**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K/A Number 1**

 

**ý****        ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2005**

** **

**OR**

** **

**o****        ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from           to              .**

 

**CommissionFile No. 000-30617**

 

**GlobalSCAPE, Inc.**

(Exact name of registrant asspecified 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**                     | ** ** | **78249**            |
| (Address of  Principal                     |       | (Zip Code)           |
| Executive  Office)                         |       |                 |

 

**(210)308-8267**

(Registrant’s Telephone Number,Including Area Code)

 

Securities registered pursuantto Section 12(b) of the Act:

**None**

 

Securities registered pursuantto Section 12(g) of the Act:

**CommonStock, par value $0.001 per share**

(Title of Class)

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

 

o Yes             ý No

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

 

o Yes             ý No

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ý Yes             o No

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 ofthis chapter) is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (check one):

 

Large Accelerated filer o             Acceleratedfiler o             Non-Acceleratedfiler ý

 

Indicate by check mark if theregistrant is a shell company (as defined in Rule 12b-2 of the Act).

 

o Yes             ý No

 

The aggregate market value of the registrant’s outstanding common stockheld by non-affiliates was approximately $1,285,850 as of the last business dayof the registrant’s most recently completed second fiscal quarter, based uponthe closing sales price of $0.37 per share on such date on the NASD’s OTCBulletin Board.

 

As of March 6, 2006 there were 14,333,690 shares of common stock outstanding.

 

**Documents Incorporated by Reference**

** **

Portions of the Registrant’sProxy Statement for the 2006 Annual Meeting of Stockholders to be held on June 1,2006, are incorporated by reference in Part III hereof.

 

 

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Explanatory Note:

 

GlobalSCAPE, Inc. is filing this Amendment No. 1to its Annual Report on Form 10-K for the year ended December 31,2005, which was originally filed with the Securities and Exchange Commission onMarch 9, 2006 (“Original Form 10-K”), to amend Item 1 “Business,”Item 1A “Risk Factors,” Item 6 “Selected Financial Data,” Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” (“MD&A”),Item 8 “Financial Statements and Supplementary Data,” Item 9A “Controls andProcedures,” and Item 15 “Exhibits and Financial Statement Schedules.”Additionally, the Registrant added Note 10 regarding the restatement of theRegistrant’s financial statements and revised Note 1.

 

As discussed in Note 1 and to the FinancialStatements, on April 26, 2006, GlobalSCAPE and its Board of Directors,after consultation with GlobalSCAPE’s independent registered public accountingfirm, concluded that GlobalSCAPE would amend its Annual Report on Form 10-Kfor the year ended December 31, 2005 and restate its financial statementsand financial information for the year ended December 31, 2005. Therestatement adjustments correct revenue from maintenance and support (net ofdeferred revenues) for the year ended December 31, 2005. GlobalSCAPEmistakenly recorded $154,433 as current revenue which should have been recordedas deferred revenue. The correction of the error resulted in a decrease of$154,433 in GlobalSCAPE’s revenue as reported on GlobalSCAPE’s income statementand an increase of $154,433 to the previously stated deferred revenue onGlobalSCAPE’s balance sheet at December 31, 2005. The error was caused bya failure to properly code deferred revenue percentages on products introducedto our product line into our sales and order entry database. The error has beencorrected.

 

For the convenience of the reader, this Form 10-K/Asets forth the Original Form 10-K, as amended hereby, in its entirety. However,this Form 10-K/A amends and restates only Items 1, 1A, 6, 7, 8, 9A, and 15of the Original Form 10-K, in each case solely as a result of and toreflect the adjustments discussed above and more fully in Note 1 of theaccompanying financial statements, and no other information in the Original Form 10-Kis amended hereby.

 

As required by Rule 12b-15 under the SecuritiesExchange Act of 1934, as amended, new certifications by GlobalSCAPE’s principalexecutive officer and principal financial officer are being filed with this Form 10-K/Aas Exhibits 31.1, 31.2, 32.1 and 32.2. In addition, Exhibits 23.1 and 23.2have been amended to contain currently-dated consents of independent registeredpublic accounting firms.

 

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**TABLEOF CONTENTS**

 
|       | **PART I**                                                                                            |       |
|------------|------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                       |       |
| Item 1.    | Business                                                                                                   |       |
|       |                                                                                                       |       |
| Item  1A.  | Risk  Factors                                                                                              |       |
|       |                                                                                                       |       |
| Item 1B.   | Unresolved Staff Comments                                                                                  |       |
|       |                                                                                                       |       |
| Item 2.    | Properties                                                                                                 |       |
|       |                                                                                                       |       |
| Item 3.    | Legal Proceedings                                                                                          |       |
|       |                                                                                                       |       |
| Item 4.    | Submission of Matters to a  Vote of Security Holders                                                       |       |
|       |                                                                                                       |       |
| Item 4A.   | Executive Officers of the  Company                                                                         |       |
|       |                                                                                                       |       |
| ** ** | **PART II**                                                                                           | ** ** |
|       |                                                                                                       |       |
| Item 5.    | Market for Registrant’s  Common Equity and Related Stockholder Matters and Issuer Purchases of Equity |       |
|       |                                                                                                       |       |
| Item 6.    | Selected Financial Data                                                                                    |       |
|       |                                                                                                       |       |
| Item 7.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operation                 |       |
|       |                                                                                                       |       |
| Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                |       |
|       |                                                                                                       |       |
| Item 8.    | Financial  Statements and Supplementary Data                                                               |       |
|       |                                                                                                       |       |
| Item 9.    | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                      |       |
|       |                                                                                                       |       |
| Item 9A.   | Controls and  Procedures                                                                                   |       |
|       |                                                                                                       |       |
| Item 9B.   | Other Information                                                                                          |       |
|       |                                                                                                       |       |
| ** ** | **PART III**                                                                                          | ** ** |
|       |                                                                                                       |       |
| Item 10.   | Directors  and Executive Officers of the Registrant                                                        |       |
|       |                                                                                                       |       |
| Item 11.   | Executive  Compensation                                                                                    |       |
|       |                                                                                                       |       |
| Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters           |       |
|       |                                                                                                       |       |
| Item 13.   | Certain  Relationships and Related Transactions                                                            |       |
|       |                                                                                                       |       |
| Item 14.   | Principal  Accountant Fees and Services                                                                    |       |
|       |                                                                                                       |       |
| ** ** | **PART IV**                                                                                           | ** ** |
|       |                                                                                                       |       |
| Item 15.   | Exhibits, Financial Statement Schedules                                                                    |       |

 

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**PreliminaryNotes**

 

GlobalSCAPE®,CuteFTP®, CuteSITE Builder®, PureCMS®, CuteZIP®, CuteHTML® and CuteMAP® areregistered trademarks of GlobalSCAPE Texas, LP. GlobalSCAPE Secure FTP Server,GlobalSCAPE Transfer Engine, ContentXML and SnapEdit are trademarks ofGlobalSCAPE Texas, LP. Other trademarks and tradenames in this Annual Reportare the property of their respective owners.

 

Inthis report, we use the following terms:

 

“HTTP”or Hyper Text Transfer Protocol is a protocol commonly used to transferhypertext documents between a web server and a web browser.

 

“S/Key”is a security system in which a one-time challenge-response password scheme isused to authenticate access to data. The purpose of S/Key is to eliminate theneed for the same password to be sent over a network each time a password isneeded for access.

 

“SSH2”or Secure Shell is a protocol that provides encrypted network communicationsbetween two computers.

 

“SSL”or Secure Socket Layer uses cryptography to encrypt data between the web serverand the web browser.

 

**Forward-LookingStatements**

 

This amended Annual Report on Form 10-K/A Number 1 and thedocuments incorporated by reference herein contain “forward-looking statements”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 are not ofhistorical fact, but describe management’s beliefs and expectations. We haveidentified many of the forward-looking statements in this Annual Report byusing words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,”and “intend.”  Although we believe thesebeliefs and expectations are reasonable, our operations involve a number ofrisks and uncertainties, including those described in the “Risk Factors” section ofthis Annual Report and other documents filed with the Securities and ExchangeCommission. Therefore, GlobalSCAPE’s actual results could differ materiallyfrom those discussed in this Annual Report.

 

# **PART I**

#  

## **Item 1.**           Business

##  

### **Company Overview**

###  

GlobalSCAPE develops and distributes secure file management softwarethat enables users to safely send data over the internet. Our productsguarantee the privacy of critical information such as financial data, medicalrecords, customer files and other similar documents. In addition, our productsensure compliance with government regulations relating to the protection ofinformation while allowing users to reduce IT costs, increase efficiency, trackand audit transaction and automate processes. We also develop and distributeWeb content management and Web development tools.

 

We started in 1996 with the distribution of CuteFTP, a file transferprotocol client program, and have achieved significant success and popularitywith this product. We built on this success by steadily adding complementaryproducts and believe we now have a reputation as a provider of easy-to use,affordable software for both individual and enterprise users. Since 2000, wehave focused on enhancing our portfolio of products to meet the increasingdemand for data security, and for solutions that permit non-technical personnelto contribute content to their organizations’ Web sites. Our software is usedworldwide across a wide range of industries. Through the end of 2005, we hadsold approximately 1,300,000 software

 

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licenses and our customer base includesindividual consumers, small to medium-sized businesses, as well as some of thelargest corporations in the world.

 

During 2005, approximately 67% of our revenues were generated fromcustomers within the United States, with the remaining 33% concentrated mostlyin Western Europe, Canada and Australia. Virtually all of our 2005 revenueswere derived from sales of software licenses and support agreements. Thecombined sales of CuteFTP and CuteFTP Pro accounted for 69% and 51% of ourrevenues in 2004 and 2005, respectively. Our combined sales of our SecureServer and Enhanced File Transfer products grew from 14% of our revenues in2004 to 44% in 2005.

 

### **Industry Background**

###  

The internet has become an integral part of operations forcompanies of all sizes, not only for e-commerce, but also as a means of managinginformation between central and remote locations and with employees, partnersand suppliers. Corporate information managers must protect business assets,ensure that policies and processes meet regulations governing the management ofsensitive information, and ensure that the right people have access to theright information at the right time. Global operations, diverse businesspartners and networks further emphasize the need for common standards to ensurecompatibility, scalability and cost-effective integration.

 

Organizations that use the internet for data transfer are also facedwith a daunting array of security challenges stemming from various regulatoryand business requirements for data privacy and confidentiality. Regulatory andprivacy requirements include legislation such as the Health InsurancePortability and Accountability Act (HIPAA), California Senate Bill (SB) 1386,and the Gramm-Leach-Bliley Act (GLBA) in the US, and the European Union’sPrivacy Directive, some of which impose severe penalties for improperdisclosure of confidential information. Additionally, industry best-practicesand self-imposed business requirements include intellectual property and tradesecrets protection and controls regarding disclosure of proprietary informationto minimize corporate risk from the devastating consequences of securitybreaches. As corporate Web operations mature, we believe we will see anincreasing demand for solutions to facilitate secure file transfers on theinternet and for solutions that streamline the management of Web content.

 

### **Products**

###  

Our current products include Windows®-based, Mac based, browser-basedand server software applications.

 

**FTP Client Programs**

 

File transfer protocol, or FTP, is the language used for file transfersfrom computer to computer across the World Wide Web. FTP is most commonly usedto download a file from a server using the internet or to upload a file to aserver.

 

***CuteFTP*.**CuteFTP is a “client-side” program, meaning that it permits a user torequest a file from or send a file to an FTP server or host computer. The userbase for this program ranges from corporate MIS professionals who use it totransfer data between locations via the internet, to individual Web siteoperators who use it to upload their Web pages to their Web hostingprovider. CuteFTP simplifies use of file transfer protocol by hiding thetechnical processes behind a user-friendly, graphical interface, which allowsusers to “drag ‘n drop” files between computers. It includes an automaticreconnection feature that resumes broken transfers, a transfer queue and abuilt in HTML editor that allows remote editing of Web pages. CuteFTP has wonseveral awards, including the CNet Editors’ Choice award, and has beenfavorably reviewed in leading online and print trade journals such as PCMagazine, WindowsNT, Yahoo Internet Life, CNet’s Download.com and Tucows, asbeing the most powerful, easy-to-use file transfer protocol program available. Weoffer CuteFTP in German, French, Spanish, Japanese and Traditional andSimplified Chinese. CuteFTP was first released in February 1995 by itsoriginal

 

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author, and was first distributed as acommercial product by GlobalSCAPE in April 1996. In October 2003,GlobalSCAPE released CuteFTP Mac, our easy-to use FTP client for the Macintoshoperating system. CuteFTP Mac incorporates many of the popular features ofCuteFTP for Windows, while adhering to Apple’s Aqua® interface and usabilityguidelines.

 

***CuteFTP Pro*.**CuteFTP Pro is a secure FTP client program designed for advanced users andinformation technology professionals. CuteFTP Pro incorporates standards forencrypted transfers using Secure Socket Layer (SSL), HTTP, and SSH2, as well asadvanced S/KEY password encryption. It includes various features attractive toadvanced users such as multi-part and concurrent file transfers tomaximize transfer speed, scheduled file transfers, automated site backups andscripting ability for automating FTP tasks. CuteFTP Pro has been favorablyreviewed by leading online publications including CNet’s Download.com, ZDNetand PC Review. CuteFTP Pro was released in March 2001 and CuteFTP MAC Prowas released in April 2004.

 

**File Transfer Servers**

 

FTP transfers require two software programs:  a client program to start a transfer and a serverto accept the connection. FTP servers are designed to provide businesses withincreased security and speedier file transport when compared to e-mail.

 

*** Secure FTP Server*.**SecureFTP Server complements CuteFTP Pro and other professional FTP clients byenabling encrypted transfers using Secure Socket Layer (SSL), Secure Shell(SSH2) and advanced S/KEY password encryption. When used with CuteFTP Pro,Secure FTP Server offers a complete digital certificate management system,giving system administrators the ability to create, sign, import, export andadd digital certificates, as well as kick off back-end processes. The latterfunctionality can be used as a partial or total replacement for more complexenterprise-level electronic data interchange systems (EDI). Additional featuresinclude full remote management capability, the ability to operate multiple FTPsites with unique directory structures from a single server and manage useraccounts with advanced restriction settings for maximum security and control. SecureFTP Server has been favorably reviewed by leading online publications includingServer Watch and File Forum. GlobalSCAPE Secure FTP Server was first releasedin January 2002.

 

***Enhanced FileTransfer Server.***Enhanced File Transfer Server isa hardened file server for enterprise-level solutions. Building on Secure FTPServer with digital certificate management, Secure Socket Layer (SSL) and S/KEYpassword encryption, remote administration, multiple site hosting andmanagement, and extensive automation with a full featured event rule libraryand Component Object Model (COM) extensions, Enhanced File Transfer Server addsrepository encryption, additional protocol support, SSH security, data offloadcapabilities, and automated notification. This product offers modules designedto be the solutions for our customer’s different needs. Enhanced File TransferServer was first released by GlobalSCAPE in November 2004. The latestversion, EFT Server 4 helps customers achieve regulatory compliance withlegislation such as HIPAA, Sarbanes-Oxley and Gramm-Leach by providing securityfunctionalities such as secure authentication, secure data transfers, securestorage and advanced encryption and signing. Enhanced File Transfer Serveroffers modules that can be added on to the product such as DMZ Gateway andSecure SMTP Gateway. DMZ Gateway, when combined with the EFT Server, adds amulti-layered security solution that allows implementing the highest levels ofsecurity for data storage and retrieval, authentication and firewalltransversal. Using a two-way connection originating from the back-end(internal) EFT server, the DMZ Gateway acts as a communication proxy to processrequests that replaces inherently insecure inbound connections from the DMZ toyour network. GlobalSCAPE’s Secure SMTP Gatewaytransparently secures outbound emails by holding sensitive messages and sendingan email notification to the recipient, who can then retrieve the message andany attachments over a secured HTTPS channel.

 

**Web Content Management**

 

Content management generally refers to software that streamlines theprocess for managing information on a Web site or intranet.

 

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***PublishXML***.PublishXML is our Web content management solution. PublishXML is designed tosolve basic problems endemic to maintaining current information on a Web sitesuch as bottlenecks in the IT department, lack of control and accountability,and miscommunication between content authors and Web developers. GlobalSCAPEmarkets the product on its website and provides all leads to Hannon-Hill Corp. Hannon-Hillacts as the sales agent for this product, and revenues from the sales are splitbased upon an agreement between the parties with all invoicing and collectionsbeing processed by GlobalSCAPE. Using PublishXML, developed by Hannon-Hill, acompany’s Web administrator may give non-technical personnel the abilityto directly revise designated content. For example, the marketing departmentcould modify pricing, product descriptions and graphics while the humanresources department updated its job postings, all without the involvement oftechnical personnel. Access by non-technical personnel is limited, however, sothat the Web site administrator’s ability to protect the overall infrastructureand design of the site is not compromised. The program is browser-based with aWindows-like interface, so users can easily access and work on Web sites,eliminating the need for special training. Changes are made to a copy of anorganization’s Web site in a staging area and published to the live site onlyafter group leaders or Web site administrators approve the content forpublishing. Additional features include WYSIWYG (what you see is what you get) editing,visual comparison of proposed changes to the live site, e-mail notification ofchanges and activity, site statistics, versioning and archiving. PublishXMLworks with any Web site development tool including popular applications such asFront Page and Dreamweaver, and can be implemented without deconstructing(re-building) the existing Web site. The program is scaled to meet the needs ofsmall to medium-sized businesses, but can be used by large organizations forintranet or independent Web site management. PublishXML was released in April 2004.

 

**Internet Products**

 

We offer avariety of software products which can be purchased and downloaded directlyfrom our automated website. These products include products that range in pricefrom $19.99 to $249.00 for a single license. Products for web page contentmanagement and design include CuteSITE Builder, CuteHTML, CuteHTML Pro andCuteMAP. We also offer a file compression product, CuteZIP, and a product forconducting online surveys, Web Survey.

 

These productsare easy to install and use, making them good products to attract users to ourwebsite.

 

### **History and Recent Developments**

###  

GlobalSCAPE was organized as a Delaware corporation in April 1996when we obtained the right to distribute CuteFTP from its original author. In1998, we purchased all rights to CuteFTP from its author and in 1999 begandeveloping and selling complementary products under the “Cute” brand such asCuteHTML and CuteMAP. In September 2000, ATSI distributed approximately27% of its GlobalSCAPE common stock to its shareholders. As a result of thispartial spin off, we became a reporting company under the Securities ExchangeAct of 1934. In June 2002, ATSI sold its remaining interest in the companyto a San Antonio based joint venture.

 

Significant developments during 2005 included:

 

•                  **February 2005**:  We announced availability of our Enhanced FileTransfer product at the HIMMS trade show for healthcare organizations.

 

•                  **March 2005**:  Thelatest versions of CuteFTP Home and CuteFTP Professional were released.

 

•                  **April 2005**:  Thelatest version of PureCMS Content Management software was released as a Hannon-Hillproduct. Hannon-Hill acts as our sales agent for PureCMS and PublishXML.

 

•                  **July 2005**: We released the latest version of EFT Serverand the new DMZ Gateway software.

 

•                  **August 2005**:  Wereleased Secure SMTP Gateway, a new email security software.

 

•                  **September 2005**:  We announced the sale of Secure FTP Server to theU.S. Army.

 

4

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### **Strategy**

###  

Our goal is to build upon our successful market position in FTP, as wehave for the past 10 years, in order to provide business users with securesolutions for their growing file transfer needs. We continue to enhance anddevelop high quality, affordable software that enables organizations andindividuals to easily create, move and manage Web and file-based data in asecure, collaborative environment. We have successfully established a brand inthe market for internet software productivity tools with our file managementproducts, CuteFTP and CuteFTP Pro. We believe that the next phase of our growthwill come through the continued development of our Secure FTP Server andEnhanced File Transfer products involving secure file transfer to meet thegrowing demand for file security when transferring information across theinternet due to changes in regulations in various industries and the demand ofusers for secure solutions. GlobalSCAPE believes that our productsrepresent a low cost solution for businesses for their secure file transferrequirements because we don’t require the purchase of a whole suite ofproducts. Our Secure FTP Server and Enhanced File Transfer productsoffer modules to form the solutions a business needs, and they only needto purchase what solves their particular needs. Maintenance and supportagreements are purchased with most of our higher-end server products bybusinesses. We will also continue to market our content management solutionsthat help non-technical professionals manage their organization’s Web siteswithout reliance on information technology professionals.

