The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements for the years ended December 31, 2008, 2007 and 2006 and related notes included elsewhere in this document.

Overview

We develop, distribute and maintain secure managed file transfer, or MFT, software for individuals and businesses to safely send files over the internet, within an enterprise, or to business partners. We have also developed Wide-Area File Services, or WAFS, collaboration and Continuous Data Protection, or CDP, software. These solutions further enhance the ability to share and backup files within the infrastructure of a company's wide and local area networks, or WAN and LAN at local network speeds. In addition, we announced Managed E-mail Attachment and software-as-a-service, or SaaS, information sharing solutions in 2008. The e-mail attachment delivery and SaaS solutions broaden our product portfolio to address the substantial installed base of IT systems with e-mail attachment size limitations and other file delivery infrastructure constraints.

Our product portfolio facilitates delivery of critical information such as financial data, medical records, customer files and other similar documents while supporting a range of information protection approaches to meet privacy and other security requirements. In addition, these solutions ensure compliance with some government regulations relating to the protection of information while allowing users to reduce IT costs, increase efficiency, track and audit transactions and automate processes. Our products also provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers. We

believe that we are strongly positioned to provide secure transfer, sharing, and replication of files that need to be transmitted inside the user's firewall to distributed offices, or outside the user's firewall to business and trading partners. We believe these business-to-business, or B2B, aspects of our solution capabilities increasingly will allow us to address adjacent market demands beyond the traditional MFT market space.

The following is a brief description of our products and solutions:

File Management Products-Our file management products are best known for the "CuteFTP" product line. They primarily consist of products that help users securely move and copy files on the Internet. A substantial portion of our revenues are derived from licensing our file management products. Some of our products encrypt the transfers for security using technology similar to a Web browser. The products consist of three product categories; client, server and compression transfer. Our file management product line includes Enhanced File Transfer, or EFT Server, Secure FTP Server, CuteFTP Professional, CuteFTP Home, and CuteFTP Lite.

Wide-Area File Services and Continuous Data Protection Products-Our WAFS products provide a file sharing, collaboration, and replication solution over multiple sites. By keeping all data updated on each location's file server, each site has instant access to the very latest version. Our WAFS products help prevent opening an old file version without user conflicts. Changes made to data on any server are mirrored on all other servers. WAFS technology can have CDP added to it to provide enterprises with a file access and data protection combination that centralizes data storage and IT administration facilities but doesn't compromise data sharing and protection. As files change, file servers backup in real time to the customer's backup site which can be at the same or a remote location. The backup server can keep any number of past versions of each file (and deleted files) which gives the customer immediate restore, as well as the ability to perform point-in-time snapshots.

Managed E-mail Attachment Solutions-Our managed e-mail attachment solution, Mail Express, addresses the needs of businesses that prefer to use their legacy e-mail infrastructure to deliver and manage e-mail attachments. E-mail traditionally has been ill-suited to delivery of certain attachments due to typical infrastructure and administrator-defined limitations on e-mail attachment size. In many cases, these limitations preclude sending or receiving e-mail attachments larger than even 10 or 20 MB. Mail Express allows delivery of multi-GB files as e-mail attachments by seamlessly replacing the attachments with links to the files. This approach can ease the load on the e-mail infrastructure and the long-term storage requirements associated with e-mail attachments. Mail Express also allows enhanced tracking and auditing of the file attachments through read receipts and log files.

Software as a Service Solution-Our SaaS solution, CuteSendIt, is a file transfer service for individuals, professionals, and businesses. CuteSendIt uses cloud computing approaches to deliver files through a hosted web portal. This solution approach meets the needs of users who do not have, or wish to invest in, file transfer infrastructure such as FTP servers or even client application software. Users access the CuteSendIt application over the Internet using a standard web browser, securely upload files (up to multi-GB) through the portal, and compose a brief message to accompany the file delivery. CuteSendIt then sends the message to the recipients as the body of an e-mail message. This e-mail message also includes links to the files uploaded through the CuteSendIt web portal. Anyone with an Internet connection can access this service at www.cutesendit.com. There is no software to install with CuteSendIt and no specific knowledge of file transfer is needed to use it. CuteSendIt currently is free to use for a limited number of transfers, and offers various monthly and yearly fee-based plans that meet specific file transfer requirements.

We believe that the future success of our business will be dependent upon our ability to improve our current products and to introduce new products, through research and development, innovations by our employees, strategic partnerships, and possible acquisitions. We intend to continue enhancing our file transfer products to meet the demands of both individual and enterprise users, and to expand into growing markets through strategic partnerships and possible future acquisitions of compatible companies and solutions.

