##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report
Pursuant to Section 13 or
15(d)
of the Securities Exchange Act of 1934For the Quarterly Period
Ended June 30, 2006
 or
 o
    
    transition report
pursuant to section 13 or
15(d)
of the securities exchange act of 1934For the transition
period from __________ to __________
 Commission
file number 000-24389
 VASCO Data Security International, Inc.
  DELAWARE
    
    36-4169320(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1901 South Meyers Road, Suite 210
Oakbrook Terrace, Illinois 60181
 (630) 932-8844
 ü
   ̈ þ  ̈
 ü






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##### 



VASCO Data Security International, Inc.
Form 10-Q
For The Six Months Ended June 30, 2006
 Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements:Consolidated Balance Sheets as of June 30, 2006 (Unaudited)
and December 31, 2005
    
    
    3Consolidated Statements of Operations (Unaudited) for
the three and six-month periods ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Comprehensive Income (Unaudited)
for the three and six-month periods ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    25SIGNATURES
    
    
    25CERTIFICATIONS
    
    
    26302 Certification of Principal Executive Officer302 Certification of Principal Financial Officer906 Certification of Principal Executive Officer906 Certification of Principal Financial Officer
  
 This report may contain the following trademarks of the
Company, some of which are registered: VASCO, AccessKey, VACMan Server and
VACMan/CryptaPak, AuthentiCard and Digipass. -2-




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##### Table of Contents



VASCO Data Security International, Inc.
Consolidated Balance Sheets
(In thousands except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and equivalents
    
    $
    15,866
    
    
    $
    16,962Restricted cash
    
    
    192
    
    
    
    181Accounts receivable, net of allowance for doubtful accounts
    
    
    16,458
    
    
    
    12,083Inventories
    
    
    2,762
    
    
    
    1,570Prepaid expenses
    
    
    495
    
    
    
    726Deferred income taxes
    
    
    342
    
    
    
    117Foreign sales tax receivable
    
    
    234
    
    
    
    89Other current assets
    
    
    83
    
    
    
    451Total current assets
    
    
    36,432
    
    
    
    32,179Property and equipment:Furniture and fixtures
    
    
    2,036
    
    
    
    1,893Office equipment
    
    
    2,025
    
    
    
    2,1554,061
    
    
    
    4,048Accumulated depreciation
    
    
    (2,804
    )
    
    
    (3,066
    )Property and equipment, net
    
    
    1,257
    
    
    
    982Intangible assets, net of accumulated amortization
    
    
    1,881
    
    
    
    1,054Goodwill
    
    
    8,805
    
    
    
    6,665Investment in Secured Services, Inc., net
    
    
    0
    
    
    
    600Other assets
    
    
    26
    
    
    
    25Total assets
    
    $
    48,401
    
    
    $
    41,505LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank borrowings
    
    $
    3,088
    
    
    $
    3,173Accounts payable
    
    
    4,339
    
    
    
    4,753Deferred revenue
    
    
    1,773
    
    
    
    1,765Accrued wages and payroll taxes
    
    
    2,000
    
    
    
    2,329Income taxes payable
    
    
    2,907
    
    
    
    1,547Other accrued expenses
    
    
    2,469
    
    
    
    2,287Total current liabilities
    
    
    16,576
    
    
    
    15,854Deferred warranty revenues
    
    
    298
    
    
    
    256Deferred tax liability
    
    
    174
    
    
    
    Stockholders equity:Common
stock, $.001 par value  75,000,000 shares authorized;
36,389,299 shares issued and outstanding at June 30, 2006
and 36,180,425 issued and outstanding at December 31, 2005
    
    
    36
    
    
    
    36Additional paid-in capital
    
    
    60,123
    
    
    
    59,625Deferred compensation
    
    
    
    
    
    
    (403
    )Accumulated deficit
    
    
    (28,781
    )
    
    
    (32,985
    )Accumulated
other comprehensive loss Cumulative translation adjustment
    
    
    (25
    )
    
    
    (878
    )Total stockholders equity
    
    
    31,353
    
    
    