 

Key elements of our strategy are:

 

***Continue to enhanceand develop security features of our products.***Corporateand individual users are increasingly concerned with security. We have addedthe Enhanced File Transfer (EFT) enterprise solution to our product line forbusinesses to meet the needs of security issues when transferring files in andout of their servers across the internet. We intend to continue to develop andadd features throughout 2006 to meet the demand for file transfer security inEFT and our other well known FTP products, CuteFTP Home and CuteFTPProfessional and Secure FTP Server. We intend to make the FTP, EFT and SecureFTP Server lines of business our main focus in 2006.

 

***Pursue strategicproduct and acquisition opportunities*.**In 2005, weadded modules and further developed our Secure FTP Server and EFT products. Wewill continue to look for opportunities to develop, acquire or add synergisticproducts or technologies that enhance the success of these products.

 

***Continue sales ofPublishXML.***We have invested considerable time andeffort in the marketing of PublishXML, our content management productintroduced in April 2004. We continue to believe that the demand for Webcontent management solutions is strong. We have released new versions of thisproduct and continue to evaluate all aspects of our management of this product,including pricing, ease of installation and use, program functionality, andmarketing and sales strategies. We intend to continue to pursue sales anddistribution of this product. In order to concentrate our efforts in this areaon PublishXML, we discontinued the sale of PureCMS through our sales agreementwith Hannon-Hill in 2005.

 

***Continue to developa more robust reseller channel*.**During 2005, wecontinued our emphasis on the development of our third party reseller channelsby hiring sales people with reseller sales backgrounds and developingrelationships with new resellers. In particular, we attempt to reach “value-added”resellers such as system design consultants. We believe sales will besignificantly enhanced if we are able to recruit numerous resellers who haveexisting relationships with prospective customers.

 

***Develop our internalsales staff****.*During2005, we continued the development of our internal direct sales force to bettersell our more complex products, such as Enhanced File Transfer, Secure FTPServer and PublishXML. We intend to continue to develop our sales staff throughfurther training and certification.

 

***Continue to developonline marketing capabilities****.*We believe we have significant expertisein driving online sales via online marketing activities, including productplacement on third party sites such as search engines and referral sites, andelectronic mail campaigns. This type of sales activity is particularly wellsuited to certain of our lower priced products because of the lower cost ofsale.We intend to continue to

 

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leverage our established Web presence todrive online sales as well as supporting our direct and reseller sales efforts.

 

### **Sales and Marketing**

###  

We sell our software primarily via download from our Web site, **www.globalscape.com**. Prospective buyers may useour software products free for a thirty-day evaluation period. The programs areautomatically disabled if a license is not purchased by the end of the trialperiod. Our current products range in price from $19.95 to $25,000 per license.Historically, the majority of our software sales have been made online using acredit card. Our software is also available for download from a variety ofindependent internet software sites such as CNet’s Download.com, as well assites in Western Europe, Canada, Australia, and Asia. We distribute a limitednumber of copies on CD in Fry’s and Micro Center stores in the United Statesand through numerous international resellers. We provide free customer supportvia a searchable knowledge base on our Web site and sell “live” support andmaintenance packages.

 

Since 2003, we have increased our emphasis on developing our internalsales staff and reseller channels to capture those sales that require personalattention, such as sales of our more complex products and sales to larger enterprises.We require training, testing and professional development of our sales peopleto insure that they are capable of meeting the needs of our customers.

 

### **Seasonality**

###  

We believeour internet sales are subject to seasonal variations and we experiencesignificantly less sales volume during national holidays and weekends whencompared to normal business days. In the fourth quarter of 2004, our salesrevenues increased approximately 11% over the same period in 2003, as a resultof new product releases and our sales force development although sales declinedfrom November 2004 to December 2004. Our fourth quarter revenues in2005 increased approximately 43% over the same quarter in 2004. The seasonalitywe have experienced seems to be lessening as we rely more on sales by ourdirect sales force, rather than our internet sales. We expect that in futureperiods we may see weakness in the fourth quarter on internet sales whencompared to the third quarter, due to the holiday season.

 

### **Network and Equipment**

###  

We have contracted with various network providers for internet access. Ourarrangements provide for redundancy in the event of a failure, and also forrapid expansion of available bandwidth in the event that there is a dramaticincrease in demand. To protect critical customer data, GlobalSCAPE’s secureserver utilizes Secure Sockets Layer encryption. We have dedicated servers onand off site and expansion plans in place to allow rapid and cost effectivescalability.

 

### **Research and Development**

###  

Our internal software engineers are responsible for software design,managing the development process, testing and quality assurance. We utilizeoffshore developers for a large portion of the coding phase of softwaredevelopment. All phases of development, including scope approval, functionaland implementation design, object modeling and programming, are subject tointernal quality assurance testing. Our use of external developers allows us totap into a highly skilled labor pool, maintain a 24-hour development schedule,decrease time to market, and minimize programming costs.

 

For the years 2003, 2004 and 2005, GlobalSCAPE spent approximately$945,000, $728,000 and $870,000 respectively, on research and development, allof which were expensed.

 

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### **Competition**

###  

The file management, content management and Web development softwaremarket sectors are intensely competitive, subject to rapid change and aresignificantly affected by new product introductions and other activities of marketparticipants. Our primary competitors vary by product and are listed below.

 

***CuteFTP*.**CuteFTP exists in a highly competitive environment with several hundred FTPsoftware utilities available on the internet. We believe our primarycompetitors are WS_FTP from Ipswitch, Inc. and FTP Voyager by RhinoSoftware, Inc. CuteFTP was the second Windows-based FTP client to marketand is consistently the most frequently downloaded FTP client on populardownload sites. CuteFTP Mac, our FTP client for the Macintosh platform,competes with Fetch, by Fetch Softworks, Interachry, by Stairways Software Pty Ltd., and Transmit FTP, by Panic Inc.

 

***CuteFTP Pro*.**CuteFTP Professional competes in the higher end of the same market asCuteFTP, targeting the security-minded IT professional. CuteFTP Professional ispositioned as one of the only secure FTP client programs that support a widerange of security standards related to the FTP protocol. Competitors in thegeneral FTP market offer products that support a smaller subset of thesesecurity standards and address a narrower segment of the secure FTP market. Competitorsinclude Van Dyke, Inc., Ipswitch, Inc., and Rhino Software, Inc.

 

***Secure FTP Server***.Secure FTP Server competes against a limited number of secure Windows-based FTPservers. We believe our primary competitors are WS_FTP Server and Serve-U. SecureFTP Server has the advantage of leveraging the success of CuteFTP Pro throughproduct integration, offering proprietary extensions to the FTP protocol, andcross-marketing efforts to an existing customer base.

 

***Enhanced FileTransfer Server.***Enhanced File Transfer Servercompetes in the managed file transfer server market. We believe our primarycompetitors are Tumbleweed, Sterling, Proginet, and SSH’s Tectia. Enhanced FileTransfer Server has the advantage of being very cost effective in its marketwhile leveraging and extending the security and file management features of ourother FTP products.

 

***CuteSITE Builder***.CuteSITE Builder competes against approximately one hundred WYSIWYG editors,including MS FrontPage, Macromedia’s Dreamweaver, HotMetal and HotDog. CuteSITEBuilder offers most of the features available in FrontPage, however, theproduct was developed to further simplify the Web site creation process and isarguably easier to use, better serving the novice. In addition, the product ispriced well below FrontPage.

 

***PublishXML***.The “content management” market is diverse and encompasses the areas ofknowledge management, document management, digital asset management and Webcontent management. PublishXML is designed for Web content management. Themarket for Web content management solutions for Fortune 500 companies and otherlarge organizations is dominated by companies such as Vignette, Interwoven,Documentum, Stellant and Microsoft, each of which offers solutions that cancost hundreds of thousands of dollars. We do not intend to compete in thismarket but are focused on small to medium-sized businesses with a simpler,affordably priced solution. We believe that we have a competitive advantage inthat we are better known than some of our competitors among technologyprofessionals who are already familiar with our file management programs,CuteFTP and CuteFTP Pro.

 

We offer PublishXML as a packaged solution. A “packaged solution” meansthat we license a copy of the software to the customer for a one-time fee toinstall and use on their own servers. Our competitors include providers ofonline solutions, such as Atomz, Crown Peak, and iUpload, and providers ofpackaged solutions, including Macromedia’s Contribute, Userland, Infosquare andEktron. PublishXML also competes against software that incorporate subsets ofWeb content management functions in Web authoring programs, such as Microsoft’sFrontPage, and Macromedia’s Dreamweaver and Contribute.

 

7

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***Web Survey.***Competitiveproducts include both applications and services including Zoomerang,WebSurveyor, EZSurvey and SurveyMonkey. We believe Web Survey has an advantageof a lower total cost of ownership than the competition.

 

***CuteHTML*.**CuteHTML exists in a highly competitive environment with approximately onehundred text-based HTML editors. CuteHTML’s competition includes HomeSite fromAllaire, Inc. CuteHTML’s advantage is that it doesn’t add extraneous codeto Web pages, an attribute preferred by many professional Web masters.

 

***CuteHTML Pro***. CuteHTMLPro faces heavy competition from visual or “WYSIWYG” editors such as FrontPage, by Microsoft, Dreamweaver, by Macromedia Inc, and competition from otherdirect editors*,*such as Homesite,also by Macromedia Inc. CuteHTML Pro’s advantage is its appeal to professionalWebmasters who typically shun visual editors in favor of the extra features andadded control provided by direct editors such as CuteHTML Pro.

 

***CuteMAP*.**CuteMAP competes against approximately 65 image-mapping utilities, whichexist in a niche market. Primary competitors include CoffeeCup Image Mapper,Ulead Smart Saver and MapEdit. CuteMAP has the advantage of being able toleverage the success of CuteHTML through product integration andcross-marketing efforts to an existing customer base.

 

***CuteZIP*.**CuteZIP exists in the highly competitive file compression utility market,competing against several hundred file compression utilities. Its maincompetitors include WinZIP, the current market leader, and NetZIP. CuteZIP’smain advantage is that it is one of the only compression utilities offering128-bit encryption to secure compressed files. In addition, users can create self-extractingencrypted archives that recipients may open even if they don’t have a ziputility installed.

 

We have limited information regarding our products’ market shares intheir respective categories. Many of our competitors have substantially greaterfinancial, technical, sales, marketing, personnel, and other resources, as wellas greater name recognition and a larger customer base than we do. Significantcompetition characterizes the markets for our products and we anticipate thatwe will face increasing pricing pressures from competitors in the future. Moreover,given that there are low barriers to entry into the software market, and themarket is rapidly evolving and subject to rapid technological change, webelieve that competition will persist and intensify in the future. We haveexperienced price declines over the last several years. A reduction in theprice of our products would negatively affect gross margins as a percentage ofnet revenues, and would require us to increase software unit sales, in order tomaintain net revenues at existing levels. For more discussion on the risksassociated with our competition, you should read the information under “RiskFactors – Risks Related to Operations – We face significant competition andcompetition in our market is likely to increase” and “– GlobalSCAPE may notbe able to compete effectively with larger, better positioned companies,resulting in lower margins and loss of market share.”

 

### **Intellectual Property**

###  

Our trademarks, copyrights and technology are central to our business. Weprotect our intellectual property rights through a combination of licenses,trademarks, service marks, copyrights, trade secret laws and restrictions ondisclosure.

 

We currently have registered trademarks for GlobalSCAPE, CuteFTP,CuteFTP Pro, PureCMS, CuteHTML, CuteZIP, CuteMAP and CuteSITE Builder. We haveobtained United States copyright registrations for all but the most recentlydeveloped versions of our software applications, and have applied forregistration for the most recently developed versions.

 

We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection. Despite our efforts to protect our proprietary rights, unauthorizedparties may attempt to copy aspects of our products or to obtain and useinformation that we regard as proprietary. Policing unauthorized use of ourproducts is difficult, and while we are unable to

 

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determine the extent to which piracy of oursoftware products exists, software piracy can be expected to be a persistentproblem. In selling our products, we rely primarily on click-wrap licenses thatare not signed by licensees, and may be unenforceable under the laws ofcertain jurisdictions. In addition, the laws of some foreign countries do notprotect our proprietary rights to as great an extent as do the laws of theUnited States. In addition, the number of patents applied for and granted forsoftware inventions is increasing. Consequently, there is a growing risk ofthird parties asserting patent claims against us. We have received, and may receivein the future, communications from third parties asserting that our productsinfringe, or may infringe, the proprietary rights of third parties,seeking indemnification against such infringement or indicating that we may berequired to obtain a license or royalty from such third parties. For morediscussion on the risks associated with our intellectual property, you shouldread the information under “Risk Factors,” especially “Risks Related to LegalUncertainty.”

 

### **Employees**

###  

As of March 1, 2006, we had 41 full-time and part-time employeesorganized within seven functional areas. The employee distribution according tofunction is as follows:

 
| **Department**                | ** ** | **Number of  Employees** |
|-------------------------------|------------|-------------------------------|
| Management and Administration |       | 7                             |
| Research and Development      |       | 4                             |
| Quality Assurance             |       | 2                             |
| Marketing                     |       | 7                             |
| Information Services          |       | 5                             |
| Sales                         |       | 10                            |
| Customer Support              |       | 6                             |

 

None of our employees are covered by collective bargaining agreementsand we believe our employee relations are good.

 

###### **Item 1A.**                Risk Factors

###### ** **

We have described below risks that we are aware of that could have amaterial adverse effect on your stock ownership and our business.

 

**Risks Related to Operations**

 

***GlobalSCAPE depends on two products for asubstantial portion of its revenues.***

 

GlobalSCAPEdepends on two products, CuteFTP and CuteFTP Pro, for approximately 51% of itsrevenues. In addition, GlobalSCAPE’s ability to produce revenues related toother products and new products depends substantially on exploiting the trafficto GlobalSCAPE’s Web site generated by the demand for CuteFTP and CuteFTP Pro. IfGlobalSCAPE is not able to maintain its competitive position with theseproducts, its revenues could decline dramatically and GlobalSCAPE’s plans toexpand its business could be substantially impaired. From 1996 to 2000, salesof licenses for CuteFTP increased significantly year to year. From 2002 through2004, combined revenues recognized from CuteFTP and CuteFTP Pro declined yearto year. CuteFTP revenue declined approximately 22%, whereas CuteFTP Proincreased approximately 18% from 2004 to 2005. Although the percentage ofcombined revenue for CuteFTP and CuteFTP Pro has declined as compared to totalrevenues, actual revenues from these two products increased approximately 1%from 2004 to 2005. Substantially all software products ultimately reach a pointin their lifecycle in which sales can be expected to plateau or decline. Whileit cannot be determined with certainty, these products may have reachedsuch a point in their lifecycles. If we are not successful in shifting ahigher percentage of our revenues to our other products and if sales of CuteFTPand Cute FTP Pro continue to remain flat or decline, our revenues, cash flowfrom operations and net income will decrease.

 

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***GlobalSCAPE’s newproduct introductions may fail to generate sufficient revenue.***

 

While we have had success in introducing our EFT products through 2005,we will need to continue to market and enhance these products with new featuresand modules to maintain our place in the market. If we fail to meet the needsof customers, or delay the introduction of demanded features, we may losesales to the competition. If revenues from CuteFTP and CuteFTP Pro decline andour new products fail to generate sufficient revenue to replace the decliningrevenues, our revenues, cash flow from operations and net income will decline.

 

***GlobalSCAPE may failto develop or license the intellectual property needed to launch new products.***

 

Our strategy for future growth depends significantly on the addition ofnew products. If we fail to timely license, and/or develop new programs, or ifour new programs are not functionally competitive with other programs in ourmarkets, our revenue growth could be substantially impaired.

 

***GlobalSCAPE may not be able to developits sales force as needed to successfully market its new products.***

 

GlobalSCAPE has relied heavily on internet sales in the past. However,our newer enterprise programs, Secure FTP Server, PublishXML and Enhanced FileTransfer (EFT), require a more complex distribution model, including relianceon value-added resellers such as Web development and system consultants. Inaddition, our internal sales force must be skilled at managing a complex andmulti-stage sales process appropriate for these products. We have experiencedsome turnover among our internal sales personnel during 2005, resulting intraining new personnel to take their place. Training new employees takes timeand can result in a loss of sales due to the technical skills that need to begained in order to sell our enterprise type software. Future turnover couldhave an immediate and direct effect on our revenues. Continued turnover,especially of key personnel, could cause revenues to decline dramatically.

 

***If GlobalSCAPE loses key personnel it may notbe able to execute its business plan.***

 

GlobalSCAPE’s future success depends on the continued services of keymembers of its management team. GlobalSCAPE did not experience turnover in itsmanagement team during 2005, which has been a key to moving our products andrevenues forward. These individuals are difficult to replace because of theintense competition for similarly skilled people. In addition, new members ofthe management team may not be productive for weeks or months as theylearn about GlobalSCAPE’s products and the administration within the Company.

 

***We face significant competition and competitionin our market is likely to increase.***

 

The markets for our products are intensely competitive andcharacterized by rapid technological change. GlobalSCAPE’s competitors areconstantly releasing improved versions of their products. The needs and expectationsof GlobalSCAPE’s customers are also evolving. Therefore, GlobalSCAPE mustcontinually enhance its products and develop new products to remain competitive.When a new product is brought to market with functionality better suited to aparticular use, the demand for currently available products may decrease. Allof GlobalSCAPE’s products are subject to the threat of reduced market shareresulting from the introduction of competitive products. GlobalSCAPE may failto develop new products and functionalities as quickly as is necessary in thefuture to avoid losing its position in the internet software market.

 

In addition, software development generally requires substantiallead-time, so GlobalSCAPE must accurately predict what changes will be needed. GlobalSCAPEmay fail to predict these changes far enough in advance, or it may nothave sufficient technical personnel to make such changes. If GlobalSCAPE cannotkeep pace, its products will lose their position in the market.

 

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***GlobalSCAPE utilizes“open source” software in some of its products.***

 

The opensource software community develops software technology for free use by anyone. Wehave relied on open source technology for the encryption features in ourCuteFTP Pro and GlobalSCAPE Secure FTP Server products. Our reliance on opensource code software may impose limitations on our ability tocommercialize our solution and may subject us to possible intellectualproperty litigation.

 

We incorporate a limited amount of open source codesoftware into our solution, and we may use more open source code softwarein the future. Open source code may impose limitations on our ability tocommercialize our solution because, among other reasons, open source license termsmay be ambiguous and may result in unanticipated obligationsregarding our solution, and open source software cannot be protected undertrade secret law. In addition, it may be difficult for us to accuratelydetermine the developers of the open source code and whether the acquiredsoftware infringes third-party intellectual property rights. As a result, wecould be subject to suits by parties claiming ownership of what we believe tobe open source software. Claims of infringement or misappropriation against uscould be costly for us to defend and could require us to seek to obtainlicenses from third parties in order to continue offering our solution, tore-engineer our solution or to discontinue the sale of our solution in theevent re-engineering could not be accomplished on a timely basis. If thisoccurs, our business and operating results could be harmed.

 

In addition, from time to time there have beenclaims challenging the ownership of open source software against companies thatincorporate open source software into their products. We use a limited amountof open source software in our solution and may use more open sourcesoftware in the future. As a result, we could be subject to suits by partiesclaiming ownership of what we believe to be open source software. Any of thislitigation could be costly for us to defend, hurt our results of operations andfinancial condition or require us to devote additional research and developmentresources to change our solution.

