          | ** ** | **2007 (1)** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease                  |       | $                                                   | 211,267    |   | $ | 190,063 |   | $ | 81,667 |   | - |   | $ | 482,997 |   |
| Equipment Leases                 |       | 1,268                                               |       | - |   | - |   | - |   | 1,268 |   |
| Total Cash Obligations           |       | $                                                   | 212,535    |   | $ | 190,063 |   | $ | 81,667 |   | - |   | $ | 484,265 |   |
|                                  |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             Amountsfor 2007 reflect the future minimum payments for the remaining nine months ofthe fiscal year.

13

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##### **CriticalAccounting Policies**

There were no changes in our criticalaccounting policies from those set forth in our Annual Report on Form 10-K forthe year ended December 31, 2006 during the quarter ended March 31, 2007.

# ***Inflation***

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

# ***Seasonality***

Historically, our internetsales have been subject to seasonal variations. We experience significantlyless sales volume during national holidays and weekends when compared to normalbusiness days.  In the fourth quarter of2005, our sales revenues decreased approximately 5% over the priorquarter.  However, this trend did notexist in 2006 where the internet sales increased in the fourth quarter by 7%over the third quarter of the same year. Over the past two years internet sales have remained relatively flatwhile sales of our file transfer server products have increased by 130% growingto become 61% of total sales.  As aresult of this change in mix of products and the apparent reversal of the internetsales seasonality in 2006, we do not expect seasonality to have a significantimpact on sales in 2007.  In the threemonths ending March 31, 2007, seasonality had no material effect on internetsales volume.

# **Comparison of the Three Monthsended March 31, 2006 and 2007**

| ** **                                    | ** ** | **2006**  | ** ** | **2007**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|-------------------|------------|
| Software product  revenues                    |       | $         | 2,414,923  |      | $          | 3,623,147         |       | $                 | 1,208,224  |   | 50 | % |
| Cost of revenues                              |       | 141,411   |       | 58,942    |       | (82,469           | )          | (58               | )%         |
| Selling, general  and administrative Expenses |       | 1,210,737 |       | 2,298,146 |       | 1,087,409         |       | 90                | %          |
| Research and  development expenses            |       | 229,330   |       | 437,544   |       | 208,214           |       | 91                | %          |
| Depreciation and  amortization                |       | 21,237    |       | 31,585    |       | 10,348            |       | 49                | %          |
| Total operating  expense                      |       | 1,602,715 |       | 2,826,217 |       | 1,223,502         |       | 76                | %          |
| Income (loss)  from operations                |       | 812,208   |       | 796,930   |       | (15,278           | )          | (2                | )%         |
| Other Income  (expense)                       |       | 14,352    |       | (62,902   | )          | (77,254           | )          | (538              | )%         |
| Income tax  expense                           |       | 277,628   |       | 260,814   |       | (16,814           | )          | (6                | )%         |
| Net income  (loss)                            |       | $         | 548,932    |      | $          | 473,214           |       | $                 | (75,718    | ) | (14 | )% |

 

***Revenue.***We derive revenues primarily from software sales.  Revenues are comprised of the gross sellingprice of software, including shipping charges and the earned portion of supportand maintenance agreements. For the three months ended March 31, 2006 and 2007,total revenues increased by $1.2 million or approximately 50% from $2.4 millionto $3.6 million largely due to the increase in revenues from sales of ourWide-Area File Systems, SecureFTP Server and Enhanced File Transfer products.Unit volume increased with approximately 73,500 licenses sold in the threemonths ended March 31, 2006 versus 79,000 sold in the same period in 2007.  The 7% increase in unit volumes included aricher sales mix of our higher priced Enhanced File Transfer, WAFS and CDPofferings resulting in an increase in the average selling price of our productsfrom $34.77 in the three months ended March 31, 2006  to $48.02 in the same period in 2007.

Our first quarter 2007 revenues, though up substantially from the samequarter in 2006, did not increase as much as we had anticipated.  The amount of time required to makeimprovements to our WAFS and CDP products that we believe are necessary hasbeen greater than we had expected. Consequently, we have not been able to aggressively market the Wide-AreaFile Systems and Continuous Data Protection products to our existing customerbase and to the market in general in the first quarter as we had initially 

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planned. We believe that good progress is currently being made on the productimprovements and we anticipate a more aggressive sales push for these productsin the latter half of the second quarter.