    25,395Total liabilities and stockholders equity
    
    $
    48,401
    
    
    $
    41,505
  -3-




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##### Table of Contents



VASCO Data Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    18,512
    
    
    $
    12,345
    
    
    $
    32,202
    
    
    $
    23,788Cost of goods sold
    
    
    6,650
    
    
    
    4,296
    
    
    
    10,889
    
    
    
    8,519Gross profit
    
    
    11,862
    
    
    
    8,049
    
    
    
    21,313
    
    
    
    15,269Operating costs:Sales and marketing
    
    
    4,466
    
    
    
    3,535
    
    
    
    8,443
    
    
    
    6,872Research and development
    
    
    1,236
    
    
    
    904
    
    
    
    2,178
    
    
    
    1,713General and administrative
    
    
    2,006
    
    
    
    1,103
    
    
    
    3,540
    
    
    
    2,076Amortization of intangible assets
    
    
    72
    
    
    
    222
    
    
    
    170
    
    
    
    400Total operating costs
    
    
    7,780
    
    
    
    5,764
    
    
    
    14,331
    
    
    
    11,061Operating income
    
    
    4,082
    
    
    
    2,285
    
    
    
    6,982
    
    
    
    4,208Recovery (impairment) of investment in
Secured Services, Inc.
    
    
    189
    
    
    
    
    
    
    
    (600
    )
    
    
    Interest income, net
    
    
    14
    
    
    
    16
    
    
    
    74
    
    
    
    42Other income, net
    
    
    135
    
    
    
    131
    
    
    
    108
    
    
    
    347Income before income taxes
    
    
    4,420
    
    
    
    2,432
    
    
    
    6,564
    
    
    
    4,597Provision for income taxes
    
    
    1,386
    
    
    
    851
    
    
    
    2,360
    
    
    
    1,609Net income
    
    
    3,034
    
    
    
    1,581
    
    
    
    4,204
    
    
    
    2,988Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Net income available to common shareholders
    
    $
    3,034
    
    
    $
    1,581
    
    
    $
    4,204
    
    
    $
    2,974Basic net income per common share
    
    $
    0.08
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.09Diluted net income per common share
    
    $
    0.08
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.08Weighted average common shares outstanding:Basic
    
    
    36,210
    
    
    
    35,458
    
    
    
    36,158
    
    
    
    34,943Dilutive
    
    
    37,690
    
    
    
    37,295
    
    
    
    37,697
    
    
    
    36,796
  -4-




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##### Table of Contents



VASCO Data Security International, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    3,034
    
    
    $
    1,581
    
    
    $
    4,204
    
    
    $
    2,988Other
comprehensive income (loss) Currency translation adjustment
    
    
    588
    
    
    
    (698
    )
    
    
    853
    
    
    
    (1,101
    )Comprehensive income
    
    $
    3,622
    
    
    $
    883
    
    
    $
    5,057
    
    
    $
    1,887
  -5-




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##### Table of Contents



VASCO Data Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 Six Months Ended June 30,2006
    
    
    2005Cash flows from operating activities:Net income from continuing operations
    
    $
    4,204
    
    
    $
    2,988Adjustments to reconcile net income from continuing operations
to net cash provided by (used in) operating activities:Impairment of investment in Secured Services, Inc.
    
    
    600
    
    
    
    Depreciation and amortization
    
    
    382
    
    
    
    555Deferred income taxes
    
    
    (110
    )
    
    
    Non-cash compensation expense
    
    
    711
    
    
    
    72Changes in assets and liabilities, net of effect of acquisition:Accounts receivable, net
    
    
    (3,628
    )
    
    
    (1,586
    )Inventories
    
    
    (1,023
    )
    
    
    (1,051
    )Prepaid expenses
    
    
    246
    
    
    
    210Foreign sales tax receivable
    
    
    (115
    )
    
    
    (144
    )Other current assets
    
    
    157
    
    
    
    88Accounts payable
    
    
    (1,209
    )
    
    
    423Deferred revenue
    
    
    (261
    )
    
    
    (22
    )Accrued wages and payroll taxes
    
    
    (901
    )
    
    
    (18
    )Income taxes payable
    
    
    1,217
    
    
    
    594Accrued expenses
    
    
    (110
    )
    