 

***Future governmentregulation may increase our cost of doing business and reduce demand forour products***.

 

New laws may be adopted to address areas such as taxation,privacy, copyrights, and quality of services, and existing laws may beapplied to the internet in unexpected ways. New laws and unexpected applicationof existing laws related to the internet could create uncertainty in the internetmarket place, which could increase our cost of doing business, reduce demandfor our products, and have a material adverse effect on our business, financialcondition and operations.

 

***If an effective internetsales tax scheme is implemented, demand for our products could decrease.***

 

GlobalSCAPE is not currently required to collect sales tax on itsonline sales except to customers in certain states. In general, state lawsrequire that if the seller does not collect sales tax, residents who purchasegoods online should remit sales tax to the appropriate taxing agency in thestate where they live. However, state agencies rarely enforce this rule andwe believe that less than 1% of our customers actually remit sales tax to theirstate taxing agencies. For practical purposes, most of our customers who do notpay sales tax to us purchase their license on a tax-free basis. If an effectiveinternet sales tax scheme is implemented it would effectively increase the costof our software in the eyes of our customers and therefore likely have atendency to decrease demand for our software.

 

***Taxes imposed byforeign governments may decrease demand for our products in those markets.***

 

On July 1, 2003, the European Union (EU) enacted Value Added Taxes(VAT) on electronic purchases. These taxes are charged to our non-businesscustomers in the EU member nations and rates vary by country. Western Europeancountries account for a substantial portion of our international sales. Thesetaxes, which vary in rate from 15% to 25%, may decrease demand for ourproducts in these markets. Expansion in the number of the EU member nations may alsodecrease demand for our products as these taxes are imposed on more of ourcustomers.

 

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***GlobalSCAPE may not be able to competeeffectively with larger, better-positioned companies, resulting in lowermargins and loss of market share.***

 

GlobalSCAPE competes with a variety of companies who have significantlygreater revenues and financial resources than GlobalSCAPE as well as greaterpersonnel and technical resources. For example, CuteFTP and CuteFTP Pro competewith products offered by Ipswitch, Inc. and Microsoft Corporation, PureCMScompetes with Macromedia Inc.’s software, and CuteSITE Builder competes withMicrosoft and Macromedia software. Large companies may be able to developnew technologies more quickly than GlobalSCAPE, to offer a broader array ofproducts, and to respond more quickly to new opportunities, industry standardsor customer requirements. For example, Macromedia’s Dreamweaver is one of themost popular Web authoring programs for consumers and small businesses,providing them with a huge established customer base to which they are able todirectly market their content management product, Contribute. Some competitors may alsobe able to adopt more aggressive pricing strategies. For example, Ipswitchgives an older version of its file transfer protocol program away for free fornon-commercial use, and Microsoft includes file transfer protocol functionalityin its internet browser, which it distributes for free. Increased competition may resultin lower operating margins and loss of market share. Additional competitors may enterthe market and may have significantly greater capabilities and resourcesthan GlobalSCAPE. You should read the information under “Business-Competition”for more information on our competitors.

 

***It may be difficult for GlobalSCAPE torecruit software developers and other technical and management personnelbecause GlobalSCAPE is a relatively small company.***

 

GlobalSCAPE competes intensely with other internet software developmentand distribution companies internationally to recruit and hire from a limitedpool of qualified personnel. Some qualified candidates prefer to work forlarger, better known companies. Failure to attract and maintain qualifiedpersonnel would impede our development and maintenance of new and existingproducts.

 

***GlobalSCAPE’s ability to develop its softwarewill be seriously impaired if it is not able to use its foreign subcontractors.***

 

GlobalSCAPE relies on foreign subcontractors to help it develop itssoftware. If these programmers decided to stop working for GlobalSCAPE, or ifGlobalSCAPE were unable to continue using them because of political or economicinstability, GlobalSCAPE would have difficulty finding comparably skilleddevelopers. In addition, GlobalSCAPE would likely have to pay considerably morefor the same work, especially if it used U.S. personnel. If GlobalSCAPE couldnot replace the programmers, it would take it significantly longer to developits products.

 

***GlobalSCAPE may incur losses as it attempts toexpand its business.***

*** ***

GlobalSCAPE intends to expand its business and therefore expects toexpend significant additional resources on developing its sales force,developing a more robust reseller program, research and development, marketingand product development. As a result, GlobalSCAPE may need to expendsignificant resources to accomplish these goals. If GlobalSCAPE fails tosuccessfully develop and market new products or improve its direct and channelsales results, it may not be able to achieve the necessary revenue growthand may not be profitable.

 

***GlobalSCAPE’s operations are vulnerable to securitybreaches that could harm the quality of its products and services or disruptits ability to deliver its products and services.***

*** ***

Third parties may breach GlobalSCAPE’s system security and damageits products and services or misappropriate confidential customer information. Thismight cause GlobalSCAPE to lose customers, or even cause customers to makeclaims on GlobalSCAPE for damages to them. In addition, GlobalSCAPE may berequired to expend significant resources to protect against security breachesand/or to address problems caused by such breaches.

 

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***GlobalSCAPE’s products may expose customers toinvasion of privacy, causing customer dissatisfaction.***

*** ***

GlobalSCAPE’s Secure FTP Server and Enhanced File Transfer are intendedto provide outsiders access to a customer’s computer, making the customervulnerable to security breaches, which could result in the loss of theirprivacy or property. If customers suffer invasions of privacy or other harm,this may result in customer dissatisfaction and possible claims against usfor any resulting damages.

 

***GlobalSCAPE’s products may contain defects that may becostly to correct, delay market acceptance of its products and damage itsreputation.***

*** ***

Errors may be found in GlobalSCAPE’s products after distribution. Iferrors are discovered, GlobalSCAPE may have to make significantexpenditures of capital to eliminate them and may not be able to correctthem in a timely manner or at all. Errors and failures in GlobalSCAPE’sproducts could result in a loss of, or delay in, market acceptance of itsproducts and could damage its reputation.

 

***GlobalSCAPE’s products rely on the prevalence ofWindows-based operating systems and if that technology fails to maintain orimprove market share, GlobalSCAPE’s products would not be as marketable.***

*** ***

Almost all of GlobalSCAPE’s current software products can only be usedon a Windows-based operating system and are not compatible with other operatingsystems. Anything that affects Windows market share negatively could have amaterial adverse effect on the demand for GlobalSCAPE’s products.

 

***GlobalSCAPE’s internal controls are limited,increasing the risk of employee mismanagement or error.***

*** ***

All of our finance, accounting and SEC disclosure work is managed by asingle officer, Thomas F. Farar, Chief Financial Officer, Secretary andTreasurer. Mr. Farar has an accounting staff of two persons. Without anincrease in staffing, it may still be difficult for us to implement thetypes of internal controls that are common to larger corporations, and wetherefore face a greater risk of mismanagement or error in these areas.

 

**Risks Related to Stock Ownership**

 

***Our stock is a penny stock, which makes it moredifficult to sell.***

*** ***

A “penny stock” is any stock which is not traded on a national exchangeor quoted on NASDAQ and which falls below a selling price of $5.00 per share inthe public market. Our common stock is quoted on the NASD’s OTC Bulletin Boardand not on an exchange or the NASDAQ, and it has traded from $0.10 to $4.90since it began active trading in February 2002. The SEC’s penny stock rules requirebrokers and dealers to take certain steps before trading in a penny stock, makingit more difficult to sell a penny stock than other stock. A sale of penny stockdoes not usually take place as quickly as a sale of other stock. You may decideto sell your stock when the market price is desirable to you, but by the timethe sale is complete, the price of the stock may have fallen to the pointthat the sale is no longer desirable. The price of penny stocks is typicallymore volatile than other stocks, exacerbating this problem. Also, some brokersare unwilling to trade in shares of penny stocks.

 

***Our stock price is/may bevolatile.***

 

The trading price of our common stock has been and could continue to besubject to wide fluctuations in response to certain factors, including:

 

•                  Quarter-to-quartervariations in results of operations;

 

•                  Ourannouncements of new products;

 

•                  Our competitors’announcements of new products;

 

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•                  Our productdevelopment or release schedule;

 

•                  Generalconditions in the software industry; and

 

•                  Investor perceptionsand expectations regarding our products, plans and strategic position and thoseof our competitors and customers.

 

In addition, the public stock markets experience extreme price andtrading volume volatility, particularly in high-technology sectors of themarket. This volatility has significantly affected the market prices ofsecurities of many technology companies for reasons often unrelated to theoperating performance of the specific companies. The broad market fluctuations may adverselyaffect the market price of our common stock.

 

***We do not paydividends on our common stock.***

 

We have not paid a dividend on our common stock and have no plan to doso in the near future.

 

***Our principalshareholders may control our management decisions.***

 

ThomasBrown and David Mann, own approximately 70% of our outstanding common stock. Therefore,Messers Brown and Mann are able to exercise significant influence over allmatters requiring shareholder approval, including the election of directors andapproval of significant corporate transactions. This concentration of ownershipmay delay or prevent a change of control of GlobalSCAPE or discourage apotential acquirer from attempting to obtain control of GlobalSCAPE, either ofwhich could have an adverse effect on the value of our common stock.

 

***Anti-takeoverprovisions in GlobalSCAPE’s charter and Delaware law could inhibit others fromacquiring GlobalSCAPE.***

 

Some of the provisions of GlobalSCAPE’s certificate of incorporationand bylaws and in Delaware law could, together or separately:

 

•                  discouragepotential acquisition proposals;

 

•                  delayor prevent a change in control; and

 

•                  limitthe price that investors may be willing to pay in the future for shares ofGlobalSCAPE’s common stock.

 

In particular, GlobalSCAPE’s certificate of incorporation and bylawsprovide for, among other things, limitations on the individuals that may callmeetings of the stockholders and do not allow for cumulative voting. GlobalSCAPEis also subject to Section 203 of the Delaware General Corporation Law,which generally prohibits a Delaware corporation from engaging in any of abroad range of business combinations with any interested stockholder, asdefined in the statute, for a period of three years following the date on whichthe stockholder became an interested stockholder.

 

***Stockholders’ ownership of GlobalSCAPE stock may besignificantly diluted, affecting the value of the stock.***

*** ***

There are options for 2,058,600 shares currently outstanding underGlobalSCAPE’s employee stock option plans as of the date of this report. Of the2,058,600 options, 1,047,451 were vested as of March 1, 2006. We havefiled a registration statement under the Securities Act of 1933, as amended(the “Securities Act”), covering stock issued upon the exercise of options bynon-affiliates, and we may file a registration statement covering optionsheld by affiliates as well. If we do not file a registration statement coveringaffiliates, affiliates who exercise their options may choose to sell thestock under an exemption from registration, such as Rule 144 under theSecurities Act. The exercise of these options and sale of the resulting stockcould depress the value of our stock.

 

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**Risks Related to Legal Uncertainty**

 

***GlobalSCAPE is vulnerable to claims that GlobalSCAPE’sproducts infringe third-party intellectual property rights particularly becauseGlobalSCAPE’s products are partially developed by independent parties.***

*** ***

GlobalSCAPE may be exposed to future litigation based on claimsthat GlobalSCAPE’s products infringe the intellectual property rights of others.This risk is exacerbated by the fact that some of the code in GlobalSCAPE’sproducts is developed by independent parties or licensed from third partiesover whom GlobalSCAPE has less control than it exercises over internaldevelopers. In addition, we expect that infringement claims against softwaredevelopers will become more prevalent as the number of products and developersgrows and the functionality of software programs in the market increasinglyoverlaps. Claims of infringement could require GlobalSCAPE to re-engineer itsproducts or seek to obtain licenses from third parties in order to continueoffering its products. In addition, an adverse legal decision affectingGlobalSCAPE’s intellectual property, or the use of significant resources todefend against this type of claim could place a significant strain onGlobalSCAPE’s financial resources and harm its reputation.

 

***GlobalSCAPE may not be able to protect its intellectualproperty rights.***

*** ***

GlobalSCAPE’s software code, and trade and service marks are some ofGlobalSCAPE’s most valuable assets. Given the global nature of the internet andGlobalSCAPE’s business, GlobalSCAPE is vulnerable to the misappropriation ofthis intellectual property, particularly in foreign markets, such as China andEastern Europe, where laws or law enforcement practices are less developed. Theglobal nature of the internet makes it difficult to control the ultimatedestination or security of GlobalSCAPE’s software making it more likely thatunauthorized third parties will copy certain portions of GlobalSCAPE’sproprietary information or reverse engineer the proprietary information used inits programs. If GlobalSCAPE’s proprietary rights were infringed by athird-party, and GlobalSCAPE did not have adequate legal recourse, GlobalSCAPE’sability to earn profits, which are highly dependent on those rights, would beseverely diminished.

 

***Other companies may own, obtain or claimtrademarks that could prevent, limit or interfere with GlobalSCAPE’s use of itstrademarks.***

*** ***

GlobalSCAPE’s various trademarks are important to its business. IfGlobalSCAPE were to lose the use of any its trademarks, its business would beharmed and GlobalSCAPE would have to devote substantial resources towardsdeveloping an independent brand identity. Defending or enforcing GlobalSCAPE’strademark rights at a local and international level could result in theexpenditure of significant financial and managerial resources.

 

###### **Item 1B.**                Unresolved Staff Comments

###### ** **

None.

 

## **Item 2.**           Properties

##  

Our corporate office is located in a technical park in northwest SanAntonio called University Park Tech Center II. Our lease for the 14,700 squarefoot facility expires in September 2008. Our annual rent is approximately$191,000. We believe these facilities will be suitable for our current businessneeds and that suitable additional space will be available on acceptable termswhen needed.

 

## **Item 3.**           LegalProceedings

##  

We are not currently involved in any material pending legalproceedings, but may become subject to legal proceedings in the ordinarycourse of our business. Such claims may result in the expenditure ofsignificant financial and managerial resources.

 

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## **Item 4.**           Submissionof Matters to a Vote of Security Holders

##  

None.

 

###### **Item 4A.**                Executive Officers of the Company

###### ** **

***Charles R. Poole***.Mr. Poole has served asGlobalSCAPE’s President since February 2004. From September 2003until February 2004, he served as the company’s Vice President of Salesand Marketing. Mr. Poole has over twenty years of experience in seniormanagement and sales with telecommunications companies, most recently as thePresident of GlobalSCAPE’s former parent company, ATSI Communications, Inc.,from 1998 – 2001. Mr. Poole has served as a Senior Vice President for A+Communications, responsible for paging, cellular and telemessaging sales from1995 – 1997, as General Manager of American Paging, Texas from 1994 – 1995, asa Division Manager of Data Documents, Inc. of Omaha, Nebraska from 1992 –1994, as President of GeoCom Partners, a satellite-based telecommunicationscompany from 1989 – 1992, as Senior Vice President of MobileComm (a BellSouthCompany) from 1984-1989, and as Regional Vice President of Burroughs Corp (nowUnisys) from 1966-1984.

 

***Thomas F. Farar.***Mr. Fararserves as GlobalSCAPE’s Treasurer, Secretary, and Chief Financial Officer. Heis responsible for all finance and accounting functions. Mr. Farar joinedGlobalSCAPE in June 2004. Prior to joining GlobalSCAPE, Mr. Fararserved as Senior Accounting Manager (1999-2003) and Controller (2003-2004) forUDP, Ltd., a telecommunications service bureau. Mr. Farar also served asDisbursements Supervisor for PG&E Gas Transmission – Texas in 1999. Mr. Fararwas Controller and Treasurer of CDH Feeders, Inc., an agriculturaloperation of cattle feedlots, and affiliated companies from 1991-1998. Mr. Fararholds a B.B.A. in Accounting from The University of Texas at San Antonio.

 

***Jeffrey Gehring****.*Mr. Gehring serves as GlobalSCAPE’s VicePresident of Sales and has been with GlobalSCAPE since November 2004 inthat capacity. Mr. Gehring is responsible for the company’s inbound sales,corporate sales and the reseller program. Mr. Gehring was employed byNextel Partners as Director of Sales in 2004, where he coordinated sales acrossthe country. From 2003 to 2004, Mr. Gehring was Sales Manager forGlobalSCAPE, performing the duties he presently holds. From 2002 to 2003, Mr. Gehringwas a principal in a start up business, ConnectOne Telecom, where got thebusiness off the ground from the organizational stage to operations. Prior to2002, Mr. Gehring was Director of Sales and Marketing at UDP, a telecommunications billing, ordermanagement and customer service software company. Inaddition to his UDP experience, he has more than 20 years of operational andsales management experience in large and medium-sized businesses, includingUnisys, Bell South and Metrocall. His experience includes strategic planningand implementation for companies that require rapid growth, as well asestablishing processes and policies that foster world-class salesorganizations.

 

*Gregory Hoffer**.***Mr. Hoffer serves as Vice President andChief Technology Officer and has been employed by GlobalSCAPE since May 2000.Mr. Hoffer is responsible for overseeing all software development and Webdevelopment at GlobalSCAPE. Before joining GlobalSCAPE, Mr. Hoffer heldsoftware development positions at the consulting firm of Marotz, Inc.Prior to that, Mr. Hoffer managed the IT department and was head of thecomputer science department at Saint Mary’s Hall, a  private school in San Antonio, Texas. Mr. Hofferreceived a bachelor’s degree in computer science from Trinity University and ispursuing his master’s degree in computer science.

 

***Stefan Lagmark.***Mr. Lagmark serves as Vice President ofMarketing. Mr. Lagmark has been with GlobalSCAPE since August 2004and is responsible for the overall marketing strategy of GlobalSCAPE. From 2002to 2004, Lagmark was a principal in Lagmark Business Brokers, where he marketedthe company’s services of brokering businesses in San Antonio, Texas and the surroundingarea. Prior to 2002, he held the position of National Sales Manager ofGallagher Power Fence, and has held several senior management positions withmultinational corporations, including that of Director of Marketing and Salesof T-Systems International, a large agricultural irrigation company and GeneralManager of Glo-Vet Supply, a distribution company of animal and veterinariansupplies, and a subsidiary of De Laval. In these leadership positions, hesuccessfully achieved growth in sales and profitability

 

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throughinnovative marketing programs, product and brand management, new distributiondevelopment and new market development. Stefan earned his Master’s degree inEconomics and Business Administration from Stockholm School of Economics,Sweden.

 

***K. Earl Posey.***Mr. Posey serves as GlobalSCAPE’s VicePresident of Strategic Development. Mr. Posey is responsible for locatingtechnologies, partners and/or companies that fit within GlobalSCAPE’sstrategies and developing relationships that will grow GlobalSCAPE’s business. Priorto joining GlobalSCAPE in January of 2006, he was Vice-president ofAdministration for ATSI, Inc. an international telecommunications companylocated in San Antonio, from 2000-2003. During 2004 and 2005, he was the SeniorPrincipal and founder for Gossyppia Partners, a management consulting firmspecializing in development of strategic management plans for corporations. Mr. Poseydid his graduate and post graduate work at Vanderbilt University.

 

17

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# PART II

 

## **Item 5.**           Marketfor Registrant’s Common Equity and Related Stockholder Matters and IssuerPurchases of Equity

##  

Our common stock is listed on the NASD’s OTCBulletin Board under the symbol GSCP. As of February 22, 2006, there wereapproximately 2,550 holders of record of our common stock representingapproximately 9,000 beneficial owners. GlobalSCAPE stock began trading on February 15,2002. The table below sets forth the quarterly high and low bid prices for ourcommon stock for the last two fiscal years.

 

### **Common Stock Price**

 

| ** **                                    | ** ** | **Fiscal Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **High**                                | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| **First  Quarter (ending March 31)**     |       | $                                       | 0.27       |   | $ | 0.16 |   | $ | 0.32 |   | $ | 0.16 |   |
| **Second  Quarter (ending June 30)**     |       | $                                       | 0.18       |   | $ | 0.10 |   | $ | 0.40 |   | $ | 0.25 |   |
| **Third  Quarter (ending September 30)** |       | $                                       | 0.18       |   | $ | 0.10 |   | $ | 3.00 |   | $ | 0.31 |   |
| **Fourth  Quarter (ending December 31)** |       | $                                       | 0.21       |   | $ | 0.13 |   | $ | 4.90 |   | $ | 1.08 |   |
| ** **                                    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Annual**                                    |       | $                                       | 0.27       |   | $ | 0.10 |   | $ | 4.90 |   | $ | 0.16 |   |

 

The closing bid price on March 6, 2006 was $2.72. Over-the-countermarket quotations reflect inter-dealer prices, without retail mark-up,mark-down, or commission and may not necessarily represent actualtransactions.