During 2008, we released several enhancements to our established product lines. For example, we introduced an Applicability Statement 2, or AS2, add-on module for EFT Server. The AS2 add-on module allows manufacturing and retail customers to efficiently connect their supply chains to key suppliers and trading partners. Many organizations are migrating to this protocol to reduce costs, and requiring their trading partners to switch to the AS2 protocol. The AS2 add-on module continues our prior practice of developing and releasing additional modules that provide additional sales and up sell opportunities for our server-based file management products. Previously introduced solutions include Auditing and Reporting (ARM), Secure Ad Hoc Transfer (SAT), and High Security Payment Card Industry (HS-PCI) modules.

We also released CuteFTP Lite and localized versions of CuteFTP during 2008. CuteFTP Lite has a relatively simple user interface and adds an entry-level FTP product to our consumer product portfolio. The localizations of CuteFTP delivered during 2008 provided simplified Chinese, Russian, Spanish, German, French, Portuguese and Turkish versions of this popular consumer product and should, over time, enhance our ability to penetrate international markets.

During 2008, we continued to develop our WAFS and CDP products, focusing on enhancements aligned with our other server product development approaches. In particular, we updated the software using customer service feedback and our standard software development practices. The WAFS update included a significant part of the software originally acquired from Availl. Our WAFS/CDP revenues continued to lag behind management estimates during 2008 as we continued to develop the necessary product enhancements. Management believes the overall WAFS market growth outlook has slowed considerably as well, based on conversations with industry analysts and sales trends observed during 2008. The 2008 WAFS sales led to the impairment of goodwill and long-lived assets associated with the 2006 acquisition of Availl.

Our continued product enhancements yielded important industry validations and recognition during 2008. For example, the GlobalSCAPE Cryptographic Module embedded in the Secure FTP Server product achieved Federal Information Processing Standards, or FIPS, 140-2 Level 1 validation. FIPS 140-2 specifies the security requirements for cryptographic modules used to protect sensitive information. To achieve validation, cryptographic modules are subjected to rigorous testing by independent, accredited test facilities. FIPS 140-2 validation is required by most Government departments, including the Department of Defense, to protect the integrity of files that cross their networks. Similarly, companies in the healthcare, financial and manufacturing markets are under pressure to ensure that customer and patient information is protected.

Secure FTP Server FIPS version 3 and CuteFTP Pro version 8 also received the Certificate of Networthiness (CoN) from the US Army Network Technology Command (NETCOM) during 2008. A CoN is required for all systems operating within the Army Enterprise Infrastructure, or AEI. The AEI includes the key information technology systems that provide the Army with agile and adaptive capabilities, powered by net-centric, interoperable access to knowledge, systems, and services. The CoN signifies successful completion of a stringent assessment to ensure Army automated information systems are secure, supportable, sustainable, and compatible with the AEI. Our receipt of this certificate enables Army installations worldwide to install and operate Secure FTP Server FIPS version 3 and CuteFTP Pro version 8.

In addition to product enhancements, we released two new solutions (Mail Express and CuteSendIt) during 2008. Mail Express broadens our solution portfolio to include direct, seamless integration with e-mail delivery systems such as Microsoft Outlook. Mail Express potentially allows us to leverage our MFT capabilities into a substantial installed base of e-mail solutions. CuteSendIt additionally introduces a SaaS solution to our portfolio. The SaaS solution is particularly attractive to some customers because it uses cloud computing approaches to deliver large files without requiring on-premises equipment installations or even customer awareness of the specific file delivery systems and associated technologies.

We intend to use strategic partnerships or acquisitions as necessary to further enhance our solution portfolio, expand our sales channels, and enter adjacent markets. For example, during 2008 we joined the Cisco Technology Developer Program as part of the program's Unified Communications solution category. The Cisco

Technology Developer Program unites Cisco with third-party developers of hardware and software to deliver tested interoperable solutions to joint customers. In addition, we established QBS Distribution as a channel partner to enhance distribution of GlobalSCAPE's market-leading secure file transfer software in the UK and Ireland. The entire GlobalSCAPE product line is available through QBS Distribution.

Our accomplishments during 2008 and in prior years resulted in the company being positioned in the Leader's Quadrant of the Gartner Magic Quadrant for the MFT market. The Magic Quadrant, and associated Gartner report, helps companies evaluate MFT vendors based on their ability to execute, and completeness of vision. From this position of MFT market leadership, we are positioned to assess and potentially pursue entry into adjacent market spaces as our business traction and economic conditions indicate the potential attractiveness of these markets.