    
    279Deferred warranty revenues
    
    
    42
    
    
    
    87Net cash provided by operating activities
    
    
    202
    
    
    
    2,475Cash flows from investing activities:Business acquisitions
    
    
    (1,818
    )
    
    
    (4,024
    )Additions to property and equipment, net
    
    
    (242
    )
    
    
    (246
    )Additions to intangible assets
    
    
    (50
    )
    
    
    Payments received on SSI note receivable
    
    
    220
    
    
    
    166Net cash used in investing activities
    
    
    (1,890
    )
    
    
    (4,104
    )Cash flows from financing activities:Proceeds from (repayment of) borrowings
    
    
    (85
    )
    
    
    1,940Proceeds from exercise of stock options
    
    
    180
    
    
    
    1,226Proceeds from exercise of preferred stock warrants
    
    
    10
    
    
    
    1,005Dividends paid on preferred stock
    
    
    
    
    
    
    (14
    )Net cash provided by financing activities
    
    
    105
    
    
    
    4,157Effect of exchange rate changes on cash
    
    
    487
    
    
    
    (790
    )Net decrease in cash
    
    
    (1,096
    )
    
    
    1,738Cash, beginning of period
    
    
    16,962
    
    
    
    8,138Cash, end of period
    
    $
    15,866
    
    
    $
    9,876
  -6-




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##### Table of Contents



VASCO Data Security International, Inc.
Notes to Consolidated Financial Statements
(All amounts are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies
 Nature of Operations
  Basis of Presentation
   Use of Estimates
  Revenue Recognition
  Hardware Revenue and License Fees:
 Support Agreements:
 -7-




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##### Table of Contents



Consulting and Education Services:
 Multiple-Element Arrangements:
   Valuation of Investment in Secured Services, Inc.
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
  Interim
Financial Reporting
 Cash and Equivalents
   -8-




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##### Table of Contents



Stock-Based Compensation
 Stock-Based Compensation Accounting for Stock Issued to Employees
   Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2006
    
    
    2,218
    
    
    $
    3.27
    
    
    
    5.98
    
    
    $
    14,773Exercised
    
    
    (90
    )
    
    
    2.00
    
    
    
    5.80
    
    
    
    545Forfeited or expired
    
    
    (42
    )
    
    
    6.11
    
    
    
    5.53
    
    
    
    159Outstanding at June 30, 2006
    
    
    2,086
    
    
    
    3.26
    
    
    
    5.39
    
    
    
    10,918At June 30, 2006:Fully vested, exercisable options
    
    
    1,797
    
    
    $
    3.03
    
    
    
    5.26
    
    
    $
    9,865Options expected to vest
    
    
    236
    
    
    
    4.63
    
    
    
    6.26
    
    
    
    879Expected forfeitures
    
    
    53
    
    
    
    5.04
    
    
    
    6.06
    
    
    
    174Total
    
    
    2,086
    
    
    
    3.28
    
    
    
    5.73
    
    
    $
    10,918
 -9-




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##### Table of Contents



Weighted
    
    Weighted
    
    UnrecognizedAverage
    
    Average
    
    Compen-Grant Date
    
    Remaining
    
    sationShares
    
    Fair Value
    
    Term
    
    CostNon-vested shares at January 1, 2006
    
    
    510
    
    
    $
    3.43
    
    
    
    6.80
    
    
    $
    1,085Vested
    
    
    (197
    )
    
    
    3.07
    
    
    
    6.61Forfeited
    
    
    (24
    )
    
    
    2.48
    
    
    
    6.73Non-vested shares at June 30, 2006
    
    
    289
    
    
    
    3.64
    
    
    
    6.22
    
    
    
    815
 Accounting for Stock-Based Compensation
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Compensation expense included in income:Stock options
    
    $
    169
    
    
    $
    
    
    
    $
    326
    
    
    $
    Restricted stock
    
    
    140
    
    
    
    36
    
    
    
    264
    
    
    
    72Long-term compensation plan
    
    
    121
    
    
    
    
    
    
    
    121
    
    
    
    Total
    
    
    430
    
    
    
    36
    
    
    