The following table reflects revenue byproduct including the related maintenance and support for each product
| ** **                                                                                               | ** ** | **Revenue for**                        | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                               | ** ** | **Quarter ending March 31,** | ** ** |
| **Product**                                                                                              | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Enhanced File  Transfer                                                                                  |       | $                                           | 894,104    |   | 37.0 | % | $ | 1,244,114 |   | 34.3 | % |
| SecureFTP Server                                                                                         |       | 595,541                                     |       | 24.7 | % | 741,889 |   | 20.5 | % |
| CuteFTP  Professional                                                                                    |       | 590,680                                     |       | 24.4 | % | 562,877 |   | 15.5 | % |
| CuteFTP Home                                                                                             |       | 265,723                                     |       | 11.0 | % | 315,372 |   | 8.7 | % |
| Wide-Area File  Systems                                                                                  |       | -                                           |       | - |   | 714,930 |   | 19.7 | % |
| Continuous Data  Protection                                                                              |       | -                                           |       | - |   | 81,444 |   | 2.3 | % |
| All Others                                                                                               |       | 226,574                                     |       | 9.4 | % | 127,711 |   | 3.5 | % |
| Deferred Revenue  adjustment                                                                             |       | (157,699                                    | )          | (6.5 | )% | (165,190 | ) | (4.5 | )% |
| Total Operating  Revenues                                                                                |       | $                                           | 2,414,923  |   | 100.0 | % | $ | 3,623,147 |   | 100.0 | % |
|                                                                                                     |       |                                        |       |   |   |   |   |   |   |
| Gross maintenance and  support included above before recognition of the net adjustment to defer  revenue |       | $                                      | 378,306    |   | 14.7 | % | $    841,515 |   | 22.2 | % |
|                                                                                                          |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 

Our Wide-Area File Systems and ContinuousData Protection products, which we began selling after completing the Availlacquisition in September 2006, accounted for approximately 22% of total revenuefor the first quarter of 2007.  Sales ofour Secure Server and Enhanced File Transfer products grew by 33% in the threemonths ended March 31, 2007, to $2.0 million from $1.5 millions in the sameperiod in 2006 and represented approximately 62% of our total revenues in thefirst three months of 2006 as compared to 55% in the same period in 2007.  The increase in revenues from these productswas the result of an increased emphasis of our internal sales group to marketand sell these products to meet the needs of businesses to transfer files in asecure fashion using business or enterprise level software. The decrease in thepercentage of sales represented by these products was the result of theintroduction of our WAFS and CDP products. Revenues from CuteFTP Home and CuteFTP Professional increased by 3% ascompared to the quarter ended March 31, 2006 and accounted for approximately35% and 24% of total revenues for the three months ended March 31, 2006 and2007, respectively.  These changesreflect the continuing maturity of CuteFTP and CuteFTP Pro, and theavailability of low cost alternatives to occasional users.  We believe that our reliance on theseproducts will continue to decline as we emphasize sales of our more complexproducts.  In addition, because of themore complex nature of Secure Server, Enhanced File Transfer, WAFS and CDP,purchasers require increased maintenance and support.  As a result, our maintenance and supportrevenues increased by 207% from the first three months of 2006 to the sameperiod in 2007 from $221,000 in 2006 to $676,000 in 2007, net of deferredrevenue.  Maintenance and support pricingis reflective of the license cost of the products and the additional support ittakes to maintain and support the products and customers. With highermaintenance and support revenues, we will recognize additional deferred revenueas we earn the revenue over the life of the maintenance and support agreement.

***Cost of Revenues.***  Cost of revenues consists primarily ofroyalties and production, packaging and shipping costs for boxed copies ofsoftware products.  Cost of revenuesdecreased $82,000 or 58% between periods from $141,000 for the three monthsended March 31, 2006 to $59,000 for the three months ended March 31, 2007.  Royalties that we pay on software productslicensed from third parties, which we resell, are expensed as a cost of salewhen the software product is sold or earlier if the recoverability of anyprepaid royalties is in doubt.  Cost ofrevenues as a percent of total revenues was 6% for the three months ended March31, 2006 as compared to 2% for the same period in 2007.

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***Selling, General andAdministrative.*** Selling, general and administrative expenses consist primarily ofpersonnel and related expenses, marketing, customer support, rents, bad debtand professional fees.  For the threemonths ended March 31, 2006 and 2007, selling, general and administrativeexpenses were $1.2 million and $2.3 million, respectively, an increase of  $1.1 million. Of this increase, 57% or $653,000 was attributable to Availl.  Of the non-Availl expenses, salariesincreased 18% as we have hired new employees in order to support current andprojected growth.  Commissions andbonuses increased 35% as a result of the increase in revenues.  In the three months ended March 31, 2006 and2007 we expensed $48,000 and $223,000 respectively, for stock basedcompensation related to the granting of stock options to employees as requiredby FAS123R.