Liquidity and Capital Resources

The Company has a strong working capital position resulting from net profits from operations over 18 of the last 19 consecutive quarters and capital raised in a 2006 equity sale. At December 31, 2008, our net working capital position was approximately $4.4 million. We had cash available of $6.3 million and we continue to generate cash from operating activities. The Company had a $750,000 line of credit with Silicon Valley Bank which expired in September 2008 that was never used and the Company chose not to seek renewal. We rely on existing cash and cash flows from operations to fund our operations.

Our capital requirements principally relate to our need to enhance our existing products and to develop new products, which primarily consist of research and development expenses and expenses for people and the elements that support their work. By comparison, we do not spend large sums on capital equipment. Over the past three years, we spent $1,617,332 in 2008, $175,779 in 2007 and $150,926 in 2006 for equipment. Capital expenditures were higher in 2008 primarily as a result of the move to new office space in San Antonio.

Our total revenues decreased 14% in 2008 when compared to 2007. This decrease in revenue is attributable mostly to the inclusion of a single $2.8 million US Army sale in our 2007 revenues. Excluding this sale, our total revenues increased by 2% in 2008 when compared to 2007. Our enterprise level server products for MFT, (EFT Server and SecureFTP Server, plus associated modules) accounted for 69% of our revenues in 2008, including maintenance and support agreements. Prior to 2006, we were largely dependent upon sales of CuteFTP Home and CuteFTP Professional, which accounted for 51% of our revenue in the year-ended December 31, 2005, and represented larger percentages of sales in earlier years. The actual sales of these products remained relatively flat during 2006 and 2007, and declined by approximately 22% in 2008 when compared to 2007. In 2008, sales of these products represented approximately 17 % of our total revenues. WAFS and CDP combined for approximately 16% of our revenues in 2008, the same as in 2007.

Because our principal sources of capital are cash on hand and cash flow from operations, to the extent that sales decline, our cash flow from operations will also decline. If sales decline or if our liquidity is otherwise under duress, management could substantially reduce discretionary and capital spending, and personnel-related expenditures. We may also sell equity securities or enter into credit arrangements in order to finance future acquisitions or licensing activities.

Net cash provided by operating activities was $3,682,542, $5,213,674 and $2,604,274 in 2008, 2007 and 2006, respectively. This increase in cash for each year is generally the result of net income. Significant non-cash add backs in 2008 include the goodwill and long lived asset impairment, offset by a large non-cash decrease in deferred taxes. The remainder of the change in cash provided by operating activities is due to changes in working capital.

Our investing activities have typically been for the purchase of computer equipment and software. However in 2006, approximately $7.6 million was used for the purchase of Availl and in 2008 a large portion of our investing activities was related to the move into our new office space.

Our financing activities over the past three years have primarily related to funding the acquisition of Availl. The cash used to make this acquisition came from a $5 million term loan from Silicon Valley Bank. We repaid $400,000 of the loan in 2006 and $4.6 million in 2007 from the cash generated from our operations and a stock offering completed in November 2006. We have also sold stock through the exercise of employee stock options. We also used our own cash for the repurchase of shares of our common stock, in the amount of $978,382 and $527,558 in 2008 and 2007, respectively.

In order to finance the cash portion of the purchase price in the purchase of Availl, GlobalSCAPE entered into a Loan and Security Agreement dated September 22, 2006 with Silicon Valley Bank. The Loan Agreement with Silicon Valley Bank provided for a $5.0 million term loan and a $750,000 revolving credit facility. We repaid the balance of the term loan on March 1, 2007. The revolving credit facility expired in September 2008 and no borrowings were made against it.

At December 31, 2008, our principal commitments consisted of obligations outstanding under operating leases as well as royalty agreements with third parties, federal income tax and trade accounts payable. The commitments related to royalty agreements are contingent on sales volumes. We plan to continue to expend significant resources on product development in future periods and may also use our cash to acquire or license technology, intellectual property, products or businesses related to our current business strategy. We moved to a new San Antonio facility in 2008. We may purchase additional fixed assets and make additional leasehold improvements in connection with moving into this facility.

