VASCO DATA SECURITY INTERNATIONAL INC - 10-K Annual Report

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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, 2002

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)

DELAWARE 36-4169320
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)

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:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE

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. _______________

As of March 20, 2003, 28,389,484 shares of the Company's Common Stock,
$.001 par value per share ("Common Stock"), were outstanding. On that date, 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 March 20, 2003)
held by non-affiliates of the registrant was $29,241,168 at $1.03 per share.

DOCUMENTS INCORPORATED BY REFERENCE
None.

INDEX

PAGE
----

PART I

----- "Safe Harbor" Provisions 3
Item 1. Description of Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 24

PART III

Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 32
Item 14. Controls and Procedures 32

PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8K 32

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1

SIGNATURES

EXHIBITS

2

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 the Company currently
markets and sells its products or anticipates selling and marketing its 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 the Company's present expectations or beliefs
concerning future events. The Company cautions 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 the Company's products
and services, competition and price levels and the Company's 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 - DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

VASCO Data Security International, Inc. was incorporated in 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 offices in Europe are located at Koningin Astridlaan
164, B-1780 Wemmel (Belgium) and the telephone number at that address is
32(0)2/456.98.10. Unless otherwise noted, specifically in the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations, references in this Annual Report to "VASCO," "Company," "company, "
"we," "our," and "us" refer to VASCO Data Security International, Inc., its
predecessor, VASCO Corp., and its subsidiaries.

The Company, through its operating subsidiaries, designs, develops,
markets and supports open standards-based hardware and software security systems
that manage and secure access to information assets.

FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES

See Note 10 to VASCO Notes to Consolidated Financial Statements for
certain information about foreign and domestic operations and export sales.

NARRATIVE DESCRIPTION OF THE BUSINESS

GENERAL

We design, develop, market and support patented "Identity 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. VASCO's Identity Authentication software is delivered via
its Digipass security products, small "calculator" hardware devices carried by
an end user, or in a software format on mobile phones, other portable devices,
and PCs. The Digipass devices, most of which incorporate an electronic digital
signature capability, guarantee the integrity of electronic

- --------
This report contains the following trademarks of the Company, some of
which are registered: VASCO, AccessKey, VACMan Server and VACMan/CryptaPak,
AuthentiCard, Digipass, and Digipass Pack.

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transactions and data transmissions. For user access control, VASCO's VACMAN
Server 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.

VASCO's target markets are the applications and their several hundred
million users that utilize fixed passwords as security. VASCO's 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.

Our security solutions are sold worldwide through our direct sales force,
as well as through distributors, resellers and systems integrators. We currently
have approximately 800 customers in more than 50 countries. Representative
customers of our products include Rabobank Nederland, ABN AMRO Bank, Eterra
Norway, ING Bank, John Hancock, Fortis Bank, Liberty Mutual, Allmerica Financial
Services, CoStar Group, and the U.S. Government.

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.

According to International Data Corporation (IDC), demand for information
security services is expected to reach $21 billion in worldwide annual spending
by 2005. Demand for security software is expected to increase to $9.4 billion in
2005. The compound annual growth rate for each area exceeds 25%.

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.

Components of Security. Data and financial asset security, and secured
access to and participation in on-line 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.

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- 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.

- 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. Most companies, however, only implement a patchwork of these
components, which can result in their security systems being compromised.

THE VASCO SOLUTION

The Company has 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 all
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, such as public key
infrastructure, known as PKI. 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 lower total cost of
security 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 a leading
provider of our open standards-based software and hardware security solutions.

VASCO'S STRATEGY

We believe we have one of the most complete lines of security products
and services for Identity Authentication available in the market today and we
intend to become a 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 aggressive 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:

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

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

- Launch a Europe, Middle East. Africa and Asia marketing campaign
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 for use on different platforms
(like mobile phones and personal digital assistants) and
incorporating biometrics into our products;

- Acquiring complementary technologies or businesses; and

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

VASCO'S PRODUCTS

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 device itself);

- 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:

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

- PIN code for the token 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 passwords, also known as one-time passwords
to authenticate users on a computer network and for a variety of other
applications. There are several 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

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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. For users
of mobile phones, Digipass's Authentication Server generates on-time passwords
that are sent to the mobile telephone user by SMS (Short Messaging System).

Digipass technology combines the benefits of both traditional password
tokens (authentication and digital signatures) with smart card readers. They
both bring portability to smart cards and allow secure time-based algorithms.

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

DIGIPASS AT WORK

[FLOW CHART}

The above illustration shows the various steps in the Digipass
initialization 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 disk or diskettes are one way of
safely transporting the Digipass secrets to the host computer.

The files on compact disk 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 those Digipass secrets to the end-users.
This assignment is based on the serial number of the Digipass and the identity
of the end-user. The Digipass is then shipped to the end-user together with a
manual and the protected PIN-code on a secure PIN-mailer is sent by a separate
shipment.

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.

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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 many applications, the largest of
which is banking. Different banking applications are:

- 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, and 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

Digipass Pack is a bundling of VASCO Digipass Go 1 and VACMAN Radius
Middleware, offering strong Identity Authentication to Small and Medium Sized
Enterprises. Although the packs contain standard Digipass Go 1, combinations
with other Digipass models are possible. Digipass Pack is compliant with server
security products of VASCO Solution Partners, like CITRIX, Netscreen, Check
Point, and CISCO and is marketed via VASCO's regional channel partners
(Distributors).

[PHOTO]
Digipass Pack

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.

Designed 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

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.

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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 you've authorized to have a Digipass
token.

VACMAN RADIUS Middleware

VACMAN RADIUS Middleware brings strong user authentication to existing
RADIUS-based environments, while seamlessly integrating with other current
infrastructure technology. Many companies already use RADIUS servers and/or
firewalls to provide a way to centrally manage all remote connections to the
corporate IT infrastructure. VACMAN RADIUS Middleware allows administrators to
positively identify remote users before granting remote access to sensitive
corporate data and applications.

Logically, VACMAN RADIUS Middleware is installed between the RADIUS
client (NAS, RAS or firewall) and the existing RADIUS server or servers. Once
installed, VACMAN RADIUS Middleware functions transparently, adding strong,
two-factor, authentication without otherwise affecting the operation of the
server or other network components.

With a range of automated administration features such as Dynamic User
Registration, automatic assignment of Digipass devices and the ability to bulk
manage users, VACMAN RADIUS Middleware provides transparent strong
authentication without adding significantly to the administration load.

VACMAN Server

VACMAN Server is an integrated, cross platform solution that uses
industry and international standards to provide strong two-factor
authentication, access control and audit for remote, local and web-based users.
It includes full support for RADIUS and web-based access solutions.

VACMAN Server has three access control modules that are available for
individual or integrated use. Strong authentication is achieved for server based
access control and management on an anywhere, anyhow, anytime basis. System
access can be achieved independently via each module (i.e., specific to a
functional task) or in concert with each other, making efficient use of common
user authentication administration.

VACMAN Server provides a number of centralized services that are common
to all authentication solutions including secure, web-based administration
allowing administrators the option to administer either locally or remotely,
customizable reporting, delegation of administrative tasks on an organizational
basis or by function, full session monitoring and a full redundancy option for
the authentication server and database.

VACMAN SERVER FOR RADIUS

[GRAPHIC]

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RADIUS-based solutions have generally relied on static user name and
passwords for authentication. Static passwords offer a potential weakness as
they can be trapped, guessed or forced to gain access to an otherwise secure
network. The VACMAN Server for RADIUS (VSR) removes this potential weakness by
adding support for One Time Passwords (OTP) for secure, two-factor
authentication using Vasco's Digipass technology. OTP's are designed to provide
that all users are strongly authenticated with information that cannot be
re-used or guessed, and thereby to eliminate the most common means of defeating
security systems.

VACMAN Server for RADIUS compliments an organization's existing security
infrastructure by providing that only users who have been strongly authenticated
are granted access to the network. The ability to support industry standards and
run on existing operating systems and hardware platforms provides the
flexibility to support virtually any existing security solution adding value to
an organization's existing investment in people and equipment.

VACMAN SERVER FOR WEB

[GRAPHIC]

Combining user authentication, authorization and audit into a single
strong authentication solution, VACMAN Server for Web extends established
Authentication, Authorization and Administration (AAA) principles to web-based
access and also supports the use of One Time Passwords (OTP) for true, Digipass
two-factor strong authentication. VACMAN Server for Web controls user access to
individual resources within the protected web site allowing an organization to
finely control what information is accessed, not only by whom, but also when.

With VACMAN Server for Web installed, OTP's can be used to provide secure
access to remote users, through the organization's existing web servers and
firewalls. Once remote access is allowed and corporate processes can be
accessed, additional authentication may be required to validate any transactions
undertaken. VACMAN Server for Web fully supports Digipass electronic signatures
providing non-repudiation for any electronic transaction.

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 United
States and a corresponding patent in certain European countries, which cover
certain aspects of our technology. The majority of our patents cover our
Digipass family of security tokens. The U.S. patents expire between 2003 and
2010 and the European patent expires in 2008. 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.

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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 21 full-time engineers and,
from time to time also engage independent engineering firms to conduct
non-strategic research and development efforts on our behalf. For the fiscal
years ended December 31, 2000, 2001 and 2002, we expended $4,369,000, $4,981,000
and $3,117,000, respectively, on research and development, representing
approximately 15%, 19% and 17% of consolidated revenues for 2000, 2001 and 2002,
respectively.

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.

PRODUCTION

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

The security tokens utilize commercially available programmable
microprocessors, or chips. We use two 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 and some other components 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 majority of our product components and arrange for
shipment to third parties for assembly and testing in accordance with our design
specifications. Our security token products are assembled exclusively by one
independent company with headquarters in Hong Kong and production facilities in
mainland China. Purchases from this company are made on a volume purchase order
basis. This company commits 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.

There can be no assurance that we will not experience interruptions in
the supply of either the component parts that are used in our products or
fully-assembled token devices in general. In the event that the flow of
components or finished product was interrupted, there could be a considerable
delay in finding suitable replacement sources for those components, as well as
in replacement assembly subcontractors with the result that our business and
results of operations could be adversely affected.

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. In the corporate network access
market segment, our main competitor is RSA Security, Inc. In the e-banking
market segment, our main competitors are ActivCard, Xiring, Todos, Kobil, and
CPS. There are many other companies such as Computer Associates International,
Rainbow and Aladdin 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, customer service and

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support, name recognition, customer base, distribution channels and price.
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.

Many 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. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share.

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 distributors, resellers and systems integrators. A sales staff of 26
coordinates our sales through both our sales channels and these 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:

BANKING/FINANCIAL SERVICES OTHER
Rabobank Nederland U.S. Department of Defense
ABN Amro Bank Telindus
SNS Bank Southern California Edison
ING Bank Eterra Norway
John Hancock DaimlerChrysler
Allmerica US Coast Guard
Fortis Bank University of Groningen
BCA Indonesia European Commission
SEB Sweden CoStar Group
Postbanken Norway
Oversea Chinese Banking Corporation Ltd.
PEKAO SA Bank Poland

For the years 2000, 2001 and 2002, the Company's top 10 customers
contributed 72%, 73% and 64%, respectively, of total worldwide revenues.

12

Long term contracts with the U.S. government accounted for 5% of revenues
for the year 2002. Revenues are only recognized from these contracts when
receipt of payment is assured. Future amounts due under the contracts are
cancelable by the U.S. government and are not recognized as revenue by the
Company.

A significant portion of our sales is denominated in various foreign
currencies that could impact results of operations. To minimize exposure to
risks associated with fluctuations in currency exchange rates, we attempt to
match the timing of delivery, amount of product and the currency denomination of
purchase orders from vendors with sales orders to customers. For additional
information regarding how currency fluctuations can affect our business, please
refer to Item 7A - 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.

See Note 10 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 February 28, 2003, we had 77 full time employees. Of these, 13 were
located in North America, 42 were located in Europe, 19 were located in
Australia and 3 assigned in Asia/Pacific. Of the total, 46 were involved in
sales, marketing and customer support, 21 in product production, research and
development and 10 in administration.