 

We have never paid a cash dividend, and do not expect to do so in theforeseeable future. We expect to reinvest all of our earnings in the furthergrowth of the business.

 

18

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## **Item 6. Selected Financial Data**

##  

The selected financial data presented below for the years ended December 31,2001, 2002, 2003, 2004 and 2005 are derived from our audited financialstatements.

 

**Statement of Operations Data:**

 
| ** **                                                                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                            | ** ** | **2001**                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues:                                                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Software product revenues                                                             |       | $                                 | 5,242,760  |   | $ | 5,186,824 |   | $ | 4,734,105 |   | $ | 4,713,191 |   | $ | 6,096,045 |   |
| Maintenance and support (net of deferred revenue)                                     |       | 16,388                            |       | 82,679 |   | 113,014 |   | 217,469 |   | 582,570 |   |
| Advertising revenues                                                                  |       | 38,540                            |       | — |   | — |   | — |   | — |   |
| Total revenues                                                                        |       | 5,297,688                         |       | 5,269,503 |   | 4,847,119 |   | 4,930,660 |   | 6,678,618 |   |
| Operating  expenses:                                                                  |       |                              |       |   |   |   |   |   |   |   |   |
| Cost of revenues (exclusive of depreciation  and amortization shown separately below) |       | 323,309                           |       | 353,918 |   | 532,910 |   | 371,242 |   | 279,964 |   |
| Selling, general and administrative                                                   |       | 3,551,498                         |       | 3,580,361 |   | 3,613,759 |   | 3,456,598 |   | 3,986,047 |   |
| Research and development                                                              |       | 1,176,714                         |       | 848,212 |   | 945,395 |   | 727,423 |   | 869,155 |   |
| Depreciation and amortization                                                         |       | 546,017                           |       | 544,063 |   | 390,154 |   | 171,834 |   | 98,071 |   |
| Settlement with ATSI Comm. Inc.                                                       |       | —                            |       | 392,905 |   | — |   | — |   | — |   |
| Total operating expenses                                                              |       | 5,597,538                         |       | 5,719,459 |   | 5,482,218 |   | 4,727,097 |   | 5,233,237 |   |
| Income  (loss) from operations                                                        |       | (299,850                          | )          | (449,956 | ) | (635,099 | ) | 203,563 |   | 1,445,378 |   |
| Interest  expense, net                                                                |       | 4,420                             |       | 11,783 |   | (5,016 | ) | (1,651 | ) | (620 | ) |
| Interest  income                                                                      |       | —                            |       | — |   | — |   | — |   | 10,685 |   |
| Gain (loss)  on sale of assets                                                        |       | —                            |       | — |   | (1,486 | ) | — |   | 1,242 |   |
| Income  (loss) before provision for income taxes                                      |       | (295,430                          | )          | (438,173 | ) | (641,601 | ) | 201,912 |   | 1,456,685 |   |
| Total income  tax provision (benefit)                                                 |       | (38,295                           | )          | 175,202 |   | 1,400 |   | 1,489 |   | 9,981 |   |
| Net income  (loss)                                                                    |       | $                                 | (257,135   | ) | $ | (613,375 | ) | $ | (643,001 | ) | 200,423 |   | 1,446,704 |   |
| Net income (loss) per common share - basic                                            |       | $                                 | (0.02      | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | 0.10 |   |
| Net income (loss) per common share  -assuming dilution                                |       | $                                 | (0.02      | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | 0.09 |   |

 

**BalanceSheet Data:**

 
| ** **                                                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **2001**              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents                                                |       | $                     | 134,537    |   | $ | 480,609 |   | $ | 342,433 |   | $ | 572,959 |   | $ | 2,029,473 |   |
| Working  capital                                                          |       | 498,134               |       | 368,567 |   | 19,203 |   | 341,749 |   | 1,741,354 |   |
| Total assets                                                              |       | 2,009,806             |       | 1,412,042 |   | 918,278 |   | 971,857 |   | 2,901,671 |   |
| Long term debt including capital lease  obligations, less current portion |       | 77,080                |       | 15,477 |   | — |   | — |   | — |   |
| Cash  dividends per common share                                          |       | $                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

19

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## **Item 7.**           Management’sDiscussion and Analysis of Financial Condition and Results of Operation

##  

The following Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with ourfinancial statements for the years ended December 31, 2003, 2004 and 2005and related notes included elsewhere in this document.

 

**Overview**

 

GlobalSCAPE develops and distributes secure file management softwarethat enables users to safely send data over the internet. Our productsguarantee the privacy of critical information such as financial data, medicalrecords, customer files and other similar documents. In addition, our productsensure compliance with government regulations relating to the protection ofinformation while allowing users to reduce IT costs, increase efficiency, trackand audit transaction and automate processes. We also develop and distributeWeb content management and Web development tools.

 

Since 2000, we have focused on enhancing our portfolio of products tomeet the increasing demand for data security, and for solutions that permitnon-technical personnel to contribute content to their organizations’ Web sites.Our strategy is to continue enhancing our file transfer products across theboard to meet the demands of both individual and enterprise users, whileimproving the security features of our current product line. We believe thatthe next phase of our growth will come through the continued development of oursecure FTP Server and Enhanced File Transfer products involving secure filetransfer to meet the growing demand for file security when transferringinformation across the internet due to changes in regulations in variousindustries and the demand of users for secure solutions. We are encouraged withthe interest we have seen in our enhanced file transfer offerings so far, withsales exceeding our expectations. We intend to release new versions of CuteFTP,CuteFTP Pro and Secure FTP Server early in 2006 and we believe we can slow thedecline in sales of CuteFTP and improve sales of CuteFTP Pro and Secure FTPServer. We plan on releasing additional versions of EFT and modules for itthroughout 2006.

 

Substantially all software products ultimately reach a point in theirlifecycle in which sales can be expected to plateau or decline. Managementbelieves that the market for stand-alone FTP client programs for home consumersmay be declining. While it cannot be determined with certainty, CuteFTPand CuteFTP Pro may have reached such a point in their lifecycles. Inorder to respond to this decline, we have begun concentrating on productofferings for business users. We have not seen the same decline in the marketfor secure FTP client programs and servers such as CuteFTP Pro and Secure FTP Serverwhich we believe better target the needs of businesses.

 

Our shift to emphasizing product offerings for business users will haveimportant consequences for our business. GlobalSCAPE will require more technicalsales and support persons to handle the complex configurations of customersystems as the customer base grows. More difficult and different situationswill arise as customer needs grow. We will need to have the ability tounderstand and solve technical issues in a timely manner. With increased salesto business we should realize additional revenues from maintenance and supportagreements to support the additional personnel.

 

##### **Liquidity and CapitalResources**

##### ** **

Our capital requirements are driven principally by our need to enhanceour existing products and to develop new products. The amount of our capitalexpenditures has a direct impact on our ability to offer enhanced and newproducts to our customers. Our principal source of capital is cash flow fromoperations which, in turn, is highly dependent on our sales revenue. Historically,we have relied heavily on sales of CuteFTP Home and CuteFTP Professional, whichaccounted for 69% and 51% of our revenues in the years ended December 31,2004 and 2005, respectively. Newer products in 2005, namely Enhanced FileTransfer and Secure FTP Server, have increased our total revenue while reducingthe percentage of total revenue previously held by the two CuteFTP products.

 

20

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Our principal sources of capital are cash on hand and cash flow fromoperations. To the extent that sales decline, our cash flow from operationswill also decline. If sales decline or our liquidity otherwise requires,management may substantially reduce personnel and personnel-related costs,reduce or substantially eliminate capital expenditures and/or reduce orsubstantially eliminate research and development expenditures.

 

Net cash provided (used) by operating activities was ($105,548),$384,314 and $1,549,636 in 2003, 2004 and 2005, respectively. Net cash used inoperating activities in 2003 was primarily the result of the net loss for theperiod offset somewhat by depreciation and amortization charges for the period.In 2004, net cash provided resulted from an increase in net income primarily asa result of increased revenues, adjustments related to depreciation andamortization as well as decreased accounts receivable. Net cash provided byoperating activities in 2005 was primarily due to an increase in net incomeprimarily as a result of increased revenues, offset by an increase in accountsreceivable, accrued liabilities and deferred revenue and a decrease in accountspayable.

 

Net cash used in investing activities for 2003, 2004 and 2005 was$73,207, $42,250, and $102,062 respectively. In 2003, 2004 and 2005, wecapitalized the purchase of $73,027, $42,250 and $103,304 in equipment andsoftware, respectively.

 

Net cash provided (used) in financing activities during 2003, 2004 and2005 was $ 40,399, ($111,538) and $8,940, respectively. In 2003, we madeprincipal payments of $61,317 on capital lease obligations and borrowed$100,000 under our line of credit and received $1,716 for the exercise of stockoptions. In 2004, we made principal payments on notes payable of $100,000 andmade principal payments of $15,294 on capital lease obligations and received$3,756 for the exercise of stock options. In 2005, we received $8,940 for theexercise of stock options. We did not enter into any new capital leases in 2004or 2005.

 

As of December 31, 2005, we had $2,029,473 in cash and cashequivalents, current assets of $2,685,505 and current liabilities of $944,151,resulting in working capital of $1,741,354. This represented a working capitalimprovement of $1,399,605 over December 31, 2004. Our principalcommitments at December 31, 2005, consisted of obligations outstandingunder operating leases as well as royalty agreements with third parties. Thecommitments related to royalty agreements are contingent on sales volumes. Weplan to expend significant resources on product development in future periodsand may also use our cash to acquire or license technology, products orbusinesses related to our current business. We expect that operating expenseswill continue to be a material use of our cash resources as well, but willmanage the business based on the immediately foreseeable operating cash flows. Thefacility that we currently occupy is expected to be sufficient for the nexttwelve months. Consequently, we do not anticipate significant expenditures for leaseholdimprovements or furniture for 2006.

 

We do not currently have any commitments for outside sources of capital.At December 31, 2005, we had a $250,000 revolving credit agreement whichexpires on March 31, 2006. We believe that, if necessary, we could enterinto a similar arrangement in the future, although we cannot assure you that wewill be able to do so. We may also sell equity securities in order tofinance future acquisitions or licensing activities.

 

The following table summarizes our contractual obligations at December 31,2005, consisting of future minimum capital lease payments and future minimumpayments under operating leases: 

 
| ** **                   | ** ** | **Payments due by period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| **Contractual obligations**  |
| Operating  lease obligations |       | $                          | 476,647    |   | $ | 190,659 |   | $ | 285,988 |   | $ | — |   | $ | — |   |
| Deferred  compensation       |       | $                          | 12,121     |   | — |   | $ | 12,121 |   | — |   | — |   |
| Total                        |       | $                          | 488,768    |   | $ | 190,659 |   | $ | 298,109 |   | $ | — |   | $ | — |   |

 

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##### **Critical AccountingPolicies**

##### ** **

***Use ofEstimates***

* *

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations is based upon the Company’s financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnites States. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amount ofassets and liabilities. On an ongoing basis, management evaluates its estimatesand judgments, including those related to revenue recognition, allowance fordoubtful accounts receivable, long-lived and intangible assets, income taxesand contingencies. Management bases its estimates on historical experience,observable trends, and various other assumptions that are believed to bereasonable under the circumstances. Management uses this information to makejudgments about the carrying values of assets and liabilities that are notreadily apparent form other sources. Actual results may differ fromthe estimates under different assumptions or conditions.

 

Management believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsfinancial statements.

 

***RevenueRecognition***

* *

Ourrevenue is generated primarily by licensing our software products and providingsupport for those products. Revenues are comprised of the gross sellingprice of the software, including shipping charges and the earned portion ofsupport and maintenance agreements. In periods where we had revenue fromadvertising, we recognized the net proceeds received from advertisers asrevenue. The Company recognizes revenue in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as modifiedby SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.

 

Revenues from the sale of software products are recognized andcompletely earned upon shipment or electronic delivery of the product providedthat persuasive evidence of an arrangement exists, collection is probable,payment terms are fixed and determinable and no significant obligations remain.The majority of our sales are delivered electronically via email.

 

We also sell technical support and maintenance agreements (postcontract customer support “PCS”), which are sometimes bundled with the software.When vendor specific objective evidence (“VSOE”) of fair value existsfor all elements in a multiple element arrangement, revenue is allocated toeach element based on the relative fair value of each of the elements. VSOE offair value is established by the price charged when the same element is soldseparately. In a multiple element arrangement whereby VSOE of fair value of allundelivered elements exists but VSOE of fair value does not exist for one ormore delivered elements, revenue is recognized using the residual method. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is recognized as revenue, assumingcollection is probable. Revenue allocated to PCS is recognized ratably over thecontractual term, typically one year. We sometimes sell installation and trainingservices with our PureCMS and EFT products. Revenue for installation andtraining is recognized when performed.

 

The Company began selling technical support and maintenance servicesfor some of its software products in 2001. Deferred revenue grew to a balanceof approximately $142,000 at December 31, 2002 and remained relativelyflat, ending 2003 with a balance of approximately $140,000. Sales of theseagreements grew in 2004 and 2005 with higher priced support and maintenance forour enterprise class software products and our efforts to renew agreementsupon their expiration. Growth in the sales of maintenance and supportagreements may result in the deferred recognition of a significant amountof revenue in future periods.

 

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***Allowance for Doubtful Accounts***

*** ***

We provide credit, in the normal course of business, to a number ofcompanies and perform ongoing evaluations of our credit risk. We requireno collateral from our customers and we estimate the allowance foruncollectible accounts based on our historical experience and current creditevaluations. No single customer accounted for more than 2% of net revenues in2003 or 2004. In 2005, we had one customer that accounted for approximately 2.7%of net revenues.

 

***Valuationof Long-Lived and Intangible Assets***

* *

The Company assesses the impairment of long-lived and intangible assetswhenever events or changes in circumstances indicate that the carrying value may notbe recoverable. Factors considered important which could trigger an impairmentreview included the following: significant underperformance relative to historical or projected futurecash flows; significant changes in the manner of use of the assets or the strategyfor the overall business; and significant negative industry trends. Whenmanagement determines that the carrying value of long-lived and intangibleassets may not be recoverable, impairment is measured based on the excessof the assets’ carrying value over the estimated fair value. No impairment wasrecognized in 2003, 2004 or 2005.

 

***Stock-BasedCompensation***

* *

The Company measures compensation expense for its stock-based employeecompensation plans, which are described in Note 8. Statement of FinancialAccounting Standards 123, *Accounting forStock-Based Compensation* (SFAS 123), encourages, but does not require, companies to recordcompensation cost for stock-based employee compensation plans based on the fairmarket value of options granted. The Company chose to account for stock basedcompensation using the intrinsic value method prescribed in APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, compensation expense is recorded tothe extent that the current market price of the underlying stock exceeds theexercise price. On December 31, 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standard 148, *Accounting for Stock Based Compensation - Transitionand Disclosure* (SFAS 148), which amends SFAS 123. SFAS 148 requiresmore prominent and frequent disclosures about the effects of stock-basedcompensation. The Company continued to account for its stock-based compensationaccording to the provisions of APB Opinion No. 25. The pro formadisclosure requirements prescribed by SFAS 123, as amended by SFAS 148 areincluded in Note 1 to the Financial Statements.

 

In December 2004, FASB issued Statement No. 123-R, *Share-Based Payment,*which establishesaccounting standards for transactions in which an entity receives employeeservices in exchange for (a) equity instruments of the entity or (b) liabilitiesthat are based on the fair value of the entity’s equity instruments or that may besettled by the issuance of equity instruments*.*Effective in the first quarter of 2006, SFAS 123-R will require usto recognize the grant-date fair value of stock options and equity basedcompensation issued to employees in the statement of operations. The statementalso requires that such transactions be accounted for using the fair–value-based method, thereby eliminating use of the intrinsic value method ofaccounting in APB No. 25, *Accountingfor Stock Issued to Employees,*which was permitted under Statement123, as originally issued. This change in accounting will be required in thefirst quarter of 2006 and will result in increased compensation expense forstock options over their vesting period.

 

See note 1 to the financial statements on page 44 under theheading Stock Options. The Company will adopt the fair value method ofaccounting for stock options during the first quarter of 2006.

 

***Research and Development***

*** ***

Research and development expenses include all direct costs, primarilysalaries for personnel and expenditures with external development sources,related to the development of new products and significant enhancements toexisting products and are expensed as incurred until such time as technological

 

23

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feasibility is achieved. For the years 2003,2004 and 2005, we spent approximately $945,000, $728,000 and $870,000respectively, on research and development. No research and development expenseswere capitalized in 2003, 2004 or 2005 and all previously capitalized researchand development expenses were fully amortized at December 31, 2002.

 

***IncomeTaxes***

* *

GlobalSCAPE accounts for income taxes using the liability method inaccordance with Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. The liabilitymethod provides that the deferred tax assets and liabilities are recorded basedon the difference between the tax bases of assets and liabilities and theircarrying amount for financial reporting purposes, as measured by the enactedtax rates and laws that will be in effect when the differences are expected toreverse. Deferred tax assets are carried on the balance sheet with thepresumption that they will be realizable in future periods when pre-tax incomeis generated. Predicting the ability to realize these assets in future periodsrequires a great deal of judgment by management. Although we have generatedpre-tax income in previous years, unusual or infrequently occurringtransactions resulted in pre-tax losses in 2001 and 2002 (compensation chargesin 2001 and the settlement with ATSI and termination of CEO in 2002). Statementof Financial Accounting Standards (SFAS) No. 109 requires a valuationallowance to reduce the deferred tax assets reported if, based on the weight ofthe evidence, it is more likely than not that some portion or all of thedeferred tax assets will not be realized. After consideration of all of theevidence, both positive and negative, management determined that a $540,350valuation allowance at December 31, 2003 and $484,853 valuation allowanceat December 31, 2004, was necessary to reduce the deferred tax assets tothe amount that will more likely than not be realized. No allowance wasconsidered necessary at December 31, 2005. The change in the valuationallowance for the current year is a net decrease of $484,853.

 

##### **Comparison of Year Ended December 31,2005 to Year Ended December 31, 2004**

##### ** **

***Revenue.***Wederive our revenues primarily from software sales. Revenue is comprised of thegross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. Revenues increased approximately36% from 2004 to 2005, from $4,930,660 in 2004 to $6,678,615 in 2005. Unitvolume decreased with approximately 170,000 licenses sold in 2004 versus124,000 sold in 2005. The decrease in unit volumes was offset by an increase inthe average selling price of our products from $39.66 in 2004 to $58.87 in 2005as a result of increased sales of our enhanced file transfer offerings. Theincrease in revenues was up quarter over quarter in 2005 compared to the samequarters in 2004. We believe the economic uncertainty in the first threequarters of 2004 contributed to those periods’ poor performance along with theturnover in our sales force. Our fourth quarter revenues in 2004 increasedapproximately 11% over the same quarter in 2003 and approximately 43% in thefourth quarter 2005 over 2004.