***Research andDevelopment.*** Research and development expenses increased $208,000 or 91% betweenperiods, from $229,000 to $438,000.  Theincrease was due largely to additional expenditures for external developmentresources and hiring of additional personnel needed to support the Availlproducts.

***Depreciation and Amortization.***  Depreciation and amortization expenseconsists of depreciation expense related to our fixed assets, amortization ofthe trademark associated with our purchase of CuteFTP and in prior periods,amortization of capitalized development costs. Depreciation and amortizationexpense increased from $21,000 to $32,000, an increase of approximately49%.  This increase was due primarily tothe addition of the assets from the Availl acquisition and the capitalizationof $56,000 of equipment and software during the first quarter.

***Other Income,Expense.*** For the three months ended March 31, 2006 and 2007, interest expenseincreased from $0 to $66,000, respectively. The interest expense incurred during 2007 was paid on the term loanrelated to the acquisition of Availl. We earned $14,000 and $2,000 in interestduring the first quarter of 2006 and 2007 respectively from investing ourexcess cash which was reduced significantly in 2007 by the use of cash in theearly payoff of the term loan.

***Income Taxes.***  The provision for federal income taxes forthe quarter ended March 31, 2006 and 2007 respectively was $278,000 and$261,000. The decrease in federal income taxes versus last year is the resultof decreased income upon which tax is due. ** **Beginning January 1, 2007, thestate of Texas has imposed a new margin tax equal to 1% of the Company’srevenue less compensation expense (based on Texas source income).  In the three months ended March 31, 2007, thetax equaled approximately $21,000**.**

***Net Income.***  GlobalSCAPE recorded net income of $549,000and $473,000 for the three months ended March 31, 2006 and 2007,respectively.  The decrease in net incomewas only $76,000 even though the Company incurred substantial increases in SG&Aand R&D expenses related to Availl plus had an additional $176,000 incompensation expense as required by FAS 123R for grants of employee stockoptions.

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**Item 3.**                          Quantitativeand Qualitative Disclosures About Market Risk

To date, we have not utilized derivativefinancial instruments or derivative commodity instruments.  We do not expect to employ these or otherstrategies to hedge market risk in the foreseeable future.  We may invest our cash in money market funds,which are subject to minimal credit and market risk.  We believe that the interest rate risk andother relevant market risks associated with these financial instruments areimmaterial.

In the three months ended March 31, 2007,approximately 33% of our revenues came from customers outside the UnitedStates.  All revenues are received inU.S. dollars so we have no exchange rate risk with regard to the sale.  However, in July 2003, the European Union(EU) enacted Value Added Taxes (VAT) on electronic purchases.  These taxes are charged to our non-businesscustomers in the EU and, in our case, are remitted quarterly in poundsterling.   We expect that the impact ofthis currency translation will not be material to our business.

**Item 4.**                          Controlsand Procedures

Asof the end of the period covered by this report, our Chief Executive Officerand Chief Financial Officer carried out an evaluation of the effectiveness ofGlobalSCAPE’s “disclosure controls and procedures” (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) and concludedthat the disclosure controls and procedures were effective.

 There were no changes in ourinternal controls over financial reporting during the period covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, our financial reporting.

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**Part II.  Other Information**

**Item 1.**                          LegalProceedings

We are notcurrently involved in any material legal proceedings.

**Item 1A.**                 Risk Factors.

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2006, which could materially affectour business, financial condition or future results.  The risks described in our Annual Report onForm 10-K are not the only risks facing GlobalSCAPE.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

**Item 6.**
| Exhibits   | ** **                                                              |
|------------|-------------------------------------------------------------------------|
| ** ** | ** **                                                              |
| 31.1       | Certificate pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|       |                                                                    |
| 31.2       | Certificate pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|       |                                                                    |
| 32.1       | Certificate pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|             |   | GLOBALSCAPE, INC. |
|-------------|--------|-------------------|
|        |   |              |   |
| May 9, 2007 |   | By:               | /s/ Charles R. Poole |
| Date        |   |              | Charles R. Poole |
|        |   |              | President and Chief Executive Officer |
|        |   |              |   |
| May 9, 2007 |   | By:               | /s/ Bernard N. Schneider |
| Date        |   |              | Bernard N. Schneider |
|        |   |              | Chief Financial Officer |

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