OneSpan Inc. - Annual Report: 2007 (Form 10-K)

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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)

or

Commission file number 000-24389

VASCO Data Security International, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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:

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

None

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer          Accelerated filer      X        Non-accelerated filer          Smaller reporting company          

                                                           (do not check if smaller reporting company)

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

As of June 30, 2007, the aggregate market value of voting and non-voting common equity (based upon the last sale price of the common stock as reported on the Nasdaq Stock Market on June 30, 2007) held by non-affiliates of the registrant was $627,626,483 at $22.76 per share.

As of February 25, 2008, there were 37,243,955 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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TABLE OF CONTENTS

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

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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 and Quantitative and Qualitative Disclosures About Market Risk contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 concerning, among other things, the prospects of, and developments and business strategies for, VASCO and our operations, including the development and marketing of certain new products and the anticipated future growth in certain markets in which we currently market and sell our products or anticipate selling and marketing our products in the future. These forward-looking statements (1) are identified by use of terms and phrases such as “expect”, “believe”, “will”, “anticipate”, “emerging”, “intend”, “plan”, “could”, “may”, “estimate”, “should”, “objective” and “goal” and similar words and expressions, but such words and phrases are not the exclusive means of identifying them, and (2) are subject to risks and uncertainties and represent our present expectations or beliefs concerning future events. VASCO 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. These risks, uncertainties and other factors have been described in greater detail in this Annual Report on Form 10-K and include, but are not limited to, (a) risks of general market conditions, including currency fluctuations, (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 (c) risks specific to VASCO, including, demand for our products and services, competition from more established firms and others, pressures on price levels and our historical dependence on relatively few products, certain suppliers and certain key customers. Thus, the results that we actually achieve may differ materially from any anticipated results included in, or implied by these statements.

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PART I

Item 1 - Business

VASCO Data Security International, Inc. was incorporated in the State of Delaware in 1997 and is the successor to VASCO Corp., a Delaware corporation. Our principal executive offices are located at 1901 South Meyers Road, Suite 210, Oakbrook Terrace, Illinois 60181; the telephone number at that address is (630) 932-8844. Our international headquarters in Europe is located at World-Wide Business Center, Balz-Zimmermannstrasse 7, CH-8152 Glattbrugg, Switzerland; the phone number at this location is 41(0)43 813 3500. Our principal operations offices in Europe are located at Koningin Astridlaan 164, B-1780 Wemmel, Belgium and the telephone number at that address is 32(0)2/609.97.00. Unless otherwise noted, references in this Annual Report on Form 10-K to “VASCO”, “company”, “we”, “our”, and “us” refer to VASCO Data Security International, Inc. and its subsidiaries.

Additional information on the company, our products and its results, including the company’s annual report on Form 10-K, quarterly reports on our Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission, or SEC are available, free of charge, on our web site at http://www.vasco.com. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file our reports electronically and they are, therefore, available from the SEC electronically at the SEC’s web site (http://www.sec.gov).

General

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

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

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

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VASCO’s product lines include:

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

Our security solutions are sold worldwide through our direct sales force, as well as through distributors, resellers and systems integrators. We currently have approximately 6,500 customers, including approximately 1,000 financial institutions, in more than 100 countries. Representative customers of our products include HSBC, Rabobank Nederland, ING Bank, Fortis Bank, Wachovia, Daimler Chrysler, VeriSign and CoStar Group. In 2007, we sold to 2,509 new accounts, of which 379 were banks and 2,130 were Enterprise Security customers. In 2006, we sold to 1,553 new accounts, of which 233 were banks and 1,320 were Enterprise Security customers.

Our Background

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

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

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On May 11, 2006, we acquired all of the shares of Logico Smart Card Solutions GmbH and its subsidiary, Logico Vertriebs GmbH, an authentication specialist located in Austria, with extensive experience in smart card operating systems. The aggregate cash purchase price was approximately $2.4 million.

On October 25, 2006, we acquired the stock of Able NV, (Able), a Unified Threat Management (UTM) specialist located in Mechelen, Belgium. Able’s key product is the aXs GUARD appliance, which combines 21 different applications for Internet security, including Digipass strong user authentication, virtual private networks (VPN), firewall, anti-virus, hacker detection, statistics reporting, content scanning and more. The cost of the Able acquisition was approximately $6.3 million in cash.

In December 2006, we opened our European headquarters in Zurich, Switzerland. In August 2007, we created a wholly-owned sales subsidiary in Brazil, and in December 2007, we created a wholly-owned sales subsidiary in Japan.

Industry Background

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

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

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

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

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

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

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In October 2005, in the U.S., the Board of Governors of the Federal Reserve System and related agencies issued Final Rules on Identity Theft, requiring each financial institution to develop and implement an anti-identity theft program by December 31, 2006.

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

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

Our Solution

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

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

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

Our Strategy

We believe we have one of the most complete lines of security products and services for strong user authentication available in the market today. We also believe that we can demonstrate to an increasing number of distributors, resellers and systems integrators that they can more effectively differentiate themselves in their marketplaces and increase the value of their products by incorporating our security products into their own products. On a broad basis, our strategy is to:

Increase Sales and Marketing Efforts Worldwide. We intend to increase our sales and marketing efforts in our established European markets as well as our developing markets in North America, South America, Asia, Australia and the Middle East. We are planning to increase both our sales and marketing staff worldwide and the number of our marketing events held, such as banking summits, enterprise security and application security events. We also plan to open new offices in the world’s leading business hubs following a three-step strategy:

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:

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Our Products

VACMAN Product Line

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

In order to provide the greatest flexibility, without compromising on functionality or security, VACMAN solutions are designed to integrate with most popular hardware and software. Once integrated, the VACMAN components become largely transparent to the users, minimizing rollout and support issues.

VACMAN Controller

VACMAN Controller is the backbone of VASCO’s product strategy towards the banking and e-commerce markets. VACMAN Controller encompasses all four authentication technologies (passwords, dynamic password technologies, certificates and biometrics) and allows our customers to use any combination of those technologies simultaneously. VACMAN Controller is natively embedded in or compatible with the solutions of over 100 VASCO solution partners.

Designed by specialists in “system entry” security, VACMAN Controller makes it easy to administer a high level of access control and allows our customers to match the level of authentication security used with their perceived risk for each user of their application. Our customer simply adds a field to his or her existing user database, describing the authentication technology used and, if applicable, the unique Digipass token assigned to the end user of their application. VACMAN Controller takes it from there, automatically authenticating the logon request using the security sequence the user specifies, whether it’s a one-time password using either response-only or a challenge/response authentication scheme or an electronic signature.

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

VACMAN Middleware

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

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

The main authentication tool in a VACMAN Middleware enabled infrastructure remains the Active Directory service. The storage of the Digipass related data is linked with the users in the Active Directory. As a result, a scalable approach is achieved and an optimal support is provided for multiple

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domains and delegated administration. VACMAN Middleware supports ODBC compliant databases, such as Oracle 9i, Microsoft SQL server 2000 and 2005, IBM DB2 8.1, Sybase Adaptive Server Anywhere 9.0 and PostgreSQL 8.0 and 8.1. VACMAN Middleware is delivered with PostgreSQL update database release versions.

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

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

aXs GUARD Product Line

There are two types of aXs GUARD appliances: aXs GUARD Authentication Appliance and aXs GUARD Authentication & Internet Security Appliance.

aXs GUARD Authentication Appliance

The aXs GUARD Authentication Appliance is a standalone authentication solution that offers strong two-factor authentication for remote Access to the corporate network or to web-based in-house business applications. It comes in a standard 19 inch rack with a mountable “slim fit” design. The appliance verifies Digipass authentication requests from RADIUS clients and web filters and can easily be integrated with any authentication server. It features a web based administration interface as well as an auditing and reporting console.

aXs GUARD Authentication & Internet Security Appliance

The aXs GUARD Authentication & Internet Security Appliance consists of a range of dedicated appliances that brings strong user authentication and secure internet communications to the enterprise through a choice of 21 software modules. aXs GUARD integrates Digipass to provide secure two factor user authentication. It is a standalone modular communications solution allowing among others intrusion, website and virus protection; remote connection through VPN’s; reporting and monitoring console etc.

Identikey Server 3.0

Identikey Server 3.0 delivers a complete turnkey solution used to verify Digipass authentication requests for remote network access or access to in-house, web-based business applications. The server software verifies authentication requests from standard RADIUS clients against a local database of users. Additionally, Identikey also provides an electronic signature system for secure transaction validation. The modular design offers centralized user management, web based administration, multi-platform support and enhanced reporting features. Identikey Server 3.0 comes with a flexible licensing system allowing easy expansion of users and Digipass.

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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:

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:

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

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

In addition, Digipass technology is designed to operate on non-VASCO platforms such as a desktop PC or laptop. Digipass technology is also available for personal digital assistants (PDA), mobile phones and smart cards. For users of mobile phones, the virtual Digipass generates one-time passwords that are sent to the mobile telephone user by SMS (Short Messaging System).

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

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

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

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

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Digipass at Work

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

The files on CD, memory stick or diskettes will be used to read all the necessary secrets and other data from the delivered Digipasses into a database. Then the application owner will assign the Digipass units to the end-users. This assignment is based on the serial number of the Digipass and the identity of the end-user. The Digipass is then shipped to the end-user along with a user manual. The protected PIN-code is sent to the end user in a separate shipment on a secure PIN-mailer.

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

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

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

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

There are 3 Digipass Packs available: Digipass Pack for Remote Authentication, Digipass Pack for Network Authentication and a combination of both, Digipass Pack for Remote and Network Authentication.

Digipass Pack for Remote Authentication

Digipass Pack for Remote Authentication is a two-factor authentication solution that replaces static logon procedures by a secure logon with One-Time Passwords. Digipass Pack for Remote Authentication has been designed to perform seamlessly with RADIUS based remote VPN clients. It incorporates Digipass software for RADIUS authentication on any type of RADIUS compliant VPN client. Digipass Pack for Remote Authentication is an out-of-the-box solution containing 5 Digipass Go 3 devices, 5 end user licenses for VACMAN Middleware for RADIUS, an installation manual, a software installation CD and 1 year of software maintenance and support services.

Digipass Pack for Network Authentication

Digipass Pack for Network Authentication is a two-factor authentication solution that replaces single factor logon (username and password) with strong passwords which are securely stored on the Digipass Smart Card. It has been designed to perform seamlessly with Windows operating systems. (Windows is a registered trademark of Microsoft Corporation in the United States and other countries.)

Digipass Pack for Network Authentication is an out-of-the-box solution containing 5 Digipass 905 units or 5 Omnikey CM4040 units; 5 Digipass Smart Cards; 5 end user licenses for Digipass Windows logon, Digipass Application Logon, Digipass Web Logon, Digipass Citrix Metaframe Logon, Digipass Windows Terminal Server Logon; a software installation CD and installation manual and 1 year of software maintenance and support services.

Digipass Pack for Remote and Network authentication

The Digipass Pack for Remote and Network Authentication is developed for remote authentication to IT infrastructure or local authentication to operating systems, servers, applications, portals and protected websites. It is a two-factor authentication solution that replaces static logon procedures to a secure logon with One Time Passwords. It has been designed to perform seamlessly with Windows operating systems or any RADIUS compliant VPN client or web page.

Digipass Pack for Remote and Network Authentication is an out-of-the-box solution containing 5 Digipass 860 units; 5 end user licenses for Digipass Windows logon, Digipass Application Logon,

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Digipass Web Logon, Digipass Citrix Metaframe Logon, Digipass Windows Terminal Server Logon; software installation CD’s; an installation manual and 1 year of software maintenance and support services.

Intellectual Property and Proprietary Rights and Licenses

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as employee and third-party non-disclosure agreements to protect our proprietary rights. In particular, we hold several patents in the U.S. and in certain European countries, which cover multiple aspects of our technology. These patents expire between 2008 and 2027. In addition to the issued patents, we also have several patents pending in the U.S. and other countries. The majority of our issued and pending patents cover our Digipass family. We believe these patents to be valuable property rights and we rely on the strength of our patents and on trade secret law to protect our intellectual property rights. To the extent that we believe our patents are being infringed upon, we intend to assert vigorously our patent protection rights, including but not limited to, pursuing all available legal remedies.

Research and Development

Our research and development efforts historically have been, and will continue to be, concentrated on product enhancement, new technology development and related new product introductions. We employ a team of full-time engineers and, from time to time, also engage independent engineering firms to conduct non-strategic research and development efforts on our behalf. We recorded $9.4 million, $5.5 million and $3.6 million for fiscal years ended December 31, 2007, 2006 and 2005, respectively, on company-sponsored research and development.

Production

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

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

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

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

Competition

The market for computer and network security solutions is very competitive and, like most technology-driven markets, is subject to rapid change and constantly evolving products and services. Our main competitor is

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RSA Security, a subsidiary of EMC Corporation. Additional competitors are ActivIdentity, Xiring, Todos Data Systems and Kobil Systems. There are many other companies such as Secure Computing, SafeNet, Entrust, and Aladdin Knowledge Systems that offer authentication hardware, software and services that range from simple locking mechanisms to sophisticated encryption technologies. We believe that competition in this market is likely to intensify as a result of increasing demand for security products.

We believe that the principal competitive factors affecting the market for computer and network security products include the strength and effectiveness of the solution, technical features, ease of use, quality/reliability, customer service and support, name recognition, customer base, distribution channels and the total cost of ownership of the authentication solution. Although we believe that our products currently compete favorably with respect to such factors, other than name recognition in certain markets, there can be no assurance that we can maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other competitive resources.

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

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

Sales and Marketing

Our security solutions are sold through our direct sales force, as well as through 77 distributors, their reseller networks and systems integrators. A sales staff of 73 coordinates our sales activity through both our sales channels and our strategic partners’ sales channels and makes direct sales calls either alone or with sales personnel of vendors of computer systems. Our sales staff also provides product education seminars to sales and technical personnel of vendors and distributors with whom we have working relationships and to potential end-users of our products.

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

Customers and Markets

Customers for our products include some of the world’s most recognized names: HSBC, Rabobank, ING Bank, Fortis Bank, Wachovia, Daimler Chrysler, and VeriSign. In 2007, we announced numerous new customers around the world including, but not limited to, Reliance Money (India), Huntington Bank (U.S.), People’s United Bank (U.S.), RBC Centura (U.S.).

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For the years 2007, 2006, and 2005, our top 10 customers contributed 45%, 49% and 64%, respectively, of total worldwide revenue. There were no customers that accounted for more than 10% of our revenue in 2007. Sales to HSBC exceeded 10% of our total revenue in 2006. Sales to Rabobank Nederland and HSBC each exceeded 10% of our revenue in 2005.

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

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

We organize our sales group and report our results in two vertical markets:

Our channel partners are critical to our success in the Enterprise Security markets. We serve this market exclusively via our two-tier indirect sales channel. We train employees of our resellers and distributors on-site and in our offices. In addition, we have developed online video training software that allows us to train people worldwide, resulting in cost and time benefits.

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

Backlog

Our backlog at December 31, 2007 was approximately $39.6 million compared to $25.6 million at December 31, 2006. We anticipate that substantially all of the backlog at the end of 2007 would be shipped in 2008. We do not believe that the specific amount of backlog at any point in time is indicative of the trends in our markets or the expected results of our business. Given the relatively small size of our business and the large size of potential orders, the backlog number can change significantly with the receipt of a new order or modification of an existing order, for example, shipment timing.

Financial Information Relating to Foreign and Domestic Operations

For financial information regarding VASCO, see our Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. We have a single reportable segment for all our

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products and operations. See Note 14 to VASCO Notes to Consolidated Financial Statements for a breakdown of revenue and long-lived assets between U.S. and foreign operations.

Employees

As of December 31, 2007, we had 240 full time employees. Of these, 30 were located in North America, 179 were located in Europe, 21 were located in Australia and 10 located in Asia. Of the total, 137 were involved in sales, marketing and customer support, 72 in research and development and 31 in general and administration.

Item 1A - Risk Factors

RISK FACTORS

You should carefully consider the following risk factors, which we consider the most significant, as well as other information contained in this Annual Report on Form 10-K. In addition, there are a number of less significant and other general risk factors that could affect our future results. If any of the events described in the risk factors were to occur, our business, financial condition or operating results could be materially and adversely affected. We have grouped our Risk Factors under captions that we believe describe various categories of potential risk. For the reader’s convenience, we have not duplicated risk factors that could be considered to be included in more than one category.

Risks Related to Our Business

We had a long operating history, but only a small accumulated profit.

Although we have reported net income of $20,963,000, $12,587,000 and $7,701,000 for the years ended December 31, 2007, 2006 and 2005, respectively, our retained earnings was only $565,000 at December 31, 2007. Over our seventeen-year operating history, we have operated at a loss for many of those years.

We derive revenue from a limited number of products and do not have a broadly-diversified product base.

Substantially all of our revenue is derived form the sale of authentication products. We also anticipate that a substantial portion of our future revenue, if any, will also be derived from these products. If the sale of these products is impeded for any reason and we have not diversified our product offerings, our business and results of operations would be negatively impacted.

The sales cycle for our products and technology is long, and we may incur substantial expenses for sales that do not occur when anticipated.

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

A typical sales cycle in the Banking market is often three to six months. Larger Banking transactions may take up to 18 months or more. Purchasing decisions for our products and systems may be subject to delays due to many factors that are not within our control, such as:

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As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly between periods. If revenue falls significantly below anticipated levels, our business would be negatively impacted.

We have a great dependence on a limited number of suppliers and the loss of their manufacturing capability could materially impact our operations.

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

We have a significant dependence on major customers and losing any of these customers could result in a significant loss in revenue.

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

Our customers have the ability to reschedule their deliveries.

A major portion of our business is scheduled by our customers under firm purchase orders (POs) which call for multiple shipments over the course of twelve months. Typically, these are firm orders with specific requests for shipments on specified dates. Occasionally, a customer may request that a shipment be accelerated and delivered earlier than scheduled or, conversely, delayed and delivered later than originally scheduled. The result is a quarter’s results may be impacted positively or negatively when such rescheduling takes place. Thus, our quarterly results may be irregular from quarter to quarter.

Our success depends on establishing and maintaining strategic relationships with other companies to develop, market and distribute our technology and products and, in some cases, to incorporate our technology into their products.

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

We may not be able to maintain effective product distribution channels, which could result in decreased revenue.

We rely on both our direct sales force and an indirect channel distribution strategy for the sale and marketing of our products. We may be unable to attract distributors, resellers and integrators, as planned, that can

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market our products effectively and provide timely and cost-effective customer support and service. There is also a risk that some or all of our distributors, resellers or integrators may be acquired, may change their business models or may go out of business, any of which could have an adverse effect on our business. Further, our distributors, integrators and resellers may carry competing lines of products. The loss of important sales personnel, distributors, integrators or resellers could adversely affect us.

We depend on our key personnel for the success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets.

Our success and our ability to manage our business depend, in large part, upon the efforts and continued service of our senior management team. The loss of one or more of our key personnel could have a material adverse effect on our business and operations. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is intense. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

If we fail to continue to attract and retain qualified personnel, our business may be harmed.

Our future success depends upon our ability to continue to attract and retain highly qualified scientific, technical, sales and managerial personnel. Competition for such personnel is intense and there can be no assurance that we can attract other highly qualified personnel in the future. If we cannot retain or are unable to hire such key personnel, our business, financial condition and results of operations could be significantly adversely affected.

Changes in our effective tax rate may have an adverse effect on our results of operations.

Our future effective tax rates may be adversely affected by a number of factors including the distribution of income among the various countries in which we operate, changes in the valuation of our deferred tax assets, increases in expenses not deductible for tax purposes, including the impairment of goodwill in connection with acquisitions, changes in share-based compensation expense, and changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles. Any significant increase in our future effective tax rates could adversely impact net income for future periods.

Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions.

Significant judgment is required in determining our provision for income taxes and other taxes such as sales and VAT taxes. There are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany agreements to purchase intellectual properties, allocate revenue and allocate costs, each of which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of such arrangements is reasonable, we can not be certain that the final tax authority review of these matters will not differ materially from what is reflected in our historical income tax provisions and other tax accruals. Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our results of operations for such period.

Any acquisitions we make could disrupt our business and harm our financial condition.

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

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Reported revenue may fluctuate widely due to the interpretation or application of accounting rules.

Our sales arrangements often include multiple elements, including hardware, software and maintenance. The accounting rules for such arrangements are complex and subject to change from time to time. Small changes in circumstances could cause wide deviations in the timing of reported revenue.

Our revenue and cash receipts may not be sufficient to meet the operating needs of our business.

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

Risks Related to the Market

We face significant competition and if we lose or fail to gain market share our financial results will suffer.

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

A decrease of average selling prices for our products and services could adversely affect our business.

The average selling prices for our solution offerings may decline as a result of competitive pricing pressures, a change in our mix of products, software and services. In addition, competition continues to increase in the market segments in which we participate and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Furthermore, we anticipate that the average selling prices and gross profits for our products will decrease over product life cycles. To sell our products and services at higher prices, we must continue to develop and introduce new products and services that incorporate new technologies or increased functionality. If we experience pricing pressures or fail to develop new products, our revenue and gross margins could decline, which could harm our business, financial condition and results of operations.

We may need additional capital in the future and our failure to obtain capital would interfere with our growth strategy.

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

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We experience variations in quarterly operating results and sales are subject to seasonality, both of which may result in a volatile stock price.

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

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

Our stock price may be volatile for reasons other than variations in our quarterly operating results.

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

A small group of persons control a substantial amount of our common stock and could delay or prevent a change of control.

Our Board of Directors, our officers and their immediate families and related entities beneficially own approximately 26.95%, with Mr. T. Kendall Hunt beneficially owning approximately 25.36%, of the outstanding shares of our common stock. As the Chairman of the Board of Directors, Chief Executive Officer and our largest stockholder, Mr. Hunt may exercise substantial control over our future direction and operation and such

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concentration of control may have the effect of discouraging, delaying or preventing a change in control and may also have an adverse effect on the market price of our common stock.

Certain provisions of our charter and of Delaware law make a takeover of our company more difficult.

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

Future issuances of blank check preferred stock may reduce voting power of common stock and may have anti-takeover effects that could prevent a change in control.

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

Risks Related to Technology and Intellectual Property

Technological changes occur rapidly in our industry and our development of new products is critical to maintain our revenue.

The introduction by our competitors of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable. Our future revenue growth and operating profit will depend in part upon our ability to enhance our current products and develop innovative products to distinguish ourselves from the competition and to meet customers’ changing needs in the data security industry. We cannot assure you that security-related product developments and technology innovations by others will not adversely affect our competitive position or that we will be able to successfully anticipate or adapt to changing technology, industry standards or customer requirements on a timely basis.

Our products contain third-party, open-source software and failure to comply with the terms of the underlying open-source software licenses could restrict our ability to sell our products or otherwise result in claims of infringement.

Our products are distributed with software programs licensed to us by third-party authors under “open-source” licenses, which may include the GNU General Public License (GPL), the GNU Lesser Public License (LGPL), the BSD License and the Apache License. These open-source software programs include, without limitation, Linux, Apache, Openssl, IPTables, Tcpdump, Postfix, Cyrus, Perl, Squid and Snort. These third-party, open-source programs are typically licensed to us for no fee and the underlying license agreements generally require us to make available to users the source code for such programs, as well as the source code for any modifications or derivative works we create based on these third-party, open-source software programs.

We have not created any modifications or derivative works to, an extended version of, or works based on, any open-source software programs referenced above. We include instructions to users on how to obtain copies of the relevant open-source code and licenses.

We do not provide end users a copy of the source code to our proprietary software because we believe that the manner in which our proprietary software is aligned or communicates with the relevant open-source

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programs does not create a modification, derivative work or extended version of, or a work based on, that open-source program requiring the distribution of our proprietary source code.

Our ability to commercialize our products by incorporating third-party, open-source software may be restricted because, among other reasons:

We must continue to attract and retain highly skilled technical personnel for our research and development department.

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

We cannot be certain that our research and development activities will be successful.

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

We depend significantly upon our proprietary technology and intellectual property and the failure to protect our proprietary rights could require us to redesign our products or require us to enter into royalty or licensing agreements, any of which could reduce revenue and increase our operating costs.

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

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

Our patents may not provide us with competitive advantages.

We hold several patents in the United States and in some European countries, which cover multiple aspects of our technology. The majority of our patents cover the Digipass product line. These patents expire

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between 2008 and 2027. In addition to the issued patents, we also have several patents pending in the United States and other countries. There can be no assurance that we will continue to develop proprietary products or technologies that are patentable, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties, or that patents of others will not hinder our competitive advantage. Although certain of our security token technologies are patented, there are other organizations that offer token-type password generators incorporating challenge-response or response-only approaches that employ different technological solutions and compete with us for market share.

We are subject to warranty and product liability risks.

A malfunction of or design defect in our products which results in a breach of a customer’s data security could result in tort or warranty claims against us. We seek to reduce the risk of these losses by attempting to negotiate warranty disclaimers and liability limitation clauses in our sales agreements. However, these measures may ultimately prove ineffective in limiting our liability for damages. We do not presently maintain product liability insurance for these types of claims.

In addition to any monetary liability for the failure of our products, an actual or perceived breach of network or data security at one of our customers could adversely affect the market’s perception of us and our products, and could have an adverse effect on our reputation and the demand for our products.

There is significant government regulation of technology exports and to the extent we cannot meet the requirements of the regulations we may be prohibited from exporting some of our products, which could negatively impact our revenue.

Our international sales and operations are subject to risks such as the imposition of government controls, new or changed export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. If we become unable to obtain foreign regulatory approvals on a timely basis our business in those countries would no longer exist and our revenue would decrease dramatically. Certain of our products are subject to export controls under U.S. law. The list of products and countries for which export approval is required, and the regulatory policies with respect thereto may be revised from time to time and our inability to obtain required approvals under these regulations could materially and adversely affect our ability to make international sales.

We employ cryptographic technology in our authentication products that uses complex mathematical formulations to establish network security systems.

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

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Risks Related to International Operations

We face a number of risks associated with our international operations, any or all of which could result in a disruption in our business and a decrease in our revenue.

In 2007, approximately 92% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. In 2006, approximately 90% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. A severe economic decline in any of our major foreign markets could adversely affect our results of operations and financial condition.

In addition to exposures to changes in the economic conditions of our major foreign markets, we are subject to a number of risks any or all of which could result in a disruption in our business and a decrease in our revenue. These include:

We are subject to foreign exchange risks, and improper management of that risk could result in large cash losses.

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

We must comply with European governmental regulations setting environmental standards.

Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards. Directive 2002/95/ec of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, known as the RoHS Directive, became effective on July 1, 2006. If we fail to maintain compliance, we may be restricted from selling our products in the European Union and this could adversely affect our results of operations. European Directive 2002/96/EC on waste, electrical and electronic equipment, known as the WEEE Directive, makes manufacturers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The WEEE Directive

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became effective on August 13, 2005. We may incur financial responsibility for the collection, recycling, treatment or disposal of products covered under the WEEE Directive. Because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or penalties associated with noncompliance are unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and regulatory costs and insurance costs. We may also be required to take additional reserves for costs associated with compliance with these regulations.

U.S. investors may have difficulties in making claims for any breach of their rights as holders of shares because some of our assets and executives are not located in the United States.

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

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

Item 1B - Unresolved Staff Comments

None.

Item 2 - Properties

Our corporate financial headquarters is located in Oakbrook Terrace, Illinois, and our U.S. sales office is located in Westborough, Massachusetts.

Our international headquarters is in Zurich, Switzerland. Our European operational headquarters, which includes sales and marketing, research and development and support facilities are located in a suburb of Brussels, Belgium. We also have a sales and research and development facility in the Netherlands; as well as operations facilities in Mechelen, Belgium. We also have research and development facilities in Bordeaux, France and Vienna, Austria.

We occupy two locations in Australia. In Brisbane we have an administrative and research and development facility. Our Australian sales office is located in Sydney.

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In the Asia/Pacific region we currently occupy three sales offices. These offices are located in Singapore, Shanghai, China, and Tokyo, Japan.

We also have a sales office in Sao Paulo, Brazil, as well as several other regional sales offices located in the U.K., Russia, and Germany.

All of our properties are leased and we believe that these facilities are adequate for our present growth plans.

Item 3 - Legal Proceedings

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

Item 4 - Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the fourth quarter of 2007, through solicitation of proxies or otherwise.

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PART II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, par value $0.001 per share, trades on the NASDAQ Stock Market under the symbol VDSI.

The following table sets forth the range of high and low closing prices of our common stock on the NASDAQ Stock Market for the past two years.

On March 11, 2008, there were 82 registered holders and approximately 32,700 street name holders of the company’s common stock.

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

See Item 11 for a description of securities authorized for issuance under our equity compensation plan.

Recent Sales of Unregistered Securities

None

Issuer Purchases of Equity Securities

None

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Stock Performance Graph

The Stock Performance Graph below compares the cumulative total return through December 31, 2007, assuming reinvestment of dividends, by an investor who invested $100.00 on December 31, 2002 in each of (i) our common stock, (ii) the Russell 2000 index, (iii) the Standard Industrial Code Index 3577 – Computer Peripheral Equipment, NEC and (iv) a comparable industry (the peer group) index selected by the company. The peer group for this purpose consists of: ActivIdentity Corp., Secure Computing Corp., Entrust Inc., and Aladdin Knowledge Systems Ltd. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

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Item 6 - Selected Financial Data (in thousands, except per share data)

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Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

(in thousands, except head count, ratios, time periods and percents)

Unless otherwise noted, references in this Annual Report on Form 10-K to “VASCO”, “company”, “we”, “our”, and “us” refer to VASCO Data Security International, Inc. and its subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 concerning, among other things, the prospects of, and developments and business strategies for, VASCO and our operations, including the development and marketing of certain new products and the anticipated future growth in certain markets in which we currently market and sell our products or anticipate selling and marketing our products in the future. These forward-looking statements (1) are identified by use of terms and phrases such as “expect”, “believe”, “will”, “anticipate”, “emerging”, “intend”, “plan”, “could”, “may”, “estimate”, “should”, “objective” and “goal” and similar words and expressions, but such words and phrases are not the exclusive means of identifying them, and (2) are subject to risks and uncertainties and represent our present expectations or beliefs concerning future events. VASCO 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. These risks, uncertainties and other factors have been described in greater detail in this Annual Report on Form 10-K and include, but are not limited to, (a) risks of general market conditions, including currency fluctuations, (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 (c) risks specific to VASCO, including, demand for our products and services, competition from more established firms and others, pressures on price levels and our historical dependence on relatively few products, certain suppliers and certain key customers. Thus, the results that we actually achieve may differ materially from any anticipated results included in, or implied by these statements.

General

The following discussion is based upon our consolidated results of operations for the years ended December 31, 2007, 2006 and 2005 (percentages in the discussion are rounded to the closest full percentage point) and should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We design, develop, market and support open standards-based hardware and software security systems that manage and secure access to information assets. We also design, develop, market and support patented Strong User Authentication products for e-business and e-commerce. Our products enable secure financial transactions to be made over private enterprise networks and public networks, such as the Internet. Our Strong User Authentication is delivered via our hardware and software Digipass security products (collectively Digipasses), most of which incorporate an electronic signature capability, which guarantees the integrity of electronic transactions and data transmissions. Some of our Digipasses are compliant with the Europay MasterCard Visa (EMV) standard and are compatible with MasterCard’s and VISA’s Chip Authentication Program (CAP). Some of our Digipass units comply with the Initiative for Open Authentication (OATH). As evidenced by our current customer base, our products are purchased by companies and, depending on the business application, are distributed to either their employees or their customers. Those customers may be other businesses or, as an example, in the case of Internet banking, our customer banks’ corporate and retail customers.

Our target market is any business process that uses some form of electronic interface where the owner of that process is at risk if unauthorized users can gain access to its process and either obtain proprietary

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information or execute transactions that are not authorized. Our products can not only increase the security associated with accessing the business process, thereby reducing the losses from unauthorized access, but also, in many cases, can reduce the cost of the process itself by automating activities that were previously performed manually.

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

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

Currency Fluctuations. In 2007, approximately 92% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. In 2006, approximately 90% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. As a result, changes in currency exchange rates, especially the Euro to U.S. Dollar, can have a significant impact on revenue and expenses. To minimize the net impact of currency on operating earnings, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. In addition, we also attempt to minimize transaction gains and losses by hedging our net U.S. Dollar asset exposure by borrowing U.S. Dollars in foreign countries such that assets denominated in U.S. Dollars are approximately equal to liabilities denominated in U.S. Dollars. As our revenue in Europe grows, we do not expect that we will be able to balance fully the exposures of currency exchange rates on revenue and operating expenses. In periods in which the U.S. Dollar is weakening, we expect that our operating earnings will increase as a result of the change in currency exchange rates.

The Euro strengthened approximately 9% and the Australian Dollar strengthened approximately 10% against the U.S. Dollar in 2007. In 2006, the annual average exchange rate for the Euro was approximately the same as in 2005 and the Australian Dollar weakened approximately 2% against the U.S. Dollar. We estimate that the strengthening of the two currencies in 2007 compared to 2006 resulted in an increase in revenue of approximately $5,840 and an increase in operating expenses of approximately $3,183. We estimate that the strengthening of the two currencies in 2006 compared to 2005 resulted in an increase in revenue of approximately $246 and an increase in operating expenses of approximately $267.

The financial position and the results of operations of most of our foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Translation adjustments arising from differences in exchange rates generated other comprehensive income of $4,887 in 2007 and $2,194 in 2006, and other comprehensive loss of $1,218 in 2005 and are included as a separate component of stockholders’ equity.

Revenues and expenses are translated at average exchange rates prevailing during the year. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations as other non-operating income/expense. Foreign exchange transaction losses aggregated $906 in 2007 and $65 in 2006. Foreign exchange gains aggregated $330 in 2005.

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Revenue

Revenue by Geographic Regions: We classify our sales by customers’ location in four geographic regions: 1) EMEA, which includes Europe, the Middle East and Africa; 2) the United States, which for our purposes includes sales in Canada; 3) Asia Pacific Rim; and 4) Other Countries, including Australia, Latin America and Central Asia. The breakdown of revenue in each of our major geographic areas was as follows:

2007 Compared to 2006 – Overview and Geographic Breakdown

Total revenue in 2007 increased $43,918 or 58% over 2006. The increase was primarily attributable to an increase in the number of Digipass units, hardware and software, sold and the full-year impact of revenue from Logico Smart Card Solutions, GmbH (Logico) and Able N.V. (Able), which we acquired in May and October of 2006, respectively. Revenues from Logico and Able combined were $3,229 in 2007 and compare to $724 in 2006.

We believe that the increase in Digipass volume is attributable to the strength and flexibility of our VACMAN Controller software platform, growth in our distribution channel, our increased investment in sales staff and marketing programs, the market’s increased awareness of the need for strong authentication to combat identity theft and our ability to deploy large volumes of high-quality products at an affordable price. The strategy introduced in the beginning of 2006 of being the Full-Option, All-Terrain company allowed us to compete effectively in both the Banking market and Enterprise Security markets. With the introduction of our DigipassPlus strategy in January 2006, we saw an increase in revenue for software-based Digipasses.

As noted in the table above, revenue from each of our geographic regions increased. Both the absolute amount of revenue from each region and the growth over the prior year reflect, in general, the regulatory environment of the region and the customers’ attitudes towards and acceptance of two-factor authentication. The growth in EMEA, $34,277, or 72%, over 2006, was attributable primarily to increased sales of Digipass products in the Banking market, but several other factors contributed to the increase in revenue including, but not limited to, substantial growth in the Enterprise Security market, the impact of currency and the acquisition of Logico and Able in 2006. The growth in the United States, $1,867, or 25%, over 2006, was related to increased Digipass sales in the Enterprise Security market. The growth in Asia Pacific, $7,447, or 119%, over 2006, was primarily the result of increased Digipass sales in the Banking market. The growth in other countries, $327, or 2%, over 2006, came from the Enterprise Security market.

We believe that the growth in all markets was attributable in large part to the increased investment we made in sales staff and marketing programs throughout 2007 and we plan to continue making incremental investments in both sales staff and marketing programs in 2008.

Given the relatively small size of the revenue in regions other than EMEA, the results may vary substantially year-to-year on both an absolute and on a percentage basis depending upon the timing of the receipt

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and delivery of a large new order or the completion of a large rollout. We believe that the variability in results will lessen as we develop a larger base of Banking customers and further develop our distribution channel for the Enterprise Security market.

2006 Compared to 2005 – Overview and Geographic Breakdown

Total revenue in 2006 increased $21,483 or 39% over 2005. The increase was primarily attributable to an increase in the number of Digipasses sold and the acquisitions of Logico and Able. Revenues from Logico and Able combined were $724 in 2006.

We believe that the increase in Digipasses sold is attributable to the same factors discussed in the comparison of 2007 to 2006.

As noted in the table above, revenue from each of our geographic regions, except for Asia Pacific, increased in 2006 when compared to 2005. As noted above, both the absolute amount of revenue from each region and the growth over the prior year reflect, in general, the regulatory environment of the region and the customers’ attitudes towards and acceptance of two-factor authentication. The growth in EMEA, $8,230 or 21% over 2005, was primarily attributable to growth in the Banking market, but several other factors including, but not limited to, substantial growth in the Enterprise Security market and the acquisition of Logico and Able contributed to the increased revenue. The growth in the United States, $3,710 or 101% over 2005, was primarily attributable to the Banking market as a result of the strong Banking industry directive issued on October 12, 2005 by the Federal Financial Institutions Examination Council (FFIEC), an umbrella regulatory group that includes the Federal Deposit Insurance Corporation (FDIC). Revenues in the Asia Pacific regions declined $371 or 6% primarily due to a decline in the Banking market. The growth in other countries, $9,915 or 197% over 2005, reflects the growth in India and in the Central/South American markets. We believe that our increased investment in sales staff and marketing programs was a significant factor in achieving the increase in revenue in 2006 over 2005.

Revenue by Target Market: Revenue is generated currently from two primary markets, Banking and Enterprise Security through the use of both direct and indirect sales channels. The breakdown of revenue between the two primary markets is as follows:

Revenue from the Banking market increased $35,320 or 54% in 2007 over 2006 and revenue from the Enterprise Security market increased $8,598 or 78% in the same period. The increase in revenue in both markets is attributable, in part, to the continued development of the indirect sales channel, which includes distributors, resellers, and solution partners. The number of distributors increased to 77 at the end of 2007 from 52 at the end of 2006. The indirect sales channel supplements the company’s direct sales force in the Banking market and is the primary source of revenue in the Enterprise Security market. Revenue generated by Logico and Able in 2007 are included in the Enterprise Security market.

Revenue from the Banking market increased $18,203 or 39% in 2006 over 2005 and revenue from the Enterprise Security market increased $3,280 or 42% in the same period. The increase in revenue in both markets

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is attributable to the factors noted above. The number of distributors increased to 52 at the end of 2006 from 45 at the end of 2005. The indirect sales channel supplements the company’s direct sales force in the Banking market and is the primary source of revenue in the Enterprise Security market.

The amounts shown above for Enterprise Security currently include revenue generated from all markets other than Banking and include, but are not limited to, corporate networks, other application-specific vertical markets, e-commerce and e-government markets. We expect that the Enterprise Security market will be an important source of future revenue for the company as our products will not only provide a higher level of security for purchases made over the Internet, they can also help protect our customers’ revenue stream by making it more difficult for subscribers to our customers’ Internet services to share passwords.

Gross Profit and Operating Expenses

The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005.

Gross Profit

2007 Compared to 2006

Consolidated gross profit for 2007 was $79,112, an increase of $27,409, or 53%, from the $51,703 reported for 2006. Gross profit as a percentage of revenue was 66% in 2007, as compared to 68% in 2006. The decrease in the gross profit as a percentage of revenue primarily reflects:

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Card readers, which are more expensive to produce than our consumer models, increased from approximately 20% of our total hardware units sold in 2006 to 29% in 2007. Our card readers often compete against other manufacturers’ readers that have less functionality and a lower cost. As a result of the higher manufacturing cost and the competitive pricing pressures, the gross profit margins from the card reader product line are generally 25 to 30 percentage points lower than those from other product lines. Our lower-cost consumer models decreased from approximately 59% of total hardware units sold in 2006 to 56% in 2007.

Non-hardware product revenue includes revenue from VACMAN Controller, software versions of our Digipasses, maintenance, support, customization, and other non-manufactured products. Non-hardware product revenue increased to approximately 14% of revenue in 2007 from 12% in 2006. The gross profit on non-hardware products is substantially higher than on hardware products. We plan to continue to emphasize licenses of software versions of our Digipasses, VACMAN Controller and related maintenance and expect that non-hardware revenue will continue to increase as a percent of our total revenue.

As noted previously, we provide discounts for large volume purchases. Generally, sales in the Enterprise Security market when compared to the Banking market are for smaller quantities and higher unit prices, which results in gross profit margins that are 20 to 25 percentage points higher than the margins in the Banking market. As noted above, revenue from the Enterprise Security market increased to 16% of total revenue in 2007 from 15% of total revenue in 2006. Looking forward, we plan to add sales staff and marketing resources dedicated to the Enterprise Security market. As the volume of business grows, we expect to see a wider range of prices and margins. We believe that sales to the small and medium sized businesses will continue to be for smaller quantities and higher prices, but we also expect that sales into the e-commerce or e-government markets will be for larger quantities with lower prices and have margins that are similar to the margins realized in the Banking market.

Our purchases of inventory are denominated in U.S. Dollars. Also, as previously noted, the company denominates a portion of its sales in Euros in an effort to offset the effects of currency fluctuations on operating expenses. The increase in revenue and gross margins resulting from changes in currency rates in 2007 was estimated to be $5,840, as noted above. Had the currency rates remained unchanged in 2007 compared to 2006, we estimate that our gross profit percentage would have been approximately 1.7 percentage points lower.

2006 Compared to 2005

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

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

The average cost, hardware and software combined, per Digipass unit sold declined approximately 20% in 2006 from 2005. The decline in the average cost per unit reflected the increased software content, a

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reduction in the manufacturing cost of most units sold and a change in mix of hardware products sold towards product targeted for use by the consumer. The lower-cost consumer models increased from approximately 48% of total units sold in 2005 to approximately 59% in 2006 while the higher-cost card readers declined from approximately 28% of total units sold in 2005 to approximately 24% in 2006.

Our purchases of inventory are denominated in U.S. Dollars. Also, as previously noted, the company denominates a portion of its sales in Euros in an effort to offset the effects of currency fluctuations on operating expenses. The increase in revenue and gross margins resulting from changes in currency rates in 2006 was $246, as noted above. The changes in currency did not, however, have a significant impact on gross margins as a percentage of revenue.

Sales and Marketing Expenses

2007 Compared to 2006

Consolidated sales and marketing expenses for the year ended December 31, 2007 were $27,181, an increase of $7,699, or 40%, from $19,482 reported for 2006.

The increase was primarily due to an increase in average headcount and related compensation expenses, recruiting fees related to new hires, an increase in marketing programs and materials, an increase in travel expenses, higher depreciation costs related primarily to the cost of training films developed in 2006, and higher third-party consulting and commission costs.

The average full-time sales, marketing and operations employee headcount increased 34% to 117 in 2007 from 87 in 2006. At year-end 2007, the company employed 137 full-time sales, marketing and operations employees. We plan to continue hiring sales and marketing professionals in 2008 in an effort to continue our accelerated sales growth.

2006 Compared to 2005

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

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

Research and Development Expenses

2007 Compared to 2006

Consolidated research and development costs for the year ended December 31, 2007 were $9,440, an increase of $3,911, or 71%, from the $5,529 reported for 2006. The increase in research and development was primarily attributable to increased compensation expenses, in part resulting from the acquisitions of Logico and Able in the second and fourth quarters of 2006, respectively.

The average full-time sales, research and development headcount increased 55% to 68 in 2007 from 44 in 2005. At year-end 2007, the company employed 72 full-time research and development employees.

2006 Compared to 2005

Consolidated research and development costs for the year ended December 31, 2006 were $5,529, an increase of $1,950, or 54%, from the $3,579 reported for 2005. Expenses in 2006 included approximately $1,090

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of expense related to Logico and Able combined. Excluding Logico and Able, research and development expenses increased approximately $860 or 24% from 2005.

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

General and Administrative Expenses

2007 Compared to 2006

Consolidated general and administrative expenses for the year ended December 31, 2007 were $10,569, an increase of $3,412 or 48%, from the $7,157 reported for 2006.

The increase in the general and administrative expense primarily reflected increased compensation expenses, recruiting fees, increased professional fees, which were primarily related to the creation of our international headquarters in Switzerland and the opening of offices in Brazil and Japan and third-party consulting costs. The average full-time general and administrative employee headcount increased 34% to 26 in 2007 from 19 in 2006.

2006 Compared to 2005

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

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

Amortization Expense

2007 Compared to 2006

Amortization expense for 2007 was $1,029, an increase of $436 or 74% from $593 reported for 2006. The increase reflected a full-year’s amortization related to the purchase of Logico and Able in 2007, which were acquired in May and October of 2006, respectively.

2006 Compared to 2005

Amortization expense for 2006 was $593, a decrease of $145 or 20% from $738 reported for 2005. The decrease was due to an intangible asset for purchase orders obtained as part of the AOS-Hagenuk acquisition, which was fully amortized in 2006, partially offset by increased amortization related to the purchase of Logico and Able in 2006.

Impairment of Investment in Secured Services, Inc.

2007 Compared to 2006

There were no adjustments to the investment account for Secured Services in 2007.

2006 Compared to 2005

We received preferred stock and a note receivable from Secured Services, Inc. (SSI) in 2003 as consideration for assets of the VACMAN Enterprise business unit. Based on a detailed valuation, we established

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

Interest Income, Net

2007 Compared to 2006

Consolidated net interest income was $479 in 2007 compared to $121 in 2006. The increase in income primarily reflected an increase in our average net cash balances partially offset by the cost of increased borrowing related to our foreign currency hedging program, which we discontinued in December 2007. Average net cash balances were $26,204 in 2007, an increase of $11,316 or 76% from $14,888 in 2006. We invested our cash balances in short-term money market instruments at an average rate of 2.7% in 2007 compared to 2.3% in 2006.

2006 Compared to 2005

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

Other Income (Expense), net

2007 Compared to 2006

Other income (expense), net in 2007 primarily included exchange gains (losses) on transactions that are denominated in currencies other than a subsidiary’s functional currency and subsidies received from foreign governments related to increasing trade in other countries. Other expense was $384 in 2007 compared to income of $178 in 2006 and reflects an increase in exchange losses of $841 partially offset by increases in other income of $279. We realized exchange losses of $906 in 2007 compared to exchange losses of $65 in 2006. We discontinued our hedging program in late 2007 as the program was not effective in hedging currencies when the impact of implementing our new Swiss headquarters was considered. We plan to implement a new hedging strategy in 2008.

2006 Compared to 2005

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

Income Taxes

2007 Compared to 2006

Income tax expense for 2007 was $10,025, compared to expense of $6,054 in 2006. The expense related primarily to our subsidiaries in Belgium, Singapore, Australia, the Netherlands, Switzerland and Austria.

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The effective tax rate in 2007 was 32.4%, a decrease of 0.1 percentage point from 32.5% in 2006. The rate in 2007 was slightly lower than 2006 and reflected the benefit from an improved geographic distribution our earnings partially offset by the reduced benefits from using net operating loss carryforwards (NOLs) in 2006. The rate for 2007 did not include the benefits of the use of any significant NOL. We expect that our effective tax rate in future years will be lower as we are able to realize the benefit associated with the implementation of our new strategy related to the ownership of our intellectual property and increased earnings in tax jurisdictions where we have net operating losses, for which the benefit has been reserved.

2006 Compared to 2005

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

Loss Carryforwards Available

At December 31, 2007, we had U.S. net operating loss carryforwards of $27,533 and foreign net operating loss carryforwards of $7,789. Most of these losses are available to offset future taxable income in the respective jurisdictions. The U.S. loss carryforwards expire in varying amounts beginning in 2018 and continuing through 2027. The foreign loss carryforwards have no expiration dates. The foreign loss carryforwards include $2,950, which was obtained in the Logico acquisition and, if utilized, would not reduce income tax expense, but would reduce deferred tax assets or goodwill instead. In addition, if certain substantial changes in the company’s ownership are deemed to have occurred, there would be an annual limitation on the amount of the U.S. carryforwards that could be utilized.

Liquidity and Capital Resources

At December 31, 2007, we had net cash balances (total cash, cash equivalents and restricted cash less bank borrowings), totaling $38,833. We had no outstanding term debt or restricted cash at December 31, 2007. Cash generated from operating activities was $24,072 during the year ended December 31, 2007. During 2007, we used $1,331 for investing activities, primarily for additions to property and equipment, and provided $97 from financing activities, primarily consisting of proceeds from the exercise of stock options, offset by a reduction in bank borrowing. Capital expenditures were $1,124 for the year ended December 31, 2007.

Cash generated from operating activities was $7,819 during the year ended December 31, 2006. During 2006, we used $9,883 for investing activities, primarily related to the acquisitions of Logico and Able, and used $247 in financing activities, primarily consisting of a reduction in bank borrowing offset by proceeds from the exercise of stock options. Capital expenditures were $459 for the year ended December 31, 2006.

On May 11, 2006, we acquired all of the issued and outstanding shares of Logico, an authentication storage specialist with extensive experience in smart card based authentication, located in Vienna, Austria. The shares of Logico were acquired for a cash payment of €1,236 (equivalent to $1,578 at the historical exchange rate). An additional payment of €150 (or $200 at the historical exchange rate) was paid on March 31, 2007 when certain performance conditions were met.

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

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€5,000 ($6,300 at the historical rate). The purchase price included €1,250 ($1,650 at the historical rate) which is subject to a bank guaranty and may be returned to us in whole or in part if the seller terminates his employment with us before October 10, 2010. As required by EITF 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination, we have recorded this portion of the purchase price as deemed compensation, to be amortized over the required employment period.

We maintain an overdraft agreement with Fortis Banque/Bank of Belgium. Under terms of the agreement, we can borrow an amount equal to 80% of our Belgium subsidiary’s defined accounts receivable up to a maximum of either 3,500 Euros or U.S. Dollars. Borrowings under the overdraft agreement accrue interest at an annual rate of 5.7% and we are obligated to pay a quarterly commitment fee of 0.125% of the unused availability. As of December 31, 2007, 3,500 Euros or U.S. Dollars were available under the overdraft agreement. The assets, excluding inventory, of the Belgian subsidiary secure the agreement and while it has no specific termination date, it can be terminated with 30 days notice. The agreement is governed by the General Lending Conditions for Corporate Customers, registered in Brussels, Belgium on December 20, 2001.

The net effect of 2007 activity resulted in an increase in net cash of $26,219 and a net cash balance of $38,833 at December 31, 2007, compared to $12,614 at the end of 2006. Our working capital at December 31, 2007 was $52,438, an increase of $30,380 or 138% from $22,058 at December 31, 2006. The change is primarily attributable to the generation of positive cash flow from operations in 2007. Our current ratio was 2.98 to 1.0 at December 31, 2007. We believe that our current cash balances, credit available under our existing overdraft agreement and the anticipated cash generated from operations, including deposits received on orders of Digipass to be delivered in 2008, will be sufficient to meet our anticipated cash needs for the next 12 months.

The net effect of 2006 activity resulted in a decrease in net cash of $1,355 and a net cash balance of $12,614 at December 31, 2006, compared to $13,970 at the end of 2005. Our working capital at December 31, 2006 was $22,058, an increase of $5,733 from $16,325 at December 31, 2005. The change is primarily attributable to the generation of positive cash flow from operations in 2006. Our current ratio was 2.15 to 1.0 at December 31, 2006.

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

Off-Balance Sheet Arrangements

The company has no off-balance sheet arrangements.

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Contractual Obligations

The company has the following contractual obligations:

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

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

Revenue Recognition

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

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

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

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

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

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regard to the discount. The estimated fair value of undelivered elements is deferred and recorded as revenue when services are performed or products are delivered. For sales arrangements in which vendor specific objective evidence (VSOE) of fair value is not established, revenue for all elements is deferred and amortized over the life of the arrangement.

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

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

Allowance for Doubtful Accounts

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

Net Realizable Value of Inventory

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

Valuation of Goodwill and Other Intangible Assets and Software Development Costs

Impairment of long-lived and intangible assets: Long-lived assets, including property, plant and equipment, identifiable intangible assets being amortized and capitalized software costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.

Goodwill and other intangible assets: Goodwill is not subject to amortization but is tested for impairment on an annual basis (or more frequently if impairment indicators arise) under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” We have established December 31 as the date of our annual test for impairment of goodwill. Impairment losses are calculated at the reporting unit level, and represent the excess of the carrying value of reporting unit goodwill over its implied fair value. The implied fair value of goodwill is determined by a two-step process. The first compares the fair value of the reporting unit (measured as the present value of expected future cash flows) to its carrying amount. If the fair value of the reporting unit is less than its carrying amount, a second step is performed. In this step, the fair value of the reporting unit is allocated to its assets and liabilities to determine the implied fair value of goodwill, which is used to measure the impairment loss. We have not recognized any

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impairment for the years ended December 31, 2007 or 2006 as the fair values of our reporting units with goodwill balances exceed our carrying amounts.

Software Capitalization

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.

Income Taxes:

At December 31, 2007, we had U.S. net operating loss (NOL) carryforwards of $22,416 and foreign NOL carryforwards of $7,789. Such losses are available to offset future taxable income in the respective jurisdictions. SFAS 109, Accounting for Income Taxes, requires that valuation reserves be established for deferred tax assets if it is more likely than not that the assets will not be realized. We have provided valuation reserves against the entire U.S. NOL and a substantial portion of the foreign NOLs.

Financial Accounting Interpretation (FIN) 48 requires the company to identify potential tax exposures in each jurisdiction which are more likely than not to be overturned by taxing authorities. We have identified one sure exposure concerning cost allocations associated with the implementation of our worldwide strategy related to the ownership of our intellectual property for which we have designated a $400 reserve in 2007 which is an offset to our U.S. deferred tax asset.

Recently Issued Accounting Pronouncements

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. On November 14, 2007, the FASB deferred the effective date for certain nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not anticipate that the adoption of SFAS No. 157 will have a significant impact on our consolidated financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We do not anticipate a material impact upon adoption of SFAS No. 159.

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Accounting for Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We are required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited. This standard will change the accounting treatment for business combinations on a prospective basis.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

Item 7A - Quantitative and Qualitative Disclosures About Market Risk (In thousands)

Foreign Currency Exchange Risk – In 2007, approximately 92% of our business was conducted outside the United States, primarily in Europe and Asia/Pacific. A significant portion of our business operations is transacted in foreign currencies. As a result, we have exposure to foreign exchange fluctuations. We are affected by both foreign currency translation and transaction adjustments. Translation adjustments result from the conversion of the foreign subsidiaries’ balance sheets and income statements to U.S. Dollars at year-end exchange rates and weighted average exchange rates, respectively. Translation adjustments resulting from this process are recorded directly into stockholders’ equity. Transaction adjustments result from currency exchange movements when one of our companies transacts business in a currency that differs from its local currency. These adjustments are recorded as gains or losses in our statements of operations. Our business transactions are spread across numerous countries and currencies. This geographic diversity reduces the risk to our operating results.

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

Interest Rate Risk – We have minimal interest rate risk. We had no debt outstanding at December 31, 2007. Our cash is invested in short-term instruments at current market rates. If rates were to increase or decrease by one percentage point, the company’s interest income would increase or decrease approximately $388 annually.

Impairment Risk – At December 31, 2007, we had goodwill of $14,319 and other intangible assets of $2,295 related mostly to the acquisition of Logico and Able in 2006 and to technology purchased in 2001 as part of our acquisition of Identikey. We will assess the net realizable value of the goodwill and other intangible assets on a regular basis, but at least annually, to determine if we have incurred any declines in the value of our capital investment. While we did not experience impairment during the year ended December 31, 2007, we may incur impairment charges in future periods.

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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-29 of this Form 10-K, and in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the company in this Annual Report on Form 10-K, and in other reports required to be filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission for such filings. As required by Rule 13a-15(b) under the Exchange Act, management of the company, under the direction of the company’s Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of the company’s disclosure controls and procedures as of December 31, 2007. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer, along with the management of the company, have determined that as of December 31, 2007, the disclosure controls and procedures were and are effective as designed to ensure that information relating to the company and its consolidated subsidiaries would be accumulated and communicated to them, as appropriate, to allow timely disclosures regarding required disclosures.

Changes in Internal Controls

There were no significant changes in the company’s internal controls over financial reporting during the quarter ended December 31, 2007.

Management’s Annual Report on Internal Control over Financial Reporting

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

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

Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Controls – Integrated Framework (COSO). Based on our assessments we believe that, as of December 31, 2007, our internal control over financial reporting is effective based on those criteria.

Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting. This report appears below.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

VASCO Data Security International, Inc.:

We have audited VASCO Data Security International, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Criteria). VASCO Data Security International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In our opinion, VASCO Data Security International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of VASCO Data Security International, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated March 14, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Chicago, Illinois

March 14, 2008

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Item 9B - Other Information

None.

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PART III

Item 10 - Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

T. KENDALL “KEN” HUNT – Mr. Hunt is our Chairman of the Board and Chief Executive Officer. Mr. Hunt has served as Chairman of the Board since the company’s incorporation in 1997, and currently serves a one-year term. He was our Chief Executive Officer from 1997 through 1999 and returned as CEO in November 2002. He is also affiliated with several high-tech early-stage companies, serving as a member of the Board of Directors of Global Med Technologies, Inc. since March 2006, Excellence Nessuah Investments, Ltd. since January 2007, Victory Park Capital L. P. since June 2007, and RedRoller Holdings, Inc. since December 2007. Mr. Hunt is President of the Belgian Business Club of Chicago. Additionally, he is on the Advisory Board for the Posse Foundation, an organization dedicated to providing full college scholarships to urban minority youth leaders through its partnerships with elite universities across the U.S. He holds an MBA from Pepperdine University, Malibu, California, and a BBA from the University of Miami, Florida. Mr. Hunt is 64 years old.

MICHAEL P. CULLINANE — Mr. Cullinane has been a director since April 10, 1998 and currently serves a one-year term. He is the Chairman of our Audit Committee and a member of our Compensation Committee and our Governance and Nominating Committee. Mr. Cullinane served as the Executive Vice President and Chief Financial Officer of Lakeview Technology from January 2005 to July 2007. Mr. Cullinane served as the Executive Vice President and Chief Financial Officer and a director of Divine, Inc. from July 1999 to May 2003. He served as Executive Vice President, Chief Financial Officer and a director of PLATINUM Technology International, Inc. from 1988 to June 1999. Mr. Cullinane received a B.B.A. from the University of Notre Dame, South Bend, Indiana. Mr. Cullinane is 58 years old.