ITEM 2 - PROPERTIES

Our corporate office is located in the United States in an office complex
in Oakbrook Terrace, Illinois, a suburb of Chicago. This facility is leased
through November 30, 2004, and consists of approximately 9,000 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 23,500 square feet of office space
that are occupied under a lease expiring on October 30, 2006. We believe that
these facilities are adequate for our present growth plans.

Our Australian office is located in a suburb of Brisbane, consisting of
approximately 4,900 square feet under a lease expiring in December 2006.

Our Asia/Pacific sales office is located in an office complex in
Singapore, consisting of approximately 377 square feet with a one-year lease,
renewable annually.

ITEM 3 - LEGAL PROCEEDINGS

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

On March 13, 2002, a suit was filed against the Company in the United
States District Court for the District of Delaware by ActiveCard, S.A., a
French corporation, claiming patent infringement, false designation of origin
and trade dress infringement. The amount of monetary damages is unspecified.
The Company intends to vigorously contest the action and has filed a
counterclaim seeking declaratory relief. The parties are currently
investigating the possibility of alternative dispute resolution, such as
mediation. In view of the present state of the proceedings, however, the
Company is not able to assess the impact of the claims on its business or
financial condition.

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 2002, through solicitation of proxies or otherwise.

13

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 United
States under the trading symbol "VDSI." In February 2003, the Common Stock was
moved from the Nasdaq National Market to the Nasdaq SmallCap Market and
continued trading under the symbol "VDSI."

On March 20, 2003, the closing sale price for the Common Stock on the
Nasdaq was $1.03 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, 2003, there were approximately 1,900
holders of record of the Common Stock.

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

HIGH LOW
---- ---

2001
First Quarter .................................... $ 8.75 $ 5.00
Second Quarter ................................... 5.80 2.80
Third Quarter .................................... 3.27 1.19
Fourth Quarter ................................... 2.98 1.00

2002
First Quarter .................................... $ 3.47 $ 2.00
Second Quarter ................................... 2.81 1.50
Third Quarter .................................... 1.97 0.87
Fourth Quarter ................................... 1.60 0.67

2003
First Quarter (thru March 18, 2003) .............. $ 1.74 $ 0.22

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 of the Company 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.

14

ITEM 6 - SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) (1)

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----

Statements of Operations Data:

Total revenues $ 16,500 $ 19,397 $ 28,066 $ 26,727 $ 18,913

Operating loss (1,327) (893) (2,601) (13,106) (2) (4,144) (2)

Net loss available to common stockholders (3,782) (2,212) (4,744) (13,198) (2) (5,703) (2)

Basic and diluted loss per common share $ (0.17) $ (0.09) $ (0.17) $ (0.47) (2) $ (0.20) (2)

Shares used in computing per share amounts 22,431 25,559 27,341 28,169 28,348

Balance Sheet Data:

Cash $ 1,662 $ 2,576 $ 13,833 $ 6,342 $ 2,616

Working capital (deficiency) (3,734) 2,473 14,307 6,672 (687)

Total assets 9,557 12,318 29,313 17,451 11,134

Long term obligations, less current portion 8,436 8,409 3,764 3,668 32

Stockholders' equity (deficit) (9,660) (1,037) 17,348 7,147 2,811

- ---------------------

(1) Represents the financial information of VASCO Corp. prior to March 11,
1998, as the Company had not begun operations until the Exchange Offer.

(2) Includes restructuring expenses of $4,284 in 2001 and $320 in 2002.

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

BACKGROUND

Our predecessor company, VASCO Corp., entered into 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. All
of these acquisitions were accounted for under the purchase method of
accounting.

On March 11, 1998, we completed a registered Exchange Offer with the
holders of the outstanding securities of VASCO Corp. In the Exchange Offer,
holders of the common stock and warrants, options and other rights to acquire
common stock of our predecessor company exchanged their securities for the same
number and kind of securities of our present company, and released any potential
claims that such holders might have had against our predecessor in connection
with the issuances of its securities and other corporate actions which occurred
mostly during the 1980's. In the Exchange Offer, almost 98% of our predecessor's
securities were tendered and accepted for exchange. In October 1998, we

15

completed the merger of our predecessor with and into the current company and
thereby eliminated all remaining outstanding securities of our predecessor and
our predecessor thereby ceased to exist.

Since the Exchange Offer, we have engaged in four acquisitions. In May
1999, we acquired the assets of SecureWare SA, a French company for a
combination of our stock and cash totaling approximately $1.4 million.

In October 1999, we acquired Intellisoft Corp. for a combination of stock
and cash totaling approximately $8 million with the cash being distributed to
dissenting shareholders. This acquisition was accounted for under the
pooling-of-interests method of accounting and, therefore, all of our financial
information has been restated to include the results of IntelliSoft.

In August 2000, we acquired Invincible Data Systems (IDS) in a
transaction that was accounted for under the pooling-of-interests method of
accounting. A total of 322,565 shares of the Common Stock were issued in the
transaction. Our historical financial information was not restated for this
transaction, which was deemed immaterial.

Our latest acquisition was completed on March 29, 2001 when we acquired
Identikey Ltd. ("Identikey"), a privately held international security software
company headquartered in Brisbane, Australia. Under the terms of the purchase
agreement, more than 90 percent of the outstanding capital stock of Identikey
was exchanged for 366,913 shares of Common Stock. This purchase was accounted
for under the purchase method of accounting, and accordingly, the acquired
assets have been recorded at their estimated fair values at the date of
acquisition. Intangible assets related to the initial purchase transaction were
$1,897,000 and are being amortized over a period of 7 years. The remaining 10%
of the Identikey has been acquired at various times with the final purchase
completed in January 2003. In exchange for the shares obtained in 2002, the
Company has issued 126,426 shares of Common Stock and paid $23,362 in cash.
Intangible assets related to the purchase of the Identikey shares in 2002 were
valued at $297,925 and are being amortized over the same period as the
intangible assets identified in the initial transaction.

OVERVIEW

We design, develop, market and support security products and services
that manage and protect against unauthorized access to computer systems of
corporate and governmental clients.

Revenue and Earnings. We sell the majority of our products in European
countries with significant sales in the United States, and we intend to actively
pursue additional markets, particularly South America, Asia/Pacific, Australia
and the Middle East.

Revenues from sales from our Digipass family continue to represent the
majority of our total revenues. Digipass products accounted for 72% of the
Company's revenues in 2000 and in excess of 80% of the Company's revenues in
both 2001 and 2002. Although we believe it is likely that sales of the Digipass
family of tokens, which can be used on various platforms, will continue to
account for a majority of our total revenues for the next few years, we also
believe that revenues from sales of our other hardware and software data
security products, including the VACMAN product line, will increase in the
future.

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.

Variations in Operating Results. Our quarterly operating results have
varied in the past and may vary significantly in the future. Factors affecting
operating results include the:

- Level of competition;

16

- Size, timing, cancellation or rescheduling of significant orders;

- Costs and availability of components;

- Our success in expanding sales and marketing programs;

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

- Market acceptance of new products and product enhancements;

- New product announcements or introductions by our competitors;

- Our ability to develop, introduce and market new products and
product enhancements;

- Changes in pricing by us or our competitors;

- Changes in foreign currency exchange rates; and

- General economic trends and other factors.

In addition, for other than the corporate network access market, we have
experienced, and may experience in the future, long sales cycles for customers
with new applications. 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.

Because our operating expenses are based on anticipated revenue levels
and a high percentage of our expenses are fixed, a small variation in the timing
of recognition of revenue could cause significant variations in operating
results from quarter to quarter.

Currency Fluctuations. Approximately 60% of our operating expenses in
2002 were denominated in a foreign currency. In addition, while the majority of
our supply and sales transactions are denominated in U.S. dollars, a significant
portion of those transactions are denominated in various foreign currencies. In
order to reduce the risks associated with fluctuations in currency exchange
rates, we attempt to match the timing of delivery, amount of product and the
currency denomination of purchase orders placed with vendors with sales orders
received from customers.

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 (deficit). Gains and losses resulting
from foreign currency transactions are included in the consolidated statements
of operations. Foreign exchange transaction gains aggregating $289,000, $183,000
and $77,000 are included in other non-operating income for 2000, 2001, and 2002,
respectively.

17

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenues for the years ended
December 31, 2000, 2001 and 2002.

PERCENTAGE OF REVENUE
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 2001 2002
----- ----- -----

Revenues ................................................. 100.0% 100.0% 100.0%
Cost of goods sold ....................................... 35.9 39.6 37.9
----- ----- -----
Gross profit ............................................. 64.1 60.4 62.1
Operating costs:
Sales and marketing ................................ 35.5 50.8 42.0
Research and development ........................... 15.5 18.6 16.5
General and administrative ......................... 20.5 23.8 24.1
Non-cash compensation (recovery) ................... 1.8 0.2 (0.3)
Restructuring expenses ............................. -- 16.0 1.7
----- ----- -----
Total operating costs ...................... 73.3 109.4 84.0
----- ----- -----
Operating loss ........................................... (9.2) (49.0) (21.9)
Interest income (expense) ................................ 0.1 2.9 (1.4)
Other (expense), net ..................................... (4.3) 1.1 --
----- ----- -----
Loss before income taxes ................................. (13.4) (45.0) (23.3)
Provision for income taxes ............................... 1.4 -- 0.7
----- ----- -----
Net loss ................................................. (14.8) (45.0) (24.0)
----- ----- -----

The following discussion is based upon the Company's consolidated results
of operations for the years ended December 31, 2002, 2001 and 2000 (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 Form 10-K.

2002 COMPARED TO 2001

Revenues

Our consolidated revenues for the year ended December 31, 2002 were
$18,913,000, a decrease of $7,814,000 or 29%, as compared to the year ended
December 31, 2001. Sales of Digipass products decreased by $5,254,000 or 24% and
revenues from non-token products decreased by $2,560,000 or 49%, primarily
related to the VACMAN Enterprise product line, which was also known as
Snareworks. The Company discontinued the active marketing of the Snareworks
product in the fourth quarter of 2001.

The geographic distribution of sales for the full year 2002 was 77% or
$14,658,000 from Europe, 16% or $2,966,000 from the United States and 7% or
$1,289,000 from other countries, primarily Asia/Pacific. In 2001, the geographic
distribution of sales was 79% or $21,242,000 from Europe and 21% or $5,485,000
from the United States.

Cost of Goods Sold

Our consolidated cost of goods sold for the year ended December 31, 2002
was $7,171,000, a decrease of $3,420,000, or 32%, as compared to the year ended
December 31, 2001. This decrease was primarily due to the reduction in revenue
but cost of goods sold was reduced further as a result of increased sales to the
Corporate Network Access market, which have a lower cost than goods sold to the
Banking market.

Gross Profit

Our consolidated gross profit for the year ended December 31, 2002 was
$11,743,000, a decrease of $4,394,000, or 27%, from the year ended December 31,
2001. This represents a gross margin of 62%, as compared to 2001's gross margin
of 60%. This increase in the gross margin rate was primarily due to increased
sales of the Digipass products to the

18

Corporate Network Access market, which has a higher margin than the traditional
Banking market, partially offset by the reduction in the sale of non-token
products as a percent of total revenue.

Sales and Marketing Expenses

Consolidated sales and marketing expenses for the year ended December 31,
2002 were $7,934,000, a decrease of $5,646,000, or 42%, from 2001. This decrease
is primarily due to the decrease in average full time sales and marketing
employee headcount to 52 in 2002 from 68 in 2001 and their related expenses. The
decrease also reflects a reduction in marketing activities that were related to
the product lines discontinued in the fourth quarter of 2001.

Research and Development Expenses

Consolidated research and development costs for the year ended December
31, 2002 were $3,117,000, a decrease of $1,864,000, or 37%, as compared to the
year ended December 31, 2001. This decrease was primarily related to our
consolidation of our research activities in Europe and Australia as part of the
restructuring in the fourth quarter of 2001 partially offset by having a full
year of expense for Identikey in 2002 as compared to 9 months of expense in
2001. Average full time research and development employee headcount in 2002 was
20 compared to 38 in 2001.

