<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                       or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________

                        Commission file number 000-24389

                     VASCO DATA SECURITY INTERNATIONAL, INC.
             (Exact Name of Registrant as Specified in Its Charter)

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<S>                                                          <C>
           DELAWARE                                              36-4169320
(State or Other Jurisdiction of                                 (IRS Employer
Incorporation or Organization)                               Identification No.)
</TABLE>

                        1901 SOUTH MEYERS ROAD, SUITE 210
                        OAKBROOK TERRACE, ILLINOIS 60181
               (Address of Principal Executive Offices)(Zip Code)

               Registrant's telephone number, including area code:
                                 (630) 932-8844

 Securities registered pursuant to Section 12(b) of the Act: __________________

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<CAPTION>
          Title of each class               Name of exchange on which registered
          -------------------               ------------------------------------
<S>                                         <C>
COMMON STOCK, PAR VALUE $.001 PER SHARE            NASDAQ CAPITAL MARKET
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:
                                      NONE

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined by Rule 405 of the Securities Act. Yes       No   X
                                                  -----    -----

     Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the act. Yes       No   X
                                                -----    -----

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   X   No
                                              -----    -----

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer (See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act).

   Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes        No   X
                                                -----     -----

     As of June 30, 2006, the aggregate market value of voting and non-voting
common equity (based upon the last sale price of the common stock as reported on
Nasdaq on June 30, 2006) held by non-affiliates of the registrant was
$219,815,000 at $8.35 per share.

     As of February 28, 2007, there were 36,801,890 shares of common stock
outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE   None.


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                                TABLE OF CONTENTS

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                                                                            PAGE
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<S>                                                                         <C>
PART I
Item 1.    Business                                                            3
Item 1A.   Risk Factors                                                       13
Item 1B.   Unresolved Staff Comments                                          19
Item 2.    Properties                                                         19
Item 3.    Legal Proceedings                                                  20
Item 4.    Submission of Matters to a Vote of Security Holders                20

PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities                  20
Item 6.    Selected Financial Data                                            22
Item 7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                       23
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk         35
Item 8.    Financial Statements and Supplementary Data                        35
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosures                                          35
Item 9A.   Controls and Procedures                                            35
Item 9B.   Other Information                                                  37

PART III
Item 10.   Directors, Executive Officers and Corporate Governance             38
Item 11.   Executive Compensation                                             39
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                    51
Item 13.   Certain Relationships and Related Transactions, and Director
              Independence                                                    53
Item 14.   Principal Accountants Fees and Services                            54

PART IV
Item 15.   Exhibits, Financial Statement Schedules                            54

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE                               F-1
</TABLE>

     This report contains the following trademarks of the Company, some of which
are registered: VASCO, VACMAN, Digipass, and Digipass Pack.


                                        2
<PAGE>

                                     PART I

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

     This Annual Report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning, among other things, the prospects,
developments and business strategies for the Company (as defined) and its
operations, including the development and marketing of certain new products and
the anticipated future growth in certain markets in which we currently market
and sell our products or anticipate selling and marketing our products in the
future. These forward-looking statements (i) are identified by their use of such
terms and phrases as "expected," "expects," "believe," "believes," "will,"
"anticipated," "emerging," "intends," "plans," "could," "may," "estimates,"
"should," "objective" and "goals" and (ii) are subject to risks and
uncertainties and represent our present expectations or beliefs concerning
future events. We caution that the forward-looking statements are qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements, including (a) risks of general market
conditions, including demand for our products and services, competition and
price levels and our historical dependence on relatively few products, certain
suppliers and certain key customers, and (b) risks inherent to the computer and
network security industry, including rapidly changing technology, evolving
industry standards, increasing numbers of patent infringement claims, changes in
customer requirements, price competitive bidding, changing government
regulations and potential competition from more established firms and others.
Therefore, results actually achieved may differ materially from expected results
included in, or implied by, these statements.

ITEM 1 - BUSINESS

     VASCO Data Security International, Inc. was incorporated in the State of
Delaware in 1997 and is the successor to VASCO Corp., a Delaware corporation.
Our principal executive offices are located at 1901 South Meyers Road, Suite
210, Oakbrook Terrace, Illinois 60181 and the telephone number at that address
is (630) 932-8844. Our principal operations offices in Europe are located at
Koningin Astridlaan 164, B-1780 Wemmel (Belgium) and the telephone number at
that address is 32(0)2/609.97.00. We announced on February 27, 2007 that we
would establish our European headquarters office in Zurich, Switzerland. Unless
otherwise noted, references in this Annual Report on Form 10-K to "VASCO,"
"Company," "company," "we," "our," and "us" refer to VASCO Data Security
International, Inc. and its subsidiaries.

     Additional information on the Company, its products and its results,
including the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed with
the Securities and Exchange Commission, or "SEC" may be found on the Company's
web site at www.vasco.com, free of charge.

GENERAL

     We, through our operating subsidiaries, design, develop, market and support
open standards-based hardware and software security systems that manage and
secure access to information assets. We design, develop, market and support
patented "Strong User Authentication" products for e-business and e-commerce.
Our products enable secure financial transactions to be made over private
enterprise networks and public networks, such as the Internet. Our Strong User
Authentication is delivered via our hardware and software Digipass security
products, (collectively "Digipasses") most of which incorporate an electronic
signature capability, which guarantees the integrity of electronic transactions
and data transmissions. Some of our Digipasses are compliant with the Europay
MasterCard Visa ("EMV") standard and are compatible with MasterCard's and VISA's
Chip Authentication Program (CAP). Some of our Digipass units are OATH
compliant.

     The backbone of our product range is VACMAN Controller. VACMAN Controller
has been extended to support all VASCO authentication technologies, including
passwords, dynamic password technology (Digipass), certificates and biometrics,
on one unique platform. Our strategy is to become the full option, all-terrain
authentication company.

     For user access control, our VACMAN Middleware products limit application
access to designated Digipass users. Digipass and VACMAN combine to provide
greater flexibility and a more affordable means than competing products of
authenticating to any network, including the Internet.


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VASCO's product lines include:

     -    (VACMAN LOGO) VACMAN: Core authentication platform, combining all
          technologies on one unique platform;

     -    (IDENTIKEY LOGO) IdentiKey: VASCO's authentication server, combining
          the VACMAN core authentication platform with full server
          functionality;

     -    (AXS GUARD LOGO) aXs GUARD: Leading authentication appliance services,
          combining Identikey with a wide variety of Internet communication
          solutions;

     -    (DIGIPASS LOGO) Digipass: A suite of over 50 multi-application client
          e-signature software products, based on the world's most widely spread
          electronic client platforms;

     -    (DIGIPASSPLUS LOGO) DigipassPlus: Authentication Services. Combines
          all VASCO products and solutions in an outsourced service offering.
          VASCO also offers related services under the DigipassPlus label, such
          as Fraud Detection and Analysis and the brand new VASCO Video
          Training.

     Our target markets are the applications and their several hundred million
users that utilize fixed passwords as security. Our event and time-based system
generates a "one-time" password that changes with every use. As a result, when
compared to fixed passwords, it substantially reduces the risk of unauthorized
access to the application.

     As of December 31, 2006, we had shipped approximately 32 million Digipass
units since our inception. Our security solutions are sold worldwide through our
direct sales force, as well as through distributors, resellers and systems
integrators. We currently have more than 4,250 customers in more than 100
countries. Representative customers of our products include HSBC, Rabobank
Nederland, ING Bank, Fortis Bank, Wachovia, Daimler Chrysler, Volvo and CoStar
Group. In 2006, we sold to 1,553 new accounts of which 233 were banks and 1,320
were Enterprise Security customers. For full year 2005, we sold 821 new accounts
including 89 new banks and 732 new Corporate Network Access accounts.

OUR BACKGROUND

     Our predecessor company, VASCO Corp., entered the data security business in
1991 through the acquisition of a controlling interest in ThumbScan, Inc., which
we renamed VASCO Data Security, Inc. in 1993. In 1996, we began an expansion of
our computer security business by acquiring Lintel Security NV/SA, a Belgian
corporation, which included assets associated with the development of security
tokens and security technologies for personal computers and computer networks.
In addition, in 1996, we acquired Digipass NV/SA, a Belgian corporation, which
was also a developer of security tokens and security technologies and whose name
we changed to VASCO Data Security NV/SA in 1997.

     On March 11, 1998, we completed a registered exchange offer with the
holders of the outstanding securities of VASCO Corp. Since the exchange offer,
we have engaged in seven acquisitions and one disposition. Two of the
acquisitions were in 2006.

     On May 11, 2006, we acquired all of the shares of Logico Smart Card
Solutions GmbH and its subsidiary, Logico Vertriebs GmbH, an authentication
specialist located in Austria, with extensive experience in smart card operating
systems. The aggregate cash purchase price was $2.2 million.

     On October 25, 2006, we acquired the stock of Able NV, (Able), a Unified
Threat Management (UTM) specialist located in Mechelen, Belgium. Able's key
product is the aXs GUARD appliance, which combines 21 different applications for
Internet security, including Digipass strong user authentication, VPN, firewall,
anti-virus,


                                       4

<PAGE>

hacker detection, statistics reporting, content scanning and more. The cost of
the Able acquisition was $6.3 million in cash.

INDUSTRY BACKGROUND

     The growth in electronic banking and electronic commerce, and the
increasing use and reliance upon proprietary or confidential information by
businesses, government and educational institutions that is remotely accessible
by many users, has made information security a paramount concern. We believe
that enterprises are seeking solutions that will continue to allow them to
expand access to data and financial assets while maintaining network security.

     Internet and Enterprise Security. With the advent of personal computers and
distributed information systems in the form of wide area networks, intranets,
local area networks and the Internet, as well as other direct electronic links,
many organizations have implemented applications to enable their work force and
third parties, including vendors, suppliers and customers, to access and
exchange data and perform electronic transactions. As a result of the increased
number of users having direct and remote access to such enterprise applications,
data and financial assets have become increasingly vulnerable to unauthorized
access and misuse.

     Individual User Security. In addition to the need for enterprise-wide
security, the proliferation of personal computers, personal digital assistants
and mobile telephones in both the home and office settings, combined with
widespread access to the Internet, have created significant opportunities for
electronic commerce by individual users such as electronic bill payment, home
banking and home shopping.

     Fueled by well-publicized incidents, including misappropriation of credit
card information and denial of service attacks, there is a growing perception
among many consumers that there is a risk involved in transmitting information
via the Internet. These incidents and this perception may hamper the development
of consumer-based electronic commerce. Accordingly, we believe that electronic
commerce will benefit from the implementation of improved security measures that
accurately identify users and reliably encrypt data transmissions over the
Internet. Many banks in European countries began to issue smart cards (credit
cards with a micro-chip) that are compliant with the EMV standard in 2005.

     Worldwide, more governments are issuing guidance for online banking
security. For example, the Hong Kong Monetary Authority (HKMA), the Hong Kong
Association of Banks (HKAB) and the Hong Kong Police Force (HKPF) jointly issued
the following statement regarding the use of two-factor authentication for
Internet banking:

     "In view of the increasing acceptance of Internet banking services and the
growing sophistication of Internet banking frauds, the banking industry in Hong
Kong reached a general consensus in June 2004 to implement two-factor
authentication for high-risk retail Internet banking transactions. Banks
offering high-risk retail Internet banking transactions will have two-factor
authentication ready for their customers by June 2005. Customers will need to
adopt two-factor authentication if they wish to conduct those transactions."

     In October 2005, in the U. S., the Federal Financial Institutions
Examination Council (FFIEC) issued guidance for Strong Authentication/Two Factor
Authentication in the Internet banking environment. Financial institutions were
expected to achieve compliance by year-end 2006.

     Components of Security. Data and financial asset security, and secured
access to and participation in online commerce, generally consist of the
following components:

     -    Encryption: Maintains data privacy by converting information into an
          unreadable pattern and allowing only authorized parties to decrypt the
          data. Encryption can also maintain data integrity by creating digital
          signatures for transmitted data, enabling the recipient to check
          whether the data has been changed since or during transmission.

     -    Identification and Authentication: Serves as the foundation for other
          security mechanisms by verifying that a user is who he or she claims
          to be. Identification and authentication mechanisms are often employed
          with encryption tools to authenticate users, to determine the proper
          encryption key for encrypting/decrypting data, or to enable users to
          digitally "sign" or verify the integrity of transmitted data.

     -    Access Control: Software that provides authentication, authorization,
          and accounting functions, controlling a user's access to only that
          data or the financial assets which he or she is authorized to access,
          and that keeps track of a user's activities after access has been
          granted.


                                       5

<PAGE>

     -    Administration and Management Tools: Software that sets, implements,
          and monitors security policies, the access to which is typically
          regulated by access control systems. These tools are extremely
          important to the overall effectiveness of a security system.

     The most effective security policies employ most, if not all, of the above
components. Many companies, however, only implement a patchwork of these
components, which could result in their security systems being compromised.

OUR SOLUTION

     We have found that, to date, most approaches to network security, including
Internet security, have been limited in scope and have failed to address all of
the critical aspects of data security. We believe that an effective
enterprise-wide solution must address and assimilate issues relating to the
following:

     -    Speed and ease of implementation, use and administration;

     -    Reliability;

     -    Interoperability with diverse enterprise environments, existing
          customer applications and the security infrastructure;

     -    Scalability; and

     -    Overall cost of ownership.

     Accordingly, we have adopted the following approach to data security:

     -    In designing our products, we have sought to incorporate
          industry-accepted, open and non-proprietary protocols. This permits
          interoperability between our products and the multiple platforms,
          products and applications widely in use.

     -    We have designed our products and services to minimize their
          integration effort with, and disruption of, existing legacy
          applications and the security infrastructure. We provide customers
          with easier implementations and a more rapid means of implementing
          security across the enterprise, including the Internet. With security
          being a critical enabling technology for on-line business initiatives,
          speed and ease of security implementation has become crucial to an
          organization's success.

     -    We design our products and services to have a more attractive total
          cost of ownership than competing products and services. We have found
          that product improvements and tools that lower a customer's total cost
          of ownership create differentiating sales and marketing tools and also
          help in the development of a highly loyal customer base that is open
          to new solutions that we offer.

     As a result of this approach, we believe that we are positioned to be the
leading provider of strong software and hardware authentication security
solutions for all types of on-line, risk-based transactions.

OUR STRATEGY

     We believe we have one of the most complete lines of security products and
services for Strong User Authentication available in the market today and we
also believe that we are the leading worldwide provider of these products and
services. A key element of our growth strategy is to demonstrate to an
increasing number of distributors, resellers and systems integrators that, by
incorporating our security products into their own products, they can more
effectively differentiate themselves in their marketplaces and increase the
value of their products. In addition, we will demonstrate to our corporate users
that our products provide mission critical security to their internal and
external security infrastructures. Following this active marketing and promotion
effort, we will work with these resellers and integrators to support their sales
of solutions that include our products. Also, we plan to expand our direct sales
marketing program to new and existing blue chip customers. Further, we intend
to:

     Increase Sales and Marketing Efforts Worldwide. We intend to increase sales
of our security products and services in our established European markets and to
actively increase our sales and support presence and marketing efforts in North
America, South America, Asia/Pacific, Australia and the Middle East. We plan to:

     -    Be the full option, all-terrain authentication company by offering our
          customers a solution with VACMAN Controller as the core and the
          backbone, encompassing all four authentication technologies
          (passwords, dynamic password technologies, certificates and
          biometrics);


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     -    Market new services and products to our existing customers by
          providing testimonial evidence of user experiences from other
          customers;

     -    Maintain a marketing campaign in Europe, the Middle East, North
          America and Asia to raise awareness of our solutions among the
          distributors and resellers of popular third party software products
          and to establish relationships with them whereby they become resellers
          of our products and solutions;

     -    Form additional strategic relationships with resellers and vendors of
          complementary, innovative security products and systems; and

     -    Develop a marketing and sales infrastructure, largely in the form of
          new resellers, distributors, and solution providers, in new markets.

     Continue Innovation. We intend to continue to enhance and broaden our line
of security products to meet the changing needs of our existing and potential
customers by:

     -    Building on our core software and hardware security expertise, such as
          expanding our technology and services for use on different platforms
          (like mobile phones and personal digital assistants);

     -    Acquiring complementary technologies or businesses; and

     -    Developing additional applications for our products in areas that may
          include securing the exchange of data in the business-to-business
          field and providing security for Internet gambling and lottery
          transactions, among others.

OUR PRODUCTS

VACMAN Product Line

     The VACMAN Product line incorporates a range of strong authentication
utilities and solutions designed to allow organizations to add Digipass strong
authentication into their existing networks and applications.

     In order to provide the greatest flexibility, while not compromising on
functionality or security, VACMAN solutions are designed to integrate with most
popular hardware and software. Once integrated, the VACMAN components become
largely transparent to the users, minimizing rollout and support issues.

     VACMAN Controller

          VACMAN Controller is the backbone of VASCO's product strategy towards
     the banking and e-commerce markets. VACMAN Controller is natively embedded
     in or compatible with the solutions of over 100 VASCO solution partners.

          Designed by specialists in "system entry" security, VACMAN Controller
     makes it easy to administer a high level of access control. The user simply
     adds a field to his or her existing user database, describing the unique
     Digipass token assigned to the user. VACMAN Controller takes it from there,
     automatically authenticating the logon request using the security sequence
     the user specifies, whether it's a one-time password using either
     response-only or a challenge/response authentication scheme or an
     electronic signature.

          VACMAN Controller allows the user the freedom to provide secure remote
     access to virtually any type of application. VACMAN Controller is a library
     requiring only a few days to implement in most systems and supports all
     Digipass functionality. Once linked to an application, VACMAN Controller
     automatically handles login requests from any users authorized to have a
     Digipass.

     VACMAN Middleware

          For organizations of all sizes that need to authenticate remote users
     for access to enterprise networks and its applications, VACMAN Middleware
     is a software suite, used to verify authentication requests and to
     centrally administer user authentication policies. Unlike other
     authentication solutions, VACMAN Middleware -together with VASCO's DIGIPASS
     family- provides affordable strong authentication and secure access to web
     applications, business applications and VPN (virtual private networks).


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          VACMAN Middleware in combination with DIGIPASS authenticators
     eliminates the weakest link in any security structure, the use of static
     passwords. It's a turnkey solution that can be up and running in minutes,
     not hours or weeks.

          The main authentication tool in a VACMAN Middleware enabled
     infrastructure remains the Active Directory service. The storage of the
     DIGIPASS related data is linked with the users in the Active Directory. As
     a result, a scalable approach is achieved and an optimal support is
     provided for multiple domains and delegated administration. VACMAN
     Middleware supports ODBC compliant databases, such as Oracle 9i, Microsoft
     SQL server 2000 and 2005, IBM DB2 8.1, Sybase Adaptive Server Anywhere 9.0
     and PostgreSQL 8.0 and 8.1. VACMAN Middleware is standard delivered with
     PostgreSQL.

          The audit console monitors incoming and outgoing radius and web
     traffic (or any other events) on the VACMAN Middleware server. The audit
     console presents all the statistical information you need to manage your
     remote access environment - providing details on events that have occurred
     since VACMAN Middleware started running, including:

          -    connection period

          -    number of information messages

          -    warnings

          -    errors and fatal errors

          There are no hardware or software conflicts to worry about because
     VACMAN Middleware uses a non intrusive method of enabling DIGIPASS
     authentication. Simply place VACMAN Middleware between the Network Access
     Server and your existing radius server - without affecting the performance
     of either.

Digipass Product Line

     Our Digipass product line, which exists as a family of authentication
devices as well as extensive software libraries, provides a flexible and
affordable means of authenticating users to any network, including the Internet.

     Security can be broken into three factors:

     -    What the user has (the Digipass itself, in either hardware or software
          version);

     -    What the user knows (the PIN code to activate the Digipass); and

     -    Who the user is (biometrics).

     The Digipass family is currently based on the first two factors. Using the
Digipass system, in order to enter a remote system or to digitally sign data,
the user needs the:

     -    Software and Hardware client authentication device (Digipass) itself
          so that if he or she does not physically have the device, he or she
          will not be able to log on to the system; and

     -    PIN code for the Digipass so if the user does not know the appropriate
          code, he or she will not be able to use the applications stored
          inside.

     Both of these factors help to make sure that a natural person is
authenticating (or signing), instead of a computer or another device. These
factors also enable very high portability for security anytime, anywhere and
anyhow.

     Digipasses calculate dynamic signatures and passwords, also known as
one-time passwords, to authenticate users on a computer network and for a
variety of other applications. There are over 50 models of the Digipass, each of
which has its own distinct characteristics depending on the platform that it
uses and the functions it performs. However, the Digipass family is designed to
work together and customers can switch their users' devices without requiring
any changes to the customers' existing infrastructure. In addition, these
devices can be used to calculate digital signatures, also known as electronic
signatures or message authentication codes, to protect electronic transactions
and the integrity of the contents of such transactions.

     In addition, Digipass technology is designed to operate on non-VASCO
platforms such as a desktop PC or laptop. Digipass technology is also available
for personal digital assistants (PDA), mobile phones and smart cards.


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<PAGE>

For users of mobile phones, the virtual Digipass generates one-time passwords
that are sent to the mobile telephone user by SMS (Short Messaging System).

     Other technologies such as paper based authentication (TAN lists) are
successfully created in the Digipass family, always based on the same back-end
VACMAN core technology.

     Digipass technology also combines the benefits of traditional password
authenticators (authentication and digital signatures) with smart card readers.
Together, they bring portability to smart cards and allow secure time-based
algorithms.

     Finally, the Digipass technology is also available in a Web browser based
version. The Digipass for Web is the ideal product to replace a password-based
security or paper based authentication system with a security system leveraging
strong authentication, to achieve a higher security level. Digipass for Web
supports user authentication, transaction signing and document signing. No
software installation is required on the end-user's PC.

     A VASCO-secured system has the features needed to secure both today's and
tomorrow's IT resources.

DIGIPASS AT WORK

                                    (GRAPHIC)

     The above illustration shows the various steps in the Digipass
authentication process. In the first step, the devices are initialized with
their unique set of secrets and keys per device. These secrets are stored in an
encrypted way on a compact disk or diskette that is sent to the application
owner (for example, the information technology manager in an organization or the
security department of a bank). These compact disks or diskettes are one way of
safely transporting the Digipass secrets to the host computer.

     The files on CD, Memory Stick or diskettes will be used to read all the
necessary secrets and other data from the delivered Digipasses into a database.
Then the application owner will assign the Digipass units to the end-users. This
assignment is based on the serial number of the Digipass and the identity of the
end-user. The Digipass


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<PAGE>

is then shipped to the end-user along with a user manual. The protected PIN-code
is sent to the end user in a separate shipment on a secure PIN-mailer.

     Using a Digipass requires a connection to the host (server) computer that
knows the parameters of the end-user's Digipass. Every time the user sends a
dynamic password or digital signature to the host computer, the computer will
retrieve all the necessary information from the database and will check the
validity of the password or signature. After the host has checked the validity
of the dynamic password or signature, it will notify the end-user of the
correctness or incorrectness of the validity check.

     Digipass security devices are not terminal dependent and do not require any
specific software platform since they only interact with a person.

     Currently, the Digipass is used in a wide variety of applications, the
largest of which is banking. Banking applications include:

     -    Corporate banking through direct dial-up, as well as over the
          Internet, and

     -    Retail banking to secure transactions made through the use of a
          dial-up connection with a personal computer, the traditional phone
          system, the Internet, wireless phones and other communication devices
          such as personal digital assistants.

     Another significant application for the Digipass is to secure access to
corporate networks for home-based, traveling and other remote users. Finally,
Digipasses are increasingly being used in a variety of e-commerce applications
where the user is part of a pre-defined user group. We intend to expand the use
of the Digipass to other groups of users and applications, including electronic
commerce transactions directed at the general public.

Digipass Pack

     Two Digipass Packs are available in two basic packs and one advanced pack.
The advanced pack is combination of both basic packs.

     DIGIPASS basic pack OTP

          DIGIPASS basic pack OTP is a security software solution that provides
     two factor authentication based on One-Time-Passwords. DIGIPASS basic pack
     replaces the single-factor login sequence of typing username and password
     with a proven security technology: strong two-factor authentication. The
     DIGIPASS solution requires authorized users to demonstrate that they
     possess both the DIGIPASS Go3 device (by typing the One-Time-Password
     generated by the Go3) and that they know a secret - a unique PIN-code. This
     two-factor authentication technology works perfectly with RADIUS based
     remote VPN.

          DIGIPASS basic pack OTP is delivered in a box comprising 5 units of DP
     Go3 and 5 end user licenses for DIGIPASS for RADIUS.

     DIGIPASS basic pack SPS

          DIGIPASS basic pack SPS is a security software solution that provides
     two factor authentication based on strong passwords stored securely on
     smart cards. DIGIPASS basic pack replaces the single-factor login sequence
     of typing username and password with a proven security technology: strong
     two-factor authentication. The DIGIPASS solution requires authorized users
     to demonstrate that they possess both the DIGIPASS smart cards (by
     inserting the smart card into the smart card reader) and that they know a
     secret - a unique PIN-code. This two-factor authentication technology works
     perfectly with e.g. Windows(R) operating systems.

          DIGIPASS basic pack SPS is delivered in a box comprising 5 units of DP
     860 (smart card reader), 5 DIGIPASS smart cards and 5 end user licenses for
     DP Windows Logon.

     DIGIPASS advanced pack

          DIGIPASS advanced pack is a security software solution that provides
     two factor authentication based on One-Time-Passwords and strong static
     passwords stored securely on smart cards depending what technology is more
     appropriate. DIGIPASS advanced pack replaces the single-factor login
     sequence of typing username and password with a proven security technology:
     strong two-factor authentication. The DIGIPASS solution requires authorized
     users to demonstrate that they possess both a DIGIPASS identity


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<PAGE>

     device (either by typing the One-Time-Password generated by the Go3 or by
     inserting the smart card into the smart card reader) and that they know a
     secret - a unique PIN-code. This two-factor authentication technology works
     perfectly with e.g. Windows(R) operating systems or any RADIUS compliant
     VPN client.

          DIGIPASS advanced pack is delivered in a box comprising 5 units of DP
     860, 5 end user licenses for DP Windows Logon and 5 end user licenses for
     DIGIPASS software for RADIUS.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND LICENSES

     We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as employee and third-party non-disclosure agreements to protect
our proprietary rights. In particular, we hold several patents in the U. S. and
in certain European countries, which cover multiple aspects of our technology.
These patents expire between 2007 and 2022. In addition to the issued patents,
we also have several patents pending in the U. S. and other countries. The
majority of our issued and pending patents cover our Digipass family. We believe
these patents to be valuable property rights and we rely on the strength of our
patents and on trade secret law to protect our intellectual property rights. To
the extent that we believe our patents are being infringed upon, we intend to
assert vigorously our patent protection rights, including but not limited to,
pursuing all available legal remedies.

RESEARCH AND DEVELOPMENT

     Our research and development efforts historically have been, and will
continue to be, concentrated on product enhancement, new technology development
and related new product introductions. We employ a team of full-time engineers
and, from time to time, also engage independent engineering firms to conduct
non-strategic research and development efforts on our behalf. We recorded $5.5
million, $3.6 million and $2.4 million for fiscal years ended December 31, 2006,
2005 and 2004, respectively, on company-sponsored research and development.

PRODUCTION

     Our security hardware Digipasses are manufactured by third parties pursuant
to purchase orders that we issue. Our hardware Digipasses are made primarily
from commercially available electronic components that are purchased globally.
Our software products, including software versions of our Digipasses are
produced either in-house or by several outside sources primarily in Australia
and Europe.

     Hardware Digipasses utilize commercially available programmable
microprocessors, or chips. We use a limited number of microprocessors, made by
Samsung, for the various hardware products we produce. The Samsung
microprocessors are purchased from Samsung Semiconductor in France. The
microprocessors are the only components of our security tokens that are not
commodity items readily available on the open market.