    711
    
    
    
    72Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect on net income
    
    $
    430
    
    
    $
    36
    
    
    $
    711
    
    
    $
    72Proforma
stock compensation disclosures
previously required by SFAS 123:Net income
available to common shares:As reported
    
    
    
    
    
    $
    1,581
    
    
    
    
    
    
    $
    2,974Compensation expense, net of tax
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    357Proforma
    
    
    
    
    
    $
    1,397
    
    
    
    
    
    
    $
    2,617Basic net income per share:As reported
    
    
    
    
    
    $
    0.04
    
    
    
    
    
    
    $
    0.09Proforma
    
    
    
    
    
    
    0.04
    
    
    
    
    
    
    
    0.07Fully diluted net income per share:As reported
    
    
    
    
    
    $
    0.04
    
    
    
    
    
    
    $
    0.08Proforma
    
    
    
    
    
    
    0.04
    
    
    
    
    
    
    
    0.07Weighted
average fair value of options granted
    
    None granted
    
    $
    4.46
    
    
    None granted
    
    $
    4.32Assumptions used to value options granted:Expected volatility
    
    
    
    
    
    
    69
    %
    
    
    
    
    
    
    69
    %Expected term
    
    
    
    
    
    7 years
    
    
    
    
    
    6 - 7 yearsRisk free interest rate
    
    
    
    
    
    
    4.21
    %
    
    
    
    
    
    
    4.21 - 4.23
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Intrinsic value of options exercised
    
    $
    319
    
    
    $
    1,647
    
    
    $
    545
    
    
    $
    2,780Fair value of shares vested
    
    
    144
    
    
    
    3
    
    
    
    602
    
    
    
    1,278
 -10-




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##### Table of Contents



Earnings per Common Share
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average common shares outstandingBasic
    
    
    36,210
    
    
    
    35,458
    
    
    
    36,158
    
    
    
    34,943Incremental shares with dilutive effect:Stock options
    
    
    1,218
    
    
    
    1,569
    
    
    
    1,287
    
    
    
    1,574Restricted stock awards
    
    
    179
    
    
    
    90
    
    
    
    166
    
    
    
    82Warrants
    
    
    83
    
    
    
    178
    
    
    
    86
    
    
    
    197Dilutive
    
    
    37,690
    
    
    
    37,295
    
    
    
    37,697
    
    
    
    36,796
 Translation of Goodwill and Intangible Assets
  Foreign Currency
Translation
  -11-




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##### Table of Contents



Note 2  Accounts Receivable and Allowance for Doubtful Accounts
  June 30,
    
    
    December 31,2006
    
    
    2005Accounts receivable
    
    $
    17,069
    
    
    $
    12,239Allowance for doubtful accounts
    
    
    (611
    )
    
    
    (156
    )Accounts receivable, net
    
    $
    16,458
    
    
    $
    12,083
 Note 3  Inventories
   June 30,
    
    
    December 31,2006
    
    
    2005Component parts
    
    $
    1,769
    
    
    $
    601Work-in-process and finished goods
    
    
    993
    
    
    
    969Total
    
    $
    2,762
    
    
    $
    1,570
 Note 4  Goodwill and Other Intangibles
  TotalCapitalized
    
    
    Patents &
    
    
    IntangibleTechnology
    
    
    Trademarks
    
    
    Assets
    
    
    GoodwillNet balance at December 31, 2005
    
    $
    957
    
    
    $
    97
    
    
    $
    1,054
    
    
    $
    6,665Additions
    
    
    700
    
    
    
    51
    
    
    
    751
    
    
    
    2,355Currency Translation Adjustment
    
    
    246
    
    
    
    
    
    
    
    246
    
    
    
    (215
    )Amortization Expense
    
    
    (166
    )
    
    
    (4
    )
    
    
    (170
    )
    