 

In 2004 and 2005, approximately 69% and 51%, respectively, of ourrevenues were generated from sales of CuteFTP and CuteFTP Pro. Combined salesof these products increased approximately 1% in revenue year over year. Salesof CuteFTP declined approximately 22% while sales of CuteFTP Pro increasedapproximately 18%. Those changes were the result of the continuing maturity ofCuteFTP and the increasing demand by business users of CuteFTP Pro. CuteFTP Prohas more features and is designed for business use, whereas CuteFTP is for homeuse only. Users are moving to CuteFTP Pro for the advanced features andsecurity levels. Our reliance on these products may negatively impactfuture results from operations if we are unable to maintain revenues from theseproducts or successfully introduce new product offerings. The relatively flatsales performance of CuteFTP and CuteFTP Pro was offset by an increase in salesof our Secure Server and Enhanced File Transfer products. Sales of theseproducts grew from 14% of our revenues in 2004 to 44% in 2005. This increasewas the result of the needs of businesses to transfer files in a secure fashionusing business or enterprise level software. In addition, because of the morecomplex nature of these products, purchasers require increased maintenance andsupport. As a result, our maintenance and support revenues increased by 168%from 2004 to 2005 from $217,469 in 2004 to $582,570, net of deferred revenue.Our maintenance and support revenues are generally recognized over the life ofthe agreement, which is discussed further under the Deferred Revenue section ofItem 7.

 

24

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***Cost of Revenues.***Costof revenues consists primarily of royalties, a portion of our bandwidth costsas well as production, packaging and shipping costs for boxed copies ofsoftware products. Cost of revenues decreased by approximately 25% betweenperiods from $371,242 in 2004 to $279,964 in 2005 due to a decrease in royaltyexpenses related to our software distribution agreements with third parties. Royaltiesthat we pay on software products licensed from third parties, which we resell,are expensed as a cost of sales when the software product is sold or earlier ifthe recoverability of any prepaid royalties is in doubt. We expect the cost ofrevenues to remain consistent both as a percentage of sales and in gross termsin 2006 when compared to 2005.

 

***Selling, General andAdministrative.***Selling, general andadministrative expenses consist primarily of personnel and related expenses,marketing, customer support, professional fees, rent, bad debt and credit cardtransaction fees. Selling, general and administrative expenses increased by approximately16%  from $3,456,598 in 2004 to $3,986,047in 2005. The number of persons employed by GlobalSCAPE was reduced from 45 to36 in February 2004. As of March 1, 2006 the number of employees was 41.

 

***Research andDevelopment.***Research and development expensesincreased by approximately 19% from $727,000 in 2004 to $870,000 in 2005. Includedin the research and development expenses, external development costs increasedapproximately 48% from 2004 to 2005. External development was increased inorder to maintain the scheduled releases of CuteFTP, CuteFTP Pro, Secure FTPServer, and EFT.

 

***Depreciation andAmortization.***Depreciation and amortizationexpense consists of depreciation expense related to our fixed assets and theamortization of the trademark associated with our purchase of CuteFTP in 1998. Depreciationand amortization expense declined by $73,763 or approximately 43% year overyear. This decrease was due primarily to a reduction in amortization expense. Thepurchase of CuteFTP was fully amortized as of September 20, 2003. Inaddition, depreciation expense has declined due to a slowdown in additions tofixed assets in current periods relative to prior periods.

 

***Other Income(Expense), Net.***In 2004, we had interest expenseof $1,651 related primarily to an advance on our line of credit and financingof insurance premiums. In 2005, we had interest expense of $620 relatedprimarily to the financing of insurance premiums. During 2005, we had interestincome of $10,685 as a result of interest earned on excess cash balances. During2005, we had a gain of $1,242 on the sale of fully depreciated fixed assets.

 

***Income Taxes.***Theprovision for state income taxes in 2004 was $1,489 and there was no provisionfor federal income taxes in 2004. GlobalSCAPE’s effective income tax ratewas  0.7% and differs from the federalrate primarily because of a change in the valuation allowance for deferred taxassets. The provision for state income taxes in 2005 was $1,065 and the provisionfor federal income taxes was $8,916 in 2005. GlobalSCAPE’s effective income taxrate is .7% and differs from the federal rate primarily because of a change inthe valuation allowance for deferred tax assets. The Company utilized netoperating loss carryforwards in 2004 to eliminate its Federal income taxexpense and utilized the remaining net operating loss carryforwards in 2005 tosubstantially reduce its Federal income tax expense.

 

***Net Income.***In2004, net income was primarily the result of a slight increase in revenue, adecrease in the cost of revenues, SG&A, research and development anddepreciation costs. Significant effort was put in to controlling expenses in2004, including the layoff of 9 employees. In 2005, net income was primarilythe result of the introduction of our Enhanced File Transfer product and thefeatures added to our Secure FTP Server product, resulting in an increase inrevenue, while we continued to control expenses.

 

##### **Comparison of Year Ended December 31,2004 to Year Ended December 31, 2003**

##### ** **

***Revenue.***Wederive our revenues primarily from software sales. Revenue is comprised of thegross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. Revenues increased approximately2% from 2003 to 2004, from $4,847,119 in 2003 to $4,930,660 in 2004. Unitvolume was relatively flat with approximately 175,000 sold in 2003

 

25

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versus 170,000 in 2004. The increase inrevenues was pronounced in the fourth quarter when compared to the same periodin 2003. We believe the economic uncertainty in the first three quarters of2004 contributed to those periods’ poor performance along with the turnover inour sales force. Our fourth quarter revenues increased approximately 11% overthe same quarter in 2003.

 

In 2003 and 2004, approximately 75% and 69%, respectively, of ourrevenues were generated from sales of CuteFTP and CuteFTP Pro. Combined salesof these products declined approximately 7% year over year as a result of thechanging needs of individuals and business to transfer files on the internet. Salesof CuteFTP declined approximately 36% while sales of CuteFTP Pro increasedapproximately 41%. The shift in revenue from CuteFTP to CuteFTP Pro was due toadditional features in CuteFTP Pro that businesses and individuals required tosecurely transfer files across the internet. Our reliance on these products may negativelyimpact future results from operations if we are unable to maintain revenuesfrom these products or successfully introduce new product offerings. In November 2004,GlobalSCAPE introduced its Enhanced File Transfer product to meet the growingneeds of businesses to comply with requirements of businesses to transfersensitive information securely.

 

***Cost of Revenues.***Costof revenues consists primarily of royalties, a portion of our bandwidth costsas well as production, packaging and shipping costs for boxed copies ofsoftware products. Cost of revenues decreased approximately 30% between periodsfrom $532,910 in 2003 to $371,242 in 2004 due to a decrease in royalty expensesrelated to our software distribution agreements with third parties. Royaltiesthat the Company pays on software products licensed from third parties, whichit resells, are expensed as a cost of sales when the software product is soldor earlier if the recoverability of any prepaid royalties is in doubt. GlobalSCAPEno longer distributes the Protect IIS product and expensed prepaid royalties ofapproximately $15,000 in December 2003. GlobalSCAPE’s agreement withHannon Hill Corp. required a minimum royalty of $16,667 per month, asprepayment of royalties, for 12 months beginning in December 2002. Thesepayments were expensed as paid because the lower than expected sales of PureCMSraised doubt as to the realization of benefit from these prepayments. The totalamount expensed in 2003 relating to these prepayments was $183,337.

 

***Selling, General andAdministrative.***Selling, general andadministrative expenses consist primarily of personnel and related expenses,marketing, customer support, professional fees, rent, bad debt and credit cardtransaction fees. Selling, general and administrative expenses decreasedapproximately 4%  a year from $3,613,759in 2003 to $3,456,598 in 2004 as a result of a decrease in the number ofemployees in 2004. The number of persons employed by GlobalSCAPE was reducedfrom 45 to 36 in February 2004.

 

For comparative purposes, selling, general and administrative expensesfor 2003 includes approximately $540,000 in advertising expenses, relatingprimarily to the launch of the PureCMS product, as compared to $205,000 in 2004.Selling, general and administrative expenses also include approximately$134,900 in amortization of the CuteFTP trademark in 2003, when it was fullyamortized.

 

***Research andDevelopment.***Research and development expensesdecreased approximately 23% from $945,395 in 2003 to $727,423 due to areduction in the number of employees in 2004 and related salaries, payrolltaxes and benefits costs. External development costs increased approximately11% from 2003 to 2004. External development was increased to offset the loss ofinternal labor due to the layoff in order to maintain the scheduled releases ofCuteFTP, CuteFTP Pro, Secure FTP Server, PureCMS and EFT.

 

***Depreciation andAmortization.***Depreciation and amortizationexpense consists of depreciation expense related to our fixed assets and theamortization of the trademark associated with our purchase of CuteFTP in 1998. Depreciationand amortization expense declined $218,320 or approximately 56% year over year.This decrease was due primarily to a reduction in amortization expense. Thepurchase of CuteFTP was fully amortized as of September 2003. In addition,depreciation expense has declined due to a slowdown in additions to fixedassets in current periods relative to prior periods.

 

***Interest Expense,Net.***In 2003, we had interest expense of $5,016related primarily to capital leases. In 2004, we had interest expense of $1,651related primarily to an advance on our line of credit and financing ofinsurance premiums.

 

26

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***Income Taxes.***Theprovision for state income taxes in 2003 was $1,400 and there was no provisionfor federal income taxes in 2003. GlobalSCAPE’s effective income tax rate wasnegative 0.2% and differs from the federal rate primarily because of a changein the valuation allowance for deferred tax assets. The provision for stateincome taxes in 2004 was $1,489 and there was no provision for federal incometaxes in 2004. GlobalSCAPE’s effective income tax rate is 0.7% and differs fromthe federal rate primarily because of a change in the valuation allowance fordeferred tax assets. The Company utilized its net operating loss carryforwardsin 2004 to reduce its Federal income tax expense.

 

***Net Income.***In2003, the net loss was primarily the result of disappointing revenueperformance in the first and fourth quarters exacerbated by the product launchexpenses related to PureCMS. In 2004, the net income was primarily theresult of a slight increase in revenue, a decrease in the cost of revenues,SG&A, research and development and depreciation costs. Significant effortwas put in to controlling expenses in 2004, including the layoff of 9employees.

 

27

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###### **Item 7A.**     Quantitativeand Qualitative Disclosures About Market Risk

 

To date, wehave not utilized derivative financial instruments or derivative commodityinstruments. We do not expect to employ these or other strategies to hedgemarket risk in the foreseeable future. We may invest our cash in money marketfunds, which are subject to minimal credit and market risk. We believe that theinterest rate risk and other relevant market risks associated with thesefinancial instruments are immaterial.

 

In 2005 approximately33% of our revenues came from customers outside the United States. All revenuesare received in U.S. dollars so we have no exchange rate risk with regard tothe sale. However, as of July 1, 2003, the European Union (EU) enacted ValueAdded Taxes (VAT) on electronic purchases. These taxes are charged to ournon-business customers in the EU and, in our case, are remitted quarterly inpound sterling. We expect that the impact of any currency translation involvedin the remittance of VAT taxes will not be material to our business.

 

28

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## **Item 8.**    FinancialStatements and Supplementary Data

## ** **

**GlobalSCAPE, Inc.**

** **

**Index to Consolidated Financial Statements**

 

**Years ending December 31, 2003, 2004 and 2005**

** **

**Contents**

** **

| Report of Independent Registered Public Accounting Firm - Helin,  Donovan, Trubee & Wilkinson, LLP |   |   |
|--------------------------------------------------------------------------------------------------------|--------|--------|
| Report of Independent Registered Public Accounting Firm - Ernst &  Young, LLP                      |   |   |
| Financial Statements                                                                                   |   |   |
| Consolidated Balance Sheets                                                                            |   |   |
| Consolidated Statements of Operations                                                                  |   |   |
| Consolidated Statements of Stockholders’ Equity                                                   |   |   |
| Consolidated Statements of Cash Flows                                                                  |   |   |
| Notes to Consolidated Financial Statements                                                             |   |   |

 

29

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**Report of Independent RegisteredPublic Accounting Firm**

 

The Board ofDirectors and Shareholders

GlobalSCAPE,Inc.:

 

We have audited the accompanying consolidated balance sheets of GlobalSCAPE, Inc. (the Company) as of December 31, 2004 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of GlobalSCAPE,Inc. as of December 31, 2004 and2005, and the results of their operations and their cash flows for the yearsthen ended in conformity with generally accepted accounting principles in theUnited States of America.

 

Asdiscussed in Note 10 to the financial statements, The Company restated certainamounts previously reported as of and for the year ended December 31, 2005.

 

**Helin, Donovan,Trubee & Wilkinson, LLP**

 

February 17,2006 (April 27, 2006 as to Note 10 and theeffects of the restatement)

Austin,Texas

 

30

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directors

GlobalSCAPE, Inc.

 

We haveaudited the accompanying consolidated statements of operations, stockholders’equity and cash flows of GlobalSCAPE, Inc. for the year ended December 31, 2003.These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of GlobalSCAPE,Inc. for the year ended December 31, 2003 in conformity with accountingprinciples generally accepted in the United States.

 

 
|                | Ernst  & Young LLP |
|---------------------|------------------------|
|                |                   |
|                |                   |
| San Antonio,  Texas |                   |
| February 27,  2004  |                   |

 

31

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**GlobalSCAPE, Inc.**

** **

**Consolidated Balance Sheets**

** **

| ** **                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                          | ** ** | **2004**         | ** ** | **2005** | ** ** |
| Assets                                                                                                              |       |             |       |   |   |
| Current  assets:                                                                                                    |       |             |       |   |   |
| Cash and cash equivalents                                                                                           |       | $                | 572,959    |   | $ | 2,029,473 |   |
| Accounts receivable (net of allowance for doubtful  accounts of $10,195 and $12,273 in 2004 and 2005, respectively) |       | 148,534          |       | 590,715 |   |
| Prepaid expenses                                                                                                    |       | 91,144           |       | 65,317 |   |
| Total  current assets                                                                                               |       | 812,637          |       | 2,685,505 |   |
|                                                                                                                |       |             |       |   |   |
| Property and  equipment:                                                                                            |       |             |       |   |   |
| Furniture and fixtures                                                                                              |       | 332,920          |       | 334,063 |   |
| Software                                                                                                            |       | 245,601          |       | 284,621 |   |
| Equipment                                                                                                           |       | 608,718          |       | 604,517 |   |
| Leasehold improvements                                                                                              |       | 167,762          |       | 167,762 |   |
|                                                                                                                |       | 1,355,001        |       | 1,390,963 |   |
| Accumulated  depreciation and amortization                                                                          |       | 1,207,663        |       | 1,238,392 |   |
| Net property  and equipment                                                                                         |       | 147,338          |       | 152,571 |   |
|                                                                                                                |       |             |       |   |   |
| Other  assets:                                                                                                      |       |             |       |   |   |
| Deferred tax asset                                                                                                  |       | —           |       | 51,983 |   |
| Other                                                                                                               |       | 11,882           |       | 11,612 |   |
| Total other assets                                                                                                  |       | 11,882           |       | 63,595 |   |
|                                                                                                                |       |             |       |   |   |
| Total assets                                                                                                        |       | $                | 971,857    |   | $ | 2,901,671 |   |

 

32

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| ** **                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2004**         | ** ** | **2005** | ** ** |
| Liabilities  and Stockholders’ Equity                                                                                                                                    |       |             |       |   |   |
| Current  liabilities:                                                                                                                                                         |       |             |       |   |   |
| Accounts payable                                                                                                                                                              |       | $                | 122,117    |   | $ | 91,763 |   |
| Accrued expenses                                                                                                                                                              |       | 170,654          |       | 230,911 |   |
| Federal income tax payable                                                                                                                                                    |       | —           |       | 60,899 |   |
| Deferred revenue                                                                                                                                                              |       | 178,117          |       | 560,578 |   |
| Total  current liabilities                                                                                                                                                    |       | 470,888          |       | 944,151 |   |
|                                                                                                                                                                          |       |             |       |   |   |
| Long-term  liabilities:                                                                                                                                                       |       |             |       |   |   |
| Deferred compensation                                                                                                                                                         |       | —           |       | 12,121 |   |
| Other long-term liabilities                                                                                                                                                   |       | 28,038           |       | 16,824 |   |
| Total  long-term liabilities                                                                                                                                                  |       | 28,038           |       | 28,945 |   |
|                                                                                                                                                                          |       |             |       |   |   |
| Total  Liabilities                                                                                                                                                            |       | 498,926          |       | 973,096 |   |
|                                                                                                                                                                          |       |             |       |   |   |
| 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, 13,773,219 and 13,798,119 shares issued and Outstanding at  December 31, 2004 and 2005, respectively |       | 13,773           |       | 13,797 |   |
| Additional paid-in capital                                                                                                                                                    |       | 675,365          |       | 684,281 |   |
| Retained earnings (deficit)                                                                                                                                                   |       | (216,207         | )          | 1,230,497 |   |
| Total  stockholders’ equity                                                                                                                                              |       | 472,931          |       | 1,928,575 |   |
| Total  liabilities and stockholders’ equity                                                                                                                              |       | $                | 971,857    |   | $ | 2,901,671 |   |

 

See accompanying notes.

 

33

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**GlobalSCAPE, Inc.**

** **

**Consolidated Statements ofOperations**

** **

| ** **                                                                            | ** ** | **For the Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Operating  revenues:                                                                  |       |                                 |       |   |   |   |   |
| Software product revenues                                                             |       | $                                    | 4,734,105  |   | $ | 4,713,191 |   | $ | 6,096,045 |   |
| Maintenance and support (net of deferred  revenues)                                   |       | 113,014                              |       | 217,469 |   | 582,570 |   |
| Total revenues                                                                        |       | 4,847,119                            |       | 4,930,660 |   | 6,678,615 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Operating  expenses:                                                                  |       |                                 |       |   |   |   |   |
| Cost of revenues (exclusive of depreciation  and amortization shown separately below) |       | 532,910                              |       | 371,242 |   | 279,964 |   |
| Selling, general and administrative Expenses                                          |       | 3,613,759                            |       | 3,456,598 |   | 3,986,047 |   |
| Research and development expenses                                                     |       | 945,395                              |       | 727,423 |   | 869,155 |   |
| Depreciation and amortization                                                         |       | 390,154                              |       | 171,834 |   | 98,071 |   |
| Total operating expense                                                               |       | 5,482,218                            |       | 4,727,097 |   | 5,233,237 |   |
| Income  (loss) from operations                                                        |       | (635,099                             | )          | 203,563 |   | 1,445,378 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Other income  (expense):                                                              |       |                                 |       |   |   |   |   |
| Interest expense                                                                      |       | (5,016                               | )          | (1,651 | ) | (620 | ) |
| Interest income                                                                       |       | —                               |       | — |   | 10,685 |   |
| Gain (loss) on sale of assets                                                         |       | (1,486                               | )          | — |   | 1,242 |   |
| Total other income (expense)                                                          |       | (6,502                               | )          | (1,651 | ) | 11,307 |   |
| Income  (loss) before income taxes                                                    |       | (641,601                             | )          | 201,912 |   | 1,456,685 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Income tax  provision:                                                                |       |                                 |       |   |   |   |   |
| Current:                                                                              |       |                                 |       |   |   |   |   |
| Federal                                                                               |       | —                               |       | — |   | 60,899 |   |
| State                                                                                 |       | 1,400                                |       | 1,489 |   | 1,065 |   |
| Deferred:                                                                             |       |                                 |       |   |   |   |   |
| Federal (benefit)                                                                     |       | —                               |       | — |   | (51,983 | ) |
| State                                                                                 |       | —                               |       | — |   | — |   |
| Total income  tax provision                                                           |       | 1,400                                |       | 1,489 |   | 9,981 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Net income  (loss)                                                                    |       | $                                    | (643,001   | ) | $ | 200,423 |   | $ | 1,446,704 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Net income (loss) per common share – basic                                       |       | $                                    | (0.05      | ) | $ | 0.01 |   | $ | 0.10 |   |
| Net income (loss) per common share –  assuming dilution                          |       | $                                    | (0.05      | ) | $ | 0.01 |   | $ | 0.09 |   |
|                                                                                  |       |                                 |       |   |   |   |   |
| Weighted average shares outstanding – basic                                      |       | 13,361,706                           |       | 13,668,800 |   | 13,778,989 |   |
| Weighted average shares outstanding –  assuming dilution                         |       | 13,361,706                           |       | 14,262,796 |   | 15,442,524 |   |

 

See accompanying notes.