     Orders of microprocessors generally require a lead-time of 12-16 weeks. We
attempt to maintain a sufficient inventory of all parts to handle short-term
increases in orders. Large orders that would significantly deplete our inventory
are typically required to be placed with more than 12 weeks of lead-time,
allowing us to attempt to make appropriate arrangements with our suppliers.

     We purchase the microprocessors and arrange for shipment to third parties
for assembly and testing in accordance with our design specifications. Our
Digipass products are assembled by one of three independent companies with
headquarters in Hong Kong and production facilities in China. Purchases from
these companies are made on a volume purchase order basis. These companies
commit to very high production standards, and as a result, they also have major
production contracts with companies such as Sony and Samsung. Equipment designed
to test product at the point of assembly is supplied by us and periodic visits
are made by our personnel for purposes of quality assurance, assembly process
review and supplier relations.

COMPETITION

     The market for computer and network security solutions is very competitive
and, like most technology-driven markets, is subject to rapid change and
constantly evolving products and services. Our main competitor is RSA Security,
a subsidiary of EMC Corporation. Additional competitors are ActivIdentity,
Xiring, Todos Data Systems and Kobil Systems. There are many other companies
such as Secure Computing, SafeNet, Entrust, and Aladdin Knowledge Systems that
offer authentication hardware, software and services that range from simple
locking mechanisms to sophisticated encryption technologies. We believe that
competition in this market is likely to intensify as a result of increasing
demand for security products.

     We believe that the principal competitive factors affecting the market for
computer and network security products include the strength and effectiveness of
the solution, technical features, ease of use, quality/reliability,


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<PAGE>

customer service and support, name recognition, customer base, distribution
channels and the total cost of ownership of the authentication solution.
Although we believe that our products currently compete favorably with respect
to such factors, other than name recognition in certain markets, there can be no
assurance that we can maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources.

     Some of our present and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources than we do, and
as a result, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of products, or to deliver competitive products
at a lower end-user price. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of our
prospective customers. It is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. Accordingly, VASCO has, and
will continue to forge its own partnerships to offer a broader range of products
and capabilities to the market.

     Our products are designed to allow authorized users access to a computing
environment, in some cases using patented technology as a replacement for the
static password. Although certain of our security token technologies are
patented, there are other organizations that offer token-type password
generators incorporating challenge-response or response-only approaches that
employ different technological solutions and compete with us for market share.

SALES AND MARKETING

     Our security solutions are sold through our direct sales force, as well as
through 52 distributors, their reseller networks and systems integrators. A
sales staff of 49 coordinates our sales activity through both our sales channels
and our strategic partners' sales channels and makes direct sales calls either
alone or with sales personnel of vendors of computer systems. Our sales staff
also provides product education seminars to sales and technical personnel of
vendors and distributors with whom we have working relationships and to
potential end-users of our products.

     Part of our expanded selling effort includes approaching our existing
strategic partners to find additional applications for our security products. In
addition, our marketing plan calls for the identification of new business
opportunities that may require enhanced security over the transmission of
electronic data or transactions where we do not currently market our products.
Our efforts also include the preparation and dissemination of white papers
prepared by our support engineers that explain how we believe our security
products can add value or otherwise be beneficial.

CUSTOMERS AND MARKETS

     Customers for our products include some of the world's most recognized
names: HSBC, Rabobank, ING Bank, Fortis Bank, Wachovia, Daimler Chrysler, Volvo
and CoStar Group. In 2006, we announced numerous new customers around the world
including, but not limited to Dexia (Belgium),Citibank (U.S.), Banco Bradesco
(Brazil), Garanti Bank (Turkey) and Postfinance (Switzerland).

     For the years 2006, 2005, and 2004, our top 10 customers contributed 49%,
64% and 60%, respectively, of total worldwide revenues. Sales to HSBC exceeded
10% of our total sales in 2006. Sales to Rabobank Nederland and HSBC each
exceeded 10% of our revenue in 2005. Rabobank Nederland, Ementor and Fortis Bank
each exceeded 10% of our revenue in 2004. The loss of any of these customers
could result in a significant loss in revenues and could have a material adverse
effect on our results of operations and financial condition.

     A significant portion of our sales is denominated in foreign currencies and
changes in exchange rates could impact results of operations. To minimize
exposure to risks associated with fluctuations in currency exchange rates, we
attempt to denominate an amount of billings in a currency such that it would
provide a hedge against operating expenses being incurred in that currency. For
additional information regarding how currency fluctuations can affect our
business, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Quantitative and Qualitative
Disclosures about Market Risk".

     We also experience seasonality in our business. These seasonal trends are
most notable in the summer months, particularly in Europe, when many businesses
defer purchase decisions.


                                       12

<PAGE>

     VASCO is active in four vertical markets:

          -    Banking and Finance: Our traditional stronghold where we are
               still growing rapidly.

          -    Enterprise Security: Our second market that has grown into a
               robust source of revenue.

          -    E-commerce: Both business-to-business and business-to-consumer
               e-commerce are becoming ever more important for VASCO.

          -    E-government: Our revenue in this market is still small, but we
               are ready to take advantage of the market's evolution.

     Our channel partners are critical to our success in the Enterprise Security
markets. VASCO serves this market exclusively via its two-tier indirect sales
channel. VASCO trains employee of its resellers and distributors on-site and in
the VASCO offices. In addition, VASCO has developed online video training
software, allowing us to train people worldwide, resulting in cost and time
benefits.

     VASCO invests in and supports its channel with marketing and public
relations actions. Distributors and resellers get the tools they need to be
successful, such as campaigns, case studies, marketing funds and more. We expect
our Enterprise Security market to become even more successful in the future.

FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS

     See Note 13 to VASCO Notes to Consolidated Financial Statements for a
breakdown of revenues and long-lived assets between U.S. and foreign operations.

EMPLOYEES

     As of December 31, 2006, we had 184 full time employees. Of these, 22 were
located in North America, 137 were located in Europe, 17 were located in
Australia and 8 located in Asia. Of the total, 98 were involved in sales,
marketing and customer support, 63 in research and development and 23 in general
and administration.

ITEM 1A - RISK FACTORS

                                  RISK FACTORS

     You should carefully consider the following risk factors, which we consider
the most significant, as well as other information contained in this Annual
Report on Form 10-K. In addition, there are a number of less significant and
other general risk factors that could affect our future results. If any of the
events described in the risk factors were to occur, our business, financial
condition or operating results could be materially and adversely affected.

                          RISKS RELATED TO OUR BUSINESS

WE HAD A HISTORY OF OPERATING LOSSES AND HAVE A LARGE ACCUMULATED DEFICIT.

     Although we have reported net income of $12,587,000, $7,701,000 and
$3,253,000 for the years ended December 31, 2006, 2005 and 2004, respectively,
our accumulated deficit was $20,398,000 at December 31, 2006.

OUR REVENUE AND CASH RECEIPTS MAY NOT BE SUFFICIENT TO MEET THE OPERATING NEEDS
OF OUR BUSINESS.

     Our revenue and cash receipts may not be sufficient to meet the operating
needs of the business. If this is the case, we may need to significantly reduce
our workforce, sell certain of our assets, enter into strategic relationships or
business combinations, discontinue some or all of our operations, or take other
similar restructuring actions. While we expect that these actions would result
in a reduction of recurring costs, they may also result in a reduction of
recurring revenues and cash receipts. It is also likely that we would incur
substantial non-recurring costs to implement one or more of these restructuring
actions.

THE SALES CYCLE FOR OUR PRODUCTS AND TECHNOLOGY IS LONG, AND WE MAY INCUR
SUBSTANTIAL EXPENSES FOR SALES THAT DO NOT OCCUR WHEN ANTICIPATED.

     The sales cycle for our products, which is the period of time between the
identification of a potential customer and completion of the sale, is typically
lengthy and subject to a number of significant risks over which we have little
control. If revenue falls significantly below anticipated levels, our business
would be seriously harmed.


                                       13

<PAGE>

     A typical sales cycle in the Banking market is often three to six months
and with larger Banking transactions can be eighteen months or more. Purchasing
decisions for our products and systems may be subject to delay due to many
factors that are not within our control, such as:

          -    The time required for a prospective customer to recognize the
               need for our products;

          -    The significant expense of many data security products and
               network systems;

          -    Customers' internal budgeting processes; and

          -    Internal procedures customers may require for the approval of
               large purchases.

WE HAVE A GREAT DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS AND THE LOSS OF
THEIR MANUFACTURING CAPABILITY COULD MATERIALLY IMPACT OUR OPERATIONS.

     In the event that the supply of components or finished products is
interrupted or relations with any of our principal vendors is terminated, there
could be a considerable delay in finding suitable replacement sources to
manufacture our products at the same cost or at all. The majority of our
products are manufactured by four independent vendors, one headquartered in
Europe and the other three in Hong Kong. Our hardware Digipasses are assembled
at facilities in mainland China. The importation of these products from China
exposes us to the possibility of product supply disruption and increased costs
in the event of changes in the policies of the Chinese government, political
unrest or unstable economic conditions in China or developments in the United
States that are adverse to trade, including enactment of protectionist
legislation.

WE HAVE A SIGNIFICANT DEPENDENCE ON MAJOR CUSTOMERS AND LOSING ANY OF THESE
CUSTOMERS COULD RESULT IN A SIGNIFICANT LOSS IN REVENUES.

     If we don't find other customers who generate significant future revenues,
the unforeseen loss of one or more of our major customers, or the inability to
maintain reasonable profit margins on sales to any of these customers, would
have a material adverse effect on our results of operations and financial
condition.

OUR SUCCESS DEPENDS ON ESTABLISHING AND MAINTAINING STRATEGIC RELATIONSHIPS WITH
OTHER COMPANIES TO DEVELOP, MARKET AND DISTRIBUTE OUR TECHNOLOGY AND PRODUCTS
AND, IN SOME CASES, TO INCORPORATE OUR TECHNOLOGY INTO THEIR PRODUCTS.

     Part of our business strategy is to enter into strategic alliances and
other cooperative arrangements with other companies in our industry. We
currently are involved in cooperative efforts with respect to the incorporation
of our products into products of others, research and development efforts,
marketing efforts and reseller arrangements. None of these relationships are
exclusive, and some of our strategic partners also have cooperative
relationships with certain of our competitors. If we are unable to enter
cooperative arrangements in the future or if we lose any of our current
strategic or cooperative relationships, our business could be harmed. We do not
control the time and resources devoted to such activities by parties with whom
we have relationships. In addition, we may not have the resources available to
satisfy our commitments, which may adversely affect these relationships. These
relationships may not continue, may not be commercially successful, or may
require our expenditure of significant financial, personnel and administrative
resources from time to time. Further, certain of our products and services
compete with the products and services of our strategic partners.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

     We may make investments in complementary companies, products or
technologies. Should we do so, our failure to successfully manage future
acquisitions could seriously harm our operating results. In the event of any
future purchases, we will face additional financial and operational risks,
including:

          -    Difficulty in assimilating the operations, technology and
               personnel of acquired companies;

          -    Disruption in our business because of the allocation of resources
               to consummate these transactions and the diversion of
               management's attention from our existing business;

          -    Difficulty in retaining key technical and managerial personnel
               from acquired companies;

          -    Dilution of our stockholders, if we issue equity to fund these
               transactions;


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<PAGE>

          -    Assumption of operating losses, increased expenses and
               liabilities; and

          -    Our relationships with existing employees, customers and business
               partners may be weakened or terminated as a result of these
               transactions.

                           RISKS RELATED TO THE MARKET

WE FACE SIGNIFICANT COMPETITION AND IF WE LOSE OR FAIL TO GAIN MARKET SHARE OUR
FINANCIAL RESULTS WILL SUFFER.

     The market for computer and network security products is highly
competitive. Our competitors include organizations that provide computer and
network security products based upon approaches similar to and different from
those that we employ such as RSA Security (recently acquired by EMC
Corporation), ActivIdentity, Xiring, Todos Data Systems and Kobil Systems. Many
of our competitors have significantly greater financial, marketing, technical
and other competitive resources than we do. As a result, our competitors may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND OUR FAILURE TO OBTAIN CAPITAL
WOULD INTERFERE WITH OUR GROWTH STRATEGY.

     Our ability to obtain financing will depend on a number of factors,
including market conditions, our operating performance and investor interest.
These factors may make the timing, amount, terms and conditions of any financing
unattractive. They may also result in our incurring additional indebtedness or
accepting stockholder dilution. If adequate funds are not available or are not
available on acceptable terms, we may have to forego strategic acquisitions or
investments, defer our product development activities, or delay the introduction
of new products.

WE EXPERIENCE VARIATIONS IN QUARTERLY OPERATING RESULTS AND ARE SUBJECT TO
SEASONALITY, BOTH OF WHICH MAY RESULT IN A VOLATILE STOCK PRICE.

     In the future, as in the past, our quarterly operating results may vary
significantly resulting in a volatile stock price. Factors affecting our
operating results include:

          -    The level of competition;

          -    The size, timing, cancellation or rescheduling of significant
               orders;

          -    New product announcements or introductions by competitors;

          -    Technological changes in the market for data security products
               including the adoption of new technologies and standards;

          -    Changes in pricing by competitors;

          -    Our ability to develop, introduce and market new products and
               product enhancements on a timely basis, if at all;

          -    Component costs and availability;

          -    Our success in expanding our sales and marketing programs;

          -    Market acceptance of new products and product enhancements;

          -    Changes in foreign currency exchange rates; and

          -    General economic trends.

     We also experience seasonality in all markets. These seasonal trends are
most notable in the summer months, particularly in Europe, when many businesses
defer purchase decisions.


                                       15

<PAGE>

A SMALL GROUP OF PERSONS CONTROL A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND
COULD DELAY OR PREVENT A CHANGE OF CONTROL.

     Our Board of Directors, our officers and their immediate families and
related entities beneficially own approximately 28.6%, with Mr. T. Kendall Hunt
controlling approximately 26.7%, of the outstanding shares of our common stock.
As the Chairman of the Board of Directors and our largest stockholder, Mr. Hunt
may exercise substantial control over our future direction and operation and
such concentration of control may have the effect of discouraging, delaying or
preventing a change in control and may also have an adverse effect on the market
price of our common stock.

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE ACCEPTABLE PRICES.

     The market price of our common stock may fluctuate significantly in
response to factors, some of which are beyond our control, including the
following:

          -    Actual or anticipated fluctuations in our operating results;

          -    Changes in market valuations of other technology companies;

          -    Announcements by us or our competitors of significant technical
               innovations, contracts, acquisitions, strategic partnerships,
               joint ventures or capital commitments;

          -    Additions or departures of key personnel;

          -    Future sales of common stock;

          -    Any deviations in net revenues or in losses from levels expected
               by the investment community; and

          -    Trading volume fluctuations.

CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.

     Our corporate charter and Delaware law contain provisions, such as a class
of authorized but unissued preferred stock which may be issued by our board
without stockholder approval that might enable our management to resist a
takeover of our company. Delaware law also limits business combinations with
interested stockholders. These provisions might discourage, delay or prevent a
change in control or a change in our management. These provisions could also
discourage proxy contests, and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors might be willing to pay
in the future for shares of our common stock.

FUTURE ISSUANCES OF BLANK CHECK PREFERRED STOCK MAY REDUCE VOTING POWER OF
COMMON STOCK AND MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL.

     Our corporate charter authorizes the issuance of up to 500,000 shares of
preferred stock with such designations, rights, powers and preferences as may be
determined from time to time by our Board of Directors, including such dividend,
liquidation, conversion, voting or other rights, powers and preferences as may
be determined from time to time by the Board of Directors without further
stockholder approval. The issuance of preferred stock could adversely affect the
voting power or other rights of the holders of common stock. In addition, the
authorized shares of preferred stock and common stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control.

              RISKS RELATED TO TECHNOLOGY AND INTELLECTUAL PROPERTY

TECHNOLOGICAL CHANGES OCCUR RAPIDLY IN OUR INDUSTRY AND OUR DEVELOPMENT OF NEW
PRODUCTS IS CRITICAL TO MAINTAIN OUR REVENUES.

     The introduction by our competitors of products embodying new technologies
and the emergence of new industry standards could render our existing products
obsolete and unmarketable. Our future revenue growth and operating profit will
depend in part upon our ability to enhance our current products and develop
innovative products to distinguish ourselves from the competition and to meet
customers' changing needs in the data security industry. We cannot assure you
that security-related product developments and technology innovations by others


                                       16

<PAGE>

will not adversely affect our competitive position or that we will be able to
successfully anticipate or adapt to changing technology, industry standards or
customer requirements on a timely basis.

WE MUST CONTINUE TO ATTRACT AND RETAIN HIGHLY SKILLED TECHNICAL PERSONNEL FOR
OUR RESEARCH AND DEVELOPMENT DEPARTMENT.

The market for highly skilled technicians in Europe, Asia, Australia and the
United States is highly competitive. If we fail to attract, train, assimilate
and retain qualified technical personnel for our research and development
department, we will experience delays in introductions of new or modified
products, loss of clients and market share and a reduction in revenues.

WE CANNOT BE CERTAIN THAT OUR RESEARCH AND DEVELOPMENT ACTIVITIES WILL BE
SUCCESSFUL.

     While management is committed to enhancing our current product offerings
and introducing new products, we cannot be certain that our research and
development activities will be successful. Furthermore, we may not have
sufficient financial resources to identify and develop new technologies and
bring new products to market in a timely and cost effective manner, and we
cannot ensure that any such products will be commercially successful if and when
they are introduced.

WE DEPEND SIGNIFICANTLY UPON OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL
PROPERTY AND THE FAILURE TO PROTECT OUR PROPRIETARY RIGHTS COULD REQUIRE US TO
REDESIGN OUR PRODUCTS OR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING
AGREEMENTS, ANY OF WHICH COULD REDUCE REVENUE AND INCREASE OUR OPERATING COSTS.

     We currently rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality agreements and contractual provisions to protect
our proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection, and generally enter into confidentiality and nondisclosure
agreements with our employees and with key vendors and suppliers.

     There has been substantial litigation in the technology industry regarding
intellectual property rights, and we may have to litigate to protect our
proprietary technology. We expect that companies in the computer and information
security market will increasingly be subject to infringement claims as the
number of products and competitors increases. Any such claims or litigation may
be time-consuming and costly, cause product shipment delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could reduce revenue and increase our operating costs.

OUR PATENTS MAY NOT PROVIDE US WITH COMPETITIVE ADVANTAGES.

     We hold several patents in the United States and in some European
countries, which cover multiple aspects of our technology. The majority of our
patents cover the Digipass product line. These patents expire between 2007 and
2022. Only one minor patent expired in 2006. In addition to the issued patents,
we also have several patents pending in the United States and other countries.
There can be no assurance that we will continue to develop proprietary products
or technologies that are patentable, that any issued patent will provide us with
any competitive advantages or will not be challenged by third parties, or that
patents of others will not hinder our competitive advantage. Although certain of
our security token technologies are patented, there are other organizations that
offer token-type password generators incorporating challenge-response or
response-only approaches that employ different technological solutions and
compete with us for market share.

WE ARE SUBJECT TO PRODUCT LIABILITY RISKS.

     A malfunction of or design defect in our products which results in a breach
of a customer's data security could result in tort or warranty claims against
us. We do not presently maintain product liability insurance for these types of
claims.

THERE IS SIGNIFICANT GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS AND TO THE
EXTENT WE CANNOT MEET THE REQUIREMENTS OF THE REGULATIONS WE MAY BE PROHIBITED
FROM EXPORTING SOME OF OUR PRODUCTS, WHICH COULD NEGATIVELY IMPACT OUR REVENUES.

     Our international sales and operations are subject to risks such as the
imposition of government controls, new or changed export license requirements,
restrictions on the export of critical technology, trade restrictions and
changes in tariffs. If we become unable to obtain foreign regulatory approvals
on a timely basis our business in


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<PAGE>

those countries would no longer exist and our revenues would decrease
dramatically. Certain of our products are subject to export controls under U.S.
law. The list of products and countries for which export approval is required,
and the regulatory policies with respect thereto may be revised from time to
time and our inability to obtain required approvals under these regulations
could materially adversely affect our ability to make international sales.

WE EMPLOY CRYPTOGRAPHIC TECHNOLOGY IN OUR AUTHENTICATION PRODUCTS THAT USES
COMPLEX MATHEMATICAL FORMULATIONS TO ESTABLISH NETWORK SECURITY SYSTEMS.

     Many of our products are based on cryptographic technology. With
cryptographic technology, a user is given a key that is required to encrypt and
decode messages. The security afforded by this technology depends on the
integrity of a user's key and in part on the application of algorithms, which
are advanced mathematical factoring equations. These codes may eventually be
broken or become subject to government regulation regarding their use, which
would render our technology and products less effective. The occurrence of any
one of the following could result in a decline in demand for our technology and
products:

          -    Any significant advance in techniques for attacking cryptographic
               systems, including the development of an easy factoring method or
               faster, more powerful computers;

          -    Publicity of the successful decoding of cryptographic messages or
               the misappropriation of keys; and

          -    Increased government regulation limiting the use, scope or
               strength of cryptography.

                    RISKS RELATED TO INTERNATIONAL OPERATIONS

WE FACE A NUMBER OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, ANY OR
ALL OF WHICH COULD RESULT IN A DISRUPTION IN OUR BUSINESS AND A DECREASE IN OUR
REVENUES.

     Our business internationally is subject to a number of risks any or all of
which could result in a disruption in our business and a decrease in our
revenues. These include:

          -    Inconsistent regulations and unexpected changes in regulatory
               requirements;

          -    Difficulties and costs of staffing and managing international
               operations;

          -    Potentially adverse tax consequences;

          -    Wage and price controls;

          -    Uncertain protection for intellectual property rights;

          -    Imposition of trade barriers;

          -    Differing technology standards;

          -    Uncertain demand for electronic commerce;

          -    Linguistic and cultural differences;

          -    Political instability; and

          -    Social unrest.

WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS, AND IMPROPER MANAGEMENT OF THAT RISK
COULD RESULT IN LARGE CASH LOSSES.

     Because a significant number of our principal customers are located outside
the United States, we expect that international sales will continue to generate
a significant portion of our total revenue. We are subject to foreign exchange
risks because the majority of our costs are denominated in U.S. dollars, whereas
a significant portion of the sales and expenses of our European operating
subsidiaries are denominated in various foreign currencies. A decrease in the
value of any of these foreign currencies relative to the U.S. dollar could
affect the profitability in U.S. dollars of our products sold in these markets.
We do not currently hold forward exchange contracts to exchange foreign
currencies for U.S. dollars to offset currency rate fluctuations.


                                       18

<PAGE>

U.S. INVESTORS MAY HAVE DIFFICULTIES IN MAKING CLAIMS FOR ANY BREACH OF THEIR
RIGHTS AS HOLDERS OF SHARES BECAUSE SOME OF OUR ASSETS AND EXECUTIVES ARE NOT
LOCATED IN THE UNITED STATES.

     Several of our executives are residents of Belgium, and a substantial
portion of our assets and those of some of our executives are located in
Belgium. As a result, it may not be possible for investors to affect service of
process on those persons located in Belgium, or to enforce judgments against
some of our executives based upon the securities or other laws of jurisdictions
other than Belgium. Moreover, we believe that under Belgian law there exists
certain restrictions on the enforceability in Belgium in original actions, or in
actions of enforcement of judgments rendered against us in courts of outside
jurisdictions that are a party to the Brussels Convention on Jurisdiction and
the Enforcement of Judgments in Civil and Commercial Matters (as amended).
Actions for enforcement of such judgments may be successful only if the Belgian
court confirms the substantive correctness of the judgment of such court, and is
satisfied:

          -    That the judgment is not contrary to the principles of public
               policy in Belgium or rules of Belgian public law;

          -    That the judgment did not violate the rights of the defendant;

          -    That the judgment is final under applicable law;

          -    That the court did not accept its jurisdiction solely on the
               basis of the nationality of the plaintiff; and

          -    As to the authenticity of the text of the judgment submitted to
               it.

     Judgments rendered in the courts of parties to the Brussels Convention will
be enforceable by the courts of Belgium without reexamination of the merits of
the case provided such judgment is final and otherwise satisfies all of the
conditions provided for in this Convention. If proceedings have been brought in
one country, however, new proceedings in another country may be barred.

ITEM 1B - UNRESOLVED STAFF COMMENTS

     None.

ITEM 2 - PROPERTIES

     Our corporate office is located in the U. S. in an office complex in
Oakbrook Terrace, Illinois, a suburb of Chicago. This facility is leased through
May 31, 2010, and consists of approximately 5,100 square feet.

     Our sales office in the U. S. in located in Westborough, Massachusetts, a
suburb of Boston. This facility is leased through February 28, 2009, and
consists of approximately 3,900 square feet.

     Our European administrative, sales and marketing, research and development
and support facilities are located in a suburb of Brussels, Belgium. These
facilities consist of approximately 29,600 square feet of office space that are
occupied under a lease expiring on September 30, 2011. Our Netherlands sales and
R&D facility, approximately 6,100 square feet, is occupied under a lease
expiring on December 31, 2010.

     Our operations for Able are located in Mechelen Belgium. These facilities
consist of approximately 1,500 square feet of office space that are occupied
under a lease expiring on December 14, 2013.

     The operation of the business formerly known as Logico is located in Vienna
Austria. These facilities consist of approximately 700 square feet of office
space that are occupied under a lease expiring on May 31, 2008.

     We have two offices located in Australia. One office is located in a suburb
of Brisbane, consisting of approximately 3,600 square feet under a lease
expiring on January 3, 2010. The second office, which is a sales office, is
located in Sydney, consisting of approximately 700 square feet under a lease
expiring on October 3, 2007.

     We have two sales offices in the Asia/Pacific region. One sales office is
located in an office complex in Singapore, consisting of approximately 3,300
square feet under a lease expiring on October 14, 2007. The second sales office
is located in Shanghai, China consisting of approximately 1,200 square feet
under a lease expiring on May 31, 2008.

     We have signed a one-year lease for up to approximately 1,500 square feet
in a business center in Zurich, Switzerland for our European headquarters.


                                       19

<PAGE>

     We believe that these facilities are adequate for our present growth plans.

ITEM 3 - LEGAL PROCEEDINGS

     We are from time to time involved in litigation incidental to the conduct
of our business. We are not currently a party to any lawsuit or proceeding
which, in the opinion of management, is likely to have a material adverse effect
on our business, financial condition or results of operations.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders during the fourth
quarter of 2006, through solicitation of proxies or otherwise.

                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Market Information (in thousands, except per share data)

     On March 20, 1998, the Company's common stock was approved for trading on
the NASD Electronic Bulletin Board system under the symbol "VDSI." On April 7,
2000, the common stock was listed on the Nasdaq National Market in the U. S.
under the trading symbol "VDSI." In February 2003, the common stock was moved
from the Nasdaq National Market to the Nasdaq SmallCap Market, now the Nasdaq
Capital Market, and continued trading under the symbol "VDSI."

     On July 15, 2003, the Company issued 2 million shares of its common stock
to Ubizen N.V. as part of the consideration given in exchange for all of the
Company's Series C Convertible Preferred Stock and Purchase Warrants owned by
Ubizen.

     On September 11, 2003, the Company sold 0.8 shares, with a stated value of
$10,000 per share, of its Series D 5% Cumulative Convertible Voting Preferred
Stock and 600 warrants to purchase common stock to various accredited investors.
The Series D Preferred was convertible into 4,000 shares of common stock. The
warrants have an exercise price of $3.47 per share. The proceeds from the sale,
$8,000 gross and approximately $7,260 net, were used for general corporate
purposes. The Series D Stock was convertible into common stock at any time and
the warrants can be exercised at any time from the date of issue until September
10, 2008, at which time the warrants expire. As of February 28, 2005, all of the
Series D Preferred stock had been converted to common stock. There were 114
warrants outstanding at February 28, 2007.

     The following table sets forth the high and low closing bid quotations for
the common stock for the periods indicated.