General and Administrative Expenses

Consolidated general and administrative expenses for the year ended
December 31, 2002 were $4,567,000, a decrease of $1,782,000, or 28%, from 2001.
This decrease can be principally attributed to lower headcount, reduced spending
on professional services and a reduction of amortization expenses resulting from
the write off of assets as part of the restructuring in the fourth quarter of
2001. Average full time general and administrative employee headcount in 2002
was 12 compared to 16 in 2001.

Restructuring Expenses

Restructuring expenses for the year ended December 31, 2002 were
$320,000, a reduction of $3,964,000 from 2001. The expense in 2002 reflects
changes in estimates of the reserves established in the fourth quarter of 2001
and primarily relate to the shutdown of the French operation and excess office
space in the United States.

Interest Income (expense), Net

Consolidated net interest income (expense) was an expense of $270,000 in
2002 compared to income of $775,000 in 2001. This increase in expense was
primarily due to a reduction in average invested cash balances, down from an
average of $6,900,000 in 2001 to $100,000 in 2002, the reversal in 2001 of an
expense accrual recorded in 2000 for the restructuring of the Company's
long-term debt, and an increase in the interest rate from 3.25% to 6%, effective
August 1, 2001, on a $3.4 million term loan, due September 30, 2003.

Income Taxes

An income tax expense for 2002 of $140,000 compares to a recovery of
$13,000 recorded for the year ended December 31, 2001. Both amounts relate to
one of our European subsidiaries.

At December 31, 2002, the Company had United States net operating loss
carryforwards approximating $26,300,000 and foreign net operating loss
carryforwards approximating $6,200,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2003 and continuing through 2021. 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. The Company has recorded a 100% valuation allowance for the
net operating loss carryforwards.

19

2001 COMPARED TO 2000

Revenues

Our consolidated revenues for the year ended December 31, 2001 were
$26,727,000, a decrease of $1,339,000, or 5%, as compared to the year ended
December 31, 2000. Although sales of Digipass products increased by $1,242,000
or 6%, revenues from non-token products, specifically VACMAN, decreased by
$2,581,000 or 33%.

The European operations contributed $21,242,000 or 79% of total
consolidated revenues, with the United States operations contributing the
remaining $5,485,000 or 21%.

Cost of Goods Sold

Our consolidated cost of goods sold for the year ended December 31, 2001
was $10,590,000, an increase of $522,000, or 5%, as compared to the year ended
December 31, 2000. This increase was primarily due to the sales mix. Digipass
products, which carry a slightly lower gross margin, made up 81% and 72% of
total sales for 2001 and 2000, respectively.

Gross Profit

Our consolidated gross profit for the year ended December 31, 2001 was
$16,136,000, a decrease of $1,860,000, or 10%, over the year ended December 31,
2000. This represents a gross margin of 60%, as compared to 2000's consolidated
gross margin of 64%. This decrease was due to stronger sales of products with
lower margins. Token products average gross margins of about 50% while non-token
products average over 90%.

Sales and Marketing Expenses

Consolidated sales and marketing expenses for the year ended December 31,
2001 were $13,579,000, an increase of $3,626,000, or 36%, over 2000. This
increase is mainly due to the increase in average full time sales and marketing
employee headcount of 68 in 2001 versus 43 in 2000. Also, increased sales
efforts including, in part, increased travel costs, and an increase in marketing
activities, including tradeshows, contributed to this expense. Additionally, the
acquisition of Identikey in March 2001 and the opening of the sales office in
Singapore resulted in additional expenses.

Research and Development Expenses

Consolidated research and development costs for the year ended December
31, 2001 were $4,981,000, an increase of $612,000, or 14%, as compared to the
year ended December 31, 2000. This increase was, in part, related to the
acquisition of Identikey in March 2001. As Identikey is primarily a development
center, the acquisition resulted in increased research and development headcount
and expenditures at an additional facility. Average full time research and
development employee headcount in 2001 was 38 compared to 32 in 2000.

General and Administrative Expenses

Consolidated general and administrative expenses for the year ended
December 31, 2001 were $6,349,000, an increase of $575,000, or 10%, over 2000.
This increase can be principally attributed to the acquisition of Identikey. As
a result of our fourth quarter restructuring, administrative headcount at the
end of 2001 was 13 compared to 19 at the end of 2000.

Interest Income (expense), Net

Consolidated interest income (expense), net in 2001 was $775,000 compared
to $29,000 in 2000. This increase was due to a reversal of interest expense
accrued in 2000 associated with the restructuring of the Company's long-term
debt.

20

Income Taxes

An income tax recovery of $13,000 was recorded for the year ended
December 31, 2001, which relates to one of our European subsidiaries.

At December 31, 2001, the Company has United States net operating loss
carryforwards approximating $22,400,000 and foreign net operating loss
carryforwards approximating $3,400,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2002 and continuing through 2020. 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.

RECENT DEVELOPMENTS

On March 18, 2003, the Company announced that it had entered into a Letter of
Intent to sell its VACMAN Enterprise business, originally known as Snareworks,
to SecureD Services, Inc. The Company will continue to sell, support, maintain,
and develop its VACMAN and Digipass strong user authentication products.

The Letter of Intent provides that the Company will receive $2 million of a
class of convertible preferred stock from SecureD Services and a share of the
net profits of the business earned from existing customers over the three years
subsequent to the sale date. The preferred stock will accrue a 6% cumulative
dividend payable at maturity in 48 months or upon earlier redemption, and will
be convertible at maturity based upon a formula conversion price. Closing of the
transaction is contingent upon the satisfactory completion of due diligence and
the execution of a definitive agreement, and is expected to occur in the second
quarter of 2003.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, our aggregate consolidated indebtedness was
$3,622,000. Cash used in operating activities was $2,910,000 during the year
ended December 31, 2002. During 2002, we used $90,000 in investing activities,
$237,000 in financing activities consisting of debt payments, and the effect of
unfavorable changes in exchange rates resulted in the use of $489,000. Net
capital expenditures, assets purchased less assets sold, used $16,000 for the
year ended December 31, 2002.

In 1997, we entered into a convertible loan agreement with Artesia Bank
N.V., formerly Banque Paribas Belgique S.A. and now doing business as Dexia Bank
("Dexia"), in order to refinance the $3,400,000 payment due December 31, 1997 in
connection with our acquisition of Digipass. The terms of the agreement provided
that the $3,400,000 principal amount is convertible, upon an offering, into
shares of our Common Stock. The original interest was at the rate of 3.25%,
payable annually, and the original maturity date was on September 30, 2002. On
August 9, 2001, the terms of this loan were restructured. Under the revised
terms, the loan is now convertible into shares of our Common Stock at the fixed
conversion rate of $7.50 per share rather than a floating rate based on the
market price of our Common Stock. The maturity date of the convertible loan is
September 30, 2003 and the interest rate is 6%. The loan is secured by a pledge
of our Common Stock owned by Mr. T. Kendall Hunt, the Company's Chairman of the
Board of Directors and Chief Executive Officer. In consideration of that pledge,
the Company has entered into an agreement with Mr. Hunt wherein, in the event
that his shares are surrendered to Dexia under the pledge agreement, the Company
will indemnify Mr. Hunt for the fair value of the shares surrendered and pay
such amount over a period that is mutually acceptable to the parties.

In July 2000, the Company issued 150,000 shares of preferred stock for
cash of $15,000,000. The preferred stock is convertible into 1,052,632 shares of
Common Stock at any time through July 2004. If not converted by July 2004, the
preferred stock will, at the option of the Company, be either repurchased or
converted into Common Stock at a rate equal to the average market price of the
Common Stock for 30 consecutive business days on which the common stock was
traded prior to the conversion date less five (5) percent.

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 Belgium subsidiary's defined accounts receivable up to maximum of two
million Euros. Borrowings under the overdraft agreement accrue interest at an
annual rate of 6.75% and the Company is obligated to pay a quarterly commitment
fee of 0.125%. As of December 31, 2002, approximately $1,360,000 Euros was
available under the overdraft agreement and there were no borrowings outstanding
under the

21

agreement. The agreement is secured by the assets of the Belgian subsidiary 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 16, 1989.

The net effect of 2002 activity resulted in a decrease in cash of
$3,727,000 and a cash balance of $2,616,000 at December 31, 2002, compared to
$6,342,000 at the end of 2001. Our working capital at December 31, 2002 was a
deficit of $687,000, a decrease of $7,348,000 from $6,661,000 at December 31,
2001. The change is attributable to the classification of the $3,400,000 term
loan as a current liability and to operating activities. Our current ratio was
0.92 to 1.0 at December 31, 2002. We believe that our current cash balances,
credit available under our existing overdraft agreement, the anticipated cash
generated from operations, including the realization of deferred revenue
recorded as a current liability, deposits received on orders of Digipass to be
delivered in 2003 and the impact of either renegotiating the loan with Dexia, or
entering into a separate agreement to replace or repay the loan to Dexia, or
having Mr. Hunt surrender his shares to Dexia will be sufficient to meet our
anticipated cash needs for the foreseeable future.

There is substantial risk, however, that the our revenue and cash
receipts will not grow at a sufficient rate to generate the funds needed to
repay our debt to Dexia within the terms of the existing agreement. If we are
unable to meet our revenue and cash goals and are also unable to renegotiate the
terms of the agreement with Dexia or reach a mutually acceptable agreement with
Mr. Hunt as an indemnity for his loss as a result of his surrender of shares of
our Common Stock to Dexia, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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.

On an on-going basis, management evaluates its estimates and judgments,
including those related to bad debts 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.

ALLOWANCE FOR DOUBTFUL ACCOUNTS: We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make payments for 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. If
the financial condition of our customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS, AND SOFTWARE
DEVELOPMENT COSTS: We assess the impairment of intangible assets 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. The Company assesses 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

22

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 technological changes in our industry, it
is reasonably possible that estimates of anticipated future revenue, the
remaining economic life of the Company's software products, or both may be
reduced significantly.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
for the associated asset retirement costs. SFAS 143 must be applied starting
with fiscal years beginning after June 15, 2002. Management does not believe the
adoption of SFAS No. 143 will have a significant impact on the Company's
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 requires that gains and losses from extinguishments of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. SFAS No. 145 is effective beginning
January 1, 2003. Management does not believe the adoption of SFAS No. 145 will
have a significant impact on the Company's consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. This
standard will be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Management does not believe the adoption of SFAS No.
146 will have a significant impact on the Company's consolidated financial
statements.

In 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN No. 45"), which requires additional disclosures by
a guarantor about its obligations under certain guarantees that it has issued.
FIN No. 45 also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The accounting requirements of FIN No. 45
are effective for the Company on January 1, 2003, on a prospective basis. The
impact of adoption is not expected to have a material impact on the Company's
results of operations, financial position or cash flows.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123,
to require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. SFAS 148 must be applied starting with fiscal years beginning after
December 16, 2003.

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

Foreign Currency Exchange Risk - Approximately 84% of our business is
conducted outside the United States, 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
transactions are recorded as gains or losses in our statement of operations. Our
foreign subsidiaries' business

23

transactions are spread across approximately 50 different countries and
currencies. This geographic diversity reduces the risk to our operating results.

Interest Rate Risk - We have minimal interest rate risk. Our $3,400,000
long-term debt has a fixed rate of 6%, which is not subject to market
fluctuations. This note matures in September 2003. If renegotiated, the interest
rate on the debt could increase. Interest expense will increase $34,000 annually
for each percentage point that the interest rate increases.

Impairment Risk - At December 31, 2002, we had goodwill and other
intangible assets of $2,160,000 related mostly to technology purchased in 2001
as part of our acquisition of Identikey. We will assess the net realizable value
of the intangible assets on a regular basis to determine if we have incurred any
declines, other than a temporary decline, in the value of our capital
investment. While we did not experience impairment for the year ended December
31, 2002, 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-20 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.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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. Mr. Hunt is a director of Dolfin.com, Inc. and
SecureD Services, Inc., both privately held companies. Mr. Hunt received a
B.B.A. from the University of Miami, Miami, Florida and an M.B.A. from
Pepperdine University, Malibu, California. Mr. Hunt is 59 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. Mr. Cullinane is currently
the Executive Vice President and Chief Financial Officer of Divine, Inc. From
1988 to June 1999 he served as Executive Vice President, Chief Financial Officer
and a director of PLATINUM Technology International, Inc. Mr. Cullinane is a
director of Divine, Inc. and Made 2 Manage Systems, Inc., both of which are
public companies. Mr. Cullinane received a B.B.A. from the University of Notre
Dame, South Bend, Indiana. Mr. Cullinane is 53 years old.