    
    Net balance at June 30, 2006
    
    $
    1,737
    
    
    $
    144
    
    
    $
    1,881
    
    
    $
    8,805Estimated amortization expense for the years ended:December 31, 2006
    
    $
    682December 31, 2007
    
    
    693December 31, 2008
    
    
    300December 31, 2009
    
    
    181December 31, 2010 and thereafter
    
    
    195
  -12-




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##### Table of Contents



Note 5  Bank Borrowings
  Note 6  Deferred Warranty
   Year
    
    Amount2006
    
    $
    512007
    
    
    1382008
    
    
    1292009
    
    
    622010
    
    
    33$
    413
 Note 7  Stockholders Equity
  Common Stock IssuedNumber of
    
    Value ofShares
    
    SharesExercise of options
    
    
    90
    
    
    $
    180Exercise of warrants
    
    
    3
    
    
    
    10Restricted stock awards, net
    
    
    116
    
    
    
    1,107
  -13-




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##### Table of Contents



Note 8  Supplemental Disclosures of Cash Flow Information
 Six months ended June 30,2006
    
    
    2005Supplemental disclosure of cash flow information:Interest paid
    
    $
    21
    
    
    $
    20Income taxes paid
    
    
    873
    
    
    
    1,018Supplemental disclosure of non-cash investing activities:Common stock issued for acquisition (263 shares)
    
    
    
    
    
    
    2,128Supplemental disclosure of non-cash financing activities:Common stock issued to redeem Series D preferred
stock upon conversion (1,040 shares)
    
    
    
    
    
    
    1,504Common stock issued to Series D preferred stock
shareholders as a dividend payment (5 shares)
    
    
    
    
    
    
    27
 Note 9  Business Combinations
  
 Business Combinations.
 May 11,2006Cash
    
    $
    34Accounts receivable, net
    
    
    47Inventory
    
    
    23Foreign sales tax & other current assets
    
    
    20Property and equipment, net
    
    
    176Developed technology
    
    
    870Deferred tax asset
    
    
    115Total assets acquired
    
    
    1,285Accounts payable
    
    
    561Deferred revenue
    
    
    200Accrued expenses
    
    
    635Deferred tax liability  current portion
    
    
    44Deferred tax liability  long-term
    
    
    174Total
liabilities assumed
    
    
    1,614Net assets acquired
    
    
    (329
    )Goodwill
    
    
    2,355Aggregate purchase price
    
    $
    2,026
 -14-




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##### Table of Contents



  Business Combinations.
  February 4,2005Cash
    
    $
    529Accounts receivable, net
    
    
    466Inventory
    
    
    11Prepaid expenses
    
    
    47Other current assets
    
    
    608Property and equipment, net
    
    
    122Total assets acquired
    
    
    1,783Accounts payable
    
    
    47Deferred revenue
    
    
    1,071Deferred income taxes
    
    
    28Accrued expenses
    
    
    156Total liabilities assumed
    
    
    1,302Net assets acquired
    
    
    481Capitalized purchase orders
    
    
    367Goodwill
    
    
    6,415Aggregate
purchase price
    
    $
    7,263
 -15-




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Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
 (in thousands, except headcount, token volume and unit price data)
    Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
  -16-




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Comparison of Results for the Three and Six Months Ended June 30, 2006 and 2005
 Economic Conditions:
 Currency Fluctuations.
    Accounting for Derivative Instruments and Hedging Activities
 -17-




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Revenue
 Revenue by Geographic Regions:
 Europe
    
    United States
    

Other
Countries
    
    TotalThree months ended June 30:Total Revenue:2006
    
    $
    11,383
    
    
    $
    2,564
    

    
    $
    4,565
    
    
    $
    18,5122005
    
    
    9,806
    
    
    
    766
    

    
    
    1,773
    
    
    
    12,345Percent of Total:2006
    
    
    61
    %
    
    
    14
    %
    

    
    25
    %
    
    
    100
    %2005
    
    
    80
    %
    
    
    6
    %
    
        
    14
    %
    
    
    100
    %Six months ended June 30:Total Revenue:2006
    
    $
    20,880
    
    
    $
    3,412

    
    
    $
    7,910
    
    
    $
    32,2022005
    
    
    19,807
    
    
    
    1,506
    

    
    
    2,475
    
    
    
    23,788Percent of Total:2006
    
    
    65
    %
    
    
    11
    %
    

    
    24
    %
    
    
    100
    %2005
    
    
    83
    %
    
    
    6
    %
    

    
    11
    %
    
    
    100
    %
     -18-




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Revenue by Target Market:
 EnterpriseBanking
    