<TABLE>
<CAPTION>
                                         High      Low
                                        ------   ------
<S>                                     <C>      <C>
2007
   First Quarter, through February 28   $19.50   $11.71

2006
   Fourth Quarter                       $12.49   $ 9.80
   Third Quarter                         10.63     7.22
   Second Quarter                         9.94     6.88
   First Quarter                         11.44     7.88

2005
   Fourth Quarter                       $12.48   $ 7.72
   Third Quarter                         12.05     8.59
   Second Quarter                        11.45     6.00
   First Quarter                          9.14     5.50
</TABLE>


                                       20

<PAGE>

Holders and Dividends

     On February 28, 2007, the closing sale price for the common stock on the
Nasdaq was $17.59 per share. Such market quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
an actual transaction. On February 28, 2007, there were approximately 8,200
holders, including holders through banks, brokers and nominees, of the Company's
common stock.

     The Company has not paid any dividends on its common stock since
incorporation. Restrictions or limitations on the payment of dividends may be
imposed under the terms of credit agreements or other contractual obligations of
the Company. In the absence of such restrictions or limitations, the declaration
and payment of dividends will be at the sole discretion of the Board of
Directors and subject to certain limitations under the General Corporation Law
of the State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements, plans for expansion and other factors deemed
relevant by the Board of Directors. The Company intends to retain any future
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.

     See Item 12 for a description of securities authorized for issuance under
our equity compensation plan.

Recent Sales of Unregistered Securities

     None

Issuer Purchases of Equity Securities

     None.


                                       21

<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                     -----------------------------------------------------
                                                       2006      2005                                2002
                                                       (8)       (7)         2004        2003        (1)
                                                     -------   -------     -------     -------     -------
<S>                                                  <C>       <C>         <C>         <C>         <C>
Statements of Operations Data:
Net revenues                                         $76,062   $54,579     $29,893     $22,866     $17,370
Operating income (loss) from continuing operations    18,942    10,953(2)    5,552(2)    1,123      (4,898)(2)
Net income (loss) from continuing operations          12,587     7,701       3,253         761      (5,293)
Net income (loss) from discontinued operations            --        --          --       1,995(6)      754
Net income (loss)                                     12,587     7,701       3,253       2,756      (4,539)
Net income (loss) available to common stockholders    12,587     7,687(3)    3,021(3)   (1,715)(4)  (5,703)(5)
Diluted income (loss) per common share
   from continuing operations                        $  0.33   $  0.21(3)  $  0.09(3)  $ (0.13)(4) $ (0.22)(5)
Shares used in computing per share amounts            37,765    37,244      33,128      29,270      28,348
Balance Sheet Data:
Cash and equivalents                                 $14,768   $16,962     $ 8,138     $ 4,817     $ 2,616
Working capital (deficiency)                          22,058    16,325       9,995       5,218        (587)
Total assets                                          62,646    41,505      20,250      13,383      11,133
Stockholders' equity                                  42,206    25,395      13,031       8,943       2,811
</TABLE>

----------
(1)  Years prior to 2003 have been restated to reclassify the results of the
     VACMAN Enterprise business unit, which was sold in the third quarter of
     2003, and reflected as a discontinued operation.

(2)  Includes restructuring expenses (recovery) of $(172) in 2005, $(32) in 2004
     and $320 in 2002.

(3)  Includes the impact of preferred stock dividends of $14 in 2005 and $232 in
     2004.

(4)  Includes the impact of a beneficial conversion feature of $3,720 related to
     the issuance of Series D Convertible Preferred Stock in the third quarter
     of 2003, preferred stock accretion of $630 and preferred stock dividends of
     $121.

(5)  Includes the impact of preferred stock accretion of $1,164 in 2002.

(6)  Includes $638 from discontinued operations and $1,357 from gain on sale of
     discontinued operations.

(7)  Includes the results of AOS-Hagenuk B.V., acquired on February 4, 2005.

(8)  Includes the results of Logico Smartcard Solutions GmbH, acquired May 11,
     2006 and Able NV, acquired October 25, 2006.


                                       22

<PAGE>

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

              (IN THOUSANDS, EXCEPT HEAD COUNT AND UNIT PRICE DATA)

OVERVIEW

     The following discussion is based upon our consolidated results of
operations for the years ended December 31, 2006, 2005 and 2004 (percentages in
the discussion are rounded to the closest full percentage point) and should be
read in conjunction with our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.

     We design, develop, market and support identity authentication products
that reduce the risk of loss from unauthorized transactions by validating a
person's identity using a one-time password and obtaining a legally-enforceable
digital signature, if needed, for financial transactions. Our products are used
currently in a wide variety of applications including, but not limited to,
Internet banking, Internet brokerage, e-commerce applications dealing with web
or mobile access and various enterprise security applications. As evidenced by
our current customer base, our products are purchased by companies and,
depending on the business application, are distributed to either their employees
or their customers. Those customers may be other businesses or, as an example in
the case of Internet banking, the banks' corporate and retail customers.

     Our target market is any business process that uses some form of electronic
interface where the owner of that process is at risk if unauthorized users can
gain access to its process and either obtain proprietary information or execute
transactions that are not authorized. Our products can not only increase the
security associated with accessing the business process, thereby reducing the
losses from unauthorized access, but also, in many cases, can reduce the cost of
the process itself by automating activities that were previously performed
manually.

     Industry Growth: We believe that, while there are no accurate measurements
of the total industry's size, the industry growth rate is increasing and will
continue to grow at a significant rate into the foreseeable future. Growth is
being driven by new government regulations, growing awareness of the impact of
identity theft, and the growth in commerce that is transacted electronically.
The issues driving the growth are global issues and the rate of adoption in each
country is a function of that country's culture, the competitive position of
businesses operating in those countries, the country's overall economic
conditions and the degree to which businesses and consumers within the country
use technology.

     Economic Conditions: Our revenues may vary significantly with changes in
the economic conditions in the countries in which we sell products currently.
With our current concentration of revenues in Europe and specifically in the
banking/finance vertical market, significant changes in the economic outlook for
the European banking market may have a significant effect on our revenues.
During difficult economic periods, our customers often delay the rollout of
existing applications and defer purchase decisions related to the implementation
of our product in new applications.

     Currency Fluctuations. In 2006, approximately 90% of our revenue and
approximately 76% of our operating expenses were generated/incurred outside of
the U. S. In 2005, approximately 93% of our revenue and approximately 74% of our
operating expenses were generated/incurred outside of the U. S. As a result,
changes in currency, especially the Euro to U.S. Dollar, can have a significant
impact on revenue and expenses. To minimize the net impact of currency on
operating earnings, we attempt to denominate an amount of billings in a currency
such that it would provide a hedge against the operating expenses being incurred
in that currency. In addition, we also attempt to minimize transaction gains and
losses by hedging our net U.S. dollar asset exposure by borrowing U.S. dollars
in foreign countries such that assets denominated in U.S. dollars are
approximately equal to liabilities denominated in U.S. dollars.

     In 2006, the annual average exchange rate for the Euro was approximately
the same as in 2005 and the Australian Dollar weakened approximately 2% against
the U.S. Dollar. The Euro strengthened approximately 1% and the Australian
Dollar strengthened approximately 4% against the U.S. Dollar in 2005. We
estimate that the strengthening of the two currencies in 2006 compared to 2005
resulted in an increase in revenues of approximately $246 and an increase in
operating expenses of approximately $267. We estimate that the strengthening of
the two currencies in 2005 compared to 2004 resulted in a decrease in revenues
of approximately $301 and an increase in operating expenses of approximately
$112. While we expected that a strengthening of the Euro compared to the U.S.
dollar would result in an increase in revenue; that was not the case in 2005.
The decline in revenue in 2005, due to currency, reflects the timing of when
revenue was realized and the corresponding changes in currency rates


                                       23

<PAGE>

in those periods. In the fourth quarter of 2005, we realized a significant
portion of our revenues when the Euro was weaker than the same period in 2004.

     Gains and losses resulting from foreign currency transactions are included
in the consolidated statements of operations. Foreign exchange transaction
losses aggregating $65 are included in other non-operating income (expense) for
2006. Foreign exchange transaction gains aggregating $330 are included in other
non-operating income (expense) for 2005 and losses aggregating $538 are included
in other non-operating income (expense) for 2004.

     The financial position and the results of operations of our foreign
subsidiaries are measured using the local currency as the functional currency.
Accordingly, assets and liabilities are translated into U.S. dollars using
current exchange rates as of the balance sheet date. Revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates generated a surplus of
$2,194 in 2006 and a deficit of $1,218 in 2005 and are included as a separate
component of stockholders' equity.

REVENUE

     REVENUES BY GEOGRAPHIC REGIONS: We sell the majority of our products in
European countries with significant sales in the U. S. and other countries,
primarily Australia and Asia/Pacific. The breakdown of revenue in each of our
major geographic areas was as follows:

<TABLE>
<CAPTION>
                              UNITED     OTHER
       YEAR          EUROPE   STATES   COUNTRIES    TOTAL
       ----         -------   ------   ---------   -------
<S>                 <C>       <C>      <C>         <C>
Total Revenue:
   2006             $47,449   $7,397    $21,216    $76,062
   2005              39,219    3,687     11,673     54,579
   2004              24,245    3,105      2,543     29,893

Percent of Total:
   2006                  62%      10%        28%       100%
   2005                  72%       7%        21%       100%
   2004                  81%      10%         9%       100%
</TABLE>

     2006 Compared to 2005 - Overview and Geographic Breakdown

     Total revenues in 2006 increased $21,483 or 39% over 2005. The increase was
primarily attributable to an increase in the number of Digipass units sold and
the acquisitions of Logico Smart Card Solutions, GmbH ("Logico") and Able N.V.
("Able"), partially offset by a decline in the average sales price per unit.
Revenues from Logico and Able combined were $724 in 2006.

     In 2006, we sold approximately 11,189 Digipass products, an increase of
approximately 3,849 units, or 52%, over the 7,340 Digipass products sold in
2005. We believe that the increase in Digipass volume is attributable to the
strength and flexibility of our VACMAN Controller software platform, growth in
our distribution channel, increased investment in sales staff and marketing
programs, increased awareness of the need for strong authentication to combat
identity theft and our ability to deploy large volumes of high-quality products
at an affordable price. The strategy introduced in the beginning of 2006 of
being the Full-Option, All-Terrain Company allowed us to compete effectively in
both the banking/finance ("Banking") market and enterprise security ("Enterprise
Security") markets. With the introduction of our DigipassPlus strategy in
January 2007, we expect to see continued worldwide expansion in authentication
for consumer-related applications and believe that we are well positioned to
compete for that business as the market expands.

     The average price per unit in 2006 was $6.80 and was 9% lower than the
$7.44 average price per unit in 2005. The decline in average price per unit
reflects our strategy of providing volume-purchase discounts to customers that
place firm purchase orders for large-volume deployments. We believe that the
lower average prices are a critical element in our customers' decision to deploy
our technology to their consumer-level customers.

     As noted in the table above, revenues from each of our geographic regions
increased. Both the absolute amount of revenue from each region and the growth
over the prior year reflect, in general, the regulatory environment of the
region and the customers' attitudes towards and acceptance of two-factor
authentication. The


                                       24

<PAGE>

growth in Europe, $8,230 or 21% over 2005, was attributable to several factors
including, but not limited to, the acquisition of Logico and Able and increased
investment in sales staff and marketing programs. The growth in the United
States, $3,710 or 101% over 2005, was a result of the strong banking industry
directive issued on October 12, 2005 by the FFIEC, an umbrella group of
regulators that includes the FDIC, increased investment in our sales staff and
increased investment in marketing programs. The growth in other countries,
$9,543 or 82% over 2005, reflects the growth in the Asian and Central/South
American markets. The growth in other countries was primarily attributable to
increased investment in our sales staff and marketing programs.

     2005 Compared to 2004 - Overview and Geographic Breakdown

     Total revenues in 2005 increased $24,686 or 83% over 2004. The increase was
primarily attributable to an increase in the number of Digipass units sold and
the acquisition of AOS-Hagenuk ("AOS"), partially offset by a decline in the
average sales price per unit. Revenues from AOS were $4,542 in 2005, net of
purchase price amortization costs of $421. Excluding revenue from AOS,
consolidated revenue increased $20,144 or 67% from 2004.

     In 2005, we sold approximately 7,340 Digipass products, an increase of
approximately 4,505 units, or 159%, over the 2,835 Digipass products sold in
2004. We believe that the increase in Digipass volume is attributable to the
growth in our distribution channel, increased investment in sales staff and
marketing programs, increased awareness of the need for strong authentication to
combat identity theft and our ability to deploy large volumes of high-quality
products at an affordable price.

     The average price per unit in 2005 was $7.44 and was 29% lower than the
$10.54 average price per unit in 2004. The decline in average price per unit
reflects our strategy of providing volume-purchase discounts to customers that
place firm purchase orders for large-volume deployments and a change in mix of
our business. We believe that the lower average prices are a critical element in
our customers' decision to deploy our technology to their consumer-level
customers. In 2005, while each of our markets grew, the growth in large-volume
deployments exceeded our growth in our lower-volume, higher priced markets, such
as Corporate Banking and Enterprise Security.

     As noted in the table above, revenues from each of our geographic regions
increased. Both the absolute amount of revenue from each region and the growth
over the prior year reflect, in general, the regulatory environment of the
region and the customers' attitudes towards and acceptance of two-factor
authentication. The growth in Europe, $14,974 or 62% over 2004, was attributable
to several factors including, but not limited to, the acquisition of AOS, the
maturity of our sales and distribution channels, increased investment in sales
staff and marketing programs and the rollout of the new smart card standard by
Europay, Mastercard, Visa ("EMV"). The growth in the United States, $582 or 19%,
was a result of increased investment in our sales staff and marketing programs.
The growth in other countries, $9,130 or 359%, reflects the growth in the Asia
and Central/South American markets. The growth in other countries was not only
attributable to increased investment in our sales staff and marketing programs,
but also to changes in regulations. In 2005, new regulations were enacted in
Hong Kong. Under the new regulations, each bank that offered internet banking
services was required to provide some form of two-factor authentication to its
customers.


                                       25

<PAGE>

     REVENUES BY TARGET MARKET: Revenues are generated currently from two
primary markets, Banking and Enterprise Security through the use of both direct
and indirect sales channels. The breakdown of revenue between the two primary
markets is as follows:

<TABLE>
<CAPTION>
                              ENTERPRISE
       YEAR         BANKING    SECURITY     TOTAL
       ----         -------   ----------   -------
<S>                 <C>       <C>          <C>
Total Revenue:
   2006             $64,987    $11,075     $76,062
   2005              46,784      7,795      54,579
   2004              23,977      5,916      29,893

Percent of Total:
   2006                  85%        15%        100%
   2005                  86%        14%        100%
   2004                  80%        20%        100%
</TABLE>

     Revenues from the Banking market increased $18,203 or 39% in 2006 over 2005
and revenues from the Enterprise Security market increased $3,280 or 42% in the
same period. The increase in revenues in both markets is attributable, in part,
to the continued development of the indirect sales channel, which includes
distributors, resellers, and solution partners. The number of distributors
increased to 52 at the end of 2006 from 45 at the end of 2005. The indirect
sales channel supplements the Company's direct sales force in the Banking market
and is the primary source of revenues in the Enterprise Security market.
Revenues generated by Logico and Able in 2006 are included in the Enterprise
Security market.

     Revenues from the Banking market increased $22,807 or 95% in 2005 over 2004
and revenues from the Enterprise Security market increased $1,879 or 32% in the
same period. The increase in revenues in both markets is attributable, in part,
to the continued development of the indirect sales channel. The number of
distributors increased to 45 at the end of 2005 from 39 at the end of 2004.
Revenues generated by AOS in 2006 are included in the Banking market.

     The amounts shown above for Enterprise Security currently include revenues
generated in the e-commerce and e-government markets. We expect that the
e-commerce and e-government markets will be an important source of future
revenue for the Company as our products will not only provide a higher level of
security for purchases made over the Internet, they can also help protect our
customers' revenue stream by making it more difficult for subscribers to our
customers' Internet services to share passwords.


                                       26

<PAGE>

GROSS PROFIT AND OPERATING EXPENSES

     The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenues for the years ended
December 31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                                  PERCENTAGE OF REVENUE
                                                 YEAR ENDED DECEMBER 31,
                                                 -----------------------
                                                  2006    2005     2004
                                                 -----   ------   ------
<S>                                              <C>     <C>      <C>
Revenues                                         100.0%   100.0%   100.0%
Cost of goods sold                                32.0     36.9     30.7
                                                 -----    -----    -----
Gross profit                                      68.0     63.1     69.3
Operating costs:
   Sales and marketing                            25.6     27.1     30.6
   Research and development                        7.3      6.6      8.2
   General and administrative                      9.4      8.3     10.7
   Restructuring expenses (recoveries)              --     (0.3)    (0.1)
   Amortization of purchased intangible assets     0.8      1.3      1.3
                                                 -----    -----    -----
                                                  43.1     43.0     50.7
                                                 -----    -----    -----
Operating income                                  24.9     20.1     18.6
Impairment of investment                          (0.8)      --       --
Interest income (expense)                          0.2      0.1      0.4
                                                 -----    -----    -----
Other income (expense), net                        0.2      0.9     (1.8)
                                                 -----    -----    -----
Income before income taxes                        24.5     21.1     17.2
Provision for income taxes                         8.0      7.0      6.3
                                                 -----    -----    -----
Net income                                        16.5     14.1     10.9
                                                 =====    =====    =====
</TABLE>

GROSS PROFIT

     2006 Compared to 2005

     Consolidated gross profit for 2006 was $51,703, an increase of $17,265, or
50%, from the $34,438 reported for 2005. Gross profit as a percentage of revenue
was 68% in 2006, as compared to 63% in 2005. The increase in the gross profit as
a percentage of revenue primarily reflects:

     -    An increase in our software product revenues as a percentage of our
          total revenue;

     -    A decline in manufacturing cost of our product; and

     -    An increase in revenues from consumer-related products percentage of
          total product revenues.

     Software product revenues include revenues from VACMAN Controller, software
versions of our Digipasses and other non-manufactured products. Software product
revenue increased to approximately 12% of revenue in 2006 from 7% in 2005. The
gross profit on software products is substantially higher than on manufactured
products.

     The impact of the decline in the manufacturing costs and change in mix of
products sold are reflected in the change in average selling price and average
cost. The average selling price, hardware and software combined, per Digipass
product declined approximately 9% to $6.80 per unit in 2006 from $7.44 in 2005.
The average cost, hardware and software combined, per Digipass unit sold
declined approximately 20% to $2.18 per unit in 2006 from $2.74 in 2005. The
decline in the average cost per unit reflected the increased software content, a
reduction in the manufacturing cost of most units sold and a change in mix of
products sold towards product targeted for use by the consumer. While the
average gross profit per unit declined on an absolute dollar basis, gross profit
as a percentage of revenue improved.

     Our purchases of inventory are denominated in U.S. dollars. Also, as
previously noted, the Company denominates a portion of its sales in Euros in an
effort to offset the effects of currency fluctuations on operating expenses. The
increase in revenue and gross margins resulting from changes in currency rates
in 2006 was $246, as


                                       27
<PAGE>

noted above. The changes in currency did not, however, have a significant impact
on gross margins as a percentage of revenue.

     2005 Compared to 2004

     Consolidated gross profit for 2005 was $34,438, an increase of $13,729, or
66%, from the $20,709 reported for 2004. Gross profit as a percentage of revenue
was 63% in 2005, as compared to 69% in 2004. The decrease in the gross profit as
a percentage of revenue reflected a decline in average sales price per unit
partially offset by a decline in the average manufacturing cost per unit.

     The significant increase in the Digipass products sold in 2005 over 2004
reflected larger customer deployments in the Banking market, the results of
which were reflected in an increase in the total quantity ordered and a decrease
in the average sales price per unit. The average selling price, hardware and
software combined, per Digipass unit sold declined approximately 29% to $7.44
per unit in 2005 from $10.54 in 2004.

     The average cost, hardware and software combined, per Digipass unit sold
declined from approximately $3.24 to $2.74, or 15%, in 2005 as compared to 2004.
The decline in the average cost per unit reflected a reduction in the
manufacturing cost of most units as well as a change in mix of specific products
sold.

     Changes in currency rates reduced revenue and gross margin by $301 in 2005,
as noted above. The changes in currency did not, however, have a significant
impact on gross margins as a percentage of revenue.

SALES AND MARKETING EXPENSES

     2006 Compared to 2005

     Consolidated sales and marketing expenses for the year ended December 31,
2006 were $19,482, an increase of $4,698, or 32%, from the $14,784 reported for
2005.

     The increase was primarily due to an increase in average headcount and
related compensation expenses, an increase in marketing programs and materials,
an increase in travel and an increase in commissions paid to third-party agents.
The average full-time sales, marketing and operations employee headcount
increased 23% to 87 in 2006 from 71 in 2005. At year-end 2006, the Company
employed 98 full-time sales, marketing and operations employees, reflecting its
increased investment in an effort to accelerate its sales growth.

     2005 Compared to 2004

     Consolidated sales and marketing expenses for the year ended December 31,
2005 were $14,784, an increase of $5,624, or 61%, from the $9,160 reported for
2004. Expenses in 2005 included approximately $841 of expense related to AOS.
Excluding AOS, sales and marketing expenses increased approximately $4,783 or
52% from 2004.

     The increase was primarily due to an increase in average headcount and
related compensation expenses, an increase in marketing programs and materials,
an increase in travel, an increase in commissions paid to third-party agents and
redundancy costs associated with the termination of a small group of employees.
The average full-time sales, marketing and operations employee headcount
increased 42% to 71 in 2005 from 50 in 2004. At year-end 2005, the Company
employed 80 full-time sales, marketing and operations employees.

RESEARCH AND DEVELOPMENT EXPENSES

     2006 Compared to 2005

     Consolidated research and development costs for the year ended December 31,
2006 were $5,529, an increase of $1,950, or 54%, from the $3,579 reported for
2005. Expenses in 2006 included approximately $1,090 of expense related to
Logico and Able combined. Excluding Logico and Able, research and development
expenses increased approximately $860 or 24% from 2005.

     The increase primarily reflects higher compensation-related expense.
Average full-time research and development employee headcount in 2006 was 44
compared to 27 in 2005.


                                       28

<PAGE>

     2005 Compared to 2004

     Consolidated research and development costs for the year ended December 31,
2005 were $3,579, an increase of $1,138, or 47%, from the $2,441 reported for
2004. Expenses in 2006 included approximately $802 of expense related to AOS.
Excluding AOS, research and development expenses increased approximately $336 or
14% from 2005.

     The increase primarily reflects higher compensation-related expense.
Average full-time research and development employee headcount in 2005 was 27
compared to 18 in 2004.

GENERAL AND ADMINISTRATIVE EXPENSES

     2006 Compared to 2005

     Consolidated general and administrative expenses for the year ended
December 31, 2006 were $7,157, an increase of $2,601 or 57%, from the $4,556
reported for 2005.

     The increase was primarily due to an increase in average headcount and
related compensation expenses, an increase in non-cash compensation expenses,
increased cost of insurance, increased cost of professional services and an
increase in the provision for uncollectible accounts. The average full-time
general and administrative employee headcount increased 36% to 19 in 2006 from
14 in 2005.

     2005 Compared to 2004

     Consolidated general and administrative expenses for the year ended
December 31, 2005 were $4,556, an increase of $1,365 or 43%, from the $3,191
reported for 2004. Expenses in 2005 included approximately $269 of expense
related to AOS. Excluding AOS, general and administrative expenses increased
approximately $1,096 or 34% from 2004.

     The increase was primarily due to increased cost of professional services,
an increase in average headcount and related compensation expenses and an
increase in the provision for uncollectible accounts. The increase in
professional services was primarily related to the cost of performing
management's assessment of internal controls over financial reporting, the
increased cost of the integrated audit and legal services related to tax
planning initiatives. The average full-time general and administrative employee
headcount increased 27% to 14 in 2005 from 11 in 2004.

RESTRUCTURING EXPENSES

     2006 Compared to 2005

     There were no adjustments to the restructuring reserves in 2006.

     2005 Compared to 2004

     During the fourth quarter of 2002, we recorded restructuring charges of
$319 related to operations in France and excess space in our U.S. headquarters.
In 2005, we resolved all issues associated with the closure of the French
operation and reversed reserves that were no longer needed, some of which had
been recorded prior to the decision to close the operation, resulting in a gain
of $172.

AMORTIZATION EXPENSE

     2006 Compared to 2005

     Amortization expense for 2006 was $593, a decrease of $145 or 20% from 2005
amount. The decrease was due to an intangible asset for purchase orders obtained
as part of the AOS-Hagenuk acquisition, which was fully amortized in 2006,
partially offset by increased amortization related to the purchase of Logico and
Able in 2006.

     2005 Compared to 2004

     Amortization expense for 2005 was $738, an increase of $341 or 86% over the
2004 amount. The increase was due to the amortization of a $367 intangible asset
for purchase orders obtained as part of the AOS-Hagenuk acquisition in February,
2005.

IMPAIRMENT OF INVESTMENT IN SECURED SERVICES, INC.

     2006 Compared to 2005


                                       29

<PAGE>

     We received preferred stock and a note receivable from Secured Services,
Inc. ("SSI") in 2003 as consideration for assets of the VACMAN Enterprise
business unit. Based on a detailed valuation, we established the initial value
of the consideration received from SSI, using a discounted value of the payment
streams expected from the note and the preferred stock. Interest income on the
note was recorded over time at the discount rate. In 2006, SSI discontinued its
monthly note payments to the Company due to its continuing operating losses and
an inability to secure new financing. We concluded that a decline in fair value
had occurred, which was other than temporary in nature as defined in EITF Issue
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. We eventually collected the entire note receivable and
interest, but did record an asset impairment charge of $600 in 2006 to fully
write down the value of the investment in the preferred stock of SSI.

INTEREST INCOME, NET

     2006 Compared to 2005

     Consolidated net interest income was income of $121 in 2006 compared to
income of $69 in 2005. The increase in income reflected an increase in our
average net cash balances partially offset by the cost of increased borrowing
related to our foreign currency hedging program. Average net cash balances were
$14,888 in 2006, an increase of $5,688 or 62% from $9,200 in 2005. Our bank
borrowings are solely related to our foreign currency hedging program. We
invested our cash balances in short-term money market instruments at nominal
rates of interest.

     2005 Compared to 2004

     Consolidated net interest income was income of $69 in 2005 compared to
income of $120 in 2004. The reduction in income reflected the cost of borrowings
related to our foreign currency hedging program, lower interest earned on the
installment note we received as a result of our sale of the VACMAN Enterprise
business in 2003, partially offset by interest earned on an increase in average
net cash balances that resulted from our strong operating cash flow throughout
2005. Average net cash balances were $9,200 in 2005, an increase of $2,700 or
42% from $6,500 in 2004.

OTHER INCOME (EXPENSE)

     2006 Compared to 2005

     Other income (expense) in 2006 primarily included exchange gains (losses)
on transactions that are denominated in currencies other than the subsidiaries'
functional currency and subsidies received from foreign governments related to
increasing trade in other countries. Other income was $178 in 2006, a decline of
$328 from 2005, which primarily reflects changes in exchange gains and losses.
We realized exchange losses of $65 in 2006 compared to exchange gains of $330 in
2005.

     2005 Compared to 2004

     Other income was $506 in 2005, an increase of $1,045 over 2004, which
primarily reflects changes in exchange gains and losses. We reported exchange
gains of $330 in 2005 compared to exchange losses of $538 in 2004. We
implemented a hedging program in the second quarter of 2005 to minimize the
impact of changes in currency rates.

INCOME TAXES

     2006 Compared to 2005

     Income tax expense for 2006 was $6,054, compared to expense of $3,827 in
2005. The expense related primarily to our subsidiaries in Belgium, the
Netherlands and Singapore. The effective tax rate in 2006 was 32.5%, a decrease
of 0.7 percentage point from 33.2% in 2005. The expense reported for 2006
reflected a benefit of $226 from the use of net operating loss carryforwards
("NOL") in Australia and an additional benefit of $120 from elimination of the
valuation reserve for the remaining unused NOLs in Australia. In the United
States, the NOL utilization benefit of $953 was partially offset by foreign
income taxed in the U.S. of $854.