FORREST D. LAIDLEY -- Mr. Laidley has been a director since July 1997 and
currently serves a one-year term. Mr. Laidley was our Secretary from our
inception through September 2000. He has been involved with us and our
predecessor, VASCO Corp., for certain periods since 1984 in similar capacities
and currently serves as Chairman of our Compensation Committee and a member of
our Audit Committee. Mr. Laidley is a partner in the law firm of Tressler,
Soderstrom, Maloney & Priess, where he has practiced since 1999. Prior to that
he was a partner in the law firm of Laidley & Porter (a predecessor firm) in
Libertyville, Illinois since 1985. He serves on the Advisory Council on Main
Street Libertyville, and is President and sole stockholder of Forrest
Properties, Inc., an Illinois real estate development corporation. Mr. Laidley
received a B.A. in History from Yale University, New Haven, Connecticut and a
J.D. from DePaul University, Chicago, Illinois. Mr. Laidley is 59 years old.

24

MICHAEL A. MULSHINE -- Mr. Mulshine has been a director since July 1997
and currently serves a one-year term. He served since 1992 as a director of our
predecessor, VASCO Corp. He is a member of our Audit Committee and Compensation
Committee. He is, and since 1977 has been, a principal of Osprey Partners, a
management consulting firm. Since 1985 he has been a director and Secretary of
SEDONA Corporation, a developer and marketer of enterprise scale Internet
solutions. Mr. Mulshine received a B.S. in Electrical Engineering from Newark
College of Engineering, Newark, New Jersey. Mr. Mulshine is 63 years old.

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 Kortrijk High
School in Kortrijk, Belgium. Mr. Valcke is 49 years old.

CLIFFORD K. BOWN -- Mr. Bown is Executive Vice President & Chief
Financial Officer. Mr. Bown started his career with KPMG where he directed the
audits for several publicly held companies, including a global leader that
provides integrated and embedded communications solutions. 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. Mr. Bown received his
MBA from the University of Chicago, a B.S. in Accountancy from the University of
Illinois, and he has a CPA certificate. Mr. Bown is 51 years old.

25

ITEM 11 - EXECUTIVE COMPENSATION

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 three years ended December 31, 2000, 2001 and 2002 for our Chief
Executive Officer and President and Executive Vice Presidents, 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").

ANNUAL COMPENSATION LONG-TERM COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
- -------------------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------

T. KENDALL HUNT (1) 2002 152,627 42,500 -- -- 120,000 -- --
Chairman and Chief 2001 165,000 25,000 -- -- 90,000 -- --
Executive Officer 2000 165,000 -- -- -- 30,000 -- --
- -------------------------------------------------------------------------------------------------------------------------
JAN VALCKE (2) 2002 166,667 40,000 34,889 -- 50,000 -- --
President and Chief 2001 155,000 36,600 8,597 -- 50,000 -- --
Operating Officer 2000 107,895 29,288 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
CLIFFORD K. BOWN (3) 2002 50,600 -- -- -- 75,000 -- --
Executive Vice
President, Chief
Financial Officer and
Secretary
- -------------------------------------------------------------------------------------------------------------------------
MARIO R. HOUTHOOFT (4) 2002 186,875 81,250 103,372 -- 120,000 -- 75,113
Chief Executive 2001 225,000 110,000 99,337 -- 120,000 -- --
Officer, President and 2000 180,000 -- 103,793 -- -- -- --
Director
- -------------------------------------------------------------------------------------------------------------------------
DENNIS D. WILSON (5) 2002 100,347 40,000 -- -- 150,000 -- --
Executive Vice 2001 155,000 45,000 -- -- 50,000 -- --
President, Chief 2000 94,167 15,000 -- -- 100,000 -- --
Financial Officer and
Secretary

(1) Mr. Hunt returned as CEO as of the Company on November 20, 2002.

(2) Mr. Valcke was elected President and COO as of November 20, 2002. Other
Annual Compensation primarily includes employment-related expenses billed
by Mr. Valcke as an independent contractor.

(3) Mr. Bown joined the Company as Executive Vice President and Chief
Financial Officer on August 19, 2002. He was appointed Secretary of the
Company as of October 21, 2002.

(4) Mr. Houthooft was terminated from the Company as its President and CEO on
November 20, 2002. Other Annual Compensation primarily includes
employment-related expenses billed by Mr. Houthooft as an independent
contractor. All Other Compensation includes the forgiveness of loans made
to Mr. Houthooft related to taxes paid under Belgium law related to the
granting of Employee Stock Options.

(5) Mr. Wilson resigned as the Company's Executive Vice President and CFO on
August 21, 2002.

26

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth all options granted to the Named Executive
Officers during 2002.

INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------------------------------

PERCENT OF POTENTIAL REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL RATES OF STOCK PRICE
NUMBER OF OPTIONS/ APPRECIATION FOR OPTION TERM (2)
SECURITIES SARS
UNDERLYING GRANTED TO ------------------------------------
OPTIONS/ EMPLOYEES EXERCISE OF
SARS GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (1) YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------

T. Kendall Hunt 120,000 7.3 % 2.27 1/09/12 171,310 434,135
- ----------------------------------------------------------------------------------------------------------------------
Jan Valcke 50,000 3.0 % 2.27 1/09/12 71,380 180,890
- ----------------------------------------------------------------------------------------------------------------------
Clifford K. Bown 75,000 4.6 % 1.20 8/19/12 56,600 143,440
- ----------------------------------------------------------------------------------------------------------------------
Mario R. Houthooft (3) 120,000 7.3 % 2.27 1/09/12 171,310 434,135
- ----------------------------------------------------------------------------------------------------------------------
Dennis D. Wilson (3) 150,000 9.1 % 2.27 1/09/12 214,140 542,670

(1) Vesting schedule is based on a time period of 36 months, with 6/36th of the
options vesting at the end of the first six months and 1/36th of the options
vesting each month thereafter on the last day of each month.

(2) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of their
term using five percent and ten percent appreciation rates as required to be
used in this table by the Securities and Exchange Commission, compounded
annually, and are not intended to forecast future appreciation, if any, of our
stock price. Additionally, these values do not take into consideration the
provisions of the options providing for nontransferability or termination of the
options following termination of employment. Therefore, the actual values
realized may be greater or less than the potential realizable values set forth
in the table.

(3) All of the options granted to Mr. Houthooft and Mr. Wilson lapsed ninety
(90) days after their separation from the Company.

27

AGGREGATED OPTION /SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

The following table sets forth the aggregate value as of December 31,
2002 of unexercised stock options held by the Named Executive Officers. The
Named Executive Officers did not exercise any stock options during 2001 and the
relevant columns have, therefore, been omitted.

NAME NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT FISCAL YEAR-END OPTIONS/SARS AT FISCAL YEAR-END ($)(1)
- ----------------------------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------

T. Kendall Hunt 227,164 167,836 0 0
Jan Valcke 134,582 99,168 0 0
Clifford K. Bown 0 75,000 0 0
Mario R. Houthooft 566,999 278,001 0 0
Dennis D. Wilson 0 0 0 0

(1) Market value of underlying securities is based on the closing price of
the Common Stock as reported on the Nasdaq National market on December
31, 2002 ($0.97) minus the exercise price.

COMPENSATION OF DIRECTORS

The Compensation Committee of our Board of Directors reviews and sets the
salaries and incentive compensation for our executive officers, directors and
other key personnel. The Compensation Committee also administers our stock
option plan. In its capacity as administrator of the stock option plan, the
Compensation Committee has authority to grant stock options and determine the
terms thereof. The members of the Compensation Committee for 2002 were: Forrest
D. Laidley, Michael P. Cullinane and Michael A. Mulshine.

Each of our directors received a quarterly cash payment of $3,750 in
connection with his service on the Board of Directors in 2002. 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 stock option grants from time to time. In 2002, options to purchase
18,000 shares of our Common Stock, at a per share exercise price of $2.27, were
issued to each of Messrs. Cullinane, Dumolin, Laidley, Lebeer and Mulshine.

EMPLOYMENT AGREEMENTS

Mr. Hunt's salary and bonus are determined pursuant to his employment
agreement dated November 20, 2002. Mr. Hunt's annual salary, any discretionary
bonus and stock options will be determined by the Compensation Committee for
each fiscal year of the Company during the employment period. In 2002, Mr. Hunt
received a base salary of $152,627, a cash bonus of $42,500, and 120,000 stock
options. In the event Mr. Hunt is terminated Without Cause, he quits for Good
Reason, or he is terminated or quits for Good Reason after a Change in Control
(as the foregoing terms are defined in his employment agreement), Mr. Hunt will
continue to receive his base pay and any applicable Incentive Compensation over
a 24-month period. In the event of such termination, Mr. Hunt has agreed to
abide by several non-compete restrictions. Mr. Hunt's current 2003 annual base
salary is $140,000, and can be adjusted by the Compensation Committee based on
the Company's performance in 2003. There is no bonus plan for 2003; however, the
Compensation Committee has the discretion to award merit bonuses based on the
Company's performance in 2003.

Mr. Valcke's salary and bonus are determined pursuant to an Independent
Contractor Employment Agreement dated November 20, 2002. Mr. Valcke's annual
salary, his bonus and stock options will be determined by the Compensation
Committee for each fiscal year of the Company during the employment period. In
2002, Mr. Valcke received $201,556 in base compensation, including
employment-related expenses billed as an independent contractor, cash bonuses
totaling 40,000 and 50,000 stock options. Either Party shall have the option to
terminate Mr. Valcke's employment with or without

28

cause, for any reason whatsoever, without any breach of this Agreement by giving
six (6) month's written notice. In the event of such termination, Mr. Valcke has
agreed to abide by various non-compete and non-solicitation restrictions for up
to 12 months following termination of the Agreement. Mr. Valcke's 2003 base
compensation is $260,000. There is no bonus plan for 2003; however, the
Compensation Committee has the discretion to award merit bonuses based on the
Company's performance in 2003.

Mr. Bown's salary and bonus are determined pursuant to his employment
agreement dated January 1, 2003. Mr. Bown's annual salary, any discretionary
bonus and stock options will be determined by the Compensation Committee for
each fiscal year of the Company during the employment period. In 2002, Mr. Bown
received a base salary of $50,600, no cash bonus, and 75,000 stock options. In
the event Mr. Bown is terminated Without Cause, he quits for Good Reason, or he
is terminated or quits for Good Reason after a Change in Control (as the
foregoing terms are defined in his employment agreement), Mr. Bown will continue
to receive his base pay and any applicable Incentive Compensation over a
12-month period. In the event of such termination, Mr. Bown has agreed to abide
by various non-compete restrictions. Mr. Bown's 2003 annual base salary is
$150,000. There is no bonus plan for 2003; however, the Compensation Committee
has the discretion to award merit bonuses based on the Company's performance in
2003.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

For 2002, our Compensation Committee was comprised of Messrs. Laidley,
Cullinane and Mulshine. Forrest D. Laidley serves as a Director and was
previously our Secretary. Also, Mr. Laidley was previously a partner in the law
firm of Laidley & Porter, which firm performed various legal services for us.
Since 1999, Mr. Laidley has been a partner in the law firm of Tressler,
Soderstrom, Maloney & Priess. Tressler, Soderstrom, Maloney & Priess has not
provided any services to the Company. Mr. Laidley and his former partners have
made equity investments in us from time to time through various private
placements and are currently stockholders.

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

Section 16(a) of the Exchange Act 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 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 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, 2002, all of
the Company's directors, executive officers and greater than 10% beneficial
owners complied with Section 16(a) filing requirements applicable to them.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

OVERVIEW

Our Board of Directors established a Compensation Committee in March of
1998. For 2002, the Compensation Committee consisted of Messrs. Laidley,
Cullinane and Mulshine, none of whom is employed by the Company, and none of
whom has any "interlocking" relationships as defined for proxy statement
disclosure purposes.