    
    Security
    
    
    TotalThree months ended June 30:Total Revenue:2006
    
    $
    16,123
    
    
    $
    2,389
    
    
    $
    18,5122005
    
    
    10,637
    
    
    
    1,708
    
    
    
    12,345Percent of Total:2006
    
    
    87
    %
    
    
    13
    %
    
    
    100
    %2005
    
    
    86
    %
    
    
    14
    %
    
    
    100
    %Six months ended June 30:Total Revenue:2006
    
    $
    27,315
    
    
    $
    4,887
    
    
    $
    32,2022005
    
    
    20,373
    
    
    
    3,415
    
    
    
    23,788Percent of Total:2006
    
    
    85
    %
    
    
    15
    %
    
    
    100
    %2005
    
    
    86
    %
    
    
    14
    %
    
    
    100
    %
    -19-




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Gross Profit and Operating Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    35.9
    
    
    
    34.8
    
    
    
    33.8
    
    
    
    35.8Gross profit
    
    
    64.1
    
    
    
    65.2
    
    
    
    66.2
    
    
    
    64.2Operating costs:Sales and marketing
    
    
    24.1
    
    
    
    28.7
    
    
    
    26.2
    
    
    
    28.9Research and development
    
    
    6.7
    
    
    
    7.3
    
    
    
    6.8
    
    
    
    7.2General and administrative
    
    
    10.8
    
    
    
    8.9
    
    
    
    11.0
    
    
    
    8.7Amortization of intangible assets
    
    
    0.4
    
    
    
    1.8
    
    
    
    0.5
    
    
    
    1.7Total operating costs
    
    
    42.0
    
    
    
    46.7
    
    
    
    44.5
    
    
    
    46.5Operating income
    
    
    22.1
    
    
    
    18.5
    
    
    
    21.7
    
    
    
    17.7Recovery (impairment) of investment in SSI
    
    
    1.0
    
    
    
    
    
    
    
    (1.9
    )
    
    
    Interest income, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Other income (expense), net
    
    
    0.7
    
    
    
    1.1
    
    
    
    0.4
    
    
    
    1.4Income before income taxes
    
    
    23.9
    
    
    
    19.7
    
    
    
    20.4
    
    
    
    19.3Provision for income taxes
    
    
    7.5
    
    
    
    6.9
    
    
    
    7.3
    
    
    
    6.8Net income
    
    
    16.4
    
    
    
    12.8
    
    
    
    13.1
    
    
    
    12.5
 Gross Profit
     -20-




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Operating Expenses
  Sales and Marketing Expenses
   Research and Development Expenses
   General and Administrative Expenses
   -21-




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Amortization of Intangible Assets
  Interest Income
  Recovery (Impairment) of Investment in Secured Services
  Other Income (Expense), Net
  Income Taxes
    -22-




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Liquidity and Capital Resources
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    

June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005EBITDA
    
    $
    4,591
    
    
    $
    2,726
    
    
    $
    6,872
    
    
    $
    5,110Interest income, net
    
    
    14
    
    
    
    16
    
    
    
    74
    
    
    
    42Provision for income taxes
    
    
    (1,386
    )
    
    
    (851
    )
    
    
    (2,360
    )
    
    
    (1,609
    )Depreciation and amortization
    
    
    (185
    )
    
    
    (310
    )
    
    
    (382
    )
    
    
    (555
    )Net income
    
    $
    3,034
    
    
    $
    1,581
    
    
    $
    4,204
    
    
    $
    2,988
   -23-




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Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB
Statement No. 109, .
 How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented
in the Income Statement (That Is, Gross Versus Net Presentation)
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  -24-




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PART II. OTHER INFORMATION
 
 Item 6. Exhibits
     
 SIGNATURES
  VASCO Data Security International, Inc./s/ T. Kendall HuntT. Kendall HuntChief Executive Officer and
Chairman of the Board of

Directors  (Principal Executive Officer)/s/ Clifford K. BownClifford K. BownExecutive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) -25-