     2005 Compared to 2004

     Income tax expense for 2005 was $3,827, compared to expense of $1,880 in
2004. The expense related primarily to our subsidiaries in Belgium, the
Netherlands and Singapore, whose tax loss carryforward was fully


                                       30

<PAGE>

utilized in 2005. The effective tax rate in 2005 was 33.2%, a decrease of 3.4
percentage points from 36.6% in 2004. The tax loss carryforward in Singapore
utilized in 2005 reduced 2006 tax expense by approximately $180. The tax rate
also reflected an improvement in earnings in countries in which we continue to
have a tax loss carryforward.

     Loss Carryforwards Available

     At December 31, 2006, we had U. S. net operating loss carryforwards of
$23,086 and foreign net operating loss carryforwards of $7,829. Such losses are
available to offset future taxable income in the respective jurisdictions. The
U. S. loss carryforwards expire in varying amounts beginning in 2018 and
continuing through 2023. The foreign loss carryforwards have no expiration
dates. The foreign loss carryforward includes $3,042 which was obtained in the
Logico acquisition and, if utilized, would not reduce income tax expense, but
would reduce deferred tax assets or goodwill instead. In addition, if certain
substantial changes in the Company's ownership are deemed to have occurred,
there would be an annual limitation on the amount of the U.S. carryforwards that
could be utilized.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2006, we had net cash balances (total cash, cash
equivalents and restricted cash less bank borrowings), totaling $12,615 and no
outstanding term debt. Cash generated from operating activities was $7,819
during the year ended December 31, 2006. During 2006, we used $9,883 for
investing activities, primarily related to the acquisitions of Logico and Able,
and used $247 in financing activities, primarily consisting of a reduction in
bank borrowing offset by proceeds from the exercise of stock options. Capital
expenditures were $459 for the year ended December 31, 2006.

     Cash generated from operating activities was $7,542 during the year ended
December 31, 2005. During 2005, we used $4,456 in investing activities,
primarily related to the acquisition of AOS-Hagenuk and generated $6,614 in
financing activities primarily consisting of an increase in bank borrowing and
proceeds from the exercise of stock options. Capital expenditures were $507 for
the year ended December 31, 2005.

     On September 11, 2003, we sold 0.8 shares, with a stated valued of $10,000
per share, of its Series D 5% Cumulative Convertible Voting Preferred Stock (the
"Series D Preferred Stock") and 600 warrants to purchase common stock. The
Series D Preferred Stock carried a 5% dividend and was convertible into 4,000
shares of common stock at a fixed price of $2.00 per share. The net proceeds
from the sale totaled $7,260 of which $5,786 was allocated to the Series D
Preferred Stock and $1,474 was allocated to the warrants based upon their
relative fair values. In addition, a beneficial conversion value was calculated
for the Series D Preferred Stock as the difference between the price of the
common stock at the transaction date and the conversion price of the Series D
Preferred Stock. The amount of the beneficial conversion, $3,720, is analogous
to a dividend and was recorded to accumulated deficit.

     On February 4, 2005, we acquired all of the share capital of A.O.S. Hagenuk
B.V. ("AOS") a private limited liability company organized and existing under
the laws of the Netherlands. The base purchase price was E5,000 of which E3,750
was paid in cash and the remainder was paid in our common stock. The common
stock was held in escrow for the benefit of the seller for a period of twelve
(12) months. In addition to the base purchase price, a variable amount related
to the gross profits collected on the sales of certain equipment will be paid to
the seller over a period of two (2) years following the closing. We do not
expect that additional payments will be made to seller with regards to the sales
of such certain equipment.

     On February 17, 2005, we, in accordance with the Designation of Rights and
Preferences of the Series D 5% Cumulative Convertible Voting Preferred Stock
(the "Series D Preferred Stock"), issued a call for the mandatory conversion of
all outstanding shares of the Series D Preferred Stock. All accrued dividends
through the conversion date have been paid.

     On May 11, 2006, we acquired all of the issued and outstanding shares of
Logico Smart Card Solutions GmbH and Logico Smartcard Solutions Vertriebs, GmbH.
(the combined group was previously defined as Logico.) Logico is an
authentication storage specialist with extensive experience in smart card based
authentication, located in Vienna, Austria. We believe that significant
synergies will be created by combining Logico's technology with our technology,
customer base and marketing channels. The shares of Logico were acquired for a
cash payment of E1236 (equivalent to $1,578). An additional payment of up to
E150 (or $198 at the December 31, 2006 exchange rate) may be due on March 31,
2007 if certain performance conditions are met.

     On October 25, 2006, we acquired Unified Threat Management (UTM) specialist
Able N.V. of Mechelen, Belgium. Able's key product is the aXs GUARD appliance.
This appliance contains 21 different modules,


                                       31

<PAGE>

including Digipass strong user authentication, VPN, firewall, anti-virus, hacker
detection, statistics & reporting, content scanning and more. VASCO acquired all
of the stock of Able N.V., in exchange for cash consideration of E5 million
($6.3 million). The purchase price included E1.25 million ($1.65 million) which
is subject to a bank guarantee and may be returned to the company in whole or in
part if the seller terminates his employment with the Company before four years
from the acquisition date. As required by EITF 95-8, Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination, the Company has recorded this portion of the purchase
price as deemed compensation, to be amortized over the required employment
period.

     We maintain an overdraft agreement with Fortis Banque/Bank of Belgium.
Under terms of the agreement, we can borrow an amount equal to 80% of our
Belgium subsidiary's defined accounts receivable up to a maximum of either 3,500
Euros or U.S. dollars. Borrowings under the overdraft agreement accrue interest
at an annual rate of 5.7% and we are obligated to pay a quarterly commitment fee
of 0.125%. As of December 31, 2006, 1,346 Euros or U.S. dollars were available
under the overdraft agreement as there were borrowings or $2,154 outstanding
under the agreement as part of our currency hedging program. The assets,
excluding inventory, of the Belgian subsidiary secure the agreement and while it
has no specific termination date, it can be terminated with thirty (30) days
notice. The agreement is governed by the General Lending Conditions for
Corporate Customers, registered in Brussels, Belgium on December 20, 2001.

     The net effect of 2006 activity resulted in a decrease in net cash of
$1,355 and a net cash balance of $12,614 at December 31, 2006, compared to
$13,970 at the end of 2005. Our working capital at December 31, 2006 was
$22,058, an increase of $5,733 from $16,325 at December 31, 2005. The change is
primarily attributable to the generation of positive cash flow from operations
in 2006. Our current ratio was 2.15 to 1.0 at December 31, 2006. We believe that
our current cash balances, credit available under our existing overdraft
agreement and the anticipated cash generated from operations, including deposits
received on orders of Digipass to be delivered in 2007, will be sufficient to
meet our anticipated cash needs for the next twelve months.

     The net effect of 2005 activity resulted in an increase in net cash of
$5,750 and a net cash balance of $13,970 at December 31, 2005, compared to
$8,220, at the end of 2004. Our working capital balance at December 31, 2005 was
$16,325, an increase of $6,330 from $9,995 at December 31, 2004. The change is
primarily attributable to the generation of positive cash flow from operations
in 2005. Our current ratio was 2.03 to 1.0 at December 31, 2005.

     We believe that our financial resources and current borrowing arrangements
are adequate to meet our operating needs. There is risk, however, that our
revenue and cash receipts will not be sufficient to meet the operating needs of
the business. If this is the case, we will need to significantly reduce our
workforce, sell certain of our assets, enter into strategic relationships or
business combinations, discontinue some or all of our operations, or take other
similar restructuring actions. While we expect that these actions would result
in a reduction of recurring costs, they also may result in a reduction of
recurring revenues and cash receipts. It is also likely that we would incur
substantial non-recurring costs to implement one or more of these restructuring
actions.

OFF-BALANCE SHEET ARRANGEMENTS

     The Company has no off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS

     The Company has the following contractual obligations:

<TABLE>
<CAPTION>
                                               Payments Due by Period
                                   ------------------------------------------------
                                            Less than     1-3      3-5    More than
                                    Total     1 year     years    years    5 years
                                   ------   ---------   ------   ------   ---------
<S>                                <C>      <C>         <C>      <C>      <C>
Operating lease obligations        $6,340     $1,654    $2,726   $1,622      $338
Purchase obligations                  605        605        --       --        --
Deferred warranty                     451        149       258       44        --
                                   ------     ------    ------   ------      ----
   Total contractual obligations   $7,396     $2,408    $2,984   $1,666      $338
                                   ======     ======    ======   ======      ====
</TABLE>

     "Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.
S. The preparation of these financial statements requires management to make
estimates and


                                       32

<PAGE>

assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period.

     On an on-going basis, management evaluates its estimates and judgments,
including those related to bad debts, net realizable value of inventory and
intangible assets. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.

Revenue Recognition

     We recognize revenue in accordance with AICPA Statement of Position ("SOP")
97-2 and SEC Staff Accounting Bulletin ("SAB") 104. Revenue is recognized when
there is persuasive evidence that an arrangement exists, delivery has occurred,
the fee is fixed or determinable and collection of the revenue is probable.

     Hardware Revenue and License Fees: Revenues from the sale of computer
security hardware or the license of software are recorded upon shipment or, if
an acceptance period is allowed, at the later of shipment or customer
acceptance. No significant obligations or contingencies exist with regard to
delivery, customer acceptance or rights of return at the time revenue is
recognized.

     Support Agreements: Support agreements generally call for us to provide
technical support and software updates to customers. Revenue on technical
support and software update rights is deferred and recognized ratably over the
term of the support agreement.

     Consulting and Education Services: We provide consulting and education
services to our customers. Revenue from such services is recognized during the
period in which the services are performed.

     Multiple-Element Arrangements: We allocate revenues to the various elements
of the arrangements based on the estimated fair value of each deliverable as
required by SOP 97-2 and Emerging Issues Task Force ("EITF") Issue No. 00-21.
The fair value for each element is based on the price charged when that element
is sold separately, price lists, renewal rates and other methods. When discounts
are given in a multiple-element arrangement, a proportionate amount of the
discount is applied to each element based on each element's fair value without
regard to the discount. The estimated fair value of undelivered elements is
deferred and recorded as revenue when services are performed or products are
delivered.

     Sales to distributors and resellers are recognized on the same basis as
sales made directly to customers. Revenue is recognized when there is persuasive
evidence that an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection of the revenue is probable.

     For large-volume transactions, we may negotiate a specific price that is
based on the number of users of the software license or quantities of hardware
supplied. The per unit prices for large-volume transactions are generally lower
than transactions for smaller quantities and the price differences are commonly
referred to as volume-purchase discounts.

Allowance for Doubtful Accounts:

     We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make payments for goods and services. We
analyze accounts receivable, customer credit-worthiness, current economic trends
and changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The allowance is based on a specific review of
all significant past-due accounts. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be required.


                                       33

<PAGE>

Net Realizable Value of Inventory:

     We write down inventory where it appears that the carrying cost of the
inventory may not be recovered through subsequent sale of the inventory. We
analyze the quantity of inventory on hand, the quantity sold in the past year,
the anticipated sales volume in the form of sales to new customers as well as
sales to previous customers, the expected sales price and the cost of making the
sale when evaluating the valuation of our inventory. If the sales volume or
sales price of a specific model declines significantly, additional writedowns
may be required.

Valuation of Goodwill and Other Intangible Assets and Software Development
Costs:

     We assess the impairment of goodwill and intangible assets with indefinite
lives annually and whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include significant underperformance relative to
expected historical or projected future operating results, significant changes
in the manner of our use of the acquired assets or the strategy for our overall
business, and significant negative industry or economic trends. We assess the
recoverability of its purchased software against estimated future revenue for
the individual products over the estimated remaining economic life of the
software.

     When we determine that the carrying value of intangibles and goodwill may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Given
the highly competitive environment and frequency of technological changes in our
industry, it is reasonably possible that estimates of anticipated future
revenue, the remaining economic life of our software products, or both may be
reduced significantly.

     The total amount of goodwill and other intangible assets as of December 31,
2006 was $15,698 and the full amount is at risk of impairment. See footnotes
1and 4 to the consolidated financial statements for more detailed information.

Research and Development:

     We are devoting substantial capital and other resources to enhance our
existing security products and develop new products to provide identity
authentication security solutions on different platforms and for different
applications. Costs of research and development, principally the design and
development of hardware and software prior to the determination of technological
feasibility, are expensed as incurred on a project-by-project basis. Our
software capitalization policy currently defines technological feasibility as a
functioning beta test prototype with confirmed manufacturability (a working
model), within a reasonably predictable range of costs. Additional criteria
include receptive customers, or potential customers, as evidenced by interest
expressed in a beta test prototype, at some suggested selling price.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June, 2006, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Interpretation (FIN) 48, "Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109", which changes the
threshold for recognizing the benefit of an uncertain tax position, prescribes a
method for measuring the tax benefit to be recorded and requires incremental
disclosures about uncertain tax positions. This interpretation is effective for
years beginning after December 15, 2006. The interpretation is expected to have
no material effect on the Company's financial condition or results of
operations.

     In June, 2006, the FASB ratified the Emerging Issues Task Force consensus
on Issue 06-3, "How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is,
Gross Versus Net Presentation)" This pronouncement will not affect the Company's
income statement presentation.


                                       34

<PAGE>

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

                                 (IN THOUSANDS)

     Foreign Currency Exchange Risk - In 2006, approximately 90% of our business
was conducted outside the United States, primarily in Europe and Asia/Pacific. A
significant portion of our business operations is transacted in foreign
currencies. As a result, we have exposure to foreign exchange fluctuations. We
are affected by both foreign currency translation and transaction adjustments.
Translation adjustments result from the conversion of the foreign subsidiaries'
balance sheets and income statements to U.S. dollars at year-end exchange rates
and weighted average exchange rates, respectively. Translation adjustments
resulting from this process are recorded directly into stockholders' equity.
Transaction adjustments result from currency exchange movements when a foreign
subsidiary transacts business in a currency that differs from its local
currency. These adjustments are recorded as gains or losses in our statements of
operations. Our foreign subsidiaries' business transactions are spread across
numerous countries and currencies. This geographic diversity reduces the risk to
our operating results.

     As noted in Management's Discussion and Analysis above, we attempt to
minimize the net impact of currency on operating earnings by denominating an
amount of billings in a currency such that it would provide a hedge against the
operating expenses being incurred in that currency. In addition, we also attempt
to minimize transaction gains and losses by hedging our net U.S. dollar asset
exposure by borrowing U.S. dollars in foreign countries such that assets
denominated in U.S. dollars are approximately equal to liabilities denominated
in U.S. dollars.

     Interest Rate Risk - We have minimal interest rate risk. Our outstanding
debt at December 31, 2006 was $2,154 and was at fixed interest rates and our
cash is invested in short-term instruments at current market rates. If rates
were to increase or decrease by one percentage point, the Company's interest
income would increase or decrease approximately $82 annually.

     Impairment Risk - At December 31, 2006, we had goodwill of $12,685 and
other intangible assets of $3,013 related mostly to the acquisition of Logico
and Able in 2006, the acquisition of AOS-Hagenuk in 2005 and to technology
purchased in 2001 as part of our acquisition of Identikey. We will assess the
net realizable value of the goodwill and other intangible assets on a regular
basis, but at least annually, to determine if we have incurred any declines in
the value of our capital investment. While we did not experience impairment
during the year ended December 31, 2006, we may incur impairment charges in
future periods.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information in response to this item is included in our consolidated
financial statements, together with the report thereon of KPMG LLP, appearing on
pages F-1 through F-22 of this Form 10-K, and in Item 7 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

ITEM 9A - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     The Company maintains a system of disclosure controls and procedures that
is designed to ensure that information required to be disclosed by the Company
in this Annual Report on Form 10-K, and in other reports required to be filed or
submitted under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission for
such filings. As required by Rule 13a-15(b) under the Exchange Act, management
of the Company, under the direction of the Company's Chief Executive Officer and
Chief Financial Officer, reviewed and performed an evaluation of the
effectiveness of the Company's disclosure controls and procedures as of December
31, 2006. Based on that review and evaluation, the Chief Executive Officer and
Chief Financial Officer, along with the management of the Company, have
determined that as of December 31, 2006, the disclosure controls and procedures
were and are effective as designed to ensure that information relating to the
Company and its consolidated subsidiaries would be accumulated and communicated
to them, as appropriate, to allow timely disclosures regarding required
disclosures.


                                       35

<PAGE>

CHANGES IN INTERNAL CONTROLS

     There were no significant changes in the Company's internal controls over
financial reporting during the quarter ended December 31, 2006.

MANAGEMENT ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     The management of VASCO Data Security International, Inc. is responsible
for establishing and maintaining adequate internal control over financial
reporting. Our internal control system was designed to provide reasonable
assurance to the company's management and board of directors regarding the
preparation and fair presentation of published financial statements. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers and effected by the company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:

     -    Pertain to the maintenance of records that in reasonable detail
          accurately and fairly reflect the transactions and dispositions of the
          assets of the company;

     -    Provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance
          with generally accepted accounting principles, and that receipts and
          expenditures of the company are being made only in accordance with
          authorizations of management and directors of the company; and

     -    Provide reasonable assurance regarding prevention or timely detection
          of unauthorized acquisition, use or disposition of the company's
          assets that could have a material effect on the financial statements.

     Our management, including our Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures or internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well designed and implemented, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues within a company are detected. The inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the controls. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected.

     Our management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2006. In making this assessment, it used
the criteria based on the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in "Internal Controls - Integrated
Framework" (COSO). Based on our assessments we believe that, as of December 31,
2006, our internal control over financial reporting is effective based on those
criteria.

     Our independent registered public accounting firm, KPMG LLP, has issued an
audit report on our assessment of our internal control over financial reporting.
Their report on management's assessment and their opinion on the effectiveness
of our internal control over financial reporting appear below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

VASCO Data Security International, Inc.:

We have audited management's assessment, presented in Management's Annual Report
on Internal Control over Financial Reporting, that VASCO Data Security
International, Inc. maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO


                                       36

<PAGE>

criteria). VASCO Data Security International, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that VASCO Data Security International,
Inc. maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, VASCO Data Security International, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO criteria.

VASCO Data Security International, Inc. acquired Logico Smart Card Solutions
(Logico) and Able N.V. (Able) during 2006, and management excluded from its
assessment of the effectiveness of VASCO Data Security International, Inc.'s
internal control over financial reporting as of December 31, 2006, Logico and
Able's internal control over financial reporting associated with total assets of
$4.8 million and $8.2 million, respectively, and total revenues of $191,000 and
$533,000, respectively, included in the consolidated financial statements of
VASCO Data Security International, Inc. and subsidiaries as of and for the year
ended December 31, 2006. Our audit of internal control over financial reporting
of VASCO Data Security International, Inc. also excluded an evaluation of the
internal control over financial reporting of Logico and Able.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
VASCO Data Security International, Inc. and subsidiaries as of December 31, 2006
and 2005, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006, and our report dated March 15, 2007
expressed an unqualified opinion on those consolidated financial statements.


/s/ KPMG LLP

Chicago, Illinois

March 15, 2007

ITEM 9B - OTHER INFORMATION

     None.


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<PAGE>

                                    PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS AND EXECUTIVE OFFICERS

     T. KENDALL "KEN" HUNT -- Mr. Hunt is Chairman of the Board and Chief
Executive Officer. He served as our Chief Executive Officer through June 1999.
He returned as CEO in November 2002. He has been a director since July 1997 and
currently serves a one-year term. He served since 1990 as Chairman and President
of our predecessor, VASCO Corp. He is also affiliated with several high-tech
early-stage companies, serving as a member of their Board of Directors. He is a
co-founder and on the board of Secured Services, Inc., a publicly-held company,
listed on the Nasdaq (Symbol: ssvc). Mr. Hunt is President of the Belgian
Business Club of Chicago. Additionally, he is on the Advisory Board for the
Posse Foundation, an organization dedicated to providing full college
scholarships to urban minority youth leaders through its partnerships with elite
universities across the U.S. He holds an MBA from Pepperdine University, Malibu,
California, 1979, and a BBA from the University of Miami, Florida, 1965. Mr.
Hunt is 63 years old.

     MICHAEL P. CULLINANE -- Mr. Cullinane has been a director since April 10,
1998 and currently serves a one-year term. He is the Chairman of our Audit
Committee and a member of our Compensation Committee and our Governance and
Nominating Committee. Mr. Cullinane currently serves as the Executive Vice
President and Chief Financial Officer of Lakeview Technology. Mr. Cullinane
served as the Executive Vice President and Chief Financial Officer and a
director of Divine, Inc. from July 1999 to May 2003. He served as Executive Vice
President, Chief Financial Officer and a director of PLATINUM Technology
International, Inc. from 1988 to June 1999. On February 25, 2003, Divine, Inc.
filed for protection under the federal bankruptcy laws. Mr. Cullinane received a
B.B.A. from the University of Notre Dame, South Bend, Indiana. Mr. Cullinane is
57 years old.

     JOHN N. FOX, JR. -- Mr. Fox has been a director since April 2005 and
currently serves a one-year term. He is Chairman of our Compensation Committee
and is a member of our Audit Committee and our Governance and Nominating
Committee. From 1998 to 2003, Mr. Fox served as a Vice Chairman of Deloitte &
Touche and the Global Director, Strategic Clients for Deloitte Consulting. He
held various other positions with Deloitte Consulting from 1968 to 2003, and
served on the board of Deloitte Touche Tohmatsu from 1998 to 2003. Mr. Fox
currently serves on a variety of non-profit boards of directors. Mr. Fox
received his B.A. degree from Wabash College and his MBA from the University of
Michigan. Mr. Fox is 64 years old.

     JEAN K. HOLLEY-- Ms. Holley was elected to the Board of Directors of VASCO
effective August 1, 2006, and was named to the Audit Committee, the Compensation
Committee and the Governance and Nominating committee of the Board. Ms. Holley
is the Executive Vice President and Chief Information Officer for Tellabs. Ms
Holley served as VP and CIO for USG Corporation as well at the Sr. IT Director
for Waste Management. Ms. Holley holds a BS in Computer Science/Electrical
Engineering from the University of Missouri-Rolla, and a MS in Computer
Science/Engineering from Illinois Institute of Technology in Chicago. She has
served on a variety of boards including Blue Wolff, Illinois Institute of
Technology, Northern Illinois University's College of Engineering & Engineering
Technology, University of Missouri - Rolla's College of Mines & Metallurgy, and
the School of Management Information Systems. She served as President of the
Academy for Computer Science at UMR and is a current Board member for Junior
Achievement. Finally, she serves as a Board member for Giant Steps of Illinois,
an autistic school for children with autistic spectrum disorders. Ms. Holley is
47 years old.

     JOHN R. WALTER -- Mr. Walter has been a director since April 2003 and
currently serves a one-year term. He is Chairman of our Governance and
Nominating Committee and is a member of our Audit Committee and our Compensation
Committee. Mr. Walter is Chairman and CEO of Ashlin Management Co., a private
investment and management services firm. Mr. Walter also serves as a director
for Deere & Company, Manpower, Inc., Inner Workings and SNP Corporation of
Singapore. Mr. Walter served as President and Chief Operating Officer of AT&T
Corporation from 1996 to 1997. He served as Chairman and CEO of R.R. Donnelley &
Sons Company, a print and digital information management company, from 1989
through 1996. Mr. Walter received a B.S. degree in management from Miami
University, Oxford, Ohio. Mr. Walter is 60 years old.


                                       38

<PAGE>

EXECUTIVE OFFICERS

     JAN VALCKE -- Mr. Valcke is President & Chief Operating Officer. Mr. Valcke
has been an officer of the Company since 1996. From 1992 to 1996, he was
Vice-President of Sales and Marketing of Digipass NV/SA, a member of the
Digiline group. He co-founded Digiline in 1988 and was a member of the Board of
Directors of Digiline. Mr.Valcke received a degree in Science from St. Amands
College in Kortrijk, Belgium. Mr. Valcke is 52 years old.

     CLIFFORD K. BOWN -- Mr. Bown is Executive Vice President & Chief Financial
Officer. Mr. Bown started his career with KPMG LLP where he directed the audits
for several publicly held companies, including a global leader that provides
integrated and embedded communications solutions. From 1991 to 1993, he was CFO
for publicly held XL/DATACOMP, a $300 million provider of midrange computer
systems and support services in the U. S. and U. K. Mr. Bown also held CFO
positions in two other companies focused on insurance and healthcare from 1995
through 2001. Mr. Bown received a B.S. in Accountancy from the University of
Illinois, Urbana, Illinois, his MBA from the University of Chicago, and he has a
CPA certificate. Mr. Bown is 55 years old.

AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has designated an Audit Committee, which consists of
Mr. Cullinane, Mr. Fox, Ms. Holley and Mr. Walter. The Board has determined that
Mr. Cullinane, Chairman of the Audit Committee and Mr. Walter each qualify as a
financial expert and has designated each person as a financial expert. Each
member of the Audit Committee has been determined to be independent as defined
by The Nasdaq Stock Market, Inc. and the Securities and Exchange Commission.

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires directors and
executive officers, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and The Nasdaq
Stock Market, Inc. Directors, executive officers and beneficial owners of more
than 10% of the outstanding shares of common stock are required by Securities
and Exchange Commission regulations to furnish us with copies of all Section
16(a) forms that they file. Based solely on review of the copies of such forms
or written representations that no reports under Section 16(a) were required, we
believe that for the year period ended December 31, 2006, all of the Company's
directors, executive officers and greater than 10% beneficial owners complied
with Section 16(a) filing requirements applicable to them.

CODE OF ETHICS

     The Company has adopted a Code of Ethics that applies to all of its
employees, including its principal executive officer and principal financial
officer. The Code of Ethics was filed in the prior year and is noted as Exhibit
14.1 herein. A copy of the Code of Ethics can also be found on our website,
www.vasco.com in the investor, corporate governance section.

ITEM 11 - EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

     The Compensation Committee (the "Committee") of the Board of Directors is
responsible for the compensation of the Chief Executive Officer, T. Kendall
Hunt; President and Chief Operating Officer, Jan Valcke; and our Executive Vice
President and Chief Financial Officer, Clifford K. Bown, who are collectively
referred to as our "named executive officers". They are the only executive
officers of the Company and our subsidiaries. It is the Committee's
responsibility to assure that the named executive officers are compensated in a
manner consistent with our compensation philosophy, internal equity
considerations, competitive practice, and the requirements of the appropriate
regulatory bodies.


                                       39

<PAGE>

Compensation Philosophy

     We operate in the competitive technology industry and view our ability to
attract and retain highly qualified and dedicated executives and key employees
as a critical component of our future success. We strive to maintain an
entrepreneurial atmosphere and to maintain a low cost operating structure. Our
targeted growth strategies require an executive compensation program that
reinforces the importance of performance and accountability. Accordingly the
programs designed to provide executives with meaningful rewards for achievement
of results above established goals, while maintaining alignment with shareholder
interests, corporate values and important strategic initiatives. Consequently,
we employ a combination of salary, annual and long-term incentive-based cash and
non-cash based compensation to retain, reward and provide incentives to our
executives and key employees.

     The company has not established any guidelines regarding stock ownership as
the named executive officers already hold substantial equity interests which we
believe directly align their interests with those of our shareholders.

Responsibility and Process

     The Compensation Committee's primary responsibility is to assure that the
Company's compensation programs and plans for executive officers are consistent
with the Company's compensation philosophy, internal equity considerations,
competitive practice, and the requirements of the appropriate regulatory bodies.

     More specifically, with respect to the compensation of the named executive
officers, the Committee has the responsibility to:

     -    Review, from time to time, the Company's compensation strategy to
          ensure that the Company's compensation programs and plans allow the
          Committee to structure the compensation of the chief executive officer
          and the other executive officers in a manner that is consistent with
          the Company's goals and objectives and shareholders' interests.