The Compensation Committee is responsible for determining the
compensation for our officers and employees. In accordance with its right to do
so, the Committee has elected to delegate the fixing of salaries below certain
levels to VASCO's Chief Executive Officer. The Compensation Committee also
administers our Amended and Restated 1997 Stock Option Plan ("Amended and
Restated Option Plan") and the Executive Incentive Compensation Plan ("Incentive
Plan"), including the designation of which officers, key employees and directors
shall receive options under the Option Plan and the amount, terms, pricing, and
vesting provisions of options granted pursuant to the Option Plan.

EXECUTIVE 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

29

entrepreneurial atmosphere and to maintain a low cost operating structure.
Consequently, we employ a combination of salary, bonuses and stock options to
reward, retain and provide incentives to our executives and key employees.

2002 CHIEF EXECUTIVE OFFICER COMPENSATION

The Compensation Committee believes that the salary approved for Mr.
Houthooft, the former Chief Executive Officer of the Company, reflected market
value for his services in 2002. Given this and the relative performance of the
Company during 2002, the Compensation Committee of the Company believes that Mr.
Houthooft's approved compensation was appropriate. Mr. Houthooft was terminated
as of November 20, 2002.

Mr. Hunt, the Company's current CEO, is being paid below market and is
expected to be adjusted based on the performance of the Company.

2002 COMPENSATION OF OTHER EXECUTIVE OFFICERS

Although we strove to maintain a low cost operating structure, our
Compensation Committee aimed to set other executives' and key employees'
salaries at a competitive level. 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.

At our 1999 Annual Meeting of Stockholders, VASCO's stockholders approved
the Amended and Restated Option Plan. The Amended and Restated Option 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 VASCO. The Compensation Committee believes that, over a period of
time, our share performance will, to a great extent, reflect executive and key
employee performance.

The Amended and Restated Option Plan provides that options may be granted
at the discretion of the Compensation Committee, in such amounts and subject to
such conditions as the Compensation Committee may determine in accordance with
the terms thereof. Options granted to employees are priced at market, are
generally fully vested after five years and expire at the end of ten years.

The Executive Incentive Compensation Plan covers our eligible executives
and key employees (each a "participant"), with such eligibility determined at
the end of each year at the sole discretion of the Compensation Committee.
Awards are based on prior year operating results, such results being subject to
audit by our independent accountants, and are distributed following the
completion of such audit.

The Compensation Committee approved a quarterly bonus program for its
executives at the beginning of 2002. This program was designed to reward the
executive team for achieving its revenue and operating income business plan
targets for each quarter in 2002. As was the case in determining the annual 2002
salaries for each executive, the quarterly bonuses were determined by analyzing
the actual 2000 compensation for other executives in our industry. It was the
Compensation Committee's goal to target these quarterly bonuses at a level
commensurate with "market" compensation for comparable executives

Awards, in whole or in part, may be offered in the form of shares of the
Common Stock or cash at the sole discretion of the Compensation Committee and
the Compensation Committee also may elect to delegate the choice of cash or
stock to the individual participants. To the extent that shares of stock are
awarded in lieu of cash, the number of shares is based on the market value of
the Common Stock on the date the award is determined, and are taxable to the
participant in the year the award is granted. Such shares are restricted and
cannot be sold or transferred except pursuant to registration under the
Securities Act of 1933 or an exemption from such registration.

Respectfully submitted,

Forrest D. Laidley, Chairman
Michael P. Cullinane
Michael A. Mulshine

30

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of March 20, 2003 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.

NAME AND ADDRESS OF AMOUNT AND NATURE OF
CLASS OF SECURITIES BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- ------------------- -------------------- ----------------

T. Kendall Hunt
1901 S. Meyers Road
Common Ste. 210 10,369,306 (1) 35.683%
Oakbrook Terrace, IL 60181

(1) Includes 200,000 shares held in the T. Kendall Hunt Charitable
Remainder Trust and 1,111,300 shares held by Barbara J. Hunt, Mr.
Hunt's spouse, as to which shares Mr. Hunt disclaims beneficial
ownership.

The table below sets forth certain information with respect to the beneficial
ownership of our Common Stock as of March 31, 2003 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 which such person has the right to acquire within
60 days after such date.

NAME AND ADDRESS OF AMOUNT AND NATURE OF
CLASS OF SECURITIES BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
------------------- ------------------- ------------------------ ----------------

T. Kendall Hunt
1901 S. Meyers Road
Common Ste. 210 10,369,306 (2) 35.683%
Oakbrook Terrace, IL 60181

Jan Valcke
Common Koningin Astridlaan 164 154,235 0.531%
B-1780 Wemmel, Belgium

Forrest D. Laidley
Common 552 Stevenson Drive 644,403 2.218%
Libertyville, IL 60048

Michael P. Cullinane
Common 2233 Edgebrook Drive 57,000 0.196%
Lisle, IL 60532

Michael A. Mulshine
Common 2517 Route 35, suite D-201 95,900 0.330%
Manasquan, NJ 08736

Cliff Bown
Common 1901 S. Meyers Road
Ste. 210 23,750 0.081%
Oakbrook Terrace, IL 60181

All Executive Officers
Common and Directors as a Group
(6 persons) 11,344,594 39.039%

31

(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 which the individual has the right to acquire within 60
days after March 31, 2003 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 200,000 shares held in the T. Kendall Hunt Charitable
Remainder Trust and 1,111,300 shares held by Barbara J. Hunt, Mr.
Hunt's spouse, as to which shares Mr. Hunt disclaims beneficial
ownership.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In consideration of the pledge of the Company's Common Stock owned by
Mr. Hunt to Dexia Bank, in connection with our $3,400,000 term loan, the Company
has entered into an agreement with Mr. Hunt wherein, in the event that his
shares are surrendered to Dexia under the pledge agreement, the Company will
indemnify Mr. Hunt for the fair value of the shares surrendered and pay such
amount over a period that is mutually acceptable to the parties. The agreement
further provides that the Company will grant a lien on the general assets of the
Company as security for the amount due Mr. Hunt.

In 2002, the Company loaned Belgian employees who received stock
options in 1999 and 2000, 141,895 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, 2002.

ITEM 14 - 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 Form 10-K, and in other reports required to be filed under the
Securities Exchange Act of 1934, is recorded, processed, summarized and reported
within the time periods specified in the rules and forms for such filings.
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 within 90 days
prior to filing this report (the "Evaluation Date"). Based on that review and
evaluation, the Chief Executive Officer and Chief Financial Officer, along with
other key management of the Company, have determined that the disclosure
controls and procedures were and are effective as designed to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them on a timely basis.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
Evaluation Date.

PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) The following consolidated financial statements and notes thereto,
and the related independent auditors' report, are included on pages F-1 through
F-20 of this Form 10-K:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2001 and 2002

Consolidated Statements of Operations for the Years Ended December
31, 2000, 2001 and 2002

Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 2000, 2001 and 2002

32

Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 2000, 2001 and 2002

Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 2001 and 2002

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.

(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:

EXHIBIT
NUMBER DESCRIPTION
-----------------------------------------------------------------
+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.

33

EXHIBIT
NUMBER DESCRIPTION
-----------------------------------------------------------------

+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.

+10.9 Office Lease by and between VASCO Data Security
International, Inc. and LaSalle National Bank, not
personally, but as Trustee under Trust Agreement dated
September 1, 1997, and known as Trust Number 53107, dated
July 22, 1985.

+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.**

+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.**

34

EXHIBIT
NUMBER DESCRIPTION
-----------------------------------------------------------------

+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.

+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.)

35

EXHIBIT
NUMBER DESCRIPTION
-----------------------------------------------------------------
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 Independent Contractor Employment agreement with Jan Valcke

10.52 Employment agreement with Clifford Bown

10.53 Indemnification Agreement with T. Kendall Hunt

21 Subsidiaries of Registrant. (Incorporated by reference - Form
10-K filed April 2, 2001.)

23 Consent of KPMG LLP.

99.1 Certification of Chief Executive Officer.

99.2 Certification of Chief Financial Officer.

- -------------------------
+ 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.

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

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.

(b) Reports on Form 8-K

No reports on Form 8-K have been filed by the Registrant during the
quarter ended December 31, 2002.

36

This page intentionally left blank.

INDEPENDENT AUDITORS' REPORT

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 (the "Company") as of
December 31, 2001 and 2002 and the related consolidated statements of
operations, comprehensive loss, stockholders' equity (deficit), and cash flows
for each of the years in the three-year period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2002,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. 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 discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and other
Intangible Assets", in 2002.

/s/ KPMG LLP

Chicago, Illinois
February 13, 2003

F-1

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
ASSETS
CURRENT ASSETS:

Cash $ 6,342,440 $ 2,615,935
Accounts receivable, net of allowance for doubtful accounts
of $206,913 and $461,129 in 2001 and 2002, respectively 3,791,916 2,881,257
Inventories, net 2,012,567 1,579,125
Prepaid expenses 405,815 407,479
Deferred income taxes 83,000 -
Other current assets 661,597 119,687
------------ ------------
Total current assets 13,297,335 7,603,483
Property and equipment
Furniture and fixtures 1,733,349 1,514,125
Office equipment 2,070,090 2,537,611
------------ ------------
3,803,439 4,051,736
Accumulated depreciation (2,088,939) (2,763,411)
------------ ------------
1,714,500 1,288,325
Intangible assets, net of accumulated amortization
of $3,913,086 in 2001 and $3,545,104 in 2002 2,223,416 1,910,504
Goodwill, net of accumulated amortization
of $708,074 in 2001 and $972,931 in 2002 188,472 249,967
Other assets 27,273 81,161
------------ ------------
Total assets $ 17,450,996 $ 11,133,440
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 158,990 $ 3,589,645
Accounts payable 3,326,652 1,850,424
Deferred revenue 869,893 720,051
Other accrued expenses 2,280,491 2,130,236
------------ ------------
Total current liabilities 6,636,026 8,290,356

Long-term debt, less current maturities 3,667,882 32,006

STOCKHOLDERS' EQUITY :
Series C Convertible Preferred Stock, $.01 par value - 500,000 shares
authorized; 150,000 shares issued and outstanding in 2000 and 2001 7,944,082 9,108,066
Common stock, $.001 par value - 75,000,000 shares authorized;
28,263,058 shares issued and outstanding in 2001
28,389,484 shares issued and outstanding in 2002 28,263 28,389
Additional paid-in capital 37,693,098 36,763,330
Accumulated deficit (38,069,082) (42,608,077)
Accumulated other comprehensive loss -
cumulative translation adjustment (449,273) (480,630)
------------ ------------
Total stockholders' equity 7,147,088 2,811,078
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,450,996 $ 11,133,440
============ ============

See accompanying notes to consolidated financial statements.

F-2

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
------------ ------------ ------------

Net revenues $ 28,065,680 $ 26,726,849 $ 18,913,178

Cost of goods sold 10,068,969 10,590,485 7,170,644
------------ ------------ ------------
Gross profit 17,996,711 16,136,364 11,742,534
------------ ------------ ------------
Operating costs:
Sales and marketing (exclusive of $152,545, $15,065 9,953,598 13,579,493 7,933,907
and $(11,719) for 2000, 2001 and 2002, respectively,
reported below as non-cash compensation (recovery))

Research and development 4,368,501 4,980,544 3,116,497

General and administrative (exclusive of $349,198, 5,773,495 6,348,527 4,566,560
$34,490 and $(38,397) for 2000, 2001 and 2002,
respectively, reported below as non-cash compensation
(recovery))

Non-cash compensation (recovery) 501,743 49,555 (50,116)

Restructuring expenses - 4,283,752 319,743
------------ ------------ ------------
Total operating costs 20,597,337 29,241,871 15,886,591
------------ ------------ ------------

Operating loss (2,600,626) (13,105,507) (4,144,057)

Interest income (expense), net 29,334 774,894 (269,867)
Other income (expense), net (1,195,234) 283,861 15,375
------------ ------------ ------------

Income (loss) before income taxes (3,766,526) (12,046,752) (4,398,549)
Provision (benefit) for income taxes 395,246 (12,782) 140,446
------------ ------------ ------------

Net loss (4,161,772) (12,033,970) (4,538,995)

Preferred stock accretion (581,992) (1,163,984) (1,163,984)
------------ ------------ ------------

Net loss available to common shareholders $ (4,743,764) $ (13,197,954) $ (5,702,979)
============ ============= ============

Basic and diluted net loss per common share $ (0.17) $ (0.47) $ (0.20)
============ ============= ============
Weighted average common shares outstanding 27,341,439 28,168,685 28,347,573
============ ============= ============

See accompanying notes to consolidated financial statements.

