VASCO DATA SECURITY INTERNATIONAL INC, POS AM, 1998-09-30

VASCO DATA SECURITY INTERNATIONAL INC
POS AM, 1998-09-30
COMPUTER INTEGRATED SYSTEMS DESIGN

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-35563
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO.2
TO
FORM S-4
ON
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VASCO DATA SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
----------------

<TABLE>
<S> <C> <C>
DELAWARE 3577 36-4169320
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

----------------
1901 SOUTH MEYERS ROAD, SUITE 210
OAKBROOK TERRACE, ILLINOIS 60181
(630) 932-8844
----------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

T. KENDALL HUNT
CHIEF EXECUTIVE OFFICER
1901 SOUTH MEYERS ROAD, SUITE 210
OAKBROOK TERRACE, ILLINOIS 60181
(630) 932-8844

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)

COPIES TO:
ROBERT B. MURPHY, ESQ.
STEVEN E. FRIEDMAN, ESQ.
SCHNADER HARRISON SEGAL & LEWIS LLP
1300 EYE STREET, NW, SUITE 1100 EAST LOBBY
WASHINGTON, DC 20005-3314
(202) 216-4200
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================

<PAGE>

PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED SEPTEMBER 30, 1998

PROSPECTUS

VASCO DATA SECURITY INTERNATIONAL, INC.

[LOGO]

This Prospectus relates to 1,004,034 warrants (the "Warrants") to purchase
the common stock, par value $0.001 per share (the "Common Stock") of VASCO Data
Security International, Inc. (the "Company") and 1,004,034 shares of Common
Stock (the "Warrant Shares") that may be issued from time to time upon the
exercise of the Warrants. The Warrants and Warrant Shares may be offered and
sold by the holders thereof or by their transferees, pledgees, donees, or
successors (collectively the "Selling Securityholders") from time to time
following the effective date of the registration statement (the "Registration
Statement") of which this Prospectus forms a part. The Warrants and the Warrant
Shares may be sold by the Selling Securityholders from time to time in
privately negotiated transactions, in transactions in the over-the-counter
market at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at varying
prices determined at the time of sale or at negotiated prices. The Selling
Securityholders may sell the Warrants and the Warrant Shares directly to
purchasers or through underwriters, broker-dealers or agents. See "Plan of
Distribution."

The Company will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Securityholders. To the extent that any
Warrants are exercised, the Company will receive the Exercise Price for the
Warrant Shares. The Company is bearing the expenses incurred in connection with
the registration of the Warrants and Warrant Shares being offered hereby other
than any underwriting discounts, selling commissions and transfer taxes (if
any), applicable to sales by the Selling Securityholders.

The Selling Securityholders and any broker-dealers, agents or underwriters
that participate in the distribution of the Warrants and the Warrant Shares may
be deemed to be "underwriters" and any discounts, commissions, concessions or
other compensation received by them and any profit on the resale of shares
purchased by them may be deemed to be underwriting compensation within the
meaning of the Securities Act. To the extent required, the names of any such
agents or underwriters involved in the sale of the Warrants and the Warrant
Shares and the applicable commissions and discounts, if any, and any other
information with respect to a particular offer or sale will be set forth in an
accompanying supplement to this Prospectus. See "Plan of Distribution."

The Common Stock is quoted on the electronic Bulletin Board of the
National Association of Securities Dealers, Inc. On September 30, 1998, the
average stock bid and asked price of the Common Stock was $ . The principal
executive offices of the Company are located at 1901 South Meyers Road, Suite
210, Oakbrook Terrace, Illinois 60181.
---------------

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 7.

---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

---------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1998.

Information contained herein is subject to completion or Amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, application or sale would be unlawful prior
to registration or qualification under the Securites laws of any such state.
<PAGE>

TABLE OF CONTENTS

PAGE
----
AVAILABLE INFORMATION ................................................... 2
FORWARD-LOOKING STATEMENTS .............................................. 3
SUMMARY ................................................................. 4
RISK FACTORS ............................................................ 6
USE OF PROCEEDS ......................................................... 13
THE COMPANIES ........................................................... 14
BUSINESS ................................................................ 27
DESCRIPTION OF SECURITIES ............................................... 47
SELLING SECURITYHOLDERS ................................................. 51
PLAN OF DISTRIBUTION .................................................... 52
EXPERTS ................................................................. 52
FINANCIAL STATEMENTS .................................................... F-1

AVAILABLE INFORMATION

The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information filed by the Company can be inspected and copied at the
public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as at the following
Commission Regional Offices: Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies can be obtained from the Commission by mail at prescribed
rates. Requests should be directed to the Commission's Public Reference Section,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.