     -    Review and approve annually the Company's goals and objectives
          relevant to the compensation of the chief executive officer and other
          executive officers, including both quantitative and qualitative goals
          and objectives, evaluate the chief executive officer's and other
          executive officers' performance against those goals and objectives and
          set the chief executive officer's and other executive officers'
          compensation based on this evaluation

     -    Review and periodically make recommendations, if needed, to our board
          of directors with respect to all compensation plans maintained by the
          Company or proposed to be adopted by the Company.

     -    Exercise all rights, authority and functions of the Board under the
          Company's compensation plans including, but not limited to,
          establishing policies and procedures with respect to grants of stock
          options and/or other equity awards, and reviewing and approving all
          grants of stock options and/or other equity awards.

     -    Establish and periodically review policies with respect to executive
          officer perquisites.

     -    Review and recommend to the Board the terms of any employment
          agreement or any amendment to an employment agreement proposed between
          the Company and any executive officer.

     The Committee makes all compensation decisions regarding the named
executive officers. The Committee may solicit input from our named executive
officers regarding goal setting and their performance if the Committee deems
such input to be appropriate and helpful to these decisions. The Committee also
approves the long term incentive awards for certain other key employees
recommended by the named executive officers.

     The Committee considers a number of factors in establishing the
compensation program for our named executive officers, including compensation
paid to executives of companies with which we compete, the relative size and
stage of our development compared to others with which we compete, our
performance compared to those competitive companies, the performance of our
named executive officers, and input from third party consultants.

     Although we strive to maintain a low cost operating structure, the
Committee aims to set our compensation programs at competitive levels. Our
compensation program consists primarily of base salary, annual cash incentive
compensation and long-term equity awards.


                                       40

<PAGE>

     We have a compensation program that is designed to reward company
performance by giving greater weight, relative to base salary, to the annual
cash incentive compensation and long-term incentive components of total
compensation. In addition, we have endeavored to make our compensation program
simple, transparent and directly aligned with performance and long-term growth
in earnings per share.

     Generally, we review the compensation of our named executive officers on an
annual basis. In connection with our review of 2006 results and setting
compensation for 2007, we increased our compensation targets to the 75th
percentile of benchmarking data, compared to prior years when compensation was
closer to the 50th percentile of that data. This increase was the result of a
number of factors, most importantly, to recognize and reward our named executive
officers for the performance of the Company, including substantial growth in
revenues, net income and earnings per share, which has been, in large part,
attributable to their superior performance. In addition, due to our thin
executive officer structure, our named executive officers have a broader range
of duties than those of similar officers of other companies. Finally, we
recognized that technology companies, generally, and the ten identified
competitors, in particular, pay above the more broadly defined market
benchmarks. These objectives also recognize the Committee's expectation that,
over the long term, VASCO will continue to generate returns greater than the
average of its peer group.

Consultants

     During 2006, the Committee engaged Hewitt Associates LLC, an independent
global human resources consulting firm, to assist the Committee with structuring
the compensation of our named executive officers. Hewitt provided benchmarking
information, including its Total Compensation MeasurementTM (TCM) data. Because
of the large variance in size of the companies comprising the TCM data,
regression analysis was used to adjust the compensation data for differences in
revenue to a value approximating the Company's revenues. Hewitt also advised the
Committee with respect to types of compensation, including the accounting and
tax treatment of various types of compensation, and provided recommendations
with respect to our compensation structure.

     Also the Committee worked with Hewitt to analyze the executive compensation
of ten competitor companies: Activcard Corp., Entrust Inc., Internet Security
Systems Inc., RSA Security Inc., Safenet Inc., Saflink Corp., Secure Computing
Corp., Sonicwall Inc., Verisign Inc. and Watchguard Technologies. We utilized
this analysis, as well as the TCM data, to assist us in setting compensation
levels and in determining the appropriate mix of compensation elements.

     We targeted the 75th percentile of the TCM data to establish compensation
for 2007. We used data provided by Hewitt to establish a target value of total
compensation for our named executive officers. Considering that target, our
compensation philosophy and the referenced benchmarks, we determined how to
divide total compensation among base salary, annual cash incentive compensation
and long-term equity compensation. With additional input from Hewitt on valuing
long-term incentive compensation, the Committee was able to set long-term
incentive compensation consistent with the objective of providing a specific
economic value to the named executive officers as opposed to targeting the
number of shares.

Base Salary

     Each of our named executive officers is party to an employment agreement
with the Company and base salary and other elements of compensation are
determined pursuant to those employment agreements. In establishing base salary,
we reviewed the performance of each of our named executive officers, their
duties and responsibilities relative to their counterparts at our benchmark
group of competitors, as well as Company objectives with respect to retention
and succession. The base salary for each executive officer is set on the basis
of personal performance and the salary level in effect for comparable positions
at companies that compete for executive talent.

     Mr. Hunt's annual base salary during 2006 was $270,000. Based primarily on
the Committee's decision to increase our target level of compensation from the
50th percentile to the 75th percentile of the TCM data, and on Mr. Hunt's
performance evaluation, his annual base salary was increased approximately 11.1%
to $300,000 for 2007.

     During 2006, Mr. Valcke's annual base salary was 270,000 Euros, or
approximately $338,000. In setting base salary for 2007, the Committee
determined that Mr. Valcke's blended executive duties, including sales,
marketing and personnel matters, in a thin executive structure, warranted an
increase in annual base salary. For this reason, as well as the decision to
increase our target level of compensation generally, Mr. Valcke's annual base
salary was increased 11.1% to 300,000 Euros, or approximately $390,000, for
2007.


                                       41

<PAGE>

     Mr. Bown's annual base salary during 2006 was $220,000. In setting base
salary for 2007, the Committee considered his added responsibilities, including
oversight of human resources, and his planned relocation to Zurich, Switzerland
to establish our European headquarters. For this reason, as well as the decision
to increase our target level of compensation generally, Mr. Bown's annual base
salary was increased 13.6% to $250,000, for 2007.

     Actual base salaries for each of the named executive officers for the
fiscal years 2006, 2005 and 2004 are disclosed in the tables below.

Annual Cash Incentive Compensation

     In February this year the Committee made non-equity incentive plan awards
to our named executive officers, payment of which is subject to the achievement
of an earnings per share target during 2007. We believe annual cash incentive
plans help communicate critical success factors to our named executive officers,
promote pay for performance and motivate our named executives to achieve higher
levels of success.

     The Committee established minimum, target and maximum levels of payment to
which each named executive officer will be entitled, based on the relationship
of audited earnings per fully diluted share, or "EPS," to the target established
by the Committee, subject to a threshold equal to eighty percent of the target.
Provided the threshold is met, each named executive officer will receive 50-75%
of the target payment if EPS is 80-90% of the performance target, 100% of the
target payment if EPS is 100% of the performance target, and 110%-150% of the
target payment if EPS is 110-140% of the performance target. The payouts for the
achievement of certain performance levels will be interpolated for achievement
of performance goals between the stated values.

     As noted above, cash incentive plan compensation was established as part of
total compensation and in consideration of benchmark data regarding cash
incentive plan compensation as a percentage of base salary and other factors
discussed below.

     Mr. Hunt's target payment for 2007 was maintained at approximately
sixty-five percent of base salary. As a result of the increase in his base
salary, the target payment increased from the 2006 target of $175,000 to
$195,000, which corresponds to a threshold payment of $97,500, based on
achievement of 80% of the EPS target, and a maximum payment of $292,500, based
on achievement of 140% of the EPS target.

     For the reasons set forth above, namely the additional executive duties
performed by Mr. Valcke, we increased his 2007 target payment to seventy-five
percent of base salary from sixty-five percent of base salary for 2006. Mr.
Valcke's target incentive payment for 2007 is 225,000 Euros (approximately
$292,500), which corresponds to a threshold payment of 112,500 Euros
(approximately $146,250) and a maximum payment of 337,500 Euros (approximately
$438,750). Mr. Valcke's target payment for 2006 was 175,000 Euros (approximately
$227,500).

     Mr. Bown's target incentive payment for 2007 is sixty percent of base
salary, or $150,000. For the reasons set forth above, namely the additional
duties performed by Mr. Bown and his relocation to Europe, we increased his
target bonus to sixty percent of base salary from fifty-five percent of base
salary, or $120,000, for 2006. His target incentive payment for 2007 corresponds
to a threshold payment of $75,000 and a maximum payment of $225,000.

     For the fiscal year ended December 31, 2006, earnings per share exceeded
110% of the target. Accordingly the maximum payout of 120% of the targeted
payout of cash bonus incentive, provided under the terms of the 2006 award, was
earned. The following incentive bonus payments were made in February, 2007 for
the fiscal 2006 performance: T. Kendall Hunt $210,000; Jan Valcke 210,000 Euros
(approximately $277,547, based on the exchange rate on February 15, 2007); and
Clifford K. Bown $144,000. For fiscal year ended 2007, the Committee expects
that the earnings per share target will be met.

     Actual bonuses paid for each of the named executive officers for the fiscal
years 2006, 2005 and 2004 are disclosed in the tables below.

Long Term Incentives

     Our 1997 Stock Compensation Plan, which was amended and restated with the
approval of our shareholders in 1999, serves as our primary vehicle for
long-term incentive awards. The plan was designed to serve as a performance
incentive to encourage our executives, key employees and others to acquire or
increase a proprietary interest in the success of the company. The Committee
believes that, over a period of time, our share performance will, to a great
extent, reflect executive and key employee performance.

     The stock compensation plan provides that options or other forms of stock
compensation, including restricted stock and participation awards, may be
granted at the discretion of the Committee, in such amounts and


                                       42

<PAGE>

subject to such conditions as the Committee may determine. All awards of stock
based compensation under the aforementioned Plan are based on the closing price
on the date of grant, which generally occurs in January or February of each year
to ensure that such date is not tied to the release of any material nonpublic
information.

     Prior to 2006, awards under our stock compensation plan included option
awards and awards of restricted stock. For 2006, the Committee decided to move
from the award of stock options, which had been the primary form of long-term
incentive award in prior years, entirely to restricted stock. The number of full
value restricted shares to be awarded was determined based on approximating the
equivalent number of options granted in 2005. We made restricted stock awards of
35,000 shares, 35,000 shares and 20,000 shares to Messrs. Hunt, Valcke and Bown,
respectively. Such awards will vest ratably over a four-year period from the
date of grant.

     For 2007, we made a number of changes in the types of awards made. First,
we looked to other types of awards to achieve our compensation goals. Second, we
did not target awards based on number of shares, but on a measure of the
economic value to the recipients.

     With respect to determining awards, we reviewed long-term incentive
compensation as part of total compensation as compared to benchmark data
regarding long-term incentive compensation as a percentage of base salary.
Targeting the 75th percentile for long-term incentive compensation, we
determined the economic value to the executive of each long-term grant to be
awarded and determined the actual awards based on VASCO's closing stock price on
the date of grant and various discounting factors. Fifty percent of the targeted
value was granted as restricted stock and fifty percent of the targeted value
was granted as a performance award. The Committee believes this mix of long-
term incentives enhances the linkage between the creation of share holder value
and long-term executive compensation; provides increased equity ownership by the
named executives; and enables competitive levels of total compensation with an
emphasis on payment for results. The Committee believes the 50/50 mix of direct
award and award only if target results are achieved best aligns the named
executive officers interests to those of shareholders.

     Each restricted stock award vests in equal annual installments over a
four-year period, beginning on the first anniversary of the date of grant. Each
performance award will vest upon the achievement of cumulative EPS target
through 2009. Under the terms of the award, no shares will vest if the
cumulative EPS target is not met and no additional shares will be earned if the
cumulative EPS target is exceeded. However, the Committee has the discretion to
adjust the awards should it deem appropriate to do so. The EPS target has been
set in alignment with the Company's strategic plan and the Committee expects
that the plan will be achieved.

     The Committee targeted an economic value to:

     Mr. Hunt of $360,000, or 120% of base salary. As a result, he received a
restricted stock award of 13,400 shares and a performance award of 20,200
shares.

     Mr. Valcke of 210,000 Euros (approximately $270,000), or 70% of base
salary. As a result, he received a restricted stock award of 10,200 shares and a
performance award of 15,300 shares.

     Mr. Bown of $162,500, or 65% of base salary. Accordingly, he received a
restricted stock award of 6,100 shares and a performance award of 9,100 shares.

     The value of equity awards for each of the named executive officers for the
fiscal years 2006, 2005 and 2004 are disclosed in the tables below.

Retirement Plans

     The Company does not provide retirement plans for the named executives.

Perquisites and Other Personal Benefits

     Mr. Valcke is provided use of a company automobile. Mr. Bown, upon his
relocation to Zurich, Switzerland to establish the Company's European
Headquarters, will be provided an allowance for housing, an automobile, certain
other relocation expenses and tax equalization.


                                       43

<PAGE>

Deductibility of Executive Compensation

     As part of its role, the Committee reviews and considers the deductibility
of executive compensation under Section 162(m) of the Internal Revenue Code of
1986, as amended, which limits the annual amount of compensation that the
Company may deduct to $1,000,000 for any named executive officer. An exception
to this regulation is for performance-based compensation which meets certain
requirements of the code. Awards made under the Incentive Compensation and Stock
Plan may qualify as performance-based compensation under Section 162(m) of the
Code. However, not all grants that may be made under the plan or that have been
made under the plan meet all requirements for deductibility under Section 162(m)
of the code. However, unless the amounts involved become material, the Committee
believes that it is more important to preserve its flexibility under the plan to
craft appropriate incentive awards than to meet every requirement for
deductibility with respect to every grant. The Committee continues to believe
that this is not currently a significant issue, but continues to monitor the
issue.

Employment Agreements

     As mentioned above, each of our named executive officers is party to an
employment agreement with the Company. In addition to governing base salary,
incentive compensation and other items, each agreement provides for severance
compensation, including severance compensation following a change in control of
the Company.

     Mr. Hunt's employment agreement is dated November 20, 2002. Under the terms
of his agreement, in the event he is terminated without cause or he quits for
good reason, whether after a change in control of the Company or not, Mr. Hunt
will continue to receive his base pay and any applicable incentive compensation
over a 24-month period. In the event of a change in control, if any payment or
benefit to be received by Mr. Hunt would be subject to an excise tax under the
Internal Revenue Code, the Company will increase the payments and benefits to
Mr. Hunt to reimburse him, on an after-tax basis, for the amount of such excise
tax. If Mr. Hunt is terminated for cause or quits without good reason, he will
not be entitled to any severance compensation. Mr. Hunt has agreed to abide by
several non-compete restrictions following the termination of his employment.
The restricted period will be either 12 or 24 months, depending on the nature of
the termination.

     Mr. Valcke's employment agreement is dated June 29, 2005. Under the terms
of his agreement, in the event he is terminated without cause or quits for good
reason, whether after a change in control of the Company or not, Mr. Valcke will
continue to receive his base pay and any applicable incentive compensation over
a 24-month period. In the event of a change in control, if any payment or
benefit to be received by Mr. Valcke would be subject to an excise tax under the
Internal Revenue Code, the Company will increase the payments and benefits to
Mr. Valcke to reimburse him, on an after-tax basis, for the amount of such
excise tax. If Mr. Valcke is terminated for cause or quits without good reason,
he will not be entitled to any severance compensation. Mr. Valcke has agreed to
abide by several non-compete restrictions following the termination of his
employment. The restricted period will be either 12 or 24 months, depending on
the nature of the termination.

     Mr. Bown's employment is dated January 1, 2003. Under the terms of his
agreement, in the event he is terminated without cause or quits for good reason,
whether after a change in control of the Company or not, Mr. Bown will continue
to receive his base pay and any applicable incentive compensation over a
12-month period. In the event of a change in control, if any payment or benefit
to be received by Mr. Bown would be subject to an excise tax under the Internal
Revenue Code, the Company will increase the payments and benefits to Mr. Bown to
reimburse him, on an after-tax basis, for the amount of such excise tax. If Mr.
Bown is terminated for cause or quits without good reason, he will not be
entitled to any severance compensation. Mr. Bown has agreed to abide by several
non-compete restrictions following the termination of his employment. The
restricted period will be either 3 or 12 months, depending on the nature of the
termination. On February 26, 2007 the Company entered into a supplemental
employment agreement with Mr. Bown which describes the terms and conditions
applicable to his assignment in Zurich, Switzerland to establish the Company'
European Headquarters. The agreement provides for housing and certain relocation
expenses and a tax equalization policy.

     We believe the severance and change in control benefits which our named
executive officers are entitled to receive are comparable with those benefits
offered by our competitors and necessary to retain a talented executive team.


                                       44
<PAGE>

SUMMARY COMPENSATION TABLE

     The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to VASCO and our subsidiaries in all capacities
during the years ended December 31, 2006, 2004 and 2004 for our Chief Executive
Officer, President and Chief Operating Officer and Executive Vice President, who
are the only executive officers of VASCO and our subsidiaries whose salary and
bonus for such year exceeded $100,000 (collectively, the "Named Executive
Officers").

<TABLE>
<CAPTION>
                                                                      NON-EQUITY
                                                                         PLAN       ALL OTHER
                                                  STOCK     OPTION      COMPEN-    ANNUAL COM-
          NAME AND                    SALARY     AWARDS     AWARDS      SATION      PENSATION      TOTAL
     PRINCIPAL POSITION       YEAR      ($)      ($)(2)     ($)(4)        ($)         ($)(1)        ($)
     ------------------       ----   --------   --------   --------   ----------   -----------   --------
<S>                           <C>    <C>        <C>        <C>        <C>          <C>           <C>
T. KENDALL HUNT
Chairman and Chief
Executive Officer             2006   $270,000   $ 78,258   $ 90,934    $210,000           --     $649,192

JAN VALCKE (3)
President and Chief
Operating Officer             2006    338,600    101,186    182,012     263,356       13,062      898,216

CLIFFORD K. BOWN
Executive Vice President,
Chief Financial Officer and
Secretary                     2006    220,000     60,004     91,025     144,000           --      515,029
</TABLE>

(1)  All other annual compensation reflects the value of Mr. Valcke's car
     allowance.

(2)  Reflects the value of restricted stock granted on January 24, 2006 and
     January 14, 2005. The restricted stock vests 25% per year on the award
     anniversary date over a four year period. The value of the award reflects
     the amortization of the grant date fair value of the award, which is based
     on the number of shares awarded and the closing price of the stock on the
     date of award, over the vesting period.

(3)  Mr. Valcke's salary and non-equity plan compensation for 2006, 2005 and
     2004 were denominated in Euros. The above information reflects the Euros
     paid translated into U.S. dollars at the average exchange rate for the
     year.

(4)  Compensation amounts for Option Awards for 2006 was determined in
     accordance with Statement of Financial Accounting Standards ("SFAS")
     123(R), Stock-Based Compensation, which the Company adopted in 2006. The
     fair value of stock options at the date of grant is estimated using the
     Black-Scholes option pricing model, with the expected life adjusted to
     reflect the effect of post-vesting restrictions. This compensation expense
     is recorded on a straight-line basis over the vesting period of the
     options. The assumptions used to determine the fair falue of the stock
     options at the date of grant are described in footnote 10 of the audited
     financial statements.


                                       45

<PAGE>

GRANTS OF PLAN-BASED AWARDS

     The following table sets forth all plan-based awards granted to the named
executive officers during 2006.

<TABLE>
<CAPTION>
                                          ESTIMATED FUTURE PAYOUTS
                                              UNDER NON-EQUITY          STOCK
                                         INCENTIVE PLAN AWARDS (1)     AWARDS:    GRANT DATE
                                        ---------------------------   NUMBER OF   FAIR VALUE
                                         THRES-                       SHARES OF    OF STOCK
                               GRANT      HOLD     TARGET   MAXIMUM     STOCK       AWARDS
            NAME                DATE      ($)       ($)       ($)        (#)          ($)
            ----              -------   -------   -------   -------   ---------   ----------
<S>                           <C>       <C>       <C>       <C>       <C>         <C>
T. KENDALL HUNT
Chairman and Chief
Executive Officer             1/24/06   140,000   175,000   210,000     35,000      333,900

JAN VALCKE
President and Chief
Operating Officer             1/24/06   175,570   219,460   263,356     35,000      333,900

CLIFFORD K. BOWN
Executive Vice President,
Chief Financial Officer and
Secretary                     1/24/06   96,0000   120,000   144,000     20,000      190,800
</TABLE>

(1)  The non-equity incentive plan awards reflect performance bonus targets for
     2006. As discussed in the Annual Cash Incentive Compensation section above,
     the amounts are earned if the actual audited fully diluted earnings per
     share equals at least 90% of the target amount established by the
     Compensation Committee of the Board of Directors. The amounts included
     above were established and earned in 2006 and were paid at the maximum in
     2007.


                                       46

<PAGE>

     OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     The following table sets forth the aggregate number of outstanding equity
awards held by the named executive officers as of December 31, 2006.

<TABLE>
<CAPTION>
                                       OPTION AWARDS                              STOCK AWARDS
                    ---------------------------------------------------   ---------------------------
                                                                           NUMBER OF
                     SECURITIES     SECURITIES                             SHARES OR    MARKET VALUE
                     UNDERLYING     UNDERLYING                             UNITS OF     OF SHARES OR
                    UNEXERCISED    UNEXERCISED     OPTION                    STOCK     UNITS OF STOCK
                      OPTIONS        OPTIONS      EXERCISE     OPTION      THAT HAVE    THAT HAVE NOT
                        (#)            (#)          PRICE    EXPIRATION   NOT VESTED       VESTED
       NAME         EXERCISABLE   UNEXERCISABLE      ($)        DATE          (#)            (#)
       ----         -----------   -------------   --------   ----------   ----------   --------------
<S>                 <C>           <C>             <C>        <C>          <C>          <C>
T. KENDALL HUNT
AWARD DATED:
   6/16/1997 (1)       125,000            --       $4.000      6/16/07          --              --
   1/11/1999 (2)        30,000            --        3.125      1/11/09          --              --
   1/11/2000 (1)        30,000            --        8.875      1/11/10          --              --
   11/30/2001 (3)       90,000            --        1.250     11/30/11          --              --
   1/9/2002 (3)        120,000            --        2.270       1/9/12          --              --
   1/9/2003 (3)        125,000            --        0.720       1/9/13          --              --
   1/8/2004 (3)        121,527         3,473        2.530       1/8/14          --              --
   1/24/2006 (1)           --             --           --           --      35,000         414,750

JAN VALCKE
AWARD DATED:
   8/18/1999 (2)         5,000            --        2.938      8/18/09          --              --
   11/30/2001 (3)       50,000            --        1.250     11/30/11          --              --
   1/9/2002 (3)         50,000            --        2.270       1/9/12          --              --
   1/9/2003 (3)        100,000            --        0.720       1/9/13          --              --
   1/8/2004 (3)         97,222         2,778        2.530       1/8/14          --              --
   1/14/2005 (4)        47,915        52,085        6.380      1/14/12          --              --
   1/14/2005 (1)            --            --           --           --      11,250         133,313
   1/24/2006 (1)            --            --           --           --      35,000         414,750

CLIFFORD K. BOWN
AWARD DATED:
   8/19/2002 (3)        75,000            --        1.200      8/19/12          --
   1/9/2003 (3)         50,000            --        0.720       1/9/13          --              --
   1/8/2004 (3)         48,611         1,389        2.530       1/8/14          --              --
   1/14/2005 (4)        23,957        26,043        6.380      1/14/12          --              --
   1/14/2005 (1)            --            --           --           --       7,500          88,875
   1/24/2006 (1)            --            --           --           --      20,000         237,000
</TABLE>

(1)  Vests annually over a 4-year period

(2)  Vests annually over a 5-year period

(3)  Vests monthly over a 36-month period

(4)  Vests monthly over a 48-month period


                                       47

<PAGE>

OPTION EXERCISES AND STOCK VESTED

     The following table sets forth the stock options exercised and stock awards
vested in the year ended December 31, 2006 held by the named executive officers.

<TABLE>
<CAPTION>
                                                         STOCK AWARDS
                           OPTION AWARDS           ------------------------
                   -----------------------------    NUMBER OF
                      NUMBER OF         VALUE        SHARES        VALUE
                   SHARES ACQUIRED     REALIZED     ACQUIRED    REALIZED ON
                     ON EXERCISE     ON EXERCISE   ON VESTING     VESTING
      NAME               (#)             ($)           (#)          ($)
      ----         ---------------   -----------   ----------   -----------
<S>                <C>               <C>           <C>          <C>
T. KENDALL HUNT             --              --           --            --
JAN VALCKE              28,750         224,688        3,750        38,025
CLIFFORD K. BOWN        25,000         203,750        2,500        25,350
</TABLE>

PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL

     As noted above under Employment Agreements and in accordance with the terms
of the Agreements as described above, each of the named executives will each be
entitled to receive their then existing rates of base pay and incentive
compensation for a period of time, as defined in their Agreements, if their
employment is terminated without cause or if they quit for good reason, whether
after a change in control of the Company or not. In addition, if there is a
change of control of the Company, all of the outstanding and unvested stock
options and awards, including those of the named executives, would automatically
vest. Assuming that a triggering event had occurred on December 31, 2006, the
total amount of the benefits that would be received by the named executives
would be as follows:

(1)  Mr. Hunt would receive from the Company aggregate cash compensation of
     $890,000 over a period of 24 months. In addition, Mr. Hunt's unvested stock
     options of 3,473 shares and unvested stock awards totaling 35,000 shares
     would become fully vested and would have a value of approximately $ $32,000
     and $415,000, respectively, using the closing price of the Company's stock
     on December 31, 2006 of $11.85 per share.

(2)  Mr. Valcke would receive from the Company aggregate cash compensation of
     890,000 Euros (approximately $1,174,000 using the exchange rate as of
     December 31, 2006) over a period of 24 months. In addition, Mr. Valcke's
     unvested stock options of 54,863 shares and unvested stock awards of 46,250
     shares would become fully vested and would have a value of approximately
     $311,000 and $548,000, respectively, using the closing price of the
     Company's stock on December 31, 2006 of $11.85 per share.

(3)  Mr. Bown would receive from the Company aggregate cash compensation of
     $400,000 using the exchange rate as of February 28, 2007) over a period of
     12 months. In addition, Mr. Bown's unvested stock options of 27,432 shares
     and unvested stock awards of 27,500 shares would become fully vested and
     would have a value of approximately $155,000 and $326,000, respectively,
     using the closing price of the Company's stock on December 31, 2006 of
     $11.85 per share.

COMPENSATION OF DIRECTORS

     The Committee reviews and sets the salaries and incentive compensation for
our executive officers. The Committee reviews information relevant to Director
compensation and presents its recommendation for such compensation to the full
Board for its approval. The Committee also administers our 1997 Stock
Compensation Plan, referred to as the "Stock Plan." In its capacity as
administrator of the Stock Plan, the Committee has authority to grant options
and other stock-based awards to all employees and determine the terms thereof.
The Committee


                                       48

<PAGE>

also makes recommendations to the Board for its approval relative to options and
other stock-based awards to be granted to non-employee Board members. The
members of the Committee for 2006 were: John Fox, Jr., Chairman, Michael P.
Cullinane, Jean, K. Holley, John R. Walter and Michael A. Mulshine through the
date of his retirement, June 14, 2006.

     Each of our directors received a quarterly cash payment of $5,000 in
connection with his or her service on the Board of Directors in 2006. The
directors also receive cash compensation for participation on committees of the
Board as follows: Audit Committee Chair $10,000 annually, paid quarterly; other
committee chairs $5,000 annually, paid quarterly; Audit Committee members $5,000
annually, paid quarterly; and other committee members $2,500 annually, paid
quarterly. Our directors are also reimbursed for expenses incurred in connection
with their attendance at periodic Board meetings. In addition, non-employee
directors are eligible to receive option grants or other stock-based awards from
time to time. In January, 2006, each non-employee director was awarded 6,500
shares of restricted stock. Such shares vest fully in one year. Ms. Holley's,
who was appointed to the Board on August 2, 2006, was awarded of 3,250 shares of
restricted stock.