F-3

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000 2001 2002
------------ ------------- ------------

Net loss $ (4,161,772) $ (12,033,970) $ (4,538,995)

Other comprehensive income (loss) -
cumulative translation adjustment (403,777) (153,127) (31,357)
------------ ------------- ------------

Comprehensive income (loss) $ (4,565,549) $ (12,187,097) $ (4,570,352)
============ ============= ============

See accompanying notes to consolidated financial statements.

F-4

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

Preferred Stock Common Stock
---------------- ------------ Accumulated
Description Shares Amount Shares Amount APIC Deficit
----------- ------ ------ ------ ------ ---- -------

BALANCE AT 12/31/99.................. - $ - 26,462,083 $ 26,462 $ 20,702,387 $ (21,873,340)
=======================================================================================

Net loss............................. - - - - - (4,161,772)
Foreign currency translation
adjustment........................ - - - - - -
Exercise of stock options............ - - 342,400 342 556,871 -
Exercise of stock warrants........... - - 303,625 304 1,724,413 -
Conversion of note and interest to
common stock...................... - - 435,910 436 5,164,618
Stocks issued for acquisition........ - - 322,565 323 1,266 -
Issuance of series C preferred 150,000 6,198,106 - - 8,801,894 -
stock.............................
Preferred stock accretion............ - 581,992 - - (581,992) -
Non-cash compensation................ - - - - 501,743 -
---------------------------------------------------------------------------------------
BALANCE AT 12/31/00.................. 150,000 $6,780,098 27,866,583 $ 27,867 $ 36,871,200 $ (26,035,112)
=======================================================================================

Net loss............................. - - - - - (12,033,970)
Foreign currency translation
adjustment........................ - - - - - -
Exercise of stock options............ - - 25,633 26 15,638 -
Exercise of stock warrants........... - - 3,929 3 17,690 -
Stocks issued for acquisition........ - - 366,913 367 1,902,999 -
Preferred stock accretion............ - 1,163,984 - - (1,163,984) -
Non-cash compensation................ - - - - 49,555 -
---------------------------------------------------------------------------------------
BALANCE AT 12/31/01.................. 150,000 $7,944,082 28,263,058 $ 28,263 $ 37,693,098 $ (38,069,082)
=======================================================================================

Net loss............................. - - - - - (4,538,995)
Foreign currency translation
adjustment........................ - - - - -
Stock issued for acquisition......... - - 126,426 126 284,332 -
Preferred stock accretion............ - 1,163,984 - - (1,163,984) -
Non-cash compensation (recovery) .... - - - - (50,116) -
---------------------------------------------------------------------------------------
BALANCE AT 12/31/02.................. 150,000 $9,108,066 28,389,484 $ 28,389 $ 36,763,330 $ (42,608,077)
=======================================================================================

Accumulated Other Total
Comprehensive Stockholders'
Description Income Equity(Deficit)
----------- ----------------- ---------------

BALANCE AT 12/31/99.................. $ 107,631 $ (1,036,860)
====================================
Net loss............................. - (4,161,772)
Foreign currency translation
adjustment........................ (403,777) (403,777)
Exercise of stock options............ - 557,213
Exercise of stock warrants........... - 1,724,717
Conversion of note and interest to
common stock...................... 5,165,054
Stocks issued for acquisition........ - 1,589
Issuance of series C preferred - 15,000,000
stock.............................
Preferred stock accretion............ - -
Non-cash compensation................ - 501,743
------------------------------------
BALANCE AT 12/31/00.................. (296,146) $ 17,347,907
====================================
Net loss............................. - (12,033,970)
Foreign currency translation
adjustment........................ (153,127) (153,127)
Exercise of stock options............ - 15,664
Exercise of stock warrants........... - 17,693
Stocks issued for acquisition........ - 1,903,366
Preferred stock accretion............ - -
Non-cash compensation................ - 49,555
------------------------------------
BALANCE AT 12/31/01.................. $ (449,273) $ 7,147,088
====================================
Net loss............................. - (4,538,995)
Foreign currency translation
adjustment........................ (31,357) (31,357)
Stock issued for acquisition......... - 284,458
Preferred stock accretion............ - -
Non-cash compensation (recovery) .... - (50,116)
------------------------------------
BALANCE AT 12/31/02.................. $ (480,630) $ 2,811,078
====================================

See accompanying notes to consolidated financial statements.

F-5

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years ended December 31,
-----------------------------------------------
2000 2001 2002
------------- ------------- -------------

Cash flows from operating activities:
Net loss $ (4,161,772) $(12,033,970) $ (4,538,995)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,415,763 5,576,096 1,351,804
Common stock issued for interest 165,054 - -
Loss on disposal of fixed assets 2,073 - -
Deferred tax expense - - 83,000
Gain on sale of fixed assets - (15) -
Non-cash compensation expense (recovery) 501,743 49,555 (50,116)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (3,615,030) 2,790,193 1,304,790
Inventories, net (306,369) (943,269) 666,205
Prepaid expenses (305,474) 51,609 34,187
Other current assets 393,253 (76,146) 560,952
Prepaid royalties and other assets 150,208 - -
Accounts payable 770,234 368,334 (1,703,517)
Deferred revenue 67,569 (1,110,621) (228,723)
Accrued expenses 2,772,721 (983,397) (389,971)
------------- ------------- -------------
Net cash used in operating activities (2,150,027) (6,311,631) (2,910,384)
------------- ------------- -------------

Cash flows from investing activities:
Cash acquired (paid) in the acquisition of Identikey, Ltd. - 141,156 (23,362)
Other assets - - (50,952)
Additions to property and equipment (3,473,564) (948,412) (15,961)
------------- ------------- -------------
Net cash used in investing activities (3,473,564) (807,256) (90,275)
------------- ------------- -------------

Cash flows from financing activities:
Repayment of debt - (299,236) (236,954)
Proceeds from exercise of stock options/warrants 2,281,930 33,357 -
Issuance of Series C Convertible Preferred Stock 15,000,000 - -
------------- ------------- -------------
Net cash provided by (used in) financing activities 17,281,930 (265,879) (236,954)
Adjustment to conform immaterial pooled business 1,589 - -
Effect of exchange rate changes on cash (403,777) (105,439) (488,892)

Net increase (decrease) in cash 11,256,151 (7,490,205) (3,726,505)
Cash, beginning of year 2,576,494 13,832,645 6,342,440
------------- ------------- -------------
Cash, end of year $ 13,832,645 $ 6,342,440 $ 2,615,935
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 323,341 $ 188,294 $ 341,998
Income taxes paid 293,875 121,359 -
Supplemental disclosure of non-cash financing and investing activities:
Conversion of note to common stock 5,000,000 - -
Common stock issued in connection with acquisition - 1,903,366 284,458

See accompanying notes to consolidated financial statements.

F-6

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

VASCO Data Security International, Inc. and its wholly owned
subsidiaries (the Company) designs, develops, markets and supports security
products and services which manage and protect against unauthorized access to
computer systems of corporate and government customers. VASCO has operations in
Belgium, Australia, Singapore and the United States.

Principles of Consolidation

The consolidated financial statements include the accounts of VASCO
Data Security International, Inc. and its wholly and majority 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 aggregating $289,000, $183,000
and $77,000 are included in other income (expense) for 2000, 2001 and 2002,
respectively.

Revenue Recognition

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

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 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 generally
recognized during the period in which the services are performed.

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.

Software 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
and development costs, prior to the establishment of technological feasibility,
determined based upon the creation of a working model, are expensed as incurred.
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. The Company did not
capitalize any software costs during the years ended December 31, 2000, 2001 and
2002.

F-7

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 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.

Fair Value of Financial Instruments

The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures and Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company 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, 2001 and 2002.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.

Goodwill and Other Intangibles

During the first quarter of 2002, VASCO implemented SFAS No. 142,
"Goodwill and Other Intangible Assets", which replaced the requirements to
amortize intangible assets with indefinite lives and goodwill with a requirement
for an impairment test. SFAS 142 also established requirements for identifiable
intangible assets, which included customer lists and proprietary technology. As
a result, during the first quarter VASCO reclassified $320,507 of gross
intangible assets, $55,650 net, to goodwill. Operating income for the twelve
months ended December 31, 2001 included $183,291 of amortization of goodwill and
other intangible assets that are not included in 2002 results, because of the
implementation of SFAS No. 142.

Intangible asset data as of December 31, 2002 is as follows:

GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------------------- -----------------

Amortized intangible assets -
Capitalized Technology and Customer Lists............. $ 5,455,609 $ 3,545,104
Unamortized intangible assets - Goodwill.................. $ 1,222,898 $ 972,931
Aggregate amortization expense............................ $ 549,954

Estimated amortization expense for the years ended:
December 31, 2003...................................... $ 532,355
December 31, 2004...................................... 319,186
December 31, 2005...................................... 319,186
December 31, 2006...................................... 319,186

Net loss would have been $183,291 lower and basic and diluted loss per
share would have decreased $.01 for the year ended December 31, 2001, if SFAS
142 had been implemented at the beginning of that period.

The Company assesses the impairment of intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment
review include

F-8

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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. The Company assesses the recoverability of its
software development costs against estimated future revenue for the individual
products over the estimated remaining economic life of the software.

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, 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 technological changes, it is reasonably
possible that estimates of anticipated future revenue, the remaining economic
life of the Company's software products, or both may be reduced significantly.

At December 31, 2001 and 2002, ending balances of goodwill and other
intangibles, net of amortization are as follows:

2001 2002
------------------- -----------------

Goodwill....................................... $ 188,472 $ 249,967
Capitalized Technology......................... 2,048,850 1,874,862
Customer Lists and Other....................... 174,586 35,642
------------------- -----------------
Total....................................... $ 2,411,908 $ 2,160,471
=================== =================

Stock-Based Compensation

At December 31, 2002, the Company had a stock-based employee
compensation plan, which is described more fully in Note 8. The Company accounts
for the plan under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is 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 following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to stock based employee compensation.

FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002
------------- ------------- -------------

Net loss available to common stockholders as reported $ (4,743,764) $(13,197,954) $ (5,702,979)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of tax (517,261) (614,084) (1,005,451)
------------- ------------- -------------
Pro forma net loss $ (5,261,025) $(13,812,038) $ (6,708,430)
============= ============= =============
Net loss per common share-basic and diluted:
As reported $ (0.17) $ (0.47) $ (0.20)
Pro forma (0.19) (0.49) (0.24)

For purposes of calculating the compensation cost consistent with SFAS
No. 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 2001 and 2002: dividend yield of 0%;
expected volatility of 50%, 119%, 118%; risk free interest rates ranging from
3.40% to 6.80%; and expected lives ranging from 1 to 5 years.

F-9

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Loss Per Common Share

Basic earnings per share are based on the weighted average number of
shares outstanding and excludes 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.

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

2000 2001 2002
--------------- ---------------- ---------------

Stock options................................. 2,342,217 3,280,837 4,609,000
Warrants...................................... 1,764,883 1,377,251 1,239,747
Convertible term loan......................... 532,029 453,333 453,333
Convertible Preferred Stock................... 1,052,632 1,052,632 1,052,632
----------------------------------------------------
Total............................... 5,691,761 6,164,053 7,354,712
====================================================

The amounts included above for the Convertible Preferred Stock reflect
the number of shares that would be issued if converted prior to the mandatory
conversion date. See Note 7 for information related to the mandatory conversion.