 

34

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**GlobalSCAPE, Inc.**

** **

**Consolidated Statements ofStockholders’ Equity**

** **
| ** **                    | ** ** | **Common Stock** | ** ** | **Additional paid in** | ** ** | **Retained** | ** ** | ** **    | ** ** |
|-------------------------------|------------|------------------|------------|------------------------|------------|--------------|------------|---------------|------------|
| ** **                    | ** ** | **Shares**       | ** ** | **Amount**             | ** ** | **Capital**  | ** ** | **Earnings**  | ** ** | **Total** | ** ** |
| ** **                    | ** ** | ** **       | ** ** | ** **             | ** ** | ** **   | ** ** | **(Deficit)** | ** ** | ** ** | ** ** |
| Balances at December 31, 2002 |       | 13,358,619       |       | $                      | 13,359     |         | $          | 670,307       |       | $ | 226,371 |   | $ | 910,037 |   |
| Net loss                      |       | —           |       | —                 |       | —       |       | (643,001      | )          | (643,001 | ) |
| Exercise of options           |       | 130,000          |       | 130                    |       | 1,586        |       | —        |       | 1,716 |   |
| Balances at December 31, 2003 |       | 13,488,619       |       | 13,489                 |       | 671,893      |       | (416,630      | )          | 268,752 |   |
| Net income                    |       | —           |       | —                 |       | —       |       | 200,423       |       | 200,423 |   |
| Exercise of options           |       | 284,600          |       | 284                    |       | 3,472        |       | —        |       | 3,756 |   |
| Balances at December 31, 2004 |       | 13,773,219       |       | 13,773                 |       | 675,365      |       | (216,207      | )          | 472,931 |   |
| Net income                    |       | —           |       | —                 |       | —       |       | 1,446,704     |       | 1,446,704 |   |
| Exercise of Options           |       | 24,900           |       | 24                     |       | 8,916        |       | —        |       | 8,940 |   |
| Balance at December 31, 2005  |       | 13,798,119       |       | $                      | 13,797     |         | $          | 684,281       |       | $ | 1,230,497 |   | $ | 1,928,575 |   |

 

See accompanying notes.

** **

**35**

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** **

**GlobalSCAPE, Inc.**

** **

**Consolidated Statements of CashFlows**

** **
| ** **                                                                                       | ** ** | **For the Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                       | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Operating  Activities:                                                                           |       |                                 |       |   |   |   |   |
| Net income  (loss)                                                                               |       | $                                    | (643,001   | ) | $ | 200,423 |   | $ | 1,446,704 |   |
| Adjustments to reconcile net income (loss) to net cash provided  (used) by operating activities: |       |                                 |       |   |   |   |   |
| Bad debt expense (recovery), net                                                                 |       | 14,508                               |       | (17,087 | ) | 8,231 |   |
| Depreciation and amortization                                                                    |       | 390,154                              |       | 171,833 |   | 98,071 |   |
| Loss (gain) on disposition of assets                                                             |       | 1,486                                |       | — |   | (1,242 | ) |
| Deferred taxes                                                                                   |       | —                               |       | — |   | (51,983 | ) |
| Changes in operating assets and  liabilities:                                                    |       |                                 |       |   |   |   |   |
| Accounts receivable                                                                              |       | (3,354                               | )          | 109,167 |   | (450,413 | ) |
| Prepaid expenses                                                                                 |       | 25,821                               |       | (44,716 | ) | 25,828 |   |
| Other assets                                                                                     |       | —                               |       | — |   | 269 |   |
| Accounts payable                                                                                 |       | 55,660                               |       | (58,438 | ) | (30,353 | ) |
| Accrued expenses                                                                                 |       | 65,440                               |       | (3,281 | ) | 60,258 |   |
| Federal income tax payable                                                                       |       | —                               |       | — |   | 60,899 |   |
| Deferred revenue                                                                                 |       | (1,047                               | )          | 37,628 |   | 382,461 |   |
| Other long-term liabilities                                                                      |       | (11,215                              | )          | (11,215 | ) | 906 |   |
| Net cash  provided (used) by operating activities                                                |       | (105,548                             | )          | 384,314 |   | 1,549,636 |   |
| Investing  Activities:                                                                           |       |                                 |       |   |   |   |   |
| Proceeds from sale of property and  equipment                                                    |       | —                               |       | — |   | 1,242 |   |
| Purchase of property and equipment                                                               |       | (73,027                              | )          | (42,250 | ) | (103,304 | ) |
| Net cash  used in investing activities                                                           |       | (73,027                              | )          | (42,250 | ) | (102,062 | ) |
| Financing  Activities:                                                                           |       |                                 |       |   |   |   |   |
| Issuance of common stock                                                                         |       | 1,716                                |       | 3,756 |   | 8,940 |   |
| Borrowings under notes payable                                                                   |       | 100,000                              |       | — |   | — |   |
| Principal payments on notes payable                                                              |       | —                               |       | (100,000 | ) | — |   |
| Principal payments on capital lease  obligations                                                 |       | (61,317                              | )          | (15,294 | ) | — |   |
| Net cash  provided (used) in financing activities                                                |       | 40,399                               |       | (111,538 | ) | 8,940 |   |
| Net increase  (decrease) in cash and cash equivalents                                            |       | (138,176                             | )          | 230,526 |   | 1,456,514 |   |
| Cash at  beginning of period                                                                     |       | 480,609                              |       | 342,433 |   | 572,959 |   |
| Cash at end  of period                                                                           |       | $                                    | 342,433    |   | $ | 572,959 |   | $ | 2,029,473 |   |

 

See accompanying notes.

** **

**36**

----

** **
| ** **                                         | ** ** | **For the Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Supplemental disclosure of  cash flow information: | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid  during the year for:                    |       |                                 |       |   |   |   |   |
| Interest                                           |       | $                                    | 4,852      |   | $ | 1,651 |   | $ | 620 |   |
| Income taxes paid                                  |       | $                                    | 1,400      |   | $ | 1,489 |   | $ | 1,065 |   |

 

See accompanying notes.

 

37

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### **GlobalSCAPE, Inc.**

### **Notes to Consolidated Financial Statements**

### **December 31, 2004 and 2005**

### ** **

**1.**             Overviewof the Business and Significant Accounting Policies

** **

***CorporateStructure***

*** ***

All of theCompany’s operations are conducted by GlobalSCAPE Texas, LP, a Texas limitedpartnership. The partners of GlobalSCAPE Texas, LP are two Nevada limitedliability companies, which are both wholly owned subsidiaries of GlobalSCAPE,Inc., a Delaware corporation. GlobalSCAPE, Inc. was approximately 70% owned bythe Brown and Mann-GlobalSCAPE Joint Venture, with the remainder held publicly.In October 2004, the Brown and Mann-GlobalSCAPE Joint Venture begandistribution of its GlobalSCAPE stock to its two partners in their respectivepercentages. Prior to December 31, 2005, the partnership had completed itsdistribution. GlobalSCAPE, Inc. is a holding company and conducts no operations.The stock of GlobalSCAPE, Inc. is quoted on the OTC Bulletin Board. Referencesto “GlobalSCAPE” or the “Company” refer collectively to all of these entitiesunless otherwise indicated.

 

***Natureof Business***

* *

GlobalSCAPE,founded in April 1996, develops and distributes Internet related software. TheCompany is best known for its popular file transfer program, CuteFTP. Sales ofCuteFTP and CuteFTP Pro accounted for 69% and 51% of total revenues in 2004 and2005, respectively. Secure FTP Server accounted for approximately 14% of totalrevenues in 2004 and 22% in 2005, increasing from 7% of total revenues in 2003.The Company derives its revenues primarily from sales of licenses to use itssoftware products. The Company is organized and operates as one operatingsegment, the provision of Internet-based software, which it markets over theInternet and through its direct internal sales force.

 

***Basis ofPresentation***

* *

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the Unites States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

 

***Principlesof Consolidation***

* *

Theconsolidated financial statements include all subsidiaries. All inter-companytransactions and balances have been eliminated.

 

***Liquidity***

* *

The Companyincurred significant operating losses during 2001, 2002 and 2003 and continued,in January, February and March of 2004, to incur significant operating losses. InFebruary 2004 GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45people then employed by the Company.

 

The Company ishighly dependent on the sale of two software products, CuteFTP and CuteFTP Pro,which are subject to technological and competitive obsolescence. Sales fromthese two products, which represented 51% of the Company’s revenues in 2005,increased 1% in revenue from the previous year. This increase was primarily insales of CuteFTP Pro, which increased 18%. Sales of CuteFTP decreased 22% yearover year and sales of Secure FTP Server, the companion product to CuteFTP Pro,increased 119%. Secure FTP Server accounted for approximately 14% and 22% in2004 and 2005 respectively of total revenues. Substantially all softwareproducts ultimately reach a point in their lifecycle in which sales can beexpected to plateau or decline. While it cannot be determined with certainty,CuteFTP may have reached such a point in its lifecycle. Management believesthat the market for stand-alone FTP clients for home consumers may be declining.However, we have not seen the same decline in

 

38

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the market for secure FTP clients and servers such as CuteFTP Pro andSecure Server which we believe better target the needs of businesses.

 

The Company’sliquidity could be reduced in 2006 if sales of CuteFTP continue to decline andthe Company is unable to successfully introduce new products or increase salesof existing products.

 

If salesdecline or the Company’s liquidity otherwise requires, management has theintent and ability to reduce personnel and personnel-related costs, reduce orsubstantially eliminate capital expenditures and/or reduce or substantiallyeliminate research and development expenditures.

 

***RevenueRecognition***

* *

The Companyrecognizes revenue in accordance with the American Institute of CertifiedPublic Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as modifiedby SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.

 

Revenues fromthe sale of software products are recognized and completely earned uponshipment or electronic delivery of the product provided that persuasiveevidence of an arrangement exists, collection is probable, payment terms arefixed and determinable and no significant obligations remain.

 

The Companyalso sells technical support and maintenance agreements (post contract customersupport “PCS”), which are sometimes bundled with the software. Whenvendor specific objective evidence (“VSOE”) of fair value exists for allelements in a multiple element arrangement, revenue is allocated to eachelement based on the relative fair value of each of the elements. VSOE of fairvalue is established by the price charged when the same element is soldseparately. In a multiple element arrangement whereby VSOE of fair value of allundelivered elements exists but VSOE of fair value does not exist for one ormore delivered elements, revenue is recognized using the residual method. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is recognized as revenue, assumingcollection is probable. Revenue allocated to PCS is recognized ratably over thecontractual term, typically one year.

 

OnApril 26, 2006, in connection with the Company’s quarter-end accountingprocedures, after consultation with the Company’s independent registered publicaccounting firm, management and the Company’s Board of Directors determinedthat there was an error in the calculation of revenue from maintenance andsupport (net of deferred revenues) for the year ended December 31, 2005. TheCompany mistakenly recorded $154,433 as current revenue which should have beenrecorded as deferred revenue. The correction of the error resulted in adecrease of $154,433 in the Company’s revenue as reported on the Company’sincome statement and an increase of $154,433 to the previously stated deferredrevenue on the Company’s balance sheet at December 31, 2005. The amount ofdeferred revenue at December 31, 2005 is $560,578. The error was caused by afailure to properly code deferred revenue percentages on products introduced toour product line into our sales and order entry database. The error has beencorrected. As a result of the error, SG&A expenses and accrued expensesdecreased by approximately $3,325 related to bonuses calculated on net income,federal income tax payable and expense was reduced by $56,630 and net incomewas reduced by $94,478. In addition, Retained earnings and Total stockholder’sequity were each reduced by $94,478. Corrections have been made where necessaryin this report as noted in the Explanatory note at the beginning of thisreport.

 

The Companybegan selling technical support and maintenance services for some of its softwareproducts in 2001. In 2004 and 2005, sales of enterprise class products resultedin higher maintenance and support agreements sold to customers and as a resultdeferred revenue at December 31, 2005 was $560,578.

 

The outboundshipping charges charged to the customer are included in software productrevenues and amounted to approximately $58,000, $38,000 and $18,000 in 2003,2004 and 2005, respectively. The costs associated with these shipping chargesare included in the software products cost of revenue.

 

39

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***RoyaltyCosts***

* *

Royalties thatthe Company pays on software products licensed from third parties, which itresells, are expensed as a cost of sales when the software product is sold orearlier if the recoverability of any prepaid royalties is in doubt. The Companyhas distribution agreements with Hannon Hill Corp., Trellix Corp., PerseusDevelopment Corp., Beehive Software, Inc., Visicom Media, Inc., and Glueck andKanja. The GlobalSCAPE software products associated with each of the companiesare PublishXML, CuteSITE Builder, Web Survey, Mac FTP, CuteHTML Pro andEnhanced File Transfer (EFT), respectively. GlobalSCAPE’s agreement with HannonHill Corp. required a minimum royalty of $16,667 per month, as prepayment ofroyalties, for 12 months beginning in December 2002. These payments wereexpensed as paid because the lower than expected sales of PureCMS raised doubtas to the realization of benefit from these prepayments. The total amountexpensed in 2003 relating to these prepayments was $183,337. The Companyaccrued approximately $36,000, $11,000, and $10,000 in royalty expense in 2003,2004 and 2005, respectively.

 

***Concentrationsof Credit Risk and Significant Customers***

* *

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash and cash equivalents, and accounts receivable.Cash is depositedin demand accounts in federally insured domestic institutions to minimize risk.The Company provides credit, in the normal course of business, to anumber of companies and performs ongoing evaluations of its credit risk. TheCompany requires no collateral from its customers. Management estimates theallowance for uncollectible accounts based on their historical experience andcredit evaluation. No single customer accounted for more than 2% of revenues in2003 or 2004. One customer accounted for approximately 2.7% of revenues in2005.

 

Cash and cash equivalents,accounts receivable, employee advances, accounts payable, accrued expenses andnotes payable, related party are reflected in the accompanying financialstatements at cost, which approximates fair value because of the short termmaturity of these instruments.

 

***OtherConcentrations***

* *

*Sales in Foreign Markets.*In2003, 2004 and 2005, approximately 35%, 36% and 33%, respectively, of theCompany’s revenues were generated from sales to customers who providedaddresses in foreign countries. However, all revenues are received in U.S.dollars so there is no exchange rate risk with respect to the sale of ourproducts. These sales were concentrated mostly in Western Europe, Canada, andAustralia. In 2003, 2004 and 2005, the UK accounted for approximately 11.1%,10.9% and 9.25%, respectively, of total revenues.

 

*Labor.*GlobalSCAPEutilizes offshore developers for a large portion of the coding phase ofsoftware development. If GlobalSCAPE were unable to continue using thesedevelopers because of political or economic instability, GlobalSCAPE may havedifficulty finding comparably skilled developers or may have to payconsiderably more for the same work, which would have a material adverse impacton results of operations.

 

***AdvertisingCosts***

* *

The Companyexpenses advertising costs as incurred. Advertising expenses charged tooperations for the years ended December 31, 2003, 2004 and 2005 wereapproximately $542,000, $205,000 and $300,000, respectively, and are includedin selling, general and administrative expenses. The advertising expenses in2003 relate primarily to the PureCMS product launch. In 2004 and 2005, theCompany incurred advertising cost principally for the purchase of keywords forinternet searches, a direct mail campaign for EFT, trade show participation andadvertising in various publications.

 

40

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***IncomeTaxes***

* *

The Companyaccounts for income taxes using the liability method in accordance withStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. The liability method providesthat the deferred tax assets and liabilities are recorded based on thedifference between the tax bases of assets and liabilities and their carryingamount for financial reporting purposes, as measured by the enacted tax ratesand laws that will be in effect when the differences are expected to reverse.Deferred tax assets are carried on the balance sheet with the presumption thatthey will be realizable in future periods when pre-tax income is generated.GlobalSCAPE recorded a deferred tax asset of $51,983 at December 31, 2005 as aresult of its taxable income for the year. Statement of FinancialAccounting Standards (SFAS) No. 109 requires a valuation allowance to reducethe deferred tax assets reported if, based on the weight of the evidence, it ismore likely than not that some portion or all of the deferred tax assets willnot be realized.  After consideration of all of the evidence, bothpositive and negative, management determined that a  valuation allowance was necessary at December31, 2004. No valuation was considered necessary at December 31, 2005. During2005 a decrease in the valuation allowance of $484,853 at was necessary to decreasethe valuation allowance for the benefit of the net operating loss carryforwardbenefit utilized in the current year.

 

***Researchand Development***

* *

Research anddevelopment expenses include all direct costs, primarily salaries for personneland expenditures with external development sources, related to the developmentof new products and significant enhancements to existing products and areexpensed as incurred until such time as technological feasibility is achieved. Forthe years 2003, 2004 and 2005, we spent approximately $945,000, $728,000 and$870,000, respectively, on research and development. Typically technological feasibilityis achieved very late in the development cycle and as such no research anddevelopment expenses were capitalized in 2003, 2004 or 2005 and all previouslycapitalized research and development expenses were fully amortized at December31, 2002.

 

***Stock-BasedCompensation***

* *

Statement ofFinancial Accounting Standards 123, *Accountingfor Stock-Based Compensation* (SFAS 123), encourages, but does not require, companies to recordcompensation cost for stock-based employee compensation plans based on the fairmarket value of options granted. The Company chose to account for stock basedcompensation using the intrinsic value method prescribed in APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, compensation expense is recorded tothe extent that the current market price of the underlying stock exceeds theexercise price. On December 31, 2002, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard 148, *Accounting for Stock Based Compensation - Transitionand Disclosure* (SFAS 148), which amends SFAS 123. SFAS 148 requiresmore prominent and frequent disclosures about the effects of stock-basedcompensation. The Company has continued to account for its stock-based compensationusing the intrinsic value method according to the provisions of APB Opinion No.25.

 

Pro formainformation regarding net income and earnings per share is required byStatement 148, which also requires that the information be determined as if theCompany had accounted for its stock options granted subsequent to December 31,1994 under the fair value method of that Statement. The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option-pricingmodel.

 

For purposesof pro forma disclosures, the estimated fair value of the options at the grantdate  is amortized to expense over theoptions’ estimated vesting period. The Company’s pro forma information for2003, 2004 and 2005 follows:

 

41

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| ** **                                                                                                                                                                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income  (loss), as reported                                                                                                                                                                   |       | $                            | (643,001   | ) | $ | 200,423 |   | $ | 1,446,704 |   |
| Stock based  compensation included in the determination of net income (loss) as reported,  net of related tax effects                                                                             |       | —                       |       | — |   | — |   |
| Stock-based compensation expense that would  have been included in the determination of net income (loss) had the fair  value based method been applied to all awards, net of related tax effects |       | (48,057                      | )          | (19,639 | ) | (25,921 | ) |
| Pro forma  net income (loss)                                                                                                                                                                      |       | $                            | (691,058   | ) | $ | 180,784 |   | $ | 1,420,783 |   |
|                                                                                                                                                                                              |       |                         |       |   |   |   |   |
| Earnings  (loss) per share:                                                                                                                                                                       |       |                         |       |   |   |   |   |
| Basic- as  reported                                                                                                                                                                               |       | $                            | (0.05      | ) | $ | 0.01 |   | $ | 0.10 |   |
| Basic- pro  forma                                                                                                                                                                                 |       | $                            | (0.05      | ) | $ | 0.00 |   | $ | 0.10 |   |
|                                                                                                                                                                                              |       |                         |       |   |   |   |   |
| Diluted- as  reported                                                                                                                                                                             |       | $                            | (0.05      | ) | $ | 0.01 |   | $ | 0.09 |   |
| Diluted- pro  forma                                                                                                                                                                               |       | $                            | (0.05      | ) | $ | 0.00 |   | $ | 0.09 |   |

 

The weightedaverage fair value of the individual stock options granted during 2003, 2004,and 2005 is estimated at $0.20, $0.11 and $0.31, respectively, on the date ofgrant. The fair values were determined using a minimum value options-pricingmodel with the following assumptions:

 

| ** **              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield          |       | None     |       | None     |       | None     |       |
| Expected volatility     |       | 2.23     |       | 1.64     |       | 1.91     |       |
| Risk-free interest rate |       | 3.21     | %          | 4.24     | %          | 4.35     | %          |
| Expected life           |       | 5.0      |       | 5.0      |       | 5.0      |       |

 

***Cash andcash equivalents***

* *

Cash includesall cash and highly liquid investments with original maturities of three monthsor less.