The following table summarizes our contractual obligations at December 31, 2008, consisting of future minimum payments under operating leases:

                                               Payments Due by Fiscal Year
                                                                      2016 and
                             2009      2010 - 2012    2013 - 2015    thereafter       Total
 Contractual Obligations
 Building Lease            $ 402,711   $  1,040,552   $  1,040,552   $ 1,156,168   $ 3,639,983
 Equipment Leases              7,392         16,448                                     23,840

                           $ 410,103   $  1,057,000   $  1,040,552   $ 1,156,168   $ 3,663,823

New Accounting Pronouncements

In April 2008, the FASB finalized Staff Position ("FSP") No. 142-3, Determination of the Useful Life of Intangible Assets. The position amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that are acquired individually or with a group of other assets and both intangible assets acquired in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The implementation of this pronouncement is not expected to have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141 R(revised), Business Combinations. This standard changes the accounting for business combinations by requiring that an acquiring entity measures and recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. The changes include the treatment of acquisition related transaction costs, the valuation of any noncontrolling interest at acquisition date fair value, the recording of acquired contingent liabilities at acquisition date fair value and the subsequent re-measurement of such liabilities after acquisition date, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals subsequent to acquisition date, and the recognition of changes in the acquirer's income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.

We do not expect the adoption of SFAS No. 141(R) to have a material impact on our financial statements unless we undertake an acquisition in 2009 and beyond.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option on January 1, 2008 and this statement will not have a material impact on the Company's financial statements and related disclosures.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of goodwill, impairment of long-lived assets, accounting for research and development costs, allowance for doubtful accounts, accounting for income taxes, and accounting for stock-based compensation.

Revenue Recognition

We recognize revenue in accordance with generally accepted accounting principles that have been prescribed for the software industry, including Statement of Position 97-2, Software Revenue Recognition, and Staff Accounting Bulletin (SAB) Nos. 101 and 104, "Revenue Recognition".

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and determinable, and collectability is probable. In making these judgments, we evaluate these criteria as follows:

• Evidence of an arrangement. We consider a non-cancelable written agreement signed by us and the customer to be persuasive evidence of an arrangement.

• Delivery has occurred. We consider delivery to have occurred when a compact disc or other medium containing the licensed software is provided to a common carrier or in the case of electronic delivery, the customer is given electronic access to the licensed software. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.

• Fixed or determinable fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenue when the refund or adjustment right lapses or the return is estimable. For arrangements with extended payment terms, we recognize revenue as amounts become due and payable or as cash is collected. We grant a limited right of return to our customers.

• Collection is deemed probable. We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon cash collection.

In arrangements that include multiple elements, including perpetual software licenses and maintenance and/or services, and packaged products with content updates, we allocate and defer revenue for the undelivered items based on vendor specific objective evidence, or VSOE, of the fair value of the undelivered elements, and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as

revenue. Our deferred revenue consists primarily of the unamortized balance of enterprise product maintenance, consumer product support, and arrangements where VSOE does not exist. Deferred revenue totaled approximately $2.8 million as of December 31, 2008, of which approximately $144,000 was classified as "Other long term liabilities" in the balance sheets. VSOE of each element is based on the price for which the undelivered element is sold separately. We determine fair value of the undelivered elements based on historical evidence of our stand-alone sales of these elements to third parties or from the stated renewal rate for the undelivered elements. When VSOE does not exist for undelivered items such as maintenance, then the entire arrangement fee is recognized ratably over the performance period.

While the above noted accounting standards govern the basis for revenue recognition, judgment and the use of estimates are required in connection with the allocation of revenue between software license revenue and maintenance and support revenue, as well as the amount of deferred revenue to be recognized in each accounting period. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and increasing flexibility in contractual arrangements could materially impact the amount recognized in the current period and deferred over time.

Valuation of goodwill and intangible assets

Goodwill. We assess goodwill and intangible assets with indefinite life for impairment within our reporting units annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the equity assigned to that unit, goodwill is not considered to be impaired and we are not required to perform further testing. If the carrying value of the equity assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of that reporting unit's goodwill. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the excess.

To determine the reporting units' fair value in the current year evaluation, we use the income approach under which we calculate the fair value of each reporting unit based on the estimated discounted future cash flows of that unit. Our cash flow assumptions are based on historical and forecasted revenue, operating costs, growth rates and other relevant factors. If management's estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of our goodwill could change significantly. Such change could result in goodwill impairment charges in future periods, which could have a significant impact on our operating results and financial condition.

During the performance of our annual impairment test and in conjunction with our budgeting process a review of the projected future sales of our WAFS/CDP products showed a significant decrease in expected future revenues. This decrease was a significant contributing factor in the goodwill impairment charge of approximately $5.8 million.

Intangible Assets. We assess the impairment of other identifiable intangible . . .