Additionally, the net loss applicable to Common Stockholders for the
years ended December 31, 2000, 2001 and 2002 would have been decreased by adding
back interest expense related to the convertible term loan of approximately
$275,000, $149,000 and $204,000, respectively, and the net loss would have been
further decreased by adding back accretion related to the Convertible Preferred
Stock of $581,992 in 2000, and $1,163,984 in both 2001 and 2002

NOTE 2 - ACQUISITIONS

At the end of August 2000, the Company acquired Invincible Data Systems
(IDS) in a transaction that has been accounted for under the
pooling-of-interests method. A total of 322,565 shares were issued in this
transaction, which was deemed immaterial. Accordingly, results of operations of
IDS prior to the date of acquisition have not been included in the Company's
results of operations.

On March 29, 2001, the Company acquired Identikey Ltd., ("Identikey"),
a privately held international security software company headquartered in
Brisbane, Australia, with operations in the United States, Europe and Australia.
Under the terms of the purchase agreement, more than 90 percent of the
outstanding capital stock of Identikey was exchanged for 366,913 shares of
Company Common Stock, with potential additional earn-out payments made in the
form of additional shares which were based on defined performance incentives as
specified in the purchase agreement.

The acquisition of Identikey was accounted for under the purchase
method of accounting, and accordingly, the acquired assets have been recorded at
their estimated fair values at the date of acquisition. Intangible assets
consisting of technology licenses related to this transaction were $1,897,000
and are being amortized over a period of 7 years.

F-10

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following summarized unaudited pro forma financial information for
the year 2000 and 2001 assumes the Identikey acquisition occurred as of January
1, 2000.

2000 2001
-------------------- --------------------

Net revenues $ 28,490,904 $ 26,726,849
Net loss (6,136,427) (13,084,785)
Preferred stock accretion (581,992) (1,163,984)
Basic and diluted net loss per common share $ (0.24) $ (0.50)
==================== ====================

Weighted average common shares outstanding 27,708,352 28,257,387
==================== ====================

The remaining 10% of the Identikey has been acquired at various times with the
final purchase completed in January 2003. During 2002, in exchange for the
shares not obtained in the initial transaction, the Company has issued 126,426
shares of Common Stock and paid $23,362 in cash. Intangible assets related to
the purchase of the Identikey shares in 2002 were valued at $297,925 and are
being amortized over the same period as the intangible assets identified in the
initial transaction.

NOTE 3 - 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.

Inventories, net of valuation allowance of $91,518 and $111,566 at
December 31, 2001 and 2002, respectively, are comprised of the following:

DECEMBER 31,
---------------------------------
2001 2002
-------------- -------------

Component parts ....................................... $ 412,921 $ 772,523
Work-in-process and finished goods .................... 1,599,646 806,602
-------------- -------------
Total .................................... $ 2,012,567 $ 1,579,125
============== =============

NOTE 4 - OTHER ACCRUED EXPENSES

Accrued expenses are comprised of the following:

DECEMBER 31,
---------------------------------
2001 2002
-------------- -------------

Accrued interest ...................................... $ 82,734 $ 56,745
Accrued payroll ....................................... 908,814 1,175,037
Other accrued expenses ................................ 1,288,943 898,454
-------------- -------------
Total .................................... $ 2,280,491 $ 2,130,236
============== =============

F-11

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5 - INCOME TAXES

At December 31, 2002, the Company has United States net operating loss
carryforwards approximating $26,300,000 and foreign net operating loss
carryforwards approximating $6,200,000. Such losses are available to offset
future taxable income in the respective jurisdictions and expire in varying
amounts beginning in 2003 and continuing through 2022. 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.

Income (loss) before income taxes was generated was in the following
jurisdictions:

FOR THE YEARS ENDED
-----------------------------------------------------
DECEMBER 31,
-----------------------------------------------------
2000 2001 2002
-------------- --------------- --------------

Domestic ................................. $ (4,293,166) $ (9,195,346) $ (3,506,644)
Foreign .................................. 526,640 (2,851,406) (891,905)
-------------- --------------- --------------
Total ............................... $ (3,766,526) $ (12,046,752) $ (4,398,549)
============== =============== ==============

The provision for income taxes consists of the following:

FOR THE YEARS ENDED
------------------------------------------------
DECEMBER 31,
------------------------------------------------
2000 2001 2002
-------------- -------------- --------------

Current:
Federal $ - $ - $ -
State ................................. 2,632 - -
Foreign ............................... 392,614 (12,782) 57,446

Deferred:
Federal ............................... $ - $ - $ 83,000
State ................................. - - -
Foreign ............................... - - -
-------------- -------------- --------------
Total ............................ $ 395,246 $ (12,782) $ 140,446
============== ============== ==============

The differences between income taxes computed using the statutory
federal income tax rate of 34% and the provisions for income taxes reported in
the consolidated statements of operations are as follows:

FOR THE YEARS ENDED
---------------------------------------------------
DECEMBER 31,
---------------------------------------------------
2000 2001 2002
-------------- -------------- --------------

Expected tax benefit at the statutory rate ..................... $ (1,231,023) $ (4,095,896) $ (1,495,506)
Increase (decrease) in income taxes resulting from:
Foreign taxes at rates other than 34% ..................... (4,243) 60,210 75,734
State tax net of federal benefit .......................... (142,908) (368,546) (175,439)
Change in valuation allowance primarily related to NOL .... 1,739,000 4,380,000 1,731,996
Nondeductible expenses .................................... 34,420 11,450 3,661
-------------- -------------- --------------
Total ................................................ $ 395,246 $ (12,782) $ 140,446
============== ============== ==============

F-12

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Included in the net change in the valuation allowance are differences
between estimates used for book purposes and the actual tax return as filed for
fiscal 2001.

The deferred income tax balances are comprised of the following:

FOR THE YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2001 2002
-------------- --------------

Deferred tax assets:
U.S. net operating loss carryforwards .................. $ 8,749,000 $ 10,260,000
Foreign net operating loss carryforwards ............... 1,709,000 1,994,000
Accounts receivable .................................... 23,000 47,000
Accrued expenses ....................................... 28,000 135,000
Deferred revenue ....................................... 40,000 27,000
-------------- --------------
Total gross deferred tax assets ................... $ 10,549,000 $ 12,463,000
Less valuation allowance .......................... (10,240,000) (12,445,000)
-------------- --------------
309,000 18,000
Deferred tax liabilities:
Fixed assets ........................................... (226,000) (18,000)
-------------- --------------
Net deferred income taxes .............................. $ 83,000 $ -
============== ==============

The net change in the total valuation allowance for the years ended
December 31, 2000, 2001 and 2002 was an increase of $1,739,000, $4,380,000 and
$2,205,000, 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 temporary differences become deductible. This
valuation allowance will be reviewed on a regular basis and adjustments made as
appropriate. Due to the uncertainty of the recoverability of the deferred tax
asset, the Company has provided a reserve for 100% of the gross tax asset at
December 31,2002.

In December 2002 and in January 2003, the Company received assessments
from the Belgian tax authorities in the amounts of 119,000 and 208,000 Euros for
tax years 1999 and 2000, respectively, wherein the authorities indicated that
the Company had not properly accounted for intercompany R&D expenses. The tax
authorities indicated that the Company should have capitalized such intercompany
amounts, and amortized the amounts over three years, rather than recording the
full amount as expense in the year incurred. The Company maintains that such
amounts were properly expensed when incurred as the amounts were for
maintenance-related activities and did not add to the long-term value of the
intellectual property. The Company plans to contest those assessments and
believes that the outcome will not have a material adverse affect on the
financial position of the Company. Under Belgian law, the Company is not
obligated to make payments on the assessments until the protest is finally
adjudicated.

NOTE 6 - DEBT

Debt consists of the following:

DECEMBER 31,
--------------------------------
2001 2002
------------- -------------

Convertible note, interest payable at 3.25% (6% beginning September 2001) ..... $ 3,400,000 $ 3,400,000
Installment notes payable ..................................................... 426,872 221,651
------------- -------------
3,826,872 3,621,651
Less current maturities ....................................................... (158,990) (3,589,645)
------------- -------------
Long-term debt ................................................................ $ 3,667,882 $ 32,006
============= =============

F-13

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In August 1997, the Company renegotiated the guarantee with Artesia
Bank N.V., formerly Banque Paribas Belgique S.A. and now doing business as Dexia
Bank ("Dexia") related to the final payment for the 1996 acquisition of Digipass
into a term loan in the amount of $3.4 million with a maturity date of September
30, 2002 and an interest rate of 3.25%. In August 2001, the Company agreed to
revise the terms of the loan. Under the new terms, the loan will now be
convertible into shares of VASCO Common Stock at the fixed conversion rate of
$7.50 per share rather than a floating rate based on the market price of the
VASCO Common Stock. Also, the maturity date of this convertible loan was reset
to September 30, 2003 with a revised interest rate of 6%. The loan is secured by
the pledge of VASCO Common Stock owned by Mr. Ken Hunt, Chairman and CEO of the
Company.

The installment notes payable primarily reflect amounts due under an
unsecured installment loan with KBC Bank of Belgium. The loan was initiated on
September 28, 1999 in the amount of 495,788 Euros payable monthly over the next
60 months with interest accruing at 5.3% annually. In September 2003, the terms
were revised to accelerate the payment on the loan such that it will be fully
repaid by September 30, 2003 and the interest rate was reduced to 5.16 percent.

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 Belgium subsidiary's defined accounts receivable up to maximum of two
million Euros. Borrowings under the overdraft agreement accrue interest at an
annual rate of 6.75% and the Company is obligated to pay a quarterly commitment
fee of 0.125%. As of December 31, 2002, approximately $1,360,000 Euros was
available under the overdraft agreement and there were no borrowings outstanding
under the agreement. The agreement is secured by the assets of the Belgian
subsidiary 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
16, 1989.

Aggregate maturities of debt at December 31, 2002 are as follows:

2003 ................................................... $ 3,589,645
2004 ................................................... 10,669
2005 ................................................... 10,669
2006 ................................................... 10,668
-------------
Total ............................................. $ 3,621,651
=============

Interest expense related to debt was $165,000, $0 and $220,895 for the
years ended December 31, 2000, 2001 and 2002, respectively. The weighted average
interest rate related to debt was 6.0% for 2002.

NOTE 7 - STOCKHOLDERS' EQUITY

Preferred Stock

In July 2000, the Company issued 150,000 shares of preferred stock for
cash of $15,000,000. The preferred stock is convertible into 1,052,632 shares of
Common Stock at any time through July 2004. If not converted by July 2004, the
preferred stock will, at the option of the Company, be either repurchased or
converted into Common Stock at a rate equal to the average market price of the
Company's Common Stock for 30 consecutive business days on which the Common
Stock was traded prior to the conversion date less five (5) percent.

In conjunction with this financing, the Company issued warrants to
purchase 789,474 common shares at $15 per share with an estimated fair value,
using the Black-Scholes pricing-model, of approximately $4.1 million and
warrants to purchase 480,000 shares at $4.25 per share with an estimated fair
value, using the Black-Scholes pricing-model, of approximately $4.7 million. The
warrants issued at $15 per share were immediately exercisable. The warrants
issued at $4.25 were exercisable over 48 months and the related fair value is
being accreted over their lives reducing earnings available to holders of
Commons Stock. In September 2000, 30,000 warrants at $4.25 per share were
exercised.

The value of the warrants which reduces the carrying value of the
preferred stock is being accreted and reduces earnings available to common
shareholders.

F-14

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Common Stock

In 2002, the Company issued 126,426 shares of Common Stock to acquire
the majority of the remaining outstanding capital stock of Identikey Ltd. The
Company recorded additional intangible assets, in the form of capitalized
technology of $274,563 related to the issuance of this stock.

In 2001, the Company issued 25,633 shares of Common Stock as a result
of the exercise of options under the Company's stock compensation plan (see Note
8) generating total proceeds of $15,664; 3,929 shares of Common Stock were
issued as a result of the exercise of warrants, generating total proceeds of
$17,693.

In March 2001, the Company issued 366,913 shares of Common Stock to
acquire 90% of the outstanding capital stock of Identikey Ltd.