<TABLE>
<CAPTION>
                    FEES EARNED OR                   OPTION
                     PAID IN CASH    STOCK AWARDS    AWARDS     TOTAL
                         ($)            ($) (1)     ($) (2)      ($)
                    --------------   ------------   -------   --------
<S>                 <C>              <C>            <C>       <C>
MICHAEL CULLINANE       $35,000         $58,134     $44,683   $137,817
JOHN WALTER              32,500          58,134      44,683    135,317
MICHAEL MULSHINE         15,000          58,134      44,683    117,817
JOHN FOX                 32,500          58,134      33,793    124,427
JEAN HOLLEY              15,000          24,615          --     39,615
</TABLE>

(1)  The value of the award reflects the amortization of the full value of the
     award, which is based on the number of shares awarded and the closing price
     of the stock on the date of award, over the vesting period.

(2)  Compensation amounts for Option Awards for 2006 was determined in
     accordance with Statement of Financial Accounting Standards ("SFAS")
     123(R), Stock-Based Compensation, which the Company adopted in 2006. The
     fair value of stock options at the date of grant is estimated using the
     Black-Scholes option pricing model, with the expected life adjusted to
     reflect the effect of post-vesting restrictions. This compensation expense
     is recorded on a straight-line basis over the vesting period of the
     options. The assumptions used to determine the fair falue of the stock
     options at the date of grant are described in footnote 10 of the audited
     financial statements.

     The following table sets forth the aggregate number of outstanding equity
awards held by the non-employee Board members as of December 31, 2006.

<TABLE>
<CAPTION>
                                       AGGREGATE
                       AGGREGATE       NUMBER OF
                       NUMBER OF        OPTION
                     STOCK AWARDS       AWARDS
                    OUTSTANDING AT    OUTSTANDING
                       12/31/06      AT 12/31/06
                    --------------   ------------
<S>                 <C>              <C>
MICHAEL CULLINANE         6,500         112,000
JOHN WALTER               6,500          60,000
JOHN FOX                  6,500          15,000
JEAN HOLLEY               3,250              --
</TABLE>

     In January 2006, the Board of Directors approved the issuance of equity
awards with an aggregate grant date fair value of $62,010 for each Mr.
Cullinane, Mr. Fox, Mr. Walter and Mr. Mulshine. In August 2006, the Board of


                                       49

<PAGE>

Directors approved the issuance of an equity award with an aggregate grant date
fair value of $28,308 for Ms. Holley.

     For 2007, our directors will receive a quarterly cash payment of $8,750 in
connection with his or her service on the Board of Directors. The directors will
also receive cash compensation for participation on committees of the Board as
follows: Audit Committee Chair $10,000 annually, paid quarterly; other Committee
Chairs $5,000 annually, paid quarterly and other Committee members $3,000
annually, paid quarterly. For 2007, each non-employee director was granted a
deferred share award of 3,800 shares (restricted stock units). Such shares vest
fully in one year, but will be paid only upon the director's departure from the
Board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The current members of our Compensation Committee are Mr.Cullinane, Mr.
Fox, Ms. Holley and Mr. Walter. None of these individuals were at any time
during fiscal year 2006 or were formerly an officer or employee of ours. In
addition, none or our executive officers serve as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our Board or Compensation Committee.

COMPENSATION COMMITTEE REPORT

     The Compensation Committee has reviewed and discussed the section of this
Annual Report on Form 10-K titled, "Compensation Discussion and Analysis," with
management and, based on such review and discussions, recommended to our Board
of Directors that the "Compensation Discussion and Analysis" section be included
in this Annual Report on Form 10-K.

                                        Submitted by the Compensation Committee:

                                        John N. Fox, Jr., Chairman
                                        Michael P. Cullinane
                                        John R. Walter
                                        Jean K. Holley

                                        March 9, 2007


                                       50
<PAGE>

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

     The following table sets forth shares of our common stock that are
authorized to be issued as of December 31, 2006 under the Company's 1997 Stock
Compensation Plan, as amended and restated in 1999:

<TABLE>
<CAPTION>
                                                                                                Number of securities
                                                                                               remaining available for
                                     Number of securities to be   Weighted average exercise     future issuance under
                                       issued upon exercise of       price of outstanding     equity compensation plan
                                        outstanding options,        options, warrants and       (excluding securities
                                         warrants and rights                rights            reflected in column (a))
           Plan Category                         (a)                         (b)                         (c)
           -------------             --------------------------   -------------------------   ------------------------
<S>                                  <C>                          <C>                         <C>
Equity compensation plans approved            2,054,938                     $3.25                     5,368,070
   by security holders
Equity compensation plans not                         0                 Not applicable             Not applicable
   approved by security holders
                                              ---------                     ------                    ---------
   Total                                      2,054,938                     $3..25                    5,368,070
                                              =========                     ======                    =========
</TABLE>

     The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of February 28, 2007 for each person
or entity who is known to us to beneficially own five percent or more of the
common stock. For purposes of the table, a person or group of persons is deemed
to have beneficial ownership of any shares as of a given date that such person
has the right to acquire within 60 days after such date.

<TABLE>
<CAPTION>
 NAME AND ADDRESS OF BENEFICIAL   AMOUNT AND NATURE OF
             OWNER                BENEFICIAL OWNERSHIP   PERCENT OF CLASS
 ------------------------------   --------------------   ----------------
<S>                               <C>                    <C>
T. Kendall Hunt                       9,880,052 (1)           26.66%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

Oberweis Asset Management, Inc.       2,210,159 (2)            6.05
333 Warrenville Road, Suite 500
Lisle, IL 60532
</TABLE>

(1)  Includes 100,000 shares held in the T. Kendall Hunt Charitable Remainder
     Trust and 1,011,300 shares held by the estate of Barbara J. Hunt, with Mr.
     Hunt as executor of the estate, as to which shares Mr. Hunt disclaims
     beneficial ownership. The amount also includes 520,000 shares that may be
     acquired pursuant to options which are exercisable at February 28, 2007 or
     become exercisable within 60 days.

(2)  Based on a Schedule 13G/A filed with the SEC on February 14, 2007.


                                       51

<PAGE>

     The table below sets forth certain information with respect to the
beneficial ownership of our common stock as of February 28, 2007 for (i) each of
our directors, (ii) each of our named executive officers, and (iii) all
directors and executive officers as a group. The persons named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them unless otherwise indicated. For purposes of
the table, a person or group of persons is deemed to have beneficial ownership
of any shares as of a given date that such person has the right to acquire
within 60 days after such date.

<TABLE>
<CAPTION>
 NAME AND ADDRESS OF BENEFICIAL     AMOUNT AND NATURE OF
             OWNER                BENEFICIAL OWNERSHIP (1)   PERCENT OF CLASS
 ------------------------------   ------------------------   ----------------
<S>                               <C>                        <C>
T. Kendall Hunt                         9,880,052(2)              26,66%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

Jan Valcke                                419,200(3)               1.14%
Koningin Astridlaan 164
B-1780 Wemmel, Belgium

Cliff Bown                                253,183(4)               0.69%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

Michael P. Cullinane                      122,300(5)               0.33%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

John N. Fox                                28,300(6)               0.08%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

Jean K. Holley                              7,050                  0.02%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

John R. Walter                             90,300(7)               0.25%
1901 S. Meyers Road
Ste. 210
Oakbrook Terrace, IL 60181

All Executive Officers and             10,800,385                 28.57%
Directors as a Group
(7 persons)
</TABLE>

(1)  The number of shares beneficially owned by each director and executive
     officer is determined under rules promulgated by the Securities and
     Exchange Commission, and the information is not necessarily indicative of
     beneficial ownership for any other purpose. Under such rules, beneficial
     ownership includes any shares as to which the individual has sole or shared
     voting power or investment power and also any shares that the individual
     has the right to acquire within 60 days after February 28, 2007 through the
     exercise of any stock option or other right. The inclusion herein of such
     shares, however, does not constitute an admission that the named
     stockholder is a direct or indirect beneficial owner of such shares. Unless
     otherwise indicated, each person or entity named in the table has sole
     voting power and investment power (or shares such power with his or her
     spouse) with respect to all shares of capital stock listed as owned by such
     person or entity.

(2)  Includes 100,000 shares held in the T. Kendall Hunt Charitable Remainder
     Trust and 1,011,300 shares held by the estate of Barbara J. Hunt, with Mr.
     Hunt as executor of the estate, as to which shares Mr. Hunt disclaims
     beneficial ownership. The amount also includes 520,000 shares that may be
     acquired pursuant to


                                       52

<PAGE>

     options which are exercisable at February 28, 2007 or become exercisable
     within 60 days.

(3)  Includes 355,000 shares that may be acquired pursuant to options which are
     exercisable at February 28, 2007 or become exercisable within 60 days.

(4)  Includes 202,083 shares that may be acquired pursuant to options which are
     exercisable at February 28, 2007 or become exercisable within 60 days.

(5)  Includes 112,000 shares that may be acquired pursuant to options which are
     exercisable at February 28, 2007 or become exercisable within 60 days.

(6)  Includes 15,000 shares that may be acquired pursuant to options which are
     exercisable at February 28, 2007 or become exercisable within 60 days.

(7)  Includes 60,000 shares that may be acquired pursuant to options which are
     exercisable at February 28, 2007 or become exercisable within 60 days.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

TRANSACTIONS WITH RELATED PERSONS

     In July 2003, the Company sold its VACMAN Enterprise business unit
("VACMAN") to SecureD Services, Inc. ("SSI"), a then newly organized company in
which T. Kendall Hunt had a 19% equity ownership interest and was one of seven
directors on its board. The transaction was approved by all of the independent
directors of the Company. The Company received a $1.1 million senior secured
promissory note and 2,000,000 shares of convertible preferred stock from SSI in
exchange for the VACMAN assets. The note was payable in 36 monthly installments
and bore an interest of 6% per annum. The preferred stock was to pay a 6%
cumulative stock dividend quarterly, and was convertible into SSI common stock
on a share-for-share basis in phases commencing July 1, 2005. We valued the
transaction at approximately $1.6 million, using a discounted value of the
payment streams expected from the note and preferred stock.

     In 2006, SSI discontinued its monthly note payments to the Company due to
its continuing operating losses and an inability to secure new financing. We
concluded that a decline in fair value had occurred, which was other than
temporary in nature as defined in EITF Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. We
eventually collected the entire note receivable and interest, but did record an
asset impairment charge of $600 in 2006 to fully write down the value of the
investment in the preferred stock of SSI.

     As we have not engaged in related person transactions, with the exception
of the one transaction noted above, we have not adopted any formal policies or
procedures for the review, approval or ratification of related person
transactions. The disclosed transaction was approved by action of the entire
Board of Directors, with the interested person abstaining.

DIRECTOR INDEPENDENCE

     Our Board of Directors has determined that directors Michael P. Cullinane,
John N. Fox, Jr., Jean K. Holley and John R. Walter are independent directors
under Nasdaq independence standards. Accordingly, all members of our audit,
nominating and compensation committees were determined to be independent. The
only member of the Board of Directors who was determined to be not independent
was T. Kendall Hunt.


                                       53

<PAGE>

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The following sets forth the amount of fees paid to our registered public
accounting firm, KPMG LLP, for services rendered in 2006 and 2005 (in
thousands):

     AUDIT FEES: The aggregate fees billed by KPMG LLP for professional services
rendered for the audit of the Company's annual financial statements, the reviews
of the financial statements included in the Company's quarterly reports on Form
10-Q, and services normally provided by the independent auditor in connection
with statutory and regulatory filings were $468 for the fiscal year ended 2006,
and $367 for the fiscal year ended December 31, 2005.

     AUDIT-RELATED FEES: There were no audit-related fees paid in 2006 or 2005.

     TAX FEES: The aggregate fees billed by KPMG LLP for tax compliance and tax
advice were $2 in 2006 and $2 in 2005. The fee for 2006 and 2005 related to the
filing of a foreign subsidiary tax return.

     ALL OTHER FEES: The aggregate fees billed by KPMG LLP for filing
withholding returns on intercompany dividend payments were $4 in 2006. Fees for
due diligence and reviews of registrations related to the acquisition of AOS
Hagenuk aggregated $55 in 2005.

     It is currently the policy of the Audit Committee of the Board of Directors
to pre-approve all services rendered by KPMG LLP. The Audit Committee
pre-approved all of the above fees for both 2006 and 2005.

                                     PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)  (1) The following consolidated financial statements and notes thereto,
and the related independent auditors' report, are included on pages F-1 through
F-23 of this Form 10-K:

          Report of Independent Registered Public Accounting Firm

          Consolidated Balance Sheets as of December 31, 2006 and 2005

          Consolidated Statements of Operations for the Years Ended December 31,
          2006, 2005 and 2004

          Consolidated Statements of Comprehensive Income (Loss) for the Years
          Ended December 31, 2006, 2005 and 2004

          Consolidated Statements of Stockholders' Equity for the Years Ended
          December 31, 2006, 2005 and 2004

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          2006, 2005 and 2004

          Notes to Consolidated Financial Statements

          (2) The following consolidated financial statement schedule of the
Company is included in this Form 10-K:

          -    Schedule II - Valuation and Qualifying Accounts

          All other financial statement schedules are omitted because such
          schedules are not required or the information required has been
          presented in the aforementioned consolidated financial statements.


                                       54

<PAGE>

          (3) The following exhibits are filed with this Form 10-K or
incorporated by reference as set forth at the end of the list of exhibits:

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                                 DESCRIPTION
 -------                                 -----------
<S>         <C>
     +3.1   Certificate of Incorporation of Registrant, as amended.

    ++3.2   Bylaws of Registrant, as amended and restated.

      4.1   Intentionally Omitted.

     +4.2   Specimen of Registrant's Common Stock Certificate.

      4.3   Intentionally Omitted.

     +4.4   Form of Letter of Transmittal and Release.

     +4.5   Form of Registrant's Warrant Agreement.

     +4.6   Form of Registrant's Option Agreement.

     +4.7   Form of Registrant's Convertible Note Agreement.

    +10.1   Netscape Communications Corporation OEM Software Order Form dated
            March 18, 1997 between VASCO Data Security, Inc. and Netscape
            Communications Corporation.**

    +10.2   License Agreement between VASCO Data Security, Inc. and SHIVA
            Corporation effective June 5, 1997.**

    +10.3   Heads of Agreement between VASCO Data Security International, Inc.,
            VASCO Data Security Europe S.A., Digiline International Luxembourg,
            Digiline S.A., Digipass S.A., Dominique Colard and Tops S.A. dated
            May 13, 1996.

    +10.4   Agreement relating to additional terms and conditions to the Heads
            of Agreement dated July 9, 1996, among the parties listed in Exhibit
            10.3.

    +10.5   Agreement between VASCO Data Security International, Inc., VASCO
            Data Security Europe SA/NV, Mario Houthooft and Guy Denudt dated
            March 1, 1996.

    +10.6   Asset Purchase Agreement dated as of March 1996 by and between
            Lintel Security SA/NV and Lintel SA/NV, Mario Houthooft and Guy
            Denudt.

    +10.7   Management Agreement dated January 31, 1997 between LINK BVBA and
            VASCO Data Security NV/SA (concerning services of Mario Houthooft).

    +10.8   Sublease Agreement by and between VASCO Data Security International,
            Inc. and APL Land Transport Services, Inc. dated as of August 29,
            1997.

   +10.10   Lease Agreement by and between TOPS S.A. and Digipass S.A. effective
            July 1, 1996.

   +10.11   Lease Agreement by and between Perkins Commercial Management
            Company, Inc. and VASCO Data Security, Inc. dated November 21, 1995.

   +10.12   Asset Purchase Agreement by and between VASCO Data Security
            International, Inc. and Wizdom Systems, Inc. dated August 20, 1996.

   +10.13   1997 VASCO Data Security International, Inc. Stock Option Plan, as
            amended.

   +10.14   Distributor Agreement between VASCO Data Security, Inc. and Hucom,
            Inc. dated June 3, 1997.**
 </TABLE>


                                       55

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                                 DESCRIPTION
 -------                                 -----------
<S>         <C>
   +10.15   Non-Exclusive Distributor Agreement by and between VASCO Data
            Security, Inc. and Concord-Eracom Nederland BV dated May 1, 1994.**

   +10.16   Banque Paribas Belgique S. A. Convertible Loan Agreement for $3.4
            million.

   +10.17   Pledge Agreement dated July 15, 1997 by and between T. Kendall Hunt
            and Banque Paribas Belgique S.A.

   +10.18   Engagement Letter between Banque Paribas S.A. and VASCO Data
            Security International, Inc. dated June 20, 1997, as amended.

   +10.19   Financing Agreement between Generale Bank and VASCO Data Security
            International, Inc. dated as of June 27, 1997.

   +10.20   Letter Agreement between Generale Bank and VASCO Data Security
            International, Inc. dated June 26, 1997.

   +10.21   Form of Warrant dated June 16, 1997 (with Schedule).

   +10.22   Form of Warrant dated October 31, 1995 (with Schedule).

   +10.23   Form of Warrant dated March 7, 1997 (with Schedule).

   +10.24   Form of Warrant dated August 13, 1996 (with Schedule).

   +10.25   Form of Warrant dated June 27, 1996 (with Schedule).

   +10.26   Form of Warrant dated June 27, 1996 (with Schedule).

   +10.27   Convertible Note in the principal amount of $500,000.00, payable to
            Generale de Banque dated July 1, 1997 (with Schedule).

   +10.28   Agreement by and between VASCO Data Security NV/SA and S.I.
            Electronics Limited effective January 21, 1997.**

   +10.29   Agreement effective May 1, 1993 by and between Digipass s.a. and
            Digiline s.a.r.l.

   +10.30   VASCO Data Security, Inc. purchase order issued to National
            Electronic & Watch Co. LTD. **

   +10.31   VASCO Data Security, Inc. purchase order issued to Micronix
            Integrated Systems.**

   +10.32   Agreement between Registrant and VASCO Data Security International,
            Inc. dated as of August 25, 1997.

   +10.33   Convertible Note dated June 1, 1996 made payable to Mario Houthooft
            in the principal amount of $373,750.00.

   +10.34   Convertible Note dated June 1, 1996 made payable to Guy Denudt in
            the principal amount of $373,750.00.

   +10.35   Osprey Partners Warrant (and Statement of Rights to Warrant and Form
            of Exercise) issued June 1, 1992.

   +10.36   Registration Rights Agreement dated as of October 19, 1995 between
            certain purchasing shareholders and VASCO Data Security
            International, Inc.

   +10.37   First Amendment to Registration Rights Agreement dated July 1, 1996.

   +10.38   Second Amendment to Registration Rights Agreement dated March 7,
            1997.
 </TABLE>


                                       56

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                                 DESCRIPTION
 -------                                 -----------
<S>         <C>
   +10.39   Purchase Agreement by and between VASCO Data Security International,
            Inc. and Kyoto Securities Ltd.

   +10.40   Convertible Note dated May 28, 1996 payable to Kyoto Securities,
            Ltd. in principal amount of $5 million.

   +10.41   Amendment to Purchase Agreement and Convertible Note by and between
            VASCO Data Security International, Inc. and Kyoto Securities, Ltd.

   +10.42   Executive Incentive Compensation Plan.

   +10.43   Letter for Credit granted by Generale de Banque to Digipass SA dated
            January 27, 1997.

  ++10.44   License Agreement dated as of March 25, 1998 by and between VASCO
            Data Security International, Inc., for itself and its subsidiaries,
            and Lernout & Hauspie Speech Products N.V.

  ++10.45   Loan Agreement dated as of March 31, 1998 by and between Lernout &
            Hauspie Speech Products N.V. and VASCO Data Security International,
            Inc.

  ++10.46   Convertible Note dated April 1, 1998 payable to Lernout & Hauspie
            Speech Products N.V. in the principal amount of $3 million.

   #10.47   Amendment I dated as of December 31, 1998 to the License Agreement
            dated as of March 25, 1998 by and between VASCO Data Security
            International, Inc., for itself and its subsidiaries, and Lernout &
            Hauspie Speech Products N.V.

    10.48   Acquisition of Identikey, Ltd. (Incorporated by reference - Form 8-K
            filed March 29, 2001.)

    10.49   Agreement with Artesia Bank to revise the terms of the $3.4 million
            convertible loan. (Incorporated by reference - Form 8-K filed August
            9, 2001.)

 ## 10.50   Employment agreement with T. Kendall Hunt.

    10.51   Not currently used

 ## 10.52   Employment agreement with Clifford Bown.

 ## 10.53   Indemnification Agreement with T. Kendall Hunt.

    10.54   Not currently used

    10.55   Share Sale and Purchase Agreement by and among VASCO Data Security
            International, Inc., A.O.S. Holding B.V., Filipan Beheer B.V., Mr.
            Mladen Filipan and Pijnenburg Beheer N.V., dated February 4, 2005
            (Incorporated by reference - Form 8-K filed February 8, 2005.

    10.56   Registration Rights Agreement by and among A.O.S. Holding B.V.,
            Filipan Beheer B.V., Mr. Mladen Filipan, Pijnenburg Beheer N.V. and
            VASCO Data Security International, Inc., dated February 4, 2005
            (Incorporated by reference - Form 8-K filed February 8, 2005.

    10.57   Employment Agreement by and between VASCO Data Security
            International, Inc. and Jan Valcke effective as of January 1, 2005
            (Incorporated by reference - Form 8-K filed July 1, 2005.Letter
            agreement dated February 26, 2007, supplementing the Employment
            Agreement dated January 1, 2003 between the Company and Clifford K.
            Bown.
</TABLE>


                                       57

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                                 DESCRIPTION
 -------                                 -----------
<S>         <C>
*** 10.58   Letter agreement dated February 26, 2007, supplementing the
            Employment Agreement dated January 1, 2003 between the Company and
            Clifford K. Bown

   * 14.1   Code of Ethics.

       21   Subsidiaries of Registrant. (Incorporated by reference - Form S-1
            filed February 27, 2006.)

       23   Consent of KPMG LLP.

     31.1   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
            Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
            dated March 15, 2007.

     31.2   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
            Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
            dated March 15, 2007.

     32.1   Section 1350 Certification of Principal Executive Officer pursuant
            to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 15,
            2007.

     32.2   Section 1350 Certification of Principal Financial Officer pursuant
            to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 15,
            2007.
</TABLE>

----------
+    Incorporated by reference to the Registrant's Registration Statement on
     Form S-4, as amended (Registration No. 333-35563), originally filed with
     the Securities and Exchange Commission on September 12, 1997.

++   Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     originally filed with the Securities and Exchange Commission on May 5,
     1998.

#    Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     originally filed with the Securities and Exchange Commission on April 14,
     1999.

##   Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     originally filed with the Securities and Exchange Commission on March 31,
     2003.

*    Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     originally filed with the Securities and Exchange Commission on March 30,
     2004.

**   Confidential treatment has been granted for the omitted portions of this
     document.

***  Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     originally filed with the Securities and Exchange Commission on March 2,
     2007.

(b)  VASCO DATA SECURITY INTERNATIONAL, INC. WILL FURNISH ANY OF THE ABOVE
     EXHIBITS TO ITS STOCKHOLDERS UPON WRITTEN REQUEST ADDRESSED TO THE
     SECRETARY AT THE ADDRESS GIVEN ON THE COVER PAGE OF THIS FORM 10-K. THE
     CHARGE FOR FURNISHING COPIES OF THE EXHIBITS IS $.25 PER PAGE, PLUS
     POSTAGE.


                                       58
<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<S>                                                                             <C>
FINANCIAL STATEMENTS
   Report of Independent Registered Public Accounting Firm                       F-2
   Consolidated Balance Sheets as of December 31, 2006 and 2005                  F-3
   Consolidated Statements of Operations for the Years Ended
      December 31, 2006, 2005 and 2004                                           F-4
   Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
      December 31, 2006, 2005 and 2004                                           F-5
   Consolidated Statements of Stockholders' Equity for the Years Ended
      December 31, 2006, 2005 and 2004                                           F-6
   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2006, 2005 and 2004                                           F-7
   Notes to Consolidated Financial Statements                                    F-8

FINANCIAL STATEMENT SCHEDULE
   The following financial statement schedule is included herein:
   Schedule II - Valuation and Qualifying Accounts                              F-24
</TABLE>

All other financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.


                                      F-1

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
VASCO Data Security International, Inc.:

We have audited the accompanying consolidated balance sheets of VASCO Data
Security International, Inc. and subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying
consolidated financial statement Schedule II - Valuation and Qualifying
Accounts. These consolidated financial statements and the consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the consolidated financial statement schedule 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VASCO Data Security
International, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As described in Note 1 to the consolidated financial statements, in 2006 the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment, modifying share-based compensation.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of VASCO Data
Security International, Inc.'s internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2007 expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.