 

***Propertyand Equipment***

* *

Property andequipment is comprised of furniture and fixtures, software, computer equipmentand leasehold improvements which are recorded at cost and depreciated using thestraight-line method over their estimated useful lives. Expenditures formaintenance and repairs are charged to operations as incurred. Property andequipment acquired under capital leases are depreciated over their useful livesor the respective lease term, if shorter. Depreciation periods used forproperty and equipment range from three to five years.

 

Leaseholdimprovements are depreciated over the shorter of the lease term or theestimated useful life of the asset.

 

***Sale /Disposal of Assets***

* *

During 2005,the Company disposed of equipment and software with an original purchase priceof $29,949 and accumulated depreciation of $29,949. GlobalSCAPE recognized again of $1,242 related to the disposal of these assets. During 2004 the Companydisposed of equipment and software with an original purchase price of $31,494and accumulated depreciation of $31,494. GlobalSCAPE recognized no gain or lossrelated to the disposal of these assets. During 2003 the Company disposed ofequipment and 

 

42

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software with an original purchase price of $69,738 and accumulateddepreciation of $68,252. GlobalSCAPE recognized a loss of $1,486 related to thedisposal of these assets.

 

***CapitalizedSoftware Development Costs***

* *

Capitalizationof software development costs begins upon the establishment of technologicalfeasibility and ceases when the product is available for general release. Theestablishment of technological feasibility and the ongoing assessment ofrecoverability of capitalized software development costs require considerablejudgment by management concerning certain external factors including, but notlimited to, technological feasibility, anticipated future gross revenue,estimated economic life and changes in software and hardware technologies. Thesesoftware development costs were amortized using the straight-line method over athree-year period and are only those costs incurred in the development ofproducts that are sold to external customers and not used for internal purposes.No research and development expenses were capitalized in 2003, 2004 or 2005 andall previously capitalized research and development expenses were fullyamortized at December 31, 2002. These software development costs are notrelated to those costs incurred for the acquisition of software products ortitles. For the years 2003, 2004 and 2005, we spent approximately $945,000,$728,000 and $870,000, respectively, on research and development.

 

***OtherLong-Term Assets***

* *

Costs incurredfor the acquisition of CuteFTP were capitalized and amortized over theestimated useful life of five years using the straight-line method. The CoreSoftware Technology on the balance sheet represents the purchase of the sourcecode and related trademark for CuteFTP and the related amortization of thesecosts. GlobalSCAPE recognized amortization expense related to CuteFTP ofapproximately $135,000 in 2003. The asset was fully amortized at December 31,2003.

 

Other assetsinclude deposits for facilities, which are anticipated to be refunded to theCompany upon termination of the lease.

 

***DeferredCompensation***

* *

*Thedeferred compensation liability is related to an employment agreement with thePresident. The deferred compensation is subject to certain terms and conditionsrelated to his planned retirement in December 2008.*

* *

***OtherLong-Term Liabilities***

* *

Otherlong-term liabilities relate to deferred payments of rent expense. Thetotal amount of base lease payments is being charged to expense on thestraight-line method over the term of the lease.

 

***EarningsPer Common Share***

* *

Basic anddiluted net income per common share is presented in conformity with Statementof Financial Accounting Standards No. 128, *EarningsPer Share* (SFAS 128) for all periods presented. Basic earnings pershare 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 numeratorsand denominators of basic and diluted earnings per share for each of thefollowing years:

 

43

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| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **2003 (1)**                | ** ** | **2004 (2)** | ** ** | **2005 (3)** | ** ** |
| Numerators                                                    | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for basic and diluted earnings  per share:          |       |                        |       |   |   |   |   |
| Net income (loss)                                             |       | $                           | (643,001   | ) | $ | 200,423 |   | $ | 1,446,704 |   |
| **Denominators**                                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Denominators for basic earnings per share:                    |       |                        |       |   |   |   |   |
| Weighed average shares outstanding-Basic                      |       | 13,361,706                  |       | 13,668,800 |   | 13,778,989 |   |
| **Dilutive potential common shares:**                         |       |                        |       |   |   |   |   |
| Stock Options                                                 |       | —                      |       | 593,996 |   | 1,663,535 |   |
| Denominator for dilutive earnings per share                   |       | 13,361,706                  |       | 14,262,796 |   | 15,442,524 |   |
| Net income (loss) per common share                            |       | $                           | (0.05      | ) | $ | 0.01 |   | $ | 0.10 |   |
| Net income (loss) per commons share –  assuming dilution |       | $                           | (0.05      | ) | $ | 0.01 |   | $ | 0.09 |   |

 

----

*(1)*   For the year ended December 31, 2003, 1,856,171options have not been included in dilutive shares as the effect would beanti-dilutive.

* *

*(2)*   For the year ended December 31, 2004, 882,000options have not been included in dilutive shares as the effect would beanti-dilutive.

* *

*(3)*   For the year ended December 31, 2005, all optionshave been included in dilutive shares.

* *

*Recent AccountingPronouncements*

* *

Effective July1, 2005, the Company adopted SFAS No. 153, Exchanges of Nonmonetary Assets, anamendment of Accounting Principles Board (“APB”) Opinion No. 29 (“SFAS 153”). SFAS153 amended prior guidance to eliminate the exception for nonmonetary exchangesof similar productive assets and replaced it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theprovisions of SFAS 153 were required to be applied prospectively. SFAS 153 didnot have a material impact on the Company’s unaudited interim condensedconsolidated financial statements.

 

In June 2005,the EITF reached consensus on Issue No. 04-5, Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”). EITF04-5 provides a framework for determining whether a general partner controlsand should consolidate a limited partnership or a similar entity in light of certainrights held by the limited partners. The consensus also provides additionalguidance on substantive rights. EITF 04-5 was effective after June 29, 2005 forall newly formed partnerships and for any pre-existing limited partnershipsthat modified their partnership agreements after that date. The adoption ofthis provision of EITF 04-5 did not have a material impact on the Company’sunaudited interim condensed consolidated financial statements. EITF 04-5 mustbe adopted by January 1, 2006 for all other limited partnerships through acumulative effect of a change in accounting principle recorded in openingequity or it may be applied retrospectively by adjusting prior period financialstatements. The adoption of this

 

44

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provision of EITF 04-5 is not expected to have a material impact on theCompany’s unaudited interim condensed consolidated financial statements.

 

In May 2005,the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). Thestatement requires retrospective application to prior periods’ financialstatements for a voluntary change in accounting principle unless it is deemedimpracticable. It also requires that a change in the method of depreciation,amortization, or depletion for long-lived, non-financial assets be accountedfor as a change in accounting estimate rather than a change in accountingprinciple. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. SFAS 154 is notexpected to have a material impact on the Company’s unaudited interim condensedconsolidated financial statements.

 

In December2004, the FASB issued SFAS 123 (revised 2004) Share-Based Payment (“SFAS 123(r)”),which revised SFAS No. 123, Accounting for Stock-Based Compensation andsupersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS123(r) provides additional guidance on determining whether certain financialinstruments awarded in share-based payment transactions are liabilities. SFAS123(r) also requires that the cost of all share-based transactions be measuredat fair value and recognized over the period during which an employee isrequired to provide service in exchange for an award. The SEC issued a finalruling in April 2005 allowing a public company that is not a small businessissuer to implement SFAS 123(r) at the beginning of the next fiscal year afterJune 15, 2005. Thus, the revised pronouncement must be adopted by the Companyby January 1, 2006. As permitted under SFAS 148, Accounting for Stock-BasedCompensation — Transition and Disclosure — an amendment of FASB Statement No.123, the Company elected to use the prospective method of accounting for stockoptions granted subsequent to December 31, 2002. Options granted prior toJanuary 1, 2003 will continue to be accounted for under the intrinsic valuemethod until the adoption of SFAS 123(r). In addition, the pro forma impact ofaccounting for these options at fair value will continue to be accounted forunder the intrinsic value method until the last of those options vest in 2005. Theadoption of SFAS 123(r)® is expected to increase compensationexpense during period that employees vest in their stock options.

 

**2.**             AccountsReceivable

** **

Accountsreceivable, which are primarily from sales of software licenses, are presentednet of an allowance for doubtful accounts. The activity of the Company’sallowance for doubtful accounts for the years ended December 31, 2003, 2004 and2005 is presented in the following table:

 

| **Balance at**              | ** ** | **Charged to  Income or  Expense** | ** ** | **Deductions  (1)** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------|------------|------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| **Year Ended  December 31** | ** ** | **Beginning  of Period**           | ** ** | ** **               |
|                        |       |                               |       |                     |       |                           |       |   |   |
| 2003                        |       | 58,427                             |       | 14,508                   |       | (29,354                        | )          | 43,581 |   |
| 2004                        |       | 43,581                             |       | (17,087                  | )          | (16,299                        | )          | 10,195 |   |
| 2005                        |       | 10,195                             |       | 8,231                    |       | (6,153                         | )          | 12,273 |   |

 

(1)  Represents amounts writtenoff as uncollectible accounts receivable.

 

**3.**             Debt

** **

The Companyhas obtained a $250,000 revolving line of credit agreement with a commercialbank. The line of credit expired in December 2004, when it was renewed andextended through March 2006. The line is due on demand, but if no demand thenin March 2006. The interest rate is subject to change and is indexed to the bank’sprime rate. The rate at December 31, 2005 was 9.25%. In connection with theline of credit, GlobalSCAPE entered into a Commercial Security Agreement withthe bank whereby GlobalSCAPE granted a security interest in all its accountsreceivable and property and equipment. The Company borrowed $100,000 onSeptember 11, 2003 under this agreement. This amount

 

45

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remained outstanding at December 31, 2003 and was repaid in February2004. The Company does not intend to renew this line of credit.

 

**4.**             Commitmentsand Contingencies

** **

**Capital Leases**

** **

The Companyhad financed the acquisition of certain fixed assets through capital leaseobligations. These obligations were paid in full in 2004. As of December 31,2005 GlobalSCAPE had no capital lease obligations.

 

Property andequipment at December 31, 2003 and 2004 includes $227,000 for assets held undercapital leases, less associated accumulated depreciation of $203,000 and$227,000, respectively. Depreciation for assets held under capital leases isincluded in depreciation and amortization expense.

 

**OperatingLeases**

** **

Minimum futurelease payments on non-cancelable operating leases for office facilities are asfollows for the years ending December 31:

 

| 2006       |   | 190,659 |    |
|------------|--------|---------|---------|
| 2007       |   | 190,659 |    |
| Thereafter |   | 95,329  |    |
|       |   | $       | 476,647 |   |
|            |        |         |         |  |

 

This leaseprovides the Company with two successive 5-year renewal options. Operatinglease expense amounted to approximately $180,000 in each of 2003, 2004 and2005.

 

**Contingencies**

** **

TheCompany from time to time may be involved in litigation relating to claimsarising out of its ordinary course of business. There are no pendingclaims against the Company that would have a material adverse effect on thefinancial statements of the Company.

 

**5.**             RelatedParty Transactions

** **

On June 11,2002, ATSI sold its majority interest in GlobalSCAPE, Inc. to Brown andMann-GlobalSCAPE Joint Venture, a Texas general partnership owned by SanAntonio-based investors Thomas W. Brown and David L. Mann. Contemporaneouslywith this transaction, GlobalSCAPE agreed to compromise and settle a $612,304inter-company balance owed to it by ATSI, which resulted in charges toGlobalSCAPE of $392,905. The balance was settled for (i) $200,000 in cash fromATSI; (ii) NTFC Capital Corporation’s release of GlobalSCAPE as a co-borroweron a capital lease executed by ATSI in 1999, and (iii) ATSI’s agreement toprovide $50,000 worth of transition support services to GlobalSCAPE over thenine months ending March 11, 2003.

 

On March 30,2004, the Company obtained a $200,000 line of credit with the Brown andMann-GlobalSCAPE Joint Venture. The line of credit was available after June 21,2004 if the Company failed to extend a line of credit with a bank and maturedon December 31, 2004. The line of credit with the partnership was not renewed. Theinterest rate was subject to change and was indexed to the prime rate publishedin the Wall Street Journal. In connection with the line of credit, GlobalSCAPEentered into a Commercial Security Agreement with the Brown andMann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interestin all its accounts receivable and property and equipment. The Brown andMann-GlobalSCAPE Joint Venture is 70% owned by Thomas W. Brown and 30% owned byDavid L. Mann, both of whom are members of GlobalSCAPE’s Board of Directors. InOctober 2004 the 

 

46

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Brown and Mann-GlobalSCAPE Joint Venture distributed all shares held bythe partnership to its two partners with the exception of 17,856 shares, whichwere distributed in 2005.

 

**6.**             IncomeTaxes

** **

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities are related to the following:

 

| ** **                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Total  deferred tax liabilities              |       | $        | —     |     | $          | — |   |
|                                         |       |     |       |     |       |
| Deferred tax  assets:                        |       |     |       |     |       |
| Accrued expenses                             |       | —   |       | 14,828   |       |
| Allowance for doubtful accounts              |       | 3,466    |       | 4,173    |       |
| Deferred compensation                        |       | —   |       | 4,121    |       |
| Depreciation and amortization                |       | 56,696   |       | 28,861   |       |
| Net operating loss carryforwards             |       | 424,691  |       | —   |       |
| Total  deferred tax assets                   |       | 484,853  |       | 51,983   |       |
| Valuation  allowance for deferred tax assets |       | 484,853  |       | —   |       |
| Net deferred  tax assets                     |       | $        | —     |     | $          | 51,983 |   |

 

Areconciliation of income tax expense and the amount computed by applying thestatutory federal income tax rate (34%) to income before income taxes is asfollows:

 

| ** **                                                  | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Taxes  computed at federal statutory rate                   |       | $        | (218,620   | )        | $          | 68,655   |       | $ | 494,911 |   |
| Increases  (decreases) in taxes resulting from:             |       |     |       |     |       |     |       |
| State taxes, net of federal benefit                         |       | 924      |       | 983      |       | 703      |       |
| Non-deductible incentive stock option  compensation charges |       | —   |       | —   |       | —   |       |
| Other non-deductible expenses                               |       | 2,581    |       | 2,368    |       | 5,653    |       |
| Change in valuation allowance                               |       | 216,515  |       | (55,497  | )          | (484,853 | )          |
| Other                                                       |       | —   |       | (15,020  | )          | (6,433   | )          |
| Total                                                       |       | $        | 1,400      |     | $          | 1,489    |       | $ | 9,981 |   |

 

At December31, 2005 the Company has utilized its available net operating losscarryforwards for both financial reporting and Federal income tax reportingpurposes.

 

**7.**             EmployeeBenefit Plan

** **

The Companyhas a 401(k) plan that covers substantially all employees with at least sixmonths of service. Under the plan, employees may elect to contribute apercentage of their annual salary subject to the Internal Revenue Code maximumlimitations. The plan provides for employer matching and discretionarycontributions, the amounts of which are to be determined annually by the Boardof Directors. The Company made contributions to the plan of $7,533, $6,910 and$11,120 for the years ended December 31, 2003, 2004 and 2005, respectively.

 

**8.**             StockOptions and Stock Based Compensation

** **

In January1998, the Company approved the 1998 Stock Option Plan (the “1998 Plan”) forofficers, other employees, directors, and consultants of the Company. Under theterms of the 1998 Plan, up

 

47

----

 

to 728,571 shares of the Company’s common stock may be granted in theform of incentive stock options or non-qualified stock options, awarded, orsold to officers, other employees, directors and consultants. As of July 31,2001, no additional grants could be issued under the 1998 Plan.

 

In May 2000,the Board of Directors approved the 2000 stock option plan (the “2000 Plan”)for key employees, non-employee directors, and advisors of the Company. Underthe terms of the 2000 Plan, up to 3,660,000 shares of the Company’s commonstock may be granted in the form of incentive stock options or non-qualifiedstock options. The maximum aggregate number of shares of common stock that maybe granted to any optionee during the term of the 2000 Plan may not exceed2,000,000. The 2000 Plan provides that the purchase price per share forincentive stock options and non-qualified stock options shall not be less thanthe fair market value of the common stock on the date of grant. The maximumterm for an option granted is ten years from the date of grant.

 

The Companyhas adopted Statement of Financial Accounting Standards No. 123, “Accountingfor Stock Based Compensation” (SFAS No. 123), and elected to use the intrinsicvalue method in accounting for its stock option plan in accordance withAccounting Principles Board opinion No. 25, “Accounting for Stock Issued toEmployees” and related interpretations under which compensation expense isrecorded to the extent that the current market price of the underlying stockexceeds the exercise price. No options were issued below fair value for theyears ended December 31, 2004 and 2005.

 

In December2004, FASB issued Statement No. 123-R, *Share-BasedPayment,*which establishes accounting standards for transactions inwhich an entity receives employee services in exchange for (a) equityinstruments of the entity or (b) liabilities that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofequity instruments*.*Effective inthe first quarter of 2006, SFAS 123-R will require us to recognize thegrant-date fair value of stock options and equity based compensation issued toemployees in the statement of operations. The statement also requires that suchtransactions be accounted for using the fair –value-based method, therebyeliminating use of the intrinsic value method of accounting in APB No. 25, *Accounting for Stock Issued to Employees,*whichwas permitted under Statement 123, as originally issued. This change inaccounting will be required in the first quarter of 2006 and will result inincreased compensation expense for stock options over their vesting period.

 

During thesecond quarter of 2005, 469,000 options were granted to various employees at anaverage exercise price of $0.3172 per share.

 

**SupplementalDisclosures for Stock Options**

** **

The followingtable shows the number of options granted, cancelled and exercised for alloption plans for the three years ending December 31, 2005.

 

| ** **                     | ** ** | **Number of** | ** ** | **Weighted Avg.**  | ** ** |
|--------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** |
| 2003                           |       |               |       |                    |       |
| Outstanding  December 31, 2002 |       | 2,965,671          |       | $                       | 0.40       |   |
| Granted                        |       | 56,000             |       | 0.20                    |       |
| Expired                        |       | 1,035,500          |       | 0.72                    |       |
| Exercised                      |       | 130,000            |       | 0.07                    |       |
| Outstanding  December 31, 2003 |       | 1,856,171          |       | $                       | 0.24       |   |
|                           |       |               |       |                    |       |
| 2004                           |       |               |       |                    |       |
| Granted                        |       | 581,000            |       | 0.12                    |       |
| Expired                        |       | 182,500            |       | 0.28                    |       |
| Exercised                      |       | 284,600            |       | 0.01                    |       |
| Outstanding  December 31, 2004 |       | 1,970,071          |       | $                       | 0.24       |   |
|                           |       |               |       |                    |       |
| 2005                           |       |               |       |                    |       |
| Granted                        |       | 469,000            |       | 0.32                    |       |
| Expired                        |       | 20,000             |       | 0.16                    |       |
| Exercised                      |       | 24,900             |       | 0.36                    |       |
| Outstanding  December 31, 2005 |       | 2,394,171          |       | $                       | 0.26       |   |

 

48

----

 

The followingtable shows information about outstanding stock options at December 31, 2005.