In 2000, the Company issued 435,910 shares of Common Stock to convert a
$5,000,000 note and related accrued interest. In September 2000, the Company
issued 322,565 shares of Common Stock as part of the acquisition of Invincible
Data Systems.

Also in 2000, the Company issued 342,400 shares of Common Stock as a
result of the exercise of options under the Company's stock compensation plan
(see Note 8) generating total proceeds of $557,213 and 303,625 shares of Common
Stock were issued as a result of the exercise of the warrants, generating total
proceeds of $1,724,717.

Warrants

Warrant activity for the years ended December 31, 2000, 2001 and 2002
are summarized below:

NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
-------------------- -------------------- --------------------

Outstanding at December 31, 1999 ............ 804,034 $5.97 $4.00 - 10.00

Granted ..................................... 1,269,474 10.94 4.25 - 15.00
Exercised ................................... (303,625) 5.68 4.00 - 10.0
Canceled .................................... (5,000) 5.19 -
-------------------- -------------------- --------------------

Outstanding at December 31, 2000 ............ 1,764,883 9.59 4.25 - 15.00

Granted ..................................... - - -
Exercised ................................... (3,929) 4.50 4.50
Canceled .................................... (383,703) 6.61 -
-------------------- -------------------- --------------------

Outstanding at December 31, 2001 ............ 1,377,251 10.44 4.25 - 15.00

Granted ..................................... - - -
Exercised ................................... - - -
Canceled .................................... (137,777) 4.50 4.50
-------------------- -------------------- --------------------

Outstanding at December 31, 2002 ............ 1,239,474 $11.10 $4.25 - 15.00
==================== ==================== ====================

NOTE 8 - STOCK COMPENSATION PLAN

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

F-15

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Compensation Plan permits the grant of options to employees of the
Company to purchase shares of Common Stock and is intended to be a nonqualified
plan. All options granted to employees are for a period of ten years, are
granted at a price equal to the fair market value of the Common Stock on the
date of the grant and are 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.

During 2001, the Compensation Committee approved a revised vesting
schedule. The new vesting schedule for officers is based on a time period of 36
months, with 6/36th of the options vesting at the end of the first 6 months and
1/36th of the options vesting each month thereafter on the last day of each
month.

The Compensation Plan further permits the grant of options to
directors, consultants and other key persons (non-employees) to purchase shares
of Common Stock. All options granted to non-employees are granted at a price
equal to the fair market value of the Common Stock on the date of the grant, and
may contain vesting requirements and/or restrictions as determined by the
Compensation Committee at the time of grant. Non-cash compensation expense
(recovery) of $(50,116) was recognized in 2002 in accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board Opinion No. 25.
This recovery was attributed to stock options issued to officers of the Company
who are located outside the U.S. and whose services are rendered under
consulting agreements.

As of December 31, 2002, the Compensation Plan was authorized to issue
options representing up to 5,652,612 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.

The following is a summary of activity under the Compensation Plan:

Options Outstanding Options Exercisable
---------------------------- -----------------------------
Weighted- Weighted- Weighted-Average
Number Average Number Average Fair Value of
of Shares Price of Shares Price Options Granted
--------- ----- --------- ----- ---------------

Outstanding at December 31, 1999 ......... 2,377,200 $ 3.23 1,074,138 $ 3.04

Granted .................................. 560,000 11.29 $ 5.82
Exercised ................................ (342,400) 1.63
Forfeited ................................ (252,583) 5.08
-----------
Outstanding at December 31, 2000 ......... 2,342,217 5.30 984,775 3.71

Granted .................................. 1,248,000 1.34 0.65
Exercised ................................ (25,633) 2.54
Forfeited ................................ (283,747) 8.07
-----------
Outstanding at December 31, 2001 ......... 3,280,837 3.76 1,235,545 4.49

Granted 1,642,750 2.22 $ 1.75
Exercised ................................ - -
Forfeited ................................ (314,587) 5.11
-----------
Outstanding at December 31, 2002 ......... 4,609,000 $ 3.12 1,917,056 $ 3.63
=========== ========== =========== ==========

The following table summarizes information about stock options outstanding at
December 31, 2002:

F-16

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
of Shares Contractual life Price of Shares Price
----------- ------------------ ----------- ------------ -----------

Range of Exercise Prices
- ------------------------

$ 0.0000 - $ 2.3000 ......... 2,822,750 8.9 years $ 1.81 598,381 $ 1.58
$ 2.3001 - $ 4.6000 ......... 1,227,250 5.9 years $ 3.41 1,000,650 $ 3.48
$ 4.6001 - $ 6.9000 ......... 187,000 4.8 years $ 5.73 166,025 $ 5.74
$ 6.9001 - $ 9.2000 ......... 115,000 7.0 years $ 8.83 73,500 $ 8.84
$ 9.2001 - $ 11.5000 ........ 120,000 7.7 years $ 10.30 60,000 $ 10.30
$ 11.5001 - $ 13.8000 ........ 112,000 7.3 years $ 11.82 6,000 $ 12.42
$ 13.8001 - $ 16.1000 ........ 15,000 7.1 years $ 15.88 7,500 $ 15.88
$ 20.7001 - $ 23.0000 ........ 10,000 7.1 years $ 20.81 5,000 $ 20.81
----------- ----------- ------------
4,609,000 1,917,056 $ 3.27
=========== =========== ============

In 2002, the Company loaned Belgian employees who received stock
options in 1999 and 2000, 141,895 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, 2002.

NOTE 9 - EMPLOYEE BENEFIT PLAN

The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code, which
provides benefits for eligible employees of the Company. The Company made no
contributions to the plan during the years ended December 31, 1999 and 2000. In
January 2001, the Company amended its benefit plan to allow Company-matching.
For the years ended December 31, 2001 and 2002, the Company contributed $106,000
and $19,000, respectively, to this plan.

NOTE 10 - GEOGRAPHIC AND CUSTOMER INFORMATION

The Company allocates revenue based on the location of the country that
initiates the sale. Information regarding geographic areas for the years ended
December 31, 2000, 2001 and 2002 are as follows:

United
States Belgium Other Total
------------ ------------- ------------ ------------

2000
- -------------

Revenue ............. $ 11,065,000 $ 16,831,000 $ 170,000 $ 28,066,000
Gross profit ........ 8,846,000 9,060,000 91,000 17,997,000
Long-lived assets ... 4,436,000 1,998,000 370,000 6,804,000

2001
- -------------

Revenue ............. $ 5,485,000 $ 20,746,000 $ 496,000 $ 26,727,000
Gross profit ........ 4,594,000 11,167,000 375,000 16,136,000
Long-lived assets ... 2,272,000 1,783,000 99,000 4,154,000

2002
- -------------

Revenue ............. $ 2,966,000 $ 14,641,000 $ 1,306,000 $ 18,913,000
Gross profit ........ 2,694,000 8,640,000 409,000 11,743,000
Long-lived assets ... 2,081,000 1,354,000 95,000 3,530,000

F-17

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For the years 2000, 2001 and 2002, the Company's top 10 customers
contributed 72%, 73% and 64% of total worldwide revenues, respectively.

In 2000, there were two customers that each accounted for more than 10%
of total revenues. In 2001 and 2002, there was one customer that contributed
more than 10% of consolidated revenues.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment under operating lease
agreements expiring at various times through 2007.

Future minimum rental payments required under noncancelable leases are
as follows:

Year Amount
- ---- ------

2003........................................ $ 1,149,000
2004........................................ 837,000
2005........................................ 560,000
2006........................................ 451,000
2007........................................ 8,000
Thereafter.................................. -
--------------
Total.................................. $ 3,005,000
==============

Rent expense under operating leases aggregated approximately $693,000,
$714,000 and $799,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.

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 12 - RESTRUCTURING

During the fourth quarter of 2001, the Company announced a
restructuring of its operations to redirect resources to its core business,
strong authentication and server software to enable enhanced security for the
web, remote access, corporate networks and financial transactions. The
restructuring included a reduction in workforce of approximately 60 employees,
in addition to the write-off of related intangible assets and property and
equipment related to discontinued activities.

A restructuring charge of $4,284,000 was recorded in the fourth
quarter. A breakdown of this charge is as follows:

Write off of goodwill $ 266,000
Write off of software licenses 2,772,000
Write off of other intangible assets 32,000
Accrual of severance and related costs 901,000
Write off of property and equipment 36,000
Other 277,000
------------------
Total $ 4,284,000
==================

Of the $901,000 in severance and related costs, $180,000 remained
outstanding as of December 31, 2001 and was paid by the end of the first quarter
of 2002.

F-18

VASCO DATA SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As part of the restructuring, 46 employees were terminated in the
United States and 14 in Europe. Research and development activities were
consolidated and are now performed primarily outside the United States and sales
and marketing activities in the United States were reduced.

During the fourth quarter of 2002, the Company recorded additional
restructuring charges of $320,000 related to operations in France and excess
space in its U.S. headquarters. Of the $320,000 recorded, $247,700 remained
unpaid at December 31, 2002 and was recorded as an accrued liability.

NOTE 13 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
---- ------------------- ------------------- ------------------- --------------------

Net sales.................... $ 6,032,000 $ 4,150,000 $ 5,127,000 $ 3,604,000
Gross profit................. 3,804,000 2,504,000 3,060,000 2,375,000
Operating expenses........... 3,972,000 3,788,000 3,753,000 4,374,000
Operating loss............... (169,000) (1,283,000) (693,000) (1,999,000)
Net loss..................... $ (160,000) $ (1,670,000) $ (809,000) $ (1,900,000)

Basic and diluted
net loss per share........... $ (0.02) $ (0.07) $ (0.04) $ (0.07)
=================== =================== =================== ====================

2001
----

Net sales.................... $ 7,873,000 $ 8,035,000 $ 4,788,000 $ 6,031,000
Gross profit................. 5,080,000 5,128,000 2,440,000 3,488,000
Operating expenses........... 6,203,000 6,654,000 6,464,000 9,921,000
Operating loss............... (1,123,000) (1,526,000) (4,024,000) (6,433,000)
Net loss..................... $ (1,039,000) $ (1,523,000) $ (3,579,000) $ (5,893,000)

Basic and diluted
net loss per share........... $ (0.05) $ (0.06) $ (0.14) $ (0.21)
=================== =================== =================== ====================

F-19

SCHEDULE II

VASCO DATA SECURITY INTERNATIONAL, INC.

VALUATION AND QUALIFYING ACCOUNTS

Bad Debt
Beginning Expense Accounts Ending
Balance (Recovery) Written Off Balance
--------------- --------------- --------------- ----------------

Allowance for Doubtful Accounts
For Trade Accounts Receivable

Year ended December 31, 2000 .......... $ 120,216 $ 195,161 $ (29,000) $ 286,377
Year ended December 31, 2001 .......... 286,377 259,714 (339,178) 206,913
Year ended December 31, 2002 .......... 206,913 320,735 (66,519) 461,129

Obsolescence
Beginning Expense Inventory Ending
Balance (Recovery) Written Off Balance
--------------- --------------- --------------- ----------------

Reserve for Obsolete Inventories

Year ended December 31, 2000 .......... $ - $ 109,000 $(109,000) $ -
Year ended December 31, 2001 .......... - 136,332 (44,814) 91,518
Year ended December 31, 2002 .......... 91,518 20,048 - 111,566

See accompanying independent auditors' report.

F-20

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 28, 2003.

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 28, 2003.

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, 2002 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.

SIGNATURE TITLE
--------- -----

/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/ Forrest D. Laidley Director
- -------------------------------------
Forrest D. Laidley

/s/ Michael A. Mulshine Director
- -------------------------------------
Michael A. Mulshine

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427

I, T. Kendall Hunt, the principal executive officer of VASCO Data Security
International, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of VASCO Data Security
International, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):

(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ T. KENDALL HUNT
Dated: March 28, 2003 -----------------------------------
T. Kendall Hunt
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)

Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427

I, Clifford K. Bown, the principal financial officer of VASCO Data Security
International, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of VASCO Data Security
International, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):

(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ CLIFFORD K. BOWN
Dated: March 28, 2003 ------------------------------------------
Clifford K. Bown
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)