/s/ KPMG LLP
Chicago, Illinois
March 15, 2007


                                      F-2

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,   DECEMBER 31,
                                                                          2006           2005
                                                                      ------------   ------------
<S>                                                                   <C>            <C>
ASSETS
   CURRENT ASSETS:
      Cash and equivalents                                              $ 14,768       $ 16,962
      Restricted cash                                                          0            181
      Accounts receivable, net of allowance for doubtful accounts
         of $712 and $156 in 2006 and 2005, respectively                  19,617         12,083
      Inventories, net                                                     4,275          1,570
      Prepaid expenses                                                     1,295            726
      Deferred income taxes                                                  375            117
      Foreign sales tax receivable                                           967             89
      Other current assets                                                    23            451
                                                                        --------       --------
         Total current assets                                             41,320         32,179
   Property and equipment:
      Furniture and fixtures                                               2,273          1,893
      Office equipment                                                     2,395          2,155
                                                                        --------       --------
                                                                           4,668          4,048
      Accumulated depreciation                                            (3,246)        (3,066)
                                                                        --------       --------
         Property and equipment, net                                       1,422            982
    Goodwill, net of accummulated amortization                            12,685          6,665
    Intangible assets, net of accumulated amortization                     3,013          1,054
    Other assets, net of accumulated amortization                          4,206            625
                                                                        --------       --------
         TOTAL ASSETS                                                   $ 62,646       $ 41,505
                                                                        ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
   CURRENT LIABILITIES:
      Bank borrowing                                                    $  2,154       $  3,173
      Accounts payable                                                     7,579          4,753
      Deferred revenue                                                     2,081          1,765
      Accrued wages and payroll taxes                                      3,176          2,329
      Income taxes payable                                                 1,396          1,547
      Current deferred income taxes                                          125             --
      Other accrued expenses                                               2,751          2,287
                                                                        --------       --------
         Total current liabilities                                        19,262         15,854
   Deferred warranty revenues                                                302            256
   Long-term compensation plan                                               356             --
   Long-term deferred taxes                                                  520             --
                                                                        --------       --------
         TOTAL LIABILITIES                                                20,440         16,110
                                                                        --------       --------
   STOCKHOLDERS' EQUITY :
      Common stock, $.001 par value - 75,000,000 shares authorized;
         36,546,289 shares issued and outstanding in 2006,
         36,180,425 shares issued and outstanding in 2005                     37             36
      Additional paid-in capital                                          61,251         59,625
      Deferred compensation                                                   --           (403)
      Accumulated deficit                                                (20,398)       (32,985)
      Accumulated other comprehensive income (loss) -                         --
         Cumulative translation adjustment                                 1,316           (878)
                                                                        --------       --------
         Total stockholders' equity                                       42,206         25,395
                                                                        --------       --------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                     $ 62,646       $ 41,505
                                                                        ========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-3

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                 For the Years Ended December 31,
                                                 --------------------------------
                                                     2006      2005      2004
                                                   -------   -------   -------
<S>                                              <C>         <C>       <C>
Net revenues                                       $76,062   $54,579   $29,893
Cost of goods sold                                  24,359    20,141     9,184
                                                   -------   -------   -------
Gross profit                                        51,703    34,438    20,709
                                                   -------   -------   -------
Operating costs:
   Sales and marketing                              19,482    14,784     9,160
   Research and development                          5,529     3,579     2,441
   General and administrative                        7,157     4,556     3,191
   Restructuring recoveries                             --      (172)      (32)
   Amortization of purchased intangible assets         593       738       397
                                                   -------   -------   -------
      Total operating costs                         32,761    23,485    15,157
                                                   -------   -------   -------
   Operating income                                 18,942    10,953     5,552
Interest income, net                                   121        69       120
Impairment of investment in Secured
   Services, Inc.                                     (600)       --        --
Other income (expense), net                            178       506      (539)
                                                   -------   -------   -------
   Income before income taxes                       18,641    11,528     5,133
Provision for income taxes                           6,054     3,827     1,880
                                                   -------   -------   -------
   Net income                                       12,587     7,701     3,253
Preferred stock accretion and dividends                 --       (14)     (232)
                                                   -------   -------   -------
Net income available to common shareholders        $12,587   $ 7,687   $ 3,021
                                                   =======   =======   =======
Net income per share:
   Basic                                           $  0.35   $  0.22   $  0.09
                                                   =======   =======   =======
   Diluted                                         $  0.33   $  0.21   $  0.09
                                                   =======   =======   =======
Weighted average common shares outstanding:
   Basic                                            36,230    35,429    32,216
                                                   =======   =======   =======
   Dilutive                                         37,765    37,244    33,128
                                                   =======   =======   =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-4

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                       For the Years Ended December 31,
                                       --------------------------------
                                            2006      2005     2004
                                          -------   -------   ------
<S>                                    <C>          <C>       <C>
Net income                                $12,587   $ 7,701   $3,253

Other comprehensive income (loss) -
   Cumulative translation adjustment        2,194    (1,218)     687
                                          -------   -------   ------
Comprehensive income                      $14,781   $ 6,483   $3,940
                                          =======   =======   ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                                                                               Other Com-    Total
                                      Preferred Stock     Common Stock     Additional  Deferred                prehensive   Stock-
                                      ---------------  ------------------   Paid-In    Compen-   Accumulated     Income    holders'
            Description               Shares   Amount    Shares    Amount    Capital    sation     Deficit       (Loss)     Equity
            -----------               ------  -------  ----------  ------  ----------  --------  -----------  -----------  --------
<S>                                   <C>     <C>      <C>         <C>     <C>         <C>       <C>          <C>          <C>
BALANCE AT DECEMBER 31, 2003            800   $ 5,786  30,425,284    $30    $47,167     $  --     $(43,693)   $  (347)     $  8,943
Net income                               --        --          --     --         --        --        3,253         --         3,253
Foreign currency translation
   adjustment                            --        --          --     --         --        --           --        687           687
Exercise of stock options                --        --     118,062      1        188        --           --         --           189
Conversion of series D preferred
   stock                               (592)   (4,282)  2,960,000      3      4,279        --           --         --            --
Cash dividend on series D preferred
   stock                                 --        --          --     --         --        --         (182)        --          (182)
Dividend paid in common stock on
   series D preferred stock              --        --      64,843     --        144        --          (23)        --           121
Dividend payable                         --        --          --     --         --        --          (27)        --           (27)
Conversion of series D warrants          --        --      13,500     --         47        --           --         --            47
                                        ---   -------  ----------    ---    -------     -----     --------    -------      --------
BALANCE AT DECEMBER 31, 2004            208     1,504  33,581,689     34     51,825        --      (40,672)       340        13,031
Net income                               --        --          --     --         --        --        7,701         --         7,701
Foreign currency translation
   adjustment                            --        --          --     --         --        --           --     (1,218)       (1,218)
Exercise of stock options                --        --     690,807      1      1,902        --           --         --         1,903
Common stock issued for acquisitions     --        --     331,104     --      2,278        --           --         --         2,278
Restricted stock awards                  --        --      84,500     --        538      (403)          --         --           135
Conversion of series D preferred
   stock                               (208)   (1,504)  1,040,000      1      1,503        --           --         --            --
Cash dividend on series D preferred
   stock                                 --        --          --     --         --        --          (14)        --           (14)
Conversion of warrants                   --        --     447,250     --      1,552        --           --         --         1,552
Dividend paid in common stock on
   series D preferred stock              --        --       5,075     --         27        --           --         --            27
                                        ---   -------  ----------    ---    -------     -----     --------    -------      --------
BALANCE AT DECEMBER 31, 2005             --        --  36,180,425     36     59,625      (403)     (32,985)      (878)       25,395
Net income                               --        --          --     --         --        --       12,587         --        12,587
Reclassification for adoption of
   FAS 123(R)                            --        --          --     --       (403)      403           --         --            --
Foreign currency translation
   adjustment                            --        --          --     --         --        --           --      2,194         2,194
Exercise of stock options                --        --     228,614      1        683        --           --         --           684
Restricted stock awards                  --        --     111,750     --        577        --           --         --           577
Conversion of warrants                   --        --      25,500     --         88        --           --         --            88
Stock option compensation                --        --          --     --        681        --           --         --           681
                                        ---   -------  ----------    ---    -------     -----     --------    -------      --------
BALANCE AT DECEMBER 31, 2006             --   $    --  36,546,289    $37    $61,251     $  --     $(20,398)   $ 1,316      $ 42,206
                                        ===   =======  ==========    ===    =======     =====     ========    =======      ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-6

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  For the Years ended
                                                                                     December 31,
                                                                              --------------------------
                                                                                2006      2005     2004
                                                                              --------  -------   ------
<S>                                                                           <C>       <C>       <C>
Cash flows from operating activities:
   Net income from continuing operations                                      $ 12,587  $ 7,701   $3,253
      Adjustments to reconcile net income from continuing operations
         to net cash provided by operating activities:
         Impairment of SSI Investment                                              600       --       --
         Depreciation and amortization                                           1,242    1,076      734
         Deferred tax expense (benefit)                                           (632)    (122)      46
         Non-cash compensation and other expenses                                1,259      146       16
         Changes in assets and liabilities, net of effects of acquisitions:
            Accounts receivable, net                                            (5,348)  (7,114)  (3,002)
            Inventories, net                                                    (2,175)    (438)    (168)
            Other current assets                                                  (558)      73     (260)
            Accounts payable                                                     1,338    2,342    1,138
            Income taxes payable                                                  (296)   1,257      598
            Accrued expenses                                                       317    1,686      202
            Other current liabilities                                             (515)     935      320
                                                                              --------  -------   ------
Net cash provided by operations                                                  7,819    7,542    2,877
                                                                              --------  -------   ------
Cash flows from investing activities:
   Business acquisitions, net of cash acquired                                  (7,362)  (3,990)      --
   Additions to property and equipment                                            (459)    (507)    (252)
   Capitalized software                                                         (2,448)      --       --
   Other assets                                                                    (74)    (182)     (64)
   Increase in restricted cash                                                     181     (127)     (82)
   Disposals of property, plant and equipment, net                                  59        7       --
   Payments received on note receivable                                            220      343      304
                                                                              --------  -------   ------
Net cash used in investing activities                                           (9,883)  (4,456)     (94)
                                                                              --------  -------   ------
Cash flows from financing activities:
   (Repayment) proceeds from bank borrowing                                     (1,019)   3,173       --
   Proceeds from exercise of stock options and warrants                            772    3,455      236
   Dividends paid on preferred stock                                                --      (14)    (182)
                                                                              --------  -------   ------
Net cash provided by (used in) financing activities                               (247)   6,614       54
Effect of exchange rate changes on cash                                            117     (876)     484
Net increase in cash                                                            (2,194)   8,824    3,321
Cash and equivalents, beginning of year                                         16,962    8,138    4,817
                                                                              --------  -------   ------
Cash and equivlents, end of year                                              $ 14,768  $16,962   $8,138
                                                                              ========  =======   ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-7
<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

     VASCO Data Security International, Inc. and its wholly owned subsidiaries
(the Company) design, develop, market and support security products and services
which manage and protect against unauthorized access to computer systems of
corporate and government customers. VASCO has operations in Austria, Australia,
Belgium, China, The Netherlands, Singapore and the United States (U.S.).

Principles of Consolidation

     The consolidated financial statements include the accounts of VASCO Data
Security International, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Foreign Currency Translation and Transactions

     The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Accordingly, assets and liabilities are translated into U.S. dollars using
current exchange rates as of the balance sheet date. Revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations. Foreign exchange transaction gains (losses) aggregating $(65), $330
and $(538) are included in other income (expense) for 2006, 2005 and 2004,
respectively. We implemented a hedging program in the second quarter of 2005 to
minimize the impact of changes in currency rates.

Revenue Recognition

     The Company recognizes revenue in accordance with AICPA Statement of
Position ("SOP") 97-2 and SEC Staff Accounting Bulletin ("SAB") 104. Revenue is
recognized when there is persuasive evidence that an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collection of the
revenue is probable.

     Hardware Revenue and License Fees: Revenues from the sale of computer
security hardware or the license of software are recorded upon shipment or, if
an acceptance period is allowed, at the later of shipment or customer
acceptance. No significant obligations or contingencies exist with regard to
delivery, customer acceptance or rights of return at the time revenue is
recognized.

     Support Agreements: Support agreements generally call for the Company to
provide technical support and software updates to customers. Revenue on
technical support and software update rights is deferred and recognized ratably
over the term of the support agreement.

     Consulting and Education Services: The Company provides consulting and
education services to its customers. Revenue from such services is recognized
during the period in which the services are performed.

     Multiple-Element Arrangements: The Company allocates revenues to the
various elements of the arrangements based on the estimated fair value of each
deliverable as required by SOP 97-2 and Emerging Issues Task Force ("EITF")
Issue No. 00-21. The fair value for each element is based on the price charged
when that element is sold separately, price lists, renewal rates and other
methods. When discounts are given in a multiple-element arrangement, a
proportionate amount of the discount is applied to each element based on each
element's fair value without regard to the discount. The estimated fair value of
undelivered elements is deferred and recorded as revenue when services are
performed or products are delivered.

     Sales to distributors and resellers are recognized on the same basis as
sales made directly to customers. Revenue is recognized when there is persuasive
evidence that an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection of the revenue is probable.

     For large-volume transactions, the Company may negotiate a specific price
that is based on the number of users of the software license or quantities of
hardware supplied. The per unit prices for large-volume transactions are
generally lower than transactions for smaller quantities and the price
differences are commonly referred to as volume-purchase discounts.


                                      F-8

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

Cash and Equivalents

     The Company classifies as cash and equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.

     Restricted cash of $181 at December 31, 2005 supports a bank guarantee
issued in favor of a customer relating to a contract prepayment. Under the terms
of the contract, the Company obtained unrestricted use of this cash in 2006 when
it fulfilled its commitment to deliver the products.

Accounts Receivable and Allowance for Doubtful Accounts

          The Company records trade accounts receivable at invoice values, which
are generally equal to fair value. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make payments for goods and services. The Company analyzes accounts receivable,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. The allowance is based on a specific review of all significant
past-due accounts. If the financial condition of our customers deteriorates,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

Inventories

     Inventories, consisting principally of hardware and component parts, are
stated at the lower of cost or market. Cost is determined using the
first-in-first-out (FIFO) method. The Company writes down inventory where it
appears that the carrying cost of the inventory may not be recovered through
subsequent sale of the inventory. The Company analyzes the quantity of inventory
on hand, the quantity sold in the past year, the anticipated sales volume in the
form of sales to new customers as well as sales to previous customers, the
expected sales price and the cost of making the sale when evaluating the
valuation of our inventory. If the sales volume or sales price of a specific
model declines significantly, additional write downs may be required.

Property and Equipment

     Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from three to seven years. Additions and improvements are capitalized,
while expenditures for maintenance and repairs are charged to operations as
incurred. Gains or losses resulting from sales or retirements are recorded as
incurred, at which time related costs and accumulated depreciation are removed
from the accounts.

Research and Development Costs

     Costs for research and development, principally the design and development
of hardware and software prior to the determination of technological
feasibility, are expensed as incurred on a project-by-project basis. The
Company's research and development costs were $5,529, $3,579 and $2,441 for
2006, 2005 and 2004, respectively.

Software Development Costs

     The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Research
costs and software development costs, prior to the establishment of
technological feasibility, determined based upon the creation of a working
model, are expensed as incurred. Our software capitalization policy currently
defines technological feasibility as a functioning beta test prototype with
confirmed manufacturability (a working model), within a reasonably predictable
range of costs. Additional criteria include receptive customers, or potential
customers, as evidenced by interest expressed in a beta test prototype, at some
suggested selling price. The Company's policy is to amortize capitalized costs
by the greater of (a) the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product, generally two to five years, including the period being reported
on. In 2006, the company capitalized $2,448 for instructional software (see
footnote 5). The Company did not incur any capitalizable software costs during
the years ended December 31, 2005 and 2004.

Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax


                                      F-9

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

     The Company has significant net operating loss carryforwards in the U. S.
and other countries which are available to reduce the liability on future
taxable income. A valuation reserve has been provided to offset most of these
future benefits because we have not determined that their realization is more
likely than not.

Fair Value of Financial Instruments

     At December 31, 2006 and 2005 the Company's financial instruments were
accounts receivable, notes receivable, accounts payable and accrued liabilities.
The estimated fair value of the Company's financial instruments has been
determined by using available market information and appropriate valuation
methodologies. The fair values of the Company's financial instruments were not
materially different from their carrying amounts at December 31, 2006 and 2005.

Accounting for Leases

     All of the Company's leases are operating leases. Rent expense on facility
leases is charged evenly over the life of the lease, regardless of the timing of
actual payments.

Use of Estimates

     The preparation of financial statements in conformity with accounting
principles generally accepted in the U. S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Valuation of Investment in Secured Services, Inc.

     The Company received preferred stock and a note receivable from Secured
Services, Inc. ("SSI") in 2003 as consideration for assets of the VACMAN
Enterprise business unit. Based on a detailed valuation, the Company established
the initial value of the consideration received from SSI, using a discounted
value of the payment streams expected from the note and the preferred stock.
Interest income on the note was recorded over time at the discount rate. In the
first quarter of 2006, SSI discontinued its monthly note payments to the
Company, due to its continuing operating losses and an inability to secure new
financing. The Company concluded that a decline in fair value had occurred,
which was other than temporary in nature as defined in EITF Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The Company therefore recorded an asset impairment charge of $789
in the first quarter of 2006 to fully write down the value of the note
receivable and the investment in SSI.

     In the second quarter of 2006, the Company did receive payment for the
remaining note balance of $189, which was recorded in income as a partial
recovery of the impaired value. On July 17, 2006, SSI filed a Form 8-K with the
SEC, announcing that it had defaulted on its primary bank debt obligations and
had agreed to surrender all of its secured assets under the loan agreements. No
further recoveries are likely to occur. No tax benefit was recorded for the
asset impairment because the Company has a net operating loss carryforward in
the U.S., for which the tax benefit is fully reserved.

Goodwill and Other Intangibles

     The Company accounts for goodwill and other indefinite-lived intangible
assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
This statement replaced the requirements to amortize intangible assets with
indefinite lives and goodwill with a requirement for an impairment test. SFAS
142 also established accounting guidelines for identifiable intangible assets,
which included customer lists, proprietary technology and other intangible
assets. Intangible assets other than patents with definite lives are amortized
over the useful life, generally three to seven years for proprietary technology.
Patents are amortized over the life of the patent, generally 20 years in the U.
S.

     The Company assesses the impairment of goodwill and intangible assets with
indefinite lives each year-end or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The Company completed
its last review during December 2006. Factors considered important which could
trigger an impairment review include significant underperformance relative to
expected historical or projected future operating results, significant changes
in the manner of our use of the acquired assets or the strategy for our overall
business, and significant negative industry or economic trends.


                                      F-10

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

     When the Company determines that the carrying value of intangibles and
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, any impairment is measured by the excess of the
carrying amount of the asset over its fair value as determined by an estimate of
discounted future cash flows.

Stock-Based Compensation

     The Company has a stock-based employee compensation plan, which is
described more fully in Note 10. As of January 1, 2006, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 123(R), Stock-Based
Compensation. This statement requires the Company to estimate the fair value of
stock options granted to employees, directors and others and to record
compensation expense equal to the estimated fair value. The fair value of stock
options at the date of grant is estimated using the Black-Scholes option pricing
model, with the expected life adjusted to reflect the effect of post-vesting
restrictions. The assumptions used for the Black-Scholes model are listed in
footnote 10. This compensation expense is recorded on a straight-line basis over
the vesting period of the options. Prior to January 1, 2006, the Company
accounted for the stock options using the intrinsic method under the recognition
and measurement principles of Accounting Principles Board ("APB") Opinion 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
compensation expense related to the stock options was reflected in net income,
as all options granted under those plans had an exercise price equal to the
market value of the underlying Common Stock on the date of grant.

     The Company elected to use the modified prospective method to transition to
SFAS 123(R). Under this method, prior periods are not restated, but the
remaining compensation cost for previously issued options is recorded over the
remaining vesting period.

Deferred Warranty

     The Company's standard practice is to provide a warranty on its
authenticators for one year after the date of purchase. Customers may purchase
extended warranties covering periods from one to three years after the standard
warranty period. The Company defers the revenue associated with the extended
warranty and recognizes it into income on a straight-line basis over the
extended warranty period. The Company has historically experienced minimal
actual claims over the warranty period.

Earnings per Common Share

     Basic earnings per share are based on the weighted average number of shares
outstanding and exclude the dilutive effect of unexercised common stock
equivalents. Diluted earnings per share is based on the weighted average number
of shares outstanding and includes the dilutive effect of unexercised common
stock equivalents to the extent they are not anti-dilutive. A reconciliation of
the shares included in the basic and fully diluted earnings per share
calculations is as follows:

<TABLE>
<CAPTION>
                                                       For the Years Ended
                                                          December 31,
                                                    ------------------------
                                                     2006     2005     2004
                                                    ------   ------   ------
<S>                                                 <C>      <C>      <C>
Weighted average common shares outstanding
   Basic                                            36,230   35,429   32,216
   Incremental shares for the effect of dilutive:
      Stock options                                  1,279    1,577      816
      Warrants                                          82      154       28
      Restricted stock awards                          174       84       --
      Identikey acquisition shares                      --       --       68
                                                    ------   ------   ------
         Dilutive                                   37,765   37,244   33,128
                                                    ======   ======   ======
</TABLE>

     Shares issuable from securities that could potentially effect diluted
earnings per share in the future that were not included in the computation of
diluted earnings per share because their effect was anti-dilutive were as
follows:

<TABLE>
<CAPTION>
                                 For the Years
                               Ended December 31,
                              -------------------
                              2006   2005    2004
                              ----   ----   -----
<S>                           <C>    <C>    <C>
Stock options                   25     25     301
Convertible preferred stock     --     --   2,320
                               ---    ---   -----
   Total                        25     25   2,621
                               ===    ===   =====
</TABLE>


                                      F-11

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 2 - ACQUISITIONS

     On October 25, 2006, the Company acquired Unified Threat Management (UTM)
specialist Able N.V. of Mechelen, Belgium. VASCO acquired all of the stock of
Able N.V., in exchange for cash consideration of E5 million ($6.3 million). The
acquisition was financed completely from the Company's cash. Able's key product
is the aXs GUARD appliance. This appliance contains 21 different modules,
including Digipass strong user authentication, VPN, firewall, anti-virus, hacker
detection, statistics & reporting, content scanning and more.

     The purchase price included E1.25 million ($1.57 million) which is subject
to a bank guaranty and may be returned to the Company in whole or in part if the
seller terminates his employment with the Company before four years from the
acquisition date. As required by EITF 95-8, Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination, the Company has recorded this portion of the purchase
price as deemed compensation in other assets, to be amortized over the required
employment period.

     On May 11, 2006, the Company acquired all of the issued and outstanding
shares of Logico Smart Card Solutions GmbH and Logico Smartcard Solutions
Vertriebs, GmbH. (The combined group will be referred to as "Logico".) Logico is
an authentication storage specialist with extensive experience in smart card
based authentication, located in Vienna, Austria. The Company believes that
significant synergies will be created by combining Logico's technology with the
Company's technology, customer base and marketing channels. The shares of Logico
were acquired for cash payments of E1,236 (equivalent to $1,578). An additional
payment of up to E150 (or $198 at the December 31 exchange rate) may be due on
March 31, 2007 if certain performance conditions are met.

     The aggregate purchase price was $2,168, consisting of the cash payment of
$1,578, previously acquired software rights with a net cost of $174 and
estimated direct transaction costs of $416.

     On February 4, 2005, the Company acquired all of the share capital of
A.O.S. Hagenuk B.V. ("AOS") a private limited liability company organized and
existing under the laws of the Netherlands. The primary purpose for the
acquisition was to obtain engineering expertise which is complimentary to our
existing product lines. The base purchase price was EUR 5,000, of which EUR
3,750 was paid in cash and the remainder was paid in the Company's Common Stock.
In addition to the base purchase price, a variable amount related to the gross
profits collected on the sales of certain equipment may be paid to the seller
over a period of two (2) years following the closing.

     Able, Logico and AOS will be operated as a wholly-owned subsidiaries of the
Company, accounted for using the purchase method in accordance with SFAS No.
141, Business Combinations. The following table summarizes the fair value of the
assets acquired and the liabilities assumed at the date of each acquisition.
Potential valuation adjustments may be identified up to one year after each
acquisition.


                                      F-12

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                          Able NV   Logico     AOS
                                          -------   ------   ------
<S>                                       <C>       <C>      <C>
Cash                                       $  827   $   34   $  529
Accounts receivable, net                      419       47      466
Inventory                                      88       23       11
Other current assets                           79       20      655
Property and equipment, net                    64      176      122
Intangible assets acquired                  1,400      870      367
Deemed compensation                         1,569       --       --
Deferred tax asset                             --      115       --
                                           ------   ------   ------
   Total assets acquired                    4,446    1,285    2,150
                                           ------   ------   ------
Accounts payable                              160      561       47
Deferred revenue                              515      200    1,071
Accrued expenses                              240      635      156
Defered tax liability - current portion        86       44       28
Defered tax liability - long-term             390      174       --
                                           ------   ------   ------
   Total liabiltites assumed                1,391    1,614    1,302
                                           ------   ------   ------
   Net assets acquired                      3,055     (329)     848
Goodwill                                    3,233    2,497    6,415
                                           ------   ------   ------
   Aggregate purchase price                $6,288   $2,168   $7,263
                                           ======   ======   ======
</TABLE>

     The total purchase price for each acquisition comprised the following:

<TABLE>
<CAPTION>
                              Able NV   Logico     AOS
                              -------   ------   ------
<S>                           <C>       <C>      <C>
Cash paid                      $6,275   $1,578   $4,374
Company stock (263 shares)         --       --    2,128
Assumed liabilities                --       --      616
Transaction costs                  13      416      145
License previously acquired        --      174       --
                               ------   ------   ------
                               $6,288   $2,168   $7,263
                               ======   ======   ======
</TABLE>

     The following summarized unaudited pro forma financial information for
2006, 2005 and 2004 assumes the AOS acquisition occurred at January 1, 2004 and
the Logico and Able acquisitions occurred at January 1, 2005:

<TABLE>
<CAPTION>
                                                2006      2005      2004
                                              -------   -------   -------
<S>                                           <C>       <C>       <C>
Net revenues                                  $78,724   $58,645   $34,449
Net income available to common shareholders    12,402     5,984     1,833
Basic net income per share                       0.34      0.17      0.06
Diluted net income per share                     0.33      0.16      0.06
</TABLE>

     The pro forma results include the amortization of intangibles acquired and
a reduction of revenue related to the estimated fair value of the deferred
revenue acquired. The Company does not record amortization expense related to
goodwill, but rather reviews the carrying value of the asset for impairment at
least annually in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. The pro forma results are not necessarily indicative of
the results that would have occurred if the acquisition had actually been
completed on January 1, 2006, 2005 or 2004, nor are they necessarily indicative
of future consolidated results.


                                      F-13

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 3 - INVENTORIES

     Inventories, net of write downs of $296 and $239 at December 31, 2006 and
2005, respectively, are comprised of the following:

<TABLE>
<CAPTION>
                                       December 31,
                                     ---------------
                                      2006     2005
                                     ------   ------
<S>                                  <C>      <C>
Component parts                      $2,450   $  601
Work-in-process and finished goods    1,825      969
                                     ------   ------
   Total                             $4,275   $1,570
                                     ======   ======
</TABLE>

NOTE 4 - GOODWILL AND OTHER INTANGIBLES

     Intangible asset activity for the three years ended December 31, 2006 and
the composition of the December 31, 2006 balance is as follows. Additions to
capitalized technology in 2006 were the result of the Logico and Able
acquisitions.

<TABLE>
<CAPTION>
                                    Capitalized    Patents &               Intangible
                                     Technology   Trademarks   Other (1)     Assets     Goodwill
                                    -----------   ----------   ---------   ----------   --------
<S>                                 <C>           <C>          <C>         <C>          <C>
Net balance at December 31, 2003      $ 1,378       $  45        $  --      $ 1,423     $   250
   Additions                              150          67           --          217          --
   Amortization expense                  (394)         (3)          --         (397)         --
                                      -------       -----        -----      -------     -------
Net balance at December 31, 2004        1,134         109           --        1,243         250
   Additions                              178         371          367          916       6,415
   Amortization expense                  (355)       (383)        (367)      (1,105)         --
                                      -------       -----        -----      -------     -------
Net balance at December 31, 2005          957          97            0        1,054       6,665
   Additions                            2,095          90                     2,185       5,659
   Impairments                              0         (20)           0          (20)          0
   Net Translation Gain/Loss              387           0                       387         361
   Amortization expense                  (559)        (34)          --         (593)         --
                                      -------       -----        -----      -------     -------
Net balance at December 31, 2006      $ 2,880       $ 133        $  --      $ 3,013     $12,685
                                      =======       =====        =====      =======     =======
December 31, 2006 balance at cost     $ 8,252       $ 186        $  --      $ 8,438     $13,297
   Accumulated amortization            (5,759)        (53)          --       (5,812)       (973)
   Translation Gain/Loss                  387          --           --          387         361
                                      -------       -----        -----      -------     -------
Net balance at December 31, 2006      $ 2,880       $ 133        $  --      $ 3,013     $12,685
                                      =======       =====        =====      =======     =======
</TABLE>

(1)  2005 amount reflects an intangible asset for firm purchase orders of AOS at
     the date of acquisition.

     Expected amortization of the intangible assets for the years ended:

<TABLE>
<S>                                <C>
December 31, 2007                  $1,030
December 31, 2008                     512
December 31, 2009                     416
December 31, 2010                     415
December 31, 2011 and thereafter      629
                                   ------
   Subject to amortization          3,002
Trademarks                             11
                                   ------
   Total intangible assets         $3,013
                                   ======
</TABLE>


                                      F-14
<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 5 - OTHER ASSETS

     Other assets at December 31, 2006 and 2005 consist of the following:

<TABLE>
<CAPTION>
                                        As of December 31, 2006    As of December 31, 2005
                                       -------------------------   -----------------------
                                                Amorti-                   Amorti-
                                        Cost     zation     Net    Cost    zation     Net
                                       ------   -------   ------   ----   -------   ------
<S>                                    <C>      <C>       <C>      <C>    <C>       <C>
Instructional Software                 $2,448     $ 68    $2,380    $--     $--      $ --
Deemed Compensation                     1,649       69     1,580     --      --        --
                                       ------     ----    ------    ---     ---      ----
   Total Subject to Amortization       $4,097     $137     3,960    $--     $--        --
                                       ======     ====              ===     ===
Less: Current Portion of Deemed
   Compensation                                             (412)                      --
Deferred Income Taxes                                        465                       --
Investment in Secured Services, Inc.                          --                      600
Other assets                                                 193                       25
                                                          ------                     ----
   Other Assets, net                                      $4,206                     $625
                                                          ======                     ====
</TABLE>

     In 2006, the Company contracted with a film producer to develop 126 hours
of instructional video software to be used internally as a staff development
tool and to be marketed to potential customers and other parties. The cost of
this software was capitalized in accordance with SFAS 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. This cost
will be amortized on a straight line basis over a five year life, or pro rata
based on actual sales as a percentage of expected sales, whichever is larger.