 

| ** **                    | ** ** | ** **               | ** ** | **Options Outstanding**                             | ** ** | **Options Exercisable**                | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.0132                       |       | 565,571                  |       | 4.89                                                |       | $                                      | 0.0132     |   | 565,571 |   | $ | 0.0132 |   |
| $0.12  - $0.20                |       | 518,600                  |       | 8.61                                                |       | 0.1497                                 |       | 176,451 |   | 0.1512 |   |
| $0.31 - $0.33                 |       | 469,000                  |       | 9.46                                                |       | 0.3172                                 |       | — |   | — |   |
| $0.464                        |       | 841,000                  |       | 5.29                                                |       | 0.4640                                 |       | 841,000 |   | 0.4640 |   |
| $0.0132  - $0.464             |       | 2,394,171                |       | 6.73                                                |       | $                                      | 0.2607     |   | 1,583,022 |   | $ | 0.2681 |   |

** **

**There were 535,571 shares exercised inJanuary 2006 at a weighted average exercise price of $0.0132 per share.**

** **

**9.**             QuarterlyFinancial Information (unaudited)

** **

**Item 8B.   FiscalYear 2004**

** **
| ** **                                           | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                                                 |       |            |       |            |       |            |       |            |       |
| Total revenues                                       |       | $               | 1,172,137  |            | $          | 1,287,797       |       | $               | 1,270,223  |   | $ | 1,200,502 |   |
| Total operating expenses                             |       | 1,377,017       |       | 1,083,595       |       | 1,134,881       |       | 1,133,091       |       |
| Other Income (expense)                               |       | (720            | )          | —          |       | (371            | )          | (560            | )          |
| Net income (loss) before provision for  income taxes |       | (205,600        | )          | 204,202         |       | 134,971         |       | 66,851          |       |
| Net income (loss)                                    |       | (205,600        | )          | 204,202         |       | 134,971         |       | 66,851          |       |
|                                                 |       |            |       |            |       |            |       |            |       |
| Net income (loss) per share:                         |       |            |       |            |       |            |       |            |       |
| Basic                                                |       | $               | (0.015     | )               | $          | 0.015           |       | $               | 0.010      |   | $ | 0.005 |   |
| Diluted                                              |       | $               | (0.015     | )               | $          | 0.014           |       | $               | 0.009      |   | $ | 0.005 |   |
| Weighted average shares outstanding:                 |       |            |       |            |       |            |       |            |       |
| Basic                                                |       | 13,488,619      |       | 13,638,995      |       | 13,773,219      |       | 13,773,219      |       |
| Diluted                                              |       | 13,488,619      |       | 14,154,174      |       | 14,303,786      |       | 14,367,215      |       |

 

49

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**Item 8C.   Fiscal Year 2005**

** **
| ** **                                    | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
|                                          |       |                 |       |                 |       |                 |       |                 |       |
| Total revenues                                |       | $                    | 1,422,381  |                 | $          | 1,819,376            |       | $                    | 1,723,685  |   | $ | 1,713,173 |   |
| Total operating expenses                      |       | 1,262,418            |       | 1,293,747            |       | 1,334,381            |       | 1,342,691            |       |
| Other Income (expense)                        |       | (328                 | )          | (15                  | )          | 4,424                |       | 7,417                |       |
| Net income before provision for income  taxes |       | 159,963              |       | 525,614              |       | 393,728              |       | 377,380              |       |
| Net income (loss)                             |       | 158,570              |       | 525,614              |       | 393,728              |       | 368,792              |       |
|                                          |       |                 |       |                 |       |                 |       |                 |       |
| Net income (loss) per share:                  |       |                 |       |                 |       |                 |       |                 |       |
| Basic                                         |       | $                    | 0.012      |                 | $          | 0.038                |       | $                    | 0.029      |   | $ | 0.027 |   |
| Diluted                                       |       | $                    | 0.011      |                 | $          | 0.036                |       | $                    | 0.025      |   | $ | 0.024 |   |
| Weighted average shares outstanding:          |       |                 |       |                 |       |                 |       |                 |       |
| Basic                                         |       | 13,773,219           |       | 13,773,219           |       | 13,776,969           |       | 13,792,523           |       |
| Diluted                                       |       | 14,366,506           |       | 14,584,284           |       | 15,582,248           |       | 15,794,293           |       |

 

GlobalSCAPEreleased its Enhanced File Transfer product in November 2004, comparisons ofGlobalSCAPE’s quarterly results from operations should take this item intoconsideration.

 

**10.****          Restatementof Financial Statements**

 

The Company has restated its 2005 financial statements from the amountspreviously reported. The restatements include adjustments (a) to recorddeferred revenue, (b) to decrease previously calculated bonus on net income and(c) adjust income taxes. Following is a summary of the restatement adjustments:

 
| ** **                                      | ** ** | **As**       | ** ** | ** **      | ** ** | **As**       | ** ** |
|-------------------------------------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| ** **                                      | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| 2005 Summary  Balance Sheet                     |       |         |       |            |       |         |       |
| Current Assets                                  |       | $            | 2,685,505  |            | —     |         | $          | 2,685,505 |   |
| Property and equipment (net)                    |       | 152,571      |       | —          |       | 152,571      |       |
| Other assets                                    |       | 63,595       |       | —          |       | 63,595       |       |
| Total Assets                                    |       | $            | 2,901,671  |            | $          | —       |       | $ | 2,901,671 |   |
|                                            |       |         |       |            |       |         |       |
| Current Liabilities                             |       |         |       |            |       |         |       |
| Accounts payable                                |       | $            | 91,763     |            | —     |         | $          | 91,763 |   |
| Accrued expenses                                |       | 234,236      |       | (3,325          | )          | 230,911      |       |
| Federal income tax payable                      |       | 117,529      |       | (56,630         | )          | 60,899       |       |
| Deferred revenue                                |       | 406,145      |       | 154,433         |       | 560,578      |       |
| Total current liabilities                       |       | 849,673      |       | 94,478          |       | 944,151      |       |
| Long-term liabilities                           |       | 28,945       |       | —          |       | 28,945       |       |
| Stockholders’ equity                       |       |         |       |            |       |         |       |
| Preferred stock                                 |       | —       |       | —          |       | —       |       |
| Common stock                                    |       | 13,797       |       | —          |       | 13,797       |       |
| Additional paid in capital                      |       | 684,281      |       | —          |       | 684,281      |       |
| Retained earnings                               |       | 1,324,975    |       | (94,478         | )          | 1,230,497    |       |
|                                            |       |         |       |            |       |         |       |
| Total liabilities and stockholders’ equity |       | $            | 2,901,671  |            | $          | —       |       | $ | 2,901,671 |   |

 

50

----

 
| ** **                                                                            | ** ** | **As**       | ** ** | ** **      | ** ** | **As**       | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                            | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| 2005 Summary  Consolidated Statement of Operations                                    |       |         |       |            |       |         |       |
| Software Product Revenues                                                             |       | $            | 6,096,045  |            | $          | —       |       | $ | 6,096,045 |   |
| Maintenance and support (net of deferred revenues)                                    |       | 737,003      |       | (154,433        | )          | 582,570      |       |
| Total Revenues                                                                        |       | 6,833,048    |       | (154,433        | )          | 6,678,615    |       |
| Operating expenses                                                                    |       |         |       |            |       |         |       |
| Cost of revenues (exclusive of depreciation  and amortization shown seperately below) |       | 279,964      |       | —          |       | 279,964      |       |
| Selling, general and administrative  expenses                                         |       | 3,989,372    |       | (3,325          | )          | 3,986,047    |       |
| Research and development expenses                                                     |       | 869,155      |       | —          |       | 869,155      |       |
| Depreciation and amortization                                                         |       | 98,071       |       | —          |       | 98,071       |       |
| Total operating expenses                                                              |       | 5,236,562    |       | (3,325          | )          | 5,233,237    |       |
| Income from operations                                                                |       | 1,596,486    |       | (151,108        | )          | 1,445,378    |       |
| Other income (expense)                                                                |       | 11,307       |       | —          |       | 11,307       |       |
| Income before income taxes                                                            |       |         |       |            |       |         |       |
| Income tax provision                                                                  |       |         |       |            |       |         |       |
| Current federal                                                                       |       | 117,529      |       | (56,630         | )          | 60,899       |       |
| Current state                                                                         |       | 1,065        |       | —          |       | 1,065        |       |
| Deferred federal (benefit)                                                            |       | (51,983      | )          | —          |       | (51,983      | )          |
| Total income tax provision                                                            |       | 66,611       |       | (56,630         | )          | 9,981        |       |
| Net Income                                                                            |       | $            | 1,541,182  |            | $          | (94,478      | )          | $ | 1,446,704 |   |
|                                                                                  |       |         |       |            |       |         |       |
| Basic per  common share                                                               |       | $            | 0.11       |            |       |         | $          | 0.10 |   |
| Diluted per  common share                                                             |       | $            | 0.10       |            |       |         | $          | 0.09 |   |

** **

## **Item 9.**    Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

## ** **

None.

 

###### **Item 9A.**     Controlsand Procedures

###### ** **

(a)GlobalSCAPE  maintains disclosurecontrols and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inits reports filed or submitted under the Exchange Act is processed, recorded,summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto GlobalSCAPE ‘s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

 

Asrequired by SEC Rule 13a-15(b), GlobalSCAPE  carried out an evaluation, under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of GlobalSCAPE’s disclosure controls and procedures as ofthe end of the period covered by this Annual Report.  Based on thisevaluation, management concluded that GlobalSCAPE’s disclosure controls andprocedures were not effective as of December 31, 2005, at the reasonableassurance level, because of the error made in the reporting of revenue frommaintenance and support (net of deferred revenues) for the year ended December31, 2005.  Notwithstanding this error that existed as of December 31,2005, management has concluded that the restated consolidated financialstatements included in this Annual Report on Form 10-K/A present fairly,in all material respects, the financial position, results of operation and cashflows of GlobalSCAPE in conformity with accounting principles generallyaccepted in the United States of America.

 

51

----

 

However, the Companybelieves that this restatement will be a one time occurrence and that movingforward its Controls and Procedures will once again be effective as the Companytakes steps to implement changes to its process and system for accounting fordeferred revenue.

 

(b)Changes in internal control over financial reporting. There were no significantchanges in our internal control over financial reporting during the last fiscalyear and/or up to and including the date of this filing that we believematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

###### **Item 9B.**     OtherInformation

###### ** **

None.

 

52

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# **PART III**

## ** **

## **Item 10.**Directorsand Executive Officers of the Registrant

## ** **

Theinformation called for by Item 10 of Form 10-K as to Directors is incorporatedherein by reference to such information included in our Proxy Statement for the2006 Annual Meeting of Stockholders to be held on June 1, 2006 under thecaption “Election of Directors.”  Alsosee Item 4A of Part I of this Form 10-K. The information called for by Item 10of Form 10-K as to compliance with Section 16(a) of the Exchange Act isincorporated herein by reference to such information included in our ProxyStatement for the 2006 Annual Meeting of Stockholders to be held on June 1,2006 under the caption “Executive Officers.”

 

GlobalSCAPE has adopted a Code of Ethics that applies to all itsemployees, including its President (its chief executive officer) and its VicePresident of Finance and Operations (its chief financial officer). GlobalSCAPE will provide a copy of its Code of Ethics to any person withoutcharge upon written request to:

 

Thomas F. Farar

Chief Financial Officer

GlobalSCAPE, Inc.

6000 Northwest Parkway, Suite 100

San Antonio, Texas  78249

 

## **Item 11.**ExecutiveCompensation

## ** **

Theinformation called for by Item 11 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2006Annual Meeting of Stockholders to be held on June 1, 2006, under the caption “ExecutiveCompensation” except for those parts under the captions “Board Report onExecutive Compensation”.

 

## **Item 12.**SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

## ** **

Theinformation called for by Item 12 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2006Annual Meeting of Stockholders to be held on June 1, 2006, under the caption “SecurityOwnership of Certain Beneficial Owners and Management.”

 

## **Item 13.**CertainRelationships and Related Transactions

## ** **

The informationcalled for by Item 13 of Form 10-K is incorporated herein by reference to suchinformation included in our Proxy Statement for the 2006 Annual Meeting ofStockholders to be held on June 1, 2006, under the caption “CertainRelationships and Related Transactions.”

 

## **Item 14.**PrincipalAccountant Fees and Services.

## ** **

Theinformation called for by Item 14 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2006Annual Meeting of Stockholders to be held on June 1, 2006 under thecaption “Principal Accountant Fees and Services.”

 

53

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# **PART IV**

#  

## **Item 15.**Exhibits,Financial Statement Schedules

## ** **

(a)(1)       Financial Statements and Schedules

 

The following financial statements of GlobalSCAPE, Inc. are included in Item 8:

 

•      Consolidated balance sheets – December 31, 2004 and 2005

 

•      Consolidated statements of operations – Years ended December 31, 2003, 2004 and 2005

 

•      Consolidated statements of stockholders’ equity – Years ended December 31, 2003, 2004 and 2005

 

•      Consolidated statements of cash flows – Years ended December 31, 2003, 2004 and 2005

 

•      Notes to consolidated financial statements – December 31, 2005

 

(2)       Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Financial Statements or Notes thereto.

 

(3)       Exhibits

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                              |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                |       | Certificate of Incorporation of the Company dated April 17, 1996  (Filed as Exhibit 3.1 to Form 10 filed May 12, 2000).                                                                                      |
| 3.2                |       | Certificate of Renewal and Revival of Certificate of Incorporation  for the Company dated February 16, 1999 (Filed as Exhibit 3.2 to Form 10  filed May 12, 2000).                                           |
| 3.3                |       | Certificate of Amendment of Certificate of Incorporation dated May  11, 2000 (Filed as Exhibit 3.3 to Form 10 filed May 12, 2000).                                                                           |
| 3.4                |       | Certificate of Amendment to Certificate of Incorporation dated  September 5, 2000 (Filed as Exhibit 3.5 to Form 10, Amendment No. 2, filed  September 12, 2000)                                              |
| 3.5                |       | Bylaws of the Company (Filed as Exhibit 3.4 to Form 10 filed May 12,  2000).                                                                                                                                 |
| 3.6                |       | Amended and Restated Bylaws of the Company effective as of September  1, 2000 (Filed as Exhibit 3.6 to Form 10, Amendment No. 2, filed September 12  2000).                                                  |
| 3.7                |       | Amended and Restated Bylaws of GlobalSCAPE effective as of October  10, 2000 (Filed as Exhibit 10.1 to Form 8-K filed October 10, 2000).                                                                     |
| 3.8                |       | Amended and Restated Bylaws of GlobalSCAPE effective as of January  30, 2003 (Filed as Exhibit 3.8 to Annual Report on Form 10-K filed March 31,  2003).                                                     |
| 4.1                |       | Specimen of Stock Certificate (Filed as Exhibit 4.1 to Annual Report  on Form 10-K filed April 2, 2001).                                                                                                     |
| *10.1              |       | 1998 Stock Option Plan as amended May 13, 1999 (Filed as Exhibit 4.2  to Form 10 filed May 12, 2000).                                                                                                        |
| *10.2              |       | 2000 Stock Option Plan dated May 8, 2000 (Filed as Exhibit 4.3 to  Form 10 filed May 12, 2000).                                                                                                              |
| *10.3              |       | Form of 1998 Stock Option Plan Rights Termination Letter Agreement of  Directors to Agree Not to Claim Any Right of Adjustment dated February 4,  2000 (Filed as Exhibit 4.6 to Form 10 filed May 12, 2000). |
| *10.4              |       | Form of 1998 Stock Option Plan Rights Termination Letter Agreement  for Employees and Consultants to Cancel Options dated February 8, 2000 (Filed  as Exhibit 4.7 to Form 10, filed May 12, 2000).           |

 

54

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| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.5              |       | Form of 1998 Stock Option Plan Rights Termination Letter of Officer  to Agree Not to Claim Any Right of Adjustment dated February 8, 2000 (Filed  as Exhibit 4.8 to Form 10 filed May 12, 2000).               |
| *10.6              |       | Form of 1998 Stock Option Plan Rights Termination Letter Agreement of  Officer to Agree Not to Exercise Options dated February 8, 2000 (Filed as  Exhibit 4.9 to Form 10 filed May 12, 2000).                  |
| *10.7              |       | Form of 1998 Stock Option Plan Reinstatement and Adjustment Letter  for Employees dated December 19, 2000 (Filed as Exhibit 10.17 to Annual  Report on Form 10-K filed April 2, 2001).                         |
| *10.8              |       | Form of Release and Indemnity Agreement between GlobalSCAPE, Inc. and  Employees dated December 19, 2000 (Filed as Exhibit 10.18 to Annual Report on  Form 10-K filed April 2, 2001).                          |
| 10.9               |       | Commercial Lease Agreement between ACLP University Park S.A. II, L.P.  and the Company dated April 13, 1999 (Filed as Exhibit 10.1 to Form 10 filed  May 12, 2000).                                            |
| *10.10             |       | Release and Indemnity Agreement between GlobalSCAPE, Inc. and Sandra  Poole-Christal dated April 2, 2001 (Filed as Exhibit 10.17 to Annual Report  on Form 10-K filed April 1, 2002).                          |
| *10.11             |       | Granting letter for 808,571 options to Sandra Poole-Christal under  GlobalSCAPE, Inc. 1998 Stock Option Plan dated April 20, 2001 (Filed as  Exhibit 10.18 to Annual Report on Form 10-K filed April 1, 2002). |
| *10.12             |       | Bonus letter for Sandra Poole-Christal in connection with grant of  808,571 options under 1998 Stock Option Plan (Filed as Exhibit 10.19 to  Annual Report on Form 10-K filed April 1, 2002).                  |
| *10.13             |       | Incentive Stock Option Agreement between GlobalSCAPE, Inc. and Sandra  Poole Christal dated April 20, 2001 (Filed as Exhibit 10.20 to Annual Report  on Form 10-K filed April 1, 2002).                        |
| *10.14             |       | Form of Incentive Stock Option Agreement under GlobalSCAPE, Inc. 2000  Stock Option Plan (Filed as Exhibit 10.21 to Annual Report on Form 10-K filed  April 1, 2002).                                          |
| *10.15             |       | Employment Agreement between GlobalSCAPE, Inc. and Charles R. Poole  dated effective July 1, 2005 (Filed as exhibit 10.1 on Form 8-K filed June  20, 2005).                                                    |
| *10.16             |       | Incentive Stock Option Agreement between GlobalSCAPE, Inc. and  Charles R. Poole dated June 15, 2005 (Filed as Exhibit 10.2 on Form 8-K filed  June 20, 2005).                                                 |
| 21                 |       | Subsidiaries (Filed as Exhibit 21 on Form 10-K filed March 24, 2005).                                                                                                                                          |
| 23.1               |       | Consent of Helin, Donovan, Trubee & Wilkinson, LLP (filed  herewith).                                                                                                                                      |
| 23.2               |       | Consent of Ernst & Young LLP (filed herewith)                                                                                                                                                              |
| 31.1               |       | Rule 13a-14(a)/15d – 14(a) Certification of Charles R. Poole,  President and Chief Executive Officer of GlobalSCAPE, Inc. (filed herewith).                                                               |
| 31.2               |       | Rule 13a-14(a)/15d – 14(a) Certification of Thomas F. Farar, Chief  Financial Officer (filed herewith).                                                                                                   |
| 32.1               |       | Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).                                                                       |

 

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* Management Compensatory Plan or Agreement

 

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**Signatures**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in San Antonio, Texas on May 3, 2006.

 

| **GlobalSCAPE,  Inc.**                |
|---------------------------------------|
| ** **                            |
|                                  | By: /s/ Charles R. Poole |   |
| Charles R. Poole                      |
| President and Chief Executive Officer |
|                                  |
|                                  | By: /s/ Thomas F. Farar |   |
| Thomas F. Farar                       |
| Chief Financial Officer               |

 

Pursuant tothe requirements of the Securities Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant in the capacitiesindicated on May 3, 2006.

 

| **Signature**        | ** **                                   | **Title**                          |
|----------------------|----------------------------------------------|------------------------------------|
|                 |                                         |
| /s/ Charles R. Poole |                                         | President, CEO and Director        |
| Charles R. Poole     | (Principal Executive Officer)                |
|                 |                                         |
| /s/ Thomas W. Brown  |                                         | Chairman of the Board and Director |
| Thomas W. Brown      |                                         |
|                 |                                         |
| /s/ David L. Mann    |                                         | Director                           |
| David L. Mann        |                                         |
|                 |                                         |
| /s/ Thomas F. Farar  |                                         | Chief Financial Officer,           |
| Thomas F. Farar      | Treasurer, Secretary                         |
|                 | (Principal Accounting and Financial Officer) |
|                      |                                              |                                    |  |  |  |

 

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