The Company has filed with the Commission a Post-Effective Amendment No. 2
to Form S-4 on Form S-1 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted from
this Prospectus in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Items omitted from this Prospectus but contained in
the Registration Statement may be inspected and copied as described above.

2
<PAGE>

FORWARD-LOOKING STATEMENTS

The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "intends,"
"foresees," "plans," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. In addition, from time to time
the Company or its representatives have made or may make forward-looking
statements, orally or in writing. Furthermore, such forward-looking statements
may be included in, but are not limited to, press releases or oral statements
made by or with the approval of an authorized executive officer of the Company.

Management wishes to caution the reader that the forward-looking
statements contained in this Prospectus involve predictions. No assurance can
be given that anticipated results will be achieved; actual results could differ
materially from those anticipated by the forward-looking statements as a result
of certain factors such as, changes in market conditions, government
regulation, technology, the international security systems industry, and the
global economy; and dependence on major customers. These risk factors are
discussed in further detail in the the Company's SEC filings with the
Commission, including the Prospectus relating to the registration of Common
Stock (File. No. 333-35563), Annual Report on Form 10-K for the year ended
December 31, 1997, and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998.

3
<PAGE>

SUMMARY

The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. Stockholders are urged to
read this Prospectus in its entirety.

As a result of the Exchange Offer (defined below) and of the Company being
the owner of 97.7% of the voting equity of VASCO Corp., a Delaware Corporation
("Old VASCO"), the Company effectively succeeded to the business and operations
of Old VASCO and, on a consolidated basis, to the prior financial history of Old
VASCO. Therefore certain historical financial information contained in this
Prospectus refers to the Company and Old VASCO on a consolidated basis as if the
Company was in existence concurrently with Old VASCO.

THE COMPANY

On or about March 11, 1998, the Company completed an exchange offer (the
"Exchange Offer") pursuant to which the Company offered to exchange one share of
Common Stock for each outstanding share of the common stock, par value $.001 per
share, of Old VASCO (the "Old VASCO Common Stock"). As a result of the Exchange
Offer, the Company acquired 97.7% of the outstanding shares of Old VASCO Common
Stock and, consequently, Old VASCO is now a subsidiary of the Company.

4
<PAGE>

SUMMARY FINANCIAL INFORMATION

The summary financial data presented below for the fiscal years ended
December 31, 1993, 1994, 1995, 1996 and 1997 has been derived from the
consolidated financial statements of the Company . The financial data for the
six months ended June 30, 1997 and 1998 and as of June 30, 1998 has been derived
from the Company's unaudited consolidated financial statements. In the opinion
of the Company's management, these unaudited consolidated financial statements
include all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation of such information. Operating results for
interim periods are not necessarily indicative of the results that might be
expected for the entire fiscal year. For a discussion of factors that affect the
comparability of the financial information set forth below, such as significant
acquisitions undertaken by Old VASCO and the disposition of Old VASCO's
Performance Systems line of business in 1996, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "RISK FACTORS."

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- -----------------------
1993 1994 1995 1996(2) 1997 1997 1998
--------- --------- --------- ----------------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Total revenues .................. $ 2,199 $ 2,693 $ 3,695 $ 10,192 $ 12,302 $ 6,592 $ 6,138
Operating income (loss) ......... 138 192 (534) (8,658)(3) (3,935) (647) (491)
Net income (loss) available to
common stockholders ........... 50 30 (465) (9,349)(3) (5,998) (1,291) (1,603)
Net income (loss) per common
share ......................... -- -- (0.03) (0.53) (0.31) (0.07) (0.08)
Shares used in computing per
share amounts ................. 13,877 14,260 14,817 17,533 19,106 18,496 20,363

</TABLE>

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
(UNAUDITED)
--------------
<S> <C>
BALANCE SHEET DATA (1):
Cash ................................................ $ 2,246
Working capital ..................................... 1,425
Total assets ........................................ 9,362
Long term obligations, less current portion ......... 11,471
Stockholders' equity (deficit) ...................... (7,753)

</TABLE>

- ----------
(1) Represents the consolidated financial information of the Company. Old VASCO
is a non-operating subsidiary of the Company.