JOHN N. FOX, JR. — Mr. Fox has been a director since April 2005 and currently serves a one-year term. He is Chairman of our Compensation Committee and is a member of our Audit Committee and our Governance and Nominating Committee. From 1998 to 2003, Mr. Fox served as a Vice Chairman of Deloitte & Touche and the Global Director, Strategic Clients for Deloitte Consulting. He held various other positions with Deloitte Consulting from 1968 to 2003, and served on the board of Deloitte Touche Tohmatsu from 1998 to 2003. Since 2007, Mr. Fox has been a director for Cognizant Technology Solutions Corporation. He also serves on a variety of non-profit boards of directors. Mr. Fox received his B.A. degree from Wabash College and his MBA from the University of Michigan. Mr. Fox is 65 years old.

JEAN K. HOLLEY— Ms. Holley was elected to the Board of Directors effective August 1, 2006, and was named to the Audit Committee, Compensation Committee and Governance and Nominating Committee. Since 2004, Ms. Holley has been serving as the Executive Vice President and Chief Information Officer for Tellabs, Inc. Ms. Holley previously served as the Vice President and Chief Information Officer for USG Corporation from 1999 to 2003. Prior to that, she served as Senior IT Director for Waste Management, Inc. Ms. Holley holds a B.S. in Computer Science/Electrical Engineering from the University of Missouri–Rolla, and a M.S. in Computer Science/Engineering from Illinois Institute of Technology in Chicago. She has served on a variety of boards including Illinois Institute of Technology, Northern Illinois University’s College of Engineering & Engineering Technology, University of Missouri – Rolla’s College of Mines & Metallurgy, and the School of Management Information Systems. She served as President of the Academy for Computer Science at UMR and is a currently serving on several boards that include Giant Steps of Illinois, a school for children with autistic spectrum disorders, the Board of Trustees for Missouri University Science and Technology and Illinois Math & Science Academy. Ms. Holley is 48 years old.

JOHN R. WALTER — Mr. Walter has been a director since April 2003 and currently serves a one-year term. He is Chairman of our Governance and Nominating Committee and is a member of our Audit Committee and Compensation Committee. Mr. Walter is Chairman and CEO of Ashlin Management Co., a private investment and management services firm. Mr. Walter also serves as a director for Manpower, Inc.,

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InnerWorkings, Inc., and SNP Corporation of Singapore. He has previously served on the boards of numerous other companies, including Deere & Company and Abbott Laboratories. Mr. Walter served as President and Chief Operating Officer of AT&T Corporation from 1996 to 1997. He served as Chairman and CEO of R.R. Donnelley & Sons company, a print and digital information management company, from 1989 through 1996. Mr. Walter received a B.S. in Management from Miami University, Oxford, Ohio. Mr. Walter is 61 years old.

Executive Officers

JAN VALCKE — Mr. Valcke is our President & Chief Operating Officer and has held this position since 2002. Mr. Valcke has been an officer of the company since 1996. From 1992 to 1996, he was Vice-President of Sales and Marketing of Digipass NV/SA, a member of the Digiline group. He co-founded Digiline in 1988 and was a member of the Board of Directors of Digiline. Mr. Valcke received a degree in Science from St. Amands College in Kortrijk, Belgium. Mr. Valcke is 53 years old.

CLIFFORD K. BOWN — Mr. Bown is our Executive Vice President & Chief Financial Officer and has held this position since 2002. Mr. Bown started his career with KPMG LLP where he directed the audits for several publicly held companies, including a global leader that provides integrated and embedded communications solutions. From 1991 to 1993, he was CFO for publicly held XL/DATACOMP, a $300 million provider of midrange computer systems and support services in the U.S. and U. K. Mr. Bown also held CFO positions in two other companies focused on insurance and healthcare from 1995 through 2001. Mr. Bown received a B.S. in Accountancy from the University of Illinois, Urbana, Illinois, his MBA from the University of Chicago, and he has a CPA certificate. Mr. Bown is 56 years old.

Audit Committee Financial Expert

The company has a standing audit committee as defined by the Securities Exchange Act of 1934. The members of the Audit Committee are directors Mr. Cullinane, Mr. Fox, Ms. Holley and Mr. Walter. The Board has determined that Mr. Cullinane, Chairman of the Audit Committee and Mr. Walter each qualify as an audit committee financial expert as defined under SEC rules. Each member of the Audit Committee has been determined to be independent as defined by The Nasdaq Stock Market, and the Securities and Exchange Commission.

Section 16(a) Beneficial Ownership Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Directors, executive officers and beneficial owners of more than 10% of the outstanding shares of common stock are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms or written representations that no reports under Section 16(a) were required, we believe that for the year period ended December 31, 2007, all of the company’s directors, executive officers and greater than 10% beneficial owners complied with Section 16(a) filing requirements applicable to them.

Code of Conduct and Ethics

The company has adopted a Code of Conduct and Ethics that applies its Board of Directors and all employees, including our principal executive officer, principal financial officer and principal accounting officer and serves as a framework for our directors and employees to exercise their best efforts to conduct themselves at the highest possible level of integrity and honesty. The Code of Conduct and Ethics is published on our website, www.vasco.com in the Investors, Corporate Governance section. Any amendments to, or waivers from, a provision of the Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer or principal accounting officer also will be posted on our website.

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Item 11 - Executive Compensation

COMPENSATION COMMITTEE MATTERS

Scope of Authority

The Compensation Committee of VASCO’s Board of Directors acts on behalf of our Board of Directors (Board) to establish the compensation of VASCO’s named executive officers and makes recommendations to the Board regarding compensation of our non-employee directors. The Compensation Committee also administers VASCO’s annual incentive cash bonus plan and our 1997 Stock Compensation Plan, pursuant to which long-term equity incentive awards are made to the named executive officers.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Compensation Policy

We operate in the very competitive information technology industry, specializing in internet security and services, which are growing fast and demand constant and market-leading innovation. To succeed in this environment, VASCO is required to attract, motivate, reward and retain highly talented and experienced executives and key employees.

Accordingly, the Compensation Committee is guided by the following principles:

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The Compensation Committee’s Processes and Procedures

The Compensation Committee makes all determinations regarding the compensation of VASCO’s named executive officers. The Compensation Committee considers the following items to ensure that VASCO’s executive compensation fulfills the Compensation Committee’s guiding principles, and their relationship to the different compensation components are described, below, under “Executive Officer Compensation Components”:

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In addition to the peer company data, the consultant provided the Compensation Committee with information from the consultant’s proprietary Total Compensation Measurement^TM (TCM) data that was reviewed by the Compensation Committee in establishing 2007 compensation levels for the named executive officers. Because of the large variance in size of the companies comprising the TCM data, at the request of the Compensation Committee, the consultant used regression analysis to adjust the compensation data for differences in revenue to a value approximating VASCO’s 2005 revenue adjusted for annualization. This review, together with the Compensation Committee’s review of the peer company information, led to the Compensation Committee’s subjective decision to use the 75^th percentile of the TCM data as a guideline in establishing total compensation levels for our named executive officers for 2007. The Compensation Committee considered this to be appropriate in light of its executive compensation policy and the performance of VASCO and our named executive officers. In determining the reasonableness of the compensation decisions, the Committee compared the combined total compensation for our named executive officers with the total combined compensation at the 75^th percentile of the TCM data (based on 2005 TCM data increased by 3.5% as recommended by the consultant). The combined 2007 total compensation of VASCO’s three named executives of $2,373,000 was at the 75^th percentile of the TCM data, as adjusted.

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The use of the independent consultant provides additional assurance that VASCO’s executive compensation is reasonable and consistent with our objectives and the Compensation Committee’s guiding principles. The consultant reports directly to the Compensation Committee and does not provide any services to management.

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Executive Compensation Components

The principal components of compensation for the named executive officers consist of base salary, annual cash incentive compensation and long-term incentive compensation:

Base Salary

Base salary is the guaranteed element of the named executive officers’ annual cash compensation. The value of base salary recognizes the executive’s long-term performance, scope of responsibilities, capabilities and the market value of those capabilities. Salary increases are effective January 1 of each year.

Mr. Hunt

In establishing Mr. Hunt’s base salary for 2007 and 2008, the Compensation Committee assessed Mr. Hunt’s performance for the previous year. It considered VASCO’s performance and Mr. Hunt’s accomplishment of the personal goals that had been established in December of the preceding year, and its own assessment of his performance. The Compensation Committee also took into account Mr. Hunt’s significant ownership of VASCO.

Accordingly, in its subjective judgment, the Compensation Committee set Mr. Hunt’s base salary at $300,000 for 2007.

In making its assessment when setting Mr. Hunt’s 2008 base salary, the Compensation Committee noted VASCO’s three-year compound annual growth in revenue, three-year EPS growth and three-year average return on equity, in each case for the three years ended December 31, 2007 based on annualized information available to the Compensation Committee in December 2007. The Compensation Committee also noted that Mr. Hunt’s base salary for 2007 was 30% below the estimated median salary for chief executive officers of the peer group companies in 2007, and that the Compensation Committee had determined to target 2008 total compensation at the 50^th percentile of VASCO’s peer group. Accordingly, after also giving consideration to Mr. Hunt’s significant ownership of VASCO, the Compensation Committee, in its subjective judgment, increased Mr. Hunt’s base salary 16.7% to $350,000 for 2008.

Other Named Executive Officers

In establishing base salary for our other named executive officers for 2007 and 2008, the Compensation Committee assessed their respective performance for the previous year. It considered VASCO’s performance and their accomplishment of the personal goals that had been established in December of the preceding year, and its own assessment of their performance.

Mr. Valcke

In setting Mr. Valcke’s 2007 base salary, the Compensation Committee took into consideration his blended executive duties and responsibilities, including sales, marketing and personnel matters, and VASCO’s lean executive structure. Accordingly, the Compensation Committee, in its subjective judgment, set Mr. Valcke’s base salary at 300,000 Euros (or approximately $390,000 based on the exchange rate in effect at the time) for 2007, an 11.1% increase from the prior year.

In making its assessment when setting 2008 base salary for Mr. Valcke, the Compensation Committee recognized Mr. Valcke’s contribution to VASCO’s financial performance in 2007 and 2006 as compared with its

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peer companies for 2006. It noted his leadership in developing and implementing an aggressive hiring plan in 2007, to grow the sales and marketing organization to support continued rapid growth in revenue, the acquisition of new customers and the penetration of new markets. The Compensation Committee also considered Mr. Valcke’s leadership in the successful implementation of a new software licensing and pricing structure in 2007. The Compensation Committee noted that these and other successfully implemented strategies continued to produce strong profit margins for the company. Based on these factors, the Compensation Committee subjectively determined to increase Mr. Valcke’s base salary for 2008 to 310,000 Euros (or approximately $444,943 based on the exchange rate in effect on December 20, 2007, when the decision was made), a 3.3% increase that places his salary above the median for the estimated 2007 salaries for officers in comparable positions at the peer group companies. The Compensation Committee, in its subjective judgment, believes his 2008 salary is consistent with his responsibilities, which the Compensation Committee believes are broader than those of officers in comparable positions at peer group companies, and is consistent with the Compensation Committee’s assessment of his performance.

Mr. Bown

In setting Mr. Bown’s base salary for 2007, the Compensation Committee considered his added responsibilities, including oversight of human resources and his relocation to Zurich, Switzerland to establish VASCO’s new European headquarters. Accordingly, the Compensation Committee, in its subjective judgment, set Mr. Bown’s base salary at $250,000 for 2007, a 13.6% increase from the prior year.

In making its assessment when setting 2008 base salary for Mr. Bown, the Compensation Committee reviewed Mr. Bown’s performance in 2007 and gave particular weight to his leadership in the establishment of VASCO’s new international headquarters in Zurich, Switzerland. In addition, it considered his success in building the company’s infrastructure needed to support the increased size of the company and anticipated growth of the workforce. This included his hiring and successfully integrating into the organization a director of worldwide human resources, a director of contracts and compliance, and a chief information officer, all of whom report to Mr. Bown. Accordingly, the Compensation Committee, in its subjective judgment, increased Mr. Bown’s base salary for 2008 to $275,000, a 10% increase which places his salary at the median for 2007 salaries for officers in comparable positions at the peer group companies.

Annual Cash Incentive Compensation

Each of the named executive officers is eligible to receive an annual cash bonus the amount of which is based on the level of EPS (calculated on a fully diluted basis) actually achieved for the year compared to the targeted level of EPS for that year. As previously discussed, the Compensation Committee believes that EPS is the most appropriate performance measure; and, the annual EPS target is derived from VASCO’s operating budget. Consequently, if the executive officers fail to successfully execute or manage the key actions assumed in the operating budget, the targeted EPS likely will not be achieved. While the Compensation Committee can, and in the future may, consider establishing targets for other factors to determine the annual incentive cash bonus, the Compensation Committee established a target EPS as the only target for 2007 and 2008 annual incentive compensation.

The annual incentive cash bonus target, which is established in February each year, is set as a percentage of each named executive officer’s base salary. The following payout curve, based on the actual EPS achieved, was established for annual cash bonuses paid for performance in 2007 and 2008:

Payment for performance between stated levels is interpolated.

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The performance target to earn annual incentive compensation for 2007 was based on the 2007 operating budget approved by the Board in December 2006; and the EPS target, based on that budget, was approved by the Compensation Committee in February 2007. In February, 2008, the Compensation Committee reviewed the actual EPS for the year ended December 31, 2007, which was $0.55, or 134.2% of the target EPS of $0.41 established in February, 2007, for performance in 2007. Accordingly, the Compensation Committee approved cash bonus awards of 146.1% of each executive’s targeted bonus. The bonus awards for 2007 performance were:

In January 2008, the Compensation Committee established the following annual bonus targets for 2008 (expressed as a percentage of 2008 base salary): Mr. Hunt, 70%; Mr. Valcke, 80%; Mr. Bown, 60%. At that time, the Compensation Committee determined that the performance target to earn 2008 annual incentive compensation would be the budgeted EPS for 2008, which was approved by the Board in December 2007. The Compensation Committee believes that it is likely that the named executive officers will achieve the budgeted EPS target for payment of the annual incentive at the 100% level. The Compensation Committee believes that it will require exceptional performance by VASCO and the named executive officers to achieve payout at the maximum award level.

Other Compensation and Benefits

Long-Term Incentives

Long-term incentive awards for 2007 were granted pursuant to our 1997 Stock Compensation Plan, which was amended and restated with the approval of our stockholders in 1999. The plan was designed to serve as a performance incentive to encourage our executives, key employees and others to acquire or increase a proprietary interest in VASCO’s success. These incentives promote a long-term perspective critical to continued success in our business. They also ensure that our leaders are focused on stockholder value. The Compensation Committee believes that, over a period of time, our share performance will, to a great extent, be a direct result of our executives’ and key employees’ performance.

The stock compensation plan provides that options or other forms of stock compensation, including restricted stock and performance shares, may be granted at the discretion of the Compensation Committee, in such amounts and subject to such conditions as the Compensation Committee may determine. All annual awards of stock-based compensation under the plan are granted at the Compensation Committee’s regular meeting in January of each year.

In determining awards for 2007, the Compensation Committee reviewed long-term incentive compensation as part of total compensation based on comparisons with companies in the 75^th percentile of the TCM data provided by the consultant. Accordingly, the Compensation Committee, in its subjective judgment, determined the target economic value of the long-term compensation award for each named executive officer as a percentage of the named executive officer’s base salary. Half of the target economic value was granted as restricted stock and the other half of the target value was granted as performance shares. Shares of restricted stock are shares of common stock that vest over time as long as the recipient remains employed by VASCO, and performance shares are shares of stock that vest only upon VASCO’s achievement of certain performance targets. The Compensation Committee believes this mix of long-term incentives enhances the link between

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the creation of stockholder value and long-term executive compensation, provides increased equity ownership by the named executive officers and enables competitive levels of total compensation with an emphasis on payment for results. The Compensation Committee believes the 50/50 mix of a restricted stock award and a performance-based award best aligns the named executive officers’ interests with those of our stockholders.

On the grant date, the economic value was converted into the equivalent number of shares by dividing the economic value by the closing price of VASCO’s common stock on the grant date and applying a discounted economic value that had been calculated by the compensation consultant. The discount factor considers the time value of money, the risk of forfeiture, and, in the case of performance awards, the likelihood of achieving the performance target. For the January 2007 awards, as a result of the discount rates applied to the restricted stock awards and performance share awards, a share of restricted stock was given an economic value of 90% of the stock’s price on the grant date and a performance share was given an economic value of 59.6% of the stock’s price on the grant date. For the January 2008 awards, as a result of the discount rates applied to the restricted stock awards and performance share awards, a share of restricted stock was given an economic value of 90.38% of the stock’s price on the grant date and a performance share was given an economic value of 74.04% of the stock’s price on the grant date.

Each restricted stock award granted as part of 2007 or 2008 long-term incentive compensation vests in equal annual installments on the first four anniversaries of the date of grant. Each performance share award will vest upon the achievement of a cumulative EPS target for a three-year period. Under the terms of the 2007 performance share awards, no shares will vest if the cumulative EPS target is not met and no additional shares will be earned if the cumulative EPS target is exceeded. The unvested portions of restricted stock awards and performance share awards are subject to forfeiture upon the recipient’s cessation of service with VASCO. Upon a change in control of VASCO, the restricted stock awards and performance share awards will vest in full.

For the performance share awards made in January 2008, the Compensation Committee adopted a payout curve that allows for a threshold payout and a maximum payout, as follows:

Payment for performance between stated levels is interpolated.

The EPS targets for the performance shares coincides with the projected EPS in VASCO’s five-year strategic financial plan for the three-year period beginning on January 1 of the year in which the award is granted. The Compensation Committee expects that the EPS targets of the long-term incentive awards made in 2007 and 2008 most likely will be achieved. The Compensation Committee believes that it will require exceptional performance by VASCO and the named executive officers to achieve payout at the maximum award level for the awards made in 2008.

For 2007, the Compensation Committee, in its subjective judgment, intending that total compensation for each named executive officer approximate the 75^th percentile of the TCM data, targeted the following economic values to the named executive officers for long-term incentive awards:

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For 2008, the Compensation Committee, in its subjective judgment, intending that total compensation for each named executive officer be at the 50^th percentile of the peer group, targeted the following economic values to the named executive officers for long-term incentive awards:

Retirement Plans

VASCO does not provide retirement plans or pension plans for the named executive officers.

Perquisites and Other Personal Benefits

Mr. Valcke is provided use of a company automobile. Mr. Bown, upon his relocation to Zurich, Switzerland to establish VASCO’s European Headquarters, was provided certain compensation and allowances as described further under “Employment Agreements,” including an allowance for housing, an automobile, certain other relocation expenses and tax equalization.

Change of Control and Severance Benefits

The Compensation Committee believes the severance and change in control benefits that our named executive officers receive are comparable with those benefits offered by our competitors and necessary to retain a talented executive team.

Deductibility of Executive Compensation

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

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Compensation Committee Report

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

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Summary Compensation Table

The following table provides selected information concerning the compensation earned during the fiscal year ended December 31, 2007 for services in all capacities to VASCO, by (1) the principal executive officer, (2) the principal financial officer, and (3) VASCO’s only other executive officer who served in positions other than principal executive officer or principal financial officer at the end of 2007 (collectively, the “named executive officers”).

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Grants of Plan-Based Awards

The following table sets forth all plan-based awards granted to the named executive officers during 2007.