     A portion of the acquisition price for Able is contingent upon the seller's
continued employment with the Company for a four year period. This amount has
been recorded as an other asset and will be amortized over the required
employment period. The amount to be amortized in the next year has been
classified as a prepaid expense. Amortization expense for the instructional
software and the deemed compensation is included in selling expense.

NOTE 6 - INCOME TAXES

     At December 31, 2006, the Company had U.S. net operating loss carryforwards
approximating $23,086 and foreign net operating loss carryforwards approximating
$7,829. Such losses are available to offset future taxable income in the
respective jurisdictions. The U.S. loss carryforwards expire in varying amounts
beginning in 2018 and continuing through 2023. The foreign loss carryforwards
have no expiration dates. Included in the foreign loss carryforwards amount is
$3,042 of tax losses acquired in the acquisition of Logico. Utilization of these
loss carryforwards would not reduce future tax expense, but would reduce
deferred tax assets or goodwill created in the acquisition. In addition, if
certain substantial changes in the Company's ownership were deemed to have
occurred, there would be an annual limitation on the amount of the U.S.
carryforwards that could be utilized.

     Income before income taxes was generated in the following jurisdictions:

<TABLE>
<CAPTION>
              For the Years Ended
                  December 31,
           --------------------------
             2006      2005     2004
           -------   -------   ------
<S>        <C>       <C>       <C>
Domestic   $   515   $   634   $1,128
Foreign     18,126    10,894    4,005
           -------   -------   ------
   Total   $18,641   $11,528   $5,133
           =======   =======   ======
</TABLE>


                                      F-15

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                          For the Years Ended
                             December 31,
                       ------------------------
                        2006     2005     2004
                       ------   ------   ------
<S>                    <C>      <C>      <C>
Current:
   Federal             $   59   $   20   $   25
   Foreign              5,917    3,713    1,809
                       ------   ------   ------
      Total current     5,976    3,733    1,834
                       ------   ------   ------
Deferred:
   Foreign                 78       94       46
                       ------   ------   ------
      Total deferred       78       94       46
                       ------   ------   ------
      Total            $6,054   $3,827   $1,880
                       ======   ======   ======
</TABLE>

     The differences between income tax provision computed using the statutory
federal income tax rate of 35% and the provision for income taxes reported in
the consolidated statements of operations are as follows:

<TABLE>
<CAPTION>
                                                             For the Years Ended
                                                                 December 31,
                                                          -------------------------
                                                            2006     2005     2004
                                                          -------   ------   ------
<S>                                                       <C>       <C>      <C>
Expected tax benefit at statutory rate                    $ 6,524   $4,035   $1,797
   Change in valuation allowance due to the generation
      (utilization) of net operating loss carryforwards    (1,104)    (315)     (26)
   Foreign taxes at rates other than the federal
      stautory rate                                          (575)      92       --
   Foreign income taxed in the U.S.                           854       --       --
   Withholding tax on intercompany interest                   398       --       --
   Other, net                                                 (43)      15      109
                                                          -------   ------   ------
      Total                                               $ 6,054   $3,827   $1,880
                                                          =======   ======   ======
</TABLE>

     The change in valuation allowance due to generation (utilization) of net
operating loss carryforwards includes $(120) for the elimination of the
valuation reserve on the Australian net operating loss carryforward at December
31, 2006.

     The deferred income tax balances are comprised of the following:

<TABLE>
<CAPTION>
                                                  As of December 31,
                                                 -------------------
                                                   2006       2005
                                                 --------   --------
<S>                                              <C>        <C>
Deferred tax assets:
   U.S. net operating loss carryforwards         $  9,004   $ 10,086
   Foreign net operating loss carryforwards         2,355      1,562
   Research and development expense                   501         --
   Restricted stock and long-term compensation        181         46
   Accrued expenses and other                         201        156
                                                 --------   --------
      Total gross deferred tax assets              12,242     11,850
      Less valuation allowance                    (11,402)   (11,733)
                                                 --------   --------
         Net deferred income tax assets          $    840   $    117
                                                 ========   ========
Deferred tax liabilities:
   Intangible assets - Logico acquisition        $    187   $     --
   Intangible assets - Able acquisition               458         --
                                                 --------   --------
      Deferred tax liabilities                   $    645   $     --
                                                 ========   ========
</TABLE>

     The net change in the total valuation allowance for the years ended
December 31, 2006, 2005 and 2004 was an increase (decrease) of $(331), $(519)
and $22, respectively. In assessing the realizability of deferred tax assets,
the Company considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the period in which these


                                      F-16

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

temporary differences become deductible. This valuation allowance will be
reviewed on a regular basis and adjustments made as appropriate. In 2006, 2005
and 2004, the Company utilized $1,211, $2,134 and $1,178 of its U.S. net
operating loss carryforwards. In 2006, the Company also utilized $872 of foreign
net operating loss carryforwards, generated $678 of new foreign net operating
loss carryforwards and acquired $3,042 of foreign net operating loss
carryforwards in the Logico acquisition. The Company has provided a valuation
allowance at December 31, 2006 for all of the gross deferred tax assets except
for those associated with its Australian and Belgian operating entities. The
Company anticipates realizing these deferred tax assets in the future as the
Company had earnings in 2006 in excess of the deferred tax assets in Australia
and Belgium and expects to generate adequate taxable income in these
jurisdictions in 2007. The Company has not provided deferred U.S. taxes on its
unremitted foreign earnings because it considers them to be permanently
invested. The deferred tax which would be recorded is estimated to be $933.

NOTE 7 - DEFERRED WARRANTY

     The Company's standard practice is to provide a warranty on its Digipasses
for two years after the date of purchase. Customers may purchase extended
warranties covering periods from one to four years after the standard warranty
period. The Company defers the revenue associated with the extended warranty and
recognizes it into income on a straight-line basis over the extended warranty
period.

     Deferred warranty at December 31, 2006, which will be earned in 2007 is
$149, and is included in current deferred revenue. The long-term deferred
warranty revenue as of December 31, 2006 will be recognized as income as
follows:

<TABLE>
<CAPTION>
Year       Amount
----       ------
<S>        <C>
2008        $168
2009          90
2010          34
2011          10
           -----
   Total    $302
           =====
</TABLE>

     The company maintains a reserve for the potential cost of future warranty
claims related to its standard warranty. Activity in the claims reserve account
was as follows:

<TABLE>
<S>                                       <C>
Warranty reserve at December 31, 2005     $259
Net provision (reversal) for claims        (86)
Product or cash issued to settle claims    (92)
                                          ----
Warranty reserve at December 31, 2006     $ 81
                                          ====
</TABLE>

NOTE 8 - DEBT

     The Company maintains an overdraft agreement with Fortis Banque/Bank of
Belgium. Under terms of the agreement, the Company can borrow an amount equal to
80% of its Belgian subsidiary's defined accounts receivable up to a maximum of
3,500 U.S. Dollars or Euros. Borrowings under the overdraft agreement accrue
interest at an annual rate of 5.7% and the Company is obligated to pay a
quarterly commitment fee of 0.125%. As of December 31, 2006, borrowings under
the agreement totaled $2,154. The assets, excluding inventory, of the Belgian
subsidiary secure the agreement and while it has no specific termination date,
it can be terminated with thirty (30) days notice. The agreement is governed by
the General Lending Conditions for Corporate Customers, registered in Brussels,
Belgium on December 20, 2001.

     Interest expense related to debt was $232, $120 and $0 for the years ended
December 31, 2006, 2005 and 2004, respectively.

NOTE 9 - STOCKHOLDERS' EQUITY

Preferred Stock

     On February 17, 2005, the Company, in accordance with the Designation of
Rights and Preferences of the Series D 5% Cumulative Convertible Voting
Preferred Stock (the "Series D Preferred Stock"), issued a call for mandatory
conversion of all outstanding shares of the Series D Preferred Stock. The
accrued dividends through the conversion date of $14 were paid. In addition,
5,075 shares of Common Stock were issued as dividends to the Series D preferred
stockholders in the first quarter of 2005.


                                      F-17

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

     On September 11, 2003, the Company sold 0.8 shares of Series D 5%
Cumulative Convertible Voting Preferred Stock (the "Series D Preferred Stock")
and 600 detachable warrants to purchase Common Stock. The Series D Preferred
Stock carried a 5% dividend and was convertible into 4,000 shares of Common
Stock at a fixed price of $2.00 per share. The implied value of the Series D
Preferred Stock was $5,714 calculated based upon the annual dividend rate
divided by a required rate of return. The warrants are exercisable, over a
five-year period, at $3.47 per share and were valued at $1,455 using the
Black-Scholes pricing model. Of the net proceeds from the sale, $5,786 was
allocated to the Series D Preferred Stock and $1,474 was allocated to the
warrants based upon their relative fair values. In addition, a beneficial
conversion value was calculated for the Series D Preferred Stock as the
difference between the price of the Company's Common Stock at the transaction
date and the conversion price of the Series D Preferred Stock. The amount of the
beneficial conversion, $3,720, is analogous to a preferred dividend and was
recorded to accumulated deficit. In 2004, 592 shares of the Series D Preferred
Stock were converted resulting in the issuance of 2,960 shares of the Company's
Common Stock. See Common Stock.

Common Stock

     On July 15, 2003, the Company reached an agreement with Ubizen N.V.
("Ubizen") whereby VASCO purchased and redeemed all 150,000 shares of the Series
C Convertible Preferred Stock (the "Series C Preferred Stock") and 1,239,474
Common Stock Purchase Warrants owned by Ubizen. Under the terms of the Purchase
Agreement, the Company paid $4,000 to Ubizen and issued 2,000 shares of the
Company's Common Stock on July 25, 2003 at a fair value of $4,000. The Common
Stock issued by the Company was subject to a lock-up period wherein the lock-up
expired in increments of 500 shares each on October 15, 2003, January 15, 2004,
April 15, 2004 and July 15, 2004. The shares were subject to volume trading
restrictions through January 1, 2005.

Warrants

     Warrant activity for the years ended December 31, 2006, 2005 and 2004 is
summarized below:

<TABLE>
<CAPTION>
                                   Number of   Exercise
                                     Shares      Price
                                   ---------   --------
<S>                                <C>         <C>
Outstanding at December 31, 2003    600,000      3.47
   Exercised                        (13,500)     3.47
                                    -------
Outstanding at December 31, 2004    586,500      3.47
   Exercised                       (447,250)     3.47
                                    -------
Outstanding at December 31, 2005    139,250      3.47
   Exercised                        (25,500)     3.47
                                    -------
Outstanding at December 31, 2006    113,750      3.47
                                    =======
</TABLE>

NOTE 10 - STOCK COMPENSATION PLAN

     The Company's 1997 Stock Compensation Plan, as amended and restated in
1999, ("Compensation Plan") is designed and intended to provide performance
incentives to the employees of the Company. The Compensation Plan is
administered by the Compensation Committee as appointed by the Board of
Directors of the Company ("Compensation Committee").

     The Compensation Plan permits the award of stock compensation in various
forms including, but not limited to stock options, restricted stock, and other
stock-based awards to employees and non-employee directors, consultants and
other key persons of the Company. The Compensation Plan is intended to be a
nonqualified plan.

Stock Options

     All options granted to employees have been for a period of from six to ten
years, are granted at a price equal to the fair market value of the Common Stock
on the date of the grant and have typically vested 25% on the first anniversary
of the grant, with an additional 25% vesting on each subsequent anniversary of
the grant. Alternative vesting schedules may include either date or event-based
vesting.

     All options granted to non-employees have been granted at a price equal to
the fair market value of the Common Stock on the date of the grant, and have
contained vesting requirements and/or restrictions as determined by the
Compensation Committee at the time of grant.


                                      F-18

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

     As of December 31, 2006, the Compensation Plan was authorized to issue
options representing up to 7,309,257 shares of the Company's Common Stock. The
authorized shares under the Compensation Plan represent 20% of the issued and
outstanding shares of the Company.

     As of January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 123(R), Stock-Based Compensation. This statement
requires the Company to estimate the fair value of stock options granted to
employees, directors and others and to record compensation expense equal to the
estimated fair value. The fair value of stock options at the date of grant is
estimated using the Black-Scholes option pricing model, with the expected life
adjusted to reflect the effect of post-vesting restrictions. This compensation
expense is recorded on a straight-line basis over the vesting period of the
options. Prior to January 1, 2006, the Company accounted for the stock options
using the intrinsic method under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations. No compensation expense related to the
stock options was reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying Common
Stock on the date of grant. The effect of adopting SFAS 123(R) was to reduce
income in 2006 by $681.

     All options granted under the plan were issued at market value on the date
of grant, with terms of six to ten years and vesting periods ranging from one to
five years. The Company issues new shares for option exercises or stock grants.
The following table summarizes option activity for the year ended December 31,
2006 and options outstanding at December 31, 2006:

<TABLE>
<CAPTION>
                                                Weighted     Weighted
                                                 Average      Average     Aggregate
                                                Exercise     Remaining    Intrinsic
                                       Shares     Price    Term (Years)     Value
                                       ------   --------   ------------   ---------
<S>                                    <C>      <C>        <C>            <C>
Outstanding at January 1, 2006          2,218     $3.27        5.98        $14,773
Exercised                                (229)     2.99        4.62          1,549
Forfeited or expired                      (48)     5.79        5.35            230
                                        -----
Outstanding at December 31, 2006        1,941      3.24        5.07         16,789
                                        =====
At December 31, 2006:
   Fully vested, exercisable options    1,754     $3.07        5.01        $15,475
   Options expected to vest               159      4.65        5.61          1,146
   Expected forfeitures                    28      5.86        5.30            168
                                        -----                              -------
      Total                             1,941      3.24        5.07        $16,789
                                        =====                              =======
</TABLE>

     The following table summarizes vesting activity for the year ended December
31, 2006. The unrecognized compensation cost at December 31, 2006 is expected to
be recognized over a weighted average period of 1.9 years.

<TABLE>
<CAPTION>
                                                   Weighted      Weighted     Unrecognized
                                                    Average       Average       Compen-
                                                  Grant Date     Remaining       sation
                                         Shares   Fair Value   Term (Years)       Cost
                                         ------   ----------   ------------   ------------
<S>                                      <C>      <C>          <C>            <C>
Non-vested shares at January 1, 2006       510       $3.43         6.80          $1,085
Vested                                    (292)       3.07         6.45
Forfeited                                  (31)       2.49         6.18
                                           ---
Non-vested shares at December 31, 2006     187        3.93         5.57             522
                                           ===
</TABLE>


                                      F-19
<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

Restricted Stock

     In addition to stock options, the Company has granted restricted stock
awards. Compensation expense is recorded for restricted stock awards based on
the market value of the stock at the date of the grant, amortized ratably over
the vesting period. This treatment was required by SFAS 123(R) and prior
statements.

     In 2006 and 2005, the Company granted restricted stock awards for 119 and
90 common shares, respectively, to employees and directors. Awards to directors
vest annually over one year and awards to employees vest annually over a four
year period. If the service period requirements are not met, these shares are
subject to forfeiture. Compensation cost equal to the market value of the stock
on the date granted will be recorded on a straight-line basis over the vesting
period. There were 175 restricted shares outstanding at December 31, 2006. The
following table summarizes restricted stock activity for the year ended December
31, 2006 and restricted stock outstanding at December 31, 2006:

<TABLE>
<CAPTION>
                                              Weighted
                                               Average     Aggregate
                                              Remaining    Intrinsic
                                   Shares   Term (Years)     Value
                                   ------   ------------   ---------
<S>                                <C>      <C>            <C>
Outstanding at January 1, 2006       84         3.04         $  833
Shares vested and issued            (22)                        226
Shares awarded                      119                       1,135
Forfeited                            (6)                         65
                                    ---
Outstanding at December 31, 2006    175         2.24          2,075
                                    ===
</TABLE>

     As of December 31, 2006. $914 of compensation cost associated with unvested
restricted stock awards attributable to future service had not yet been
recognized.

Long-term Incentive Compensation Plan

     In 2006, the Company initiated a long-term compensation program under the
provisions of the Compensation Plan. The long-term incentive plan provides
awards to key employees that can be earned if the Company achieves certain
cumulative earnings per share targets over a three year period. The awards
amounts are designated as a specific dollar amount, but at the option of the
Company, can be paid in either stock or cash. If paid in stock, the Company will
determine the price of the stock on the date the awards are earned and issue the
corresponding number of freely tradable shares to the employees.

     The Company granted awards totaling $1,330 in 2006. Compensation expense
for long-term incentive plan awards is recognized ratably over the period
beginning with the effective date of the grant and ending on December 31 of the
targeted three-year period. Employees forfeit their awards if they terminate
from the Company prior to the end of the three-year target period. The amounts
expensed are reported as long-term liabilities on the balance sheet until such
awards are payable within the succeeding twelve-month period, at which time the
accrued liability will be reflected in current liabilities until paid.


                                      F-20

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

     The following table summarizes compensation expense recorded under the
stock compensation plans and, for periods prior to January 1, 2006, illustrates
the effect on net income and net income per share if the Company had applied the
fair value recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation:

<TABLE>
<CAPTION>
                                                   2006        2005            2004
                                                 -------   ------------   -------------
<S>                                              <C>       <C>            <C>
Compensation expense included in income:
   Stock options                                  $  681   $         --   $          --
   Restricted stock                                  577            135              --
   Long-term compensation plan                       356             --              --
                                                  ------   ------------   -------------
      Total                                        1,614            135              --
   Income tax benefit                                 --             --              --
                                                  ------   ------------   -------------
      Effect on net income                        $1,614   $        135   $          --
                                                  ======   ============   =============
Proforma stock compensation disclosures
   previously required by SFAS 123:
   Net income available to common shares:
      As reported                                          $      7,687   $       3,021
      Compensation expense, net of tax                             (726)         (1,065)
                                                           ------------   -------------
      Proforma                                             $      6,961   $       1,956
                                                           ============   =============
   Basic net income per share:
      As reported                                          $       0.22   $        0.09
      Proforma                                                     0.20            0.06
   Fully diluted net income per share:
      As reported                                          $       0.21   $        0.09
      Proforma                                                     0.19            0.06
                                                  None
Weighted average fair value of options granted   Granted   $       4.27   $        1.59

Assumptions used to value options granted:
   Expected volatility                                --             69%            104%
   Expected term                                      --    6 - 7 years     1-5.6 years
   Risk free interest rate                            --    4.21 - 4.23%   4.08% - 4.27%
   Expected dividends                                 --             --              --
Intrinsic value of options exercised              $1,549   $      4,385   $         249
Fair value of shares vested                          896          2,048           1,709
</TABLE>

     In 2002, the Company loaned Belgian employees who received stock options in
1999 and 2000, 142 Euros to pay taxes assessed on those options by the Belgian
Government. Even though stock options granted to all employees were granted at
prices equal to the fair market value of the Common Stock on the date of the
grant, Belgian employees who were recipients of stock options were assessed
taxes based on the value determined under Belgian tax legislation dated March
26, 1999. The total amounts advanced in 2002 were based on each recipient's
specific tax assessment. Due to the uncertainty of collecting the amounts loaned
to the employees, the notes have been fully reserved for as of December 31, 2006
and 2005.


                                      F-21

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 11 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                  For the Years ended December 31,
                                                                  --------------------------------
                                                                       2006     2005     2004
                                                                      ------   ------   ------
<S>                                                               <C>          <C>      <C>
Supplemental disclosure of cash flow information:
   Interest paid                                                          63   $   91   $   17
   Income taxes paid                                                  $3,915   $2,641   $1,294
Supplemental disclosure of non-cash investing activities:
   Common stock issued in connection with acquisition                 $   --   $2,128   $   --
   Accrued capitalized technology                                     $   --   $  150   $  150
Supplemental disclosure of non-cash financing activities:
   Common stock issued to redeem Series D preferred stock
      upon conversion of preferred shares (in shares)                     --    1,040    2,960
   Common stock issued to redeem Series D preferred stock             $   --   $1,504   $4,282
   Dividends accrued on preferred stock                               $   --   $   --   $  (27)
   Common stock issued as dividends to Series D preferred stock
      shareholders (5 and 65 shares in 2005 and 2004)                 $   --   $   27   $  144
</TABLE>

NOTE 12 - EMPLOYEE BENEFIT PLAN

     The Company maintains a defined contribution pension plan for its U. S.
employees established pursuant to the provisions of Section 401(k) of the
Internal Revenue Code, which provides benefits for eligible employees of the
Company. In January 2001, the Company amended its benefit plan to allow
Company-matching. For the years ended December 31, 2006, 2005 and 2004, the
Company contributed $57, $31 and $21, respectively, to this plan.

     The Company also maintains a pension plan for its Belgian employees, in
compliance with Belgian law. The plan is a defined contribution plan, but has a
minimum return guarantee under Belgian law. Returns guaranteed by the pension
plan administrator are essentially equal to the legal requirement. For the years
ended December 31, 2006, 2005 and 2004, the Company contributed $206, $160 and
$127, respectively, to this plan.

NOTE 13 - GEOGRAPHIC AND CUSTOMER INFORMATION

     The Company records revenue in country that has responsibility for the
transaction. Information regarding geographic areas for the years ended December
31, 2006, 2005 and 2004 is as follows:

<TABLE>
<CAPTION>
                       United States    Europe    Other     Total
                       -------------   -------   -------   ------
<S>                    <C>             <C>       <C>       <C>
2006
   Revenue                 $7,397      $47,449   $21,216   $76,062
   Gross profit             6,196       31,566    13,941    51,703
   Long-lived assets          628       19,442       792    20,862

2005
   Revenue                 $3,687      $39,219   $11,673   $54,579
   Gross profit             3,232       25,253     7,443    35,928
   Long-lived assets          755        7,706       901     9,362

2004
   Revenue                 $3,105      $24,245   $ 2,543   $29,893
   Gross profit             2,816       15,891     2,002    20,709
   Long-lived assets          942          913     1,273     3,128
</TABLE>

For the years 2006, 2005 and 2004, the Company's top 10 customers contributed
49%, 64% and 60%, respectively, of total worldwide revenues. In 2006, one
customer accounted for 10.3% of revenues. In 2005, two customers accounted for
13.5% and 11.3% of revenues. In 2004, three customers accounted for 12.6%, 12.0%
and 11.8% of revenues.


                                      F-22

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 14 - COMMITMENTS AND CONTINGENCIES

     The Company leases office space and automobiles under operating lease
agreements expiring at various times through 2015. Future minimum rental
payments required under non-cancelable leases are as follows:

<TABLE>
<CAPTION>
Year         Amount
----         ------
<S>          <C>
2007         $1,654
2008          1,503
2009          1,223
2010            927
2011            695
Thereafter      338
             ------
   Total     $6,340
             ======
</TABLE>

     Rent expense under operating leases aggregated approximately $1,229, $836
and $851 for the years ended December 31, 2006, 2005 and 2004, respectively.
Rent expense is recorded on a straight-line basis over the life of the lease
agreement.

     From time to time, the Company has been involved in litigation incidental
to the conduct of its business. Currently, the Company is not a party to any
lawsuit or proceeding that, in management's opinion, is likely to have a
material adverse effect on its business, financial condition or results of
operations.

NOTE 15 - RESTRUCTURING

     During the fourth quarter of 2002, the Company recorded restructuring
charges of $319 related to operations in France and excess space in its U.S.
headquarters. In 2005, the Company resolved all issues associated with the
closure of the French operation and reversed reserves that were no longer
needed, some of which had been recorded prior to the decision to close the
operation, resulting in a gain of $172. In 2004, $32 was reversed from
restructuring accruals as a result of the renegotiation of the Corporate
Headquarters' office lease.


                                      F-23

<PAGE>

                     VASCO DATA SECURITY INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     No material fourth quarter adjustments were recorded in 2006 or 2005. The
quarterly results of operations are as follows:

<TABLE>
<CAPTION>
                         First     Second    Third     Fourth
                        Quarter   Quarter   Quarter   Quarter
                        -------   -------   -------   -------
<S>                     <C>       <C>       <C>       <C>
        2006
Net sales               $13,690   $18,512   $18,707   $25,153
Gross profit              9,451    11,862    12,785    17,605
Operating expenses        6,551     7,780     7,809    10,621
Operating income          2,900     4,082     4,976     6,984
Net income                1,170     3,034     3,287     5,096
Net income per share:
   Basic                $  0.03   $  0.08   $  0.09   $  0.14
   Fully diluted           0.03      0.08      0.09      0.13

        2005
Net sales               $11,443   $12,345   $13,272   $17,519
Gross profit              7,220     8,049     8,134    11,035
Operating expenses        5,298     5,764     5,596     6,827
Operating income          1,922     2,285     2,538     4,208
Net income                1,407     1,581     1,751     2,962
Net income per share:
   Basic                $  0.04   $  0.04   $  0.05   $  0.08
   Fully diluted           0.04      0.04      0.05      0.08
</TABLE>

Due to rounding in earnings per share, the sum of the quarters may not be equal
to the full year.

                                   SCHEDULE II
                     VASCO DATA SECURITY INTERNATIONAL, INC.
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                               Bad Debt
                                  Beginning    Expense       Accounts     Ending
                                   Balance    (Recovery)   Written Off   Balance
                                  ---------   ----------   -----------   -------
<S>                               <C>         <C>          <C>           <C>
Allowance for Doubtful Accounts
For Trade Accounts Receivable
Year ended December 31, 2006        $156        $ 522         $  --        $678
Year ended December 31, 2005         160           31           (35)        156
Year ended December 31, 2004         471         (108)         (203)        160
</TABLE>

                  See accompanying independent auditors' report


                                      F-24

<PAGE>

                                   SIGNATURES

     Pursuant to the 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 the undersigned, thereunto duly authorized, on March 15, 2007.

                                        VASCO Data Security International, Inc.


                                        /s/ T. Kendall Hunt
                                        ----------------------------------------
                                        T. Kendall Hunt
                                        Chief Executive Officer

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES INDICATED ON MARCH 15, 2007.

                                POWER OF ATTORNEY

     Each of the undersigned, in his capacity as an officer or director, or
both, as the case may be, of VASCO Data Security International, Inc. does hereby
appoint T. Kendall Hunt, and each of them severally, his true and lawful
attorneys or attorney to execute in his name, place and stead, in his capacity
as director or officer, or both, as the case may be, this Annual Report on Form
10-K for the fiscal year ended December 31, 2005 and any and all amendments
thereto and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission. Each of said
attorneys shall have power to act hereunder with or without the other attorney
and shall have full power and authority to do and perform in the name and on
behalf of each of said directors or officers, or both, as the case may be, every
act whatsoever requisite or necessary to be done in the premises, as fully and
to all intents and purposes as to which each of said officers or directors, or
both, as the case may be, might or could do in person, hereby ratifying and
confirming all that said attorneys or attorney may lawfully do or cause to be
done by virtue hereof.

<TABLE>
<CAPTION>
             SIGNATURE                               TITLE
             ---------                               -----
<S>                                  <C>


/s/ T. Kendall Hunt                  Chief Executive Officer and Chairman
----------------------------------   (Principal Executive Officer)
T. Kendall Hunt


/s/ Jan Valcke                       President and Chief Operating Officer
----------------------------------   (Principal Operating Officer)
Jan Valcke


/s/ Clifford K. Bown                 Chief Financial Officer and Secretary
----------------------------------   (Principal Financial Officer and
Clifford K. Bown                     Principal Accounting Officer)


/s/ Michael P. Cullinane             Director
----------------------------------
Michael P. Cullinane


/s/ Jean K. Holley                   Director
----------------------------------
Jean K. Holley


/s/ John R. Walter                   Director
----------------------------------
John R. Walter


/s/ John N. Fox, Jr.                 Director
----------------------------------
John N. Fox, Jr.
</TABLE>