(2) Includes the results of operations of Lintel Security NV/SA from March 1996
and Digipass SA from July 1996; see "FINANCIAL STATEMENTS."

(3) Includes a pretax charge for acquired in-process research and development
of $7,351,000.

5
<PAGE>

RISKS FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the Common
Stock. This Prospectus contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
certain of the factors set forth in the following risk factors and elsewhere in
this prospectus.

POSSIBLE VOLATILITY OF STOCK PRICE. The market prices for securities of
technology-dependent companies such as the Company have been volatile. Factors
such as announcements of variations in quarterly financial results, a reduction
in sales, changes in governmental regulations, competitive developments, and
sales of substantial blocks of the securities of the Company by the holders
thereof, among other things, could cause the market price of the Common Stock to
fluctuate significantly. The sale in the public trading markets of a significant
number of shares of Common Stock issued in connection with future financing
requirements or acquisitions, if any, may also cause substantial fluctuations
in, or may adversely affect, the price of the Common Stock over short time
periods. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies that often has been unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Common Stock following the Merger.

ADVERSE EFFECTS OF EXERCISE OF EXISTING OPTIONS AND CONVERSION OF
CONVERTIBLE SECURITIES. A substantial number of shares of Common Stock are
issuable upon exercise or conversion of other outstanding equity equivalent
securities (the "the Company Equity Equivalent Securities") and pursuant to
other contractual arrangements of the Company. Certain of these shares may be
issued at below-market prices. The issuance of these shares of the Company could
have an adverse effect on the market price of the Common Stock.

HOLDING COMPANY STRUCTURE; ADVERSE EFFECTS OF FAILURE TO BE ENTITLED TO
MAXIMUM CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company's assets consist
principally of its ownership of Old VASCO Common Stock and its other
indirectly-owned subsidiaries (as more fully described below) and it is
primarily a holding company. As a result, the Company's income, if any, will
depend on dividends received from its direct and indirect subsidiaries.

Intercorporate dividends are subject to federal income taxation, but a
corporate shareholder may claim a deduction for dividends received from a
domestic corporation. The amount deducted would not be taxable income. The
amount of any dividends from its subsidiaries that the Company is able to deduct
will depend on its level of equity ownership of those subsidiaries. If the
Company's equity ownership in a subsidiary is 80% or more, 20% or more but less
than 80%, or less than 20%, the amount which it would be able to deduct would be
100%, 80% or 70%, respectively. Because the Company's principal income, if any,
at the holding company level will depend primarily on dividends from its
subsidiaries, the Company's ownership of less than 80% of the outstanding equity
of any of its subsidiaries and its resulting inability to be entitled to deduct
100% of the amount of any dividends received from its subsidiaries could have an
adverse effect on the Company's results of operations and financial condition.

POTENTIAL DILUTION. The Company's Certificate of Incorporation, as amended,
authorizes the issuance of seventy-five million (75,000,000) shares of Common
Stock. As of September 28, 1998, there were 20,336,057 shares of Common Stock
issued and outstanding. The Company's Board of Directors has the power to issue
any or all of the authorized but unissued shares without stockholder approval.

It is anticipated that the Company will attempt to meet its future
financing needs through the issuance of equity or debt securities in public or
private offerings. To the extent that any such offering involves the sale of
Common Stock or a derivative thereof at a price lower than that paid by any
investors prior thereto, including investors in Old VASCO and its predecessors,
such offering would have an immediate and possibly substantial dilutive impact
on investors who purchased prior thereto at higher prices. In addition, to the
extent outstanding options and warrants to purchase Common Stock are exercised,
there will be further dilution to new investors.

6
<PAGE>

LOW PRICE OF COMMON STOCK MAY AFFECT MARKETABILITY BY IMPOSING CERTAIN
BROKER-DEALER TRADING RESTRICTIONS. Trading in securities which trade at a price
under $5.00 is subject to the Commission's "penny stock" regulations. "Penny
stocks" generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq stock market system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The Company has applied for the listing of Common Stock on
the NNM.

The penny stock regulations require additional disclosure by broker-dealers
in connection with any trades involving penny stock. The regulations impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally,
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchase and have received the
purchaser's written consent to the transaction prior to sale. Prior to any penny
stock transaction, the broker-dealer must deliver a disclosure schedule
explaining the penny stock market and the risks associated therewith. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.

If the Common Stock becomes subject to the penny stock regulations, the
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock, which
could severely limit the market liquidity of the Common Stock and the ability of
stockholders to sell their shares of the Common Stock in the secondary market.

The foregoing required penny stock restrictions will not apply to the
Common Stock if it is accepted for listing on the NNM and has certain price and
volume information provided on a current and continuing basis or if the Company
meets certain minimum net tangible assets or average revenue criteria. There can
be no assurances that the Common Stock will qualify for exemption from these
restrictions.

PREFERRED STOCK ISSUANCE. The Company's Certificate of Incorporation, as
amended, also authorizes the issuance of five hundred thousand (500,000) shares
of preferred stock with such designations, rights, powers and preferences as may
be determined from time to time by the Company's Board of Directors. The
Company's Board of Directors is empowered, without stockholder approval, to
issue up to 500,000 shares of preferred stock with such dividend, liquidation,
conversion, voting or other rights, powers and preferences as may be determined
from time to time by the Board. 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 of the Company, depending upon the determination
of the Company's Board of Directors as to whether such a change in control would
be in the best interests of the Company's stockholders.

NOT ALL POTENTIAL CLAIMS WILL BE ELIMINATED. While the Company believes
that, as a result of the Exchange Offer, it is in a better position to raise
capital through public and private markets, there is no assurance that the
Exchange Offer eliminated all potential claims against Old VASCO or its
predecessors based on or arising out of the Corporate Matters (as defined
below). Both those holders who did not participate in the Exchange Offer as well
as those who did, may attempt to assert Corporate Matters claims against the
Company. Such claims, if any, could have an adverse effect on the Company's
ability to raise capital and in turn an adverse effect on its results of
operations and financial condition.

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company has incurred
losses from continuing operations before interest and taxes for the years ended
December 31, 1996, December 31, 1997 and the six months ended June 30, 1998 of
$8,658,000, $3,935,000, and $491,000 respectively. As of June 30, 1998, the
Company had an accumulated deficit of $17,504,000, which amount includes a
pretax write-off of acquired in-process technology related to the acquisitions
of Lintel Security NV and Digipass SA for

7
<PAGE>

the year ended December 31, 1996 in the amount of $7,351,000. In view of the
Company's loss history, there can be no assurance that the Company will be able
to achieve or sustain profitability on an annual or quarterly basis in the
future.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's
quarterly operating results have in the past varied and may in the future vary
significantly. Factors affecting operating results include: the size, timing,
cancellation or rescheduling of significant orders; the level of competition;
market acceptance of new products and product enhancements; new product
announcements or introductions by the Company's competitors; adoption of new
technologies and standards; changes in pricing by the Company or its
competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis, if at all; component costs
and availability; the Company's success in expanding its sales and marketing
programs; technological changes in the market for data security products;
foreign currency exchange rates; and general economic trends and other factors.

ADDITIONAL CAPITAL NEEDED. The Company requires additional capital to
finance its working capital and other needs, including the repayment of
outstanding obligations and the financing of future growth. The Company believes
that its current cash balances and anticipated cash revenues from operations
will be sufficient to meet its anticipated cash needs through March 1999.

Continuance of the Company's operations beyond March 1999, however, will
depend on its ability to obtain adequate financing. Although the Company has
obtained the necessary financing in the past and intends to raise capital in the
near term through, among other potential financing sources, a possible public
offering of Common Stock, there is no assurance that it will be able to do so in
the future. In addition, there is no assurance that the Company can reduce its
expenditures or sell assets or proprietary rights without having a material
effect on its business.

RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS. The market for
the Company's products is very dynamic and characterized by rapidly changing
technology, evolving industry standards and government policies, changing
customer requirements, price-competitive bidding and frequent product
enhancements and innovations. The introduction by the Company or its competitors
of products embodying new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. Therefore, the Company's future success will depend in part upon
its ability to enhance its current products and develop innovative products to
distinguish itself from the competition and to meet customers' changing needs in
the data security industry. The Company is presently expending significant
resources to enhance its existing products and develop and introduce the next
generation of token and other security products. There can be no assurance,
however, that security-related product developments and technology innovations
by others will not adversely affect the Company's competitive position or that
the Company will be able to successfully anticipate or adapt to changing
technology, industry standards or customer requirements on a timely basis. Any
failure by the Company to anticipate and respond to such changes could have a
material adverse effect on the Company's results of operations and financial
condition.

DEPENDENCE ON MAJOR CUSTOMERS. Approximately 23% of the Company's revenues
during 1997 were derived from the sale of the Company security products to one
European distributor, Sirnet/Protect Data, and two other European customers each
accounted for approximately 16% of the Company's total revenues. There can be no
assurance that the Company will be able to modify its existing products or
develop new products that will continue to meet the specifications of these
customers. Absent significant future revenues from alternative sources, the
unforeseen loss of one or more of the Company's major customers' business, or
the inability to maintain reasonable profit margins on sales to any of these
customers, would have a material adverse effect on the Company's results of
operations and financial condition. See " BUSINESS -- Customers and Markets."

PRODUCT CONCENTRATION. Sales of the Company's AccessKey II and Digipass
security tokens together comprised the majority of the Company's net sales
during fiscal 1995, 1996 and 1997. Should the demand for or pricing of either of
these products decline due to the introduction of superior or lower cost
products by competitors, changes in the computer industry or other factors, the
Company's results of operations and financial condition would be adversely
affected.

8
<PAGE>

DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS. The Company is party
to collaborative arrangements with a number of corporations and evaluates, on an
ongoing basis, potential strategic alliances and intends to continue to pursue
such arrangements. The Company's future success will depend significantly on the
success of its current arrangements and its ability to establish additional
arrangements. There can be no assurance that these arrangements will result in
commercially successful products. See "BUSINESS -- The Company Security Products
- -- Strategic Relationships."

VARIATIONS IN OPERATING RESULTS. Current the Company's quarterly operating
results have in the past varied and may in the future vary significantly.
Factors affecting operating results include: the level of competition; the size,
timing, cancellation or rescheduling of significant orders; market acceptance of
new products and product enhancements; new product announcements or
introductions by current competitors; adoption of new technologies and
standards; changes in pricing by current competitors; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis, if at all; component costs and availability; current Company
success in expanding its sales and marketing programs; technological changes in
the market for data security products; foreign currency exchange rates; and
general economic trends and other factors.

In addition, the Company has experienced, and may experience in the future,
seasonality in its business. The seasonal trends have included higher revenue in
the last quarter of the calendar year and lower revenue in the next succeeding
quarter. The Company believes that revenue has tended to be higher in the last
quarter due to the tendency of certain customers to implement or complete
changes in computer or network security prior to the end of the calendar year.
In addition, revenue has tended to be lower in the summer months, particularly
in Europe, when many businesses defer purchase decisions. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of expenses are fixed, a small variation in the timing of recognition of revenue
could cause significant variations in operating results from quarter to quarter.

RISKS OF INTERNATIONAL OPERATIONS. Sales to customers outside the United
States accounted for approximately 61%, 95% and 92% of the Company's net
revenues in the years ended December 31, 1995, 1996 and 1997, respectively.
Because a significant number of the Company's principal customers are located in
other countries, management expects that international sales will continue to
generate a significant portion of the Company's total revenue. The Company's
international business is subject to a variety of risks, including tariffs and
other trade barriers, the establishment and expansion of indirect distribution
channels in certain countries or regions, delays in expanding its international
distribution channels, difficulties collecting international accounts receivable
from distributors or resellers, increased costs associated with maintaining
international marketing efforts, the introduction of non-tariff trade barriers
and difficulties in enforcing intellectual property rights. In addition, the
majority of the supply and sales transactions of the Company are denominated in
U.S. dollars, whereas many of the supply and sales transactions of Vasco Data
Security NV/SA, the Company's European operating subsidiary ("VDS NV/SA"), 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 the Company's products sold in these markets.
The Company is therefore subject to the risks associated with fluctuations in
currency exchange rates. In order to reduce the risk of fluctuations in currency
exchange rates, VDS NV/SA began in 1997 to buy U.S. dollars based on three- to
six-month estimated future needs for U.S. dollars, has developed price lists
denominated in both U.S. dollars and foreign currencies, and endeavors to
denominate its new supply and sales transactions in U.S. dollars. VDS NV/SA is
also beginning to attempt to match as to timing of delivery, amount of product
and denomination of currency, some purchase orders from vendors with sales
orders to customers. There can be no assurance, however, that these matching
efforts will be successful in reducing currency exchange risks or that the risks
of international operations will not have a material adverse effect on the
Company's financial condition or results of operations. The Company does not
hold forward exchange contracts or other hedging instruments to exchange various
foreign currencies for U.S. dollars to offset currency rate fluctuations which
might affect its obligations in relation to its repayment out of income from
sales (which are principally in foreign currency) of debt under its loan
obligations (which are principally in U.S. dollars).

9
<PAGE>

COMPETITION. The market for computer and network security products is
highly competitive and subject to rapid change. The Company believes that the
principal competitive factors affecting the market for computer and network
security products include name recognition, technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. The Company's competitors include organizations
that provide computer and network security products based upon approaches
similar to and different from those employed by the Company. There can be no
assurance that the market for computer and network security products will not
ultimately be dominated by approaches other than the approach marketed by the
Company. See "BUSINESS -- The Data Security Industry -- Industry Background,"
"-- Company Security Products" and "-- Competition."

Many of the Company's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than the
Company. As a result, they 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. Competition could
increase if new companies enter the market or if existing competitors expand
their product lines. Any reduction in gross margins resulting from competitive
factors could have a material adverse effect the Company's financial condition
or results of operations.

Although the Company believes that it has certain technological and other
advantages over its competitors, maintaining such advantages will require
continued investment by the Company in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom the Company has strategic
relationships, to increase the ability of their products to address the security
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances may emerge and rapidly acquire significant market
share. If this were to occur, the financial condition and results of operations
of the Company could be materially adversely affected. See "BUSINESS --
Competition."

DEPENDENCE ON SINGLE SOURCE SUPPLIERS. The majority of the Company's
products are manufactured by two independent vendors headquartered in Hong Kong.
One of the vendors is under a contract that extends to January 21, 1999, with
automatic one-year renewals subject to termination on six months notice, and
purchases from the other vendor are on a purchase order by purchase order basis.
Each vendor assembles the Company's security tokens at facilities in mainland
China. The importation of these products from China exposes the Company 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. While the
Company believes that it could find substitute contractors for the manufacture
and assembly of its products, and has had discussions to that effect with a
vendor in Belgium, in the event that the supply of components or finished
products is interrupted or relations with either of the two principal vendors is
terminated, there could be a considerable delay finding suitable replacement
sources to manufacture the Company's products which could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, the Company's AccessKey II product contains a custom-designed
microprocessor which is fabricated by a single supplier located in the United
States and is procured by purchase orders. The Company expects AccessKey II
production to be reduced during 1998 as production of Digipass 300 increases,
which employs a widely available microprocessor. Any unforeseen interruption in
the supply of microprocessors for the Access Key II from the sole supplier prior
to the full phase-in of the Digipass 300 product, however, would have a material
adverse effect on the Company's results of operations or financial condition.
See "BUSINESS -- Production."

PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY. The Company's success
depends significantly upon its proprietary technology. The Company currently
relies on a combination of patent, copyright and trademark laws, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written mate-

10
<PAGE>

rials under trade secret and copyright laws, which afford only limited
protection and generally enters into confidentiality and nondisclosure
agreements with its employees and with key vendors and suppliers. The Company
holds several patents in the United States and a corresponding patent in certain
European countries, which cover certain aspects of its technology. The U.S.
patents expire between 2003 through 2010 and the European patent expires in
2008. There can be no assurance that the Company will develop proprietary
products or technologies that are patentable, that any issued patent will
provide the Company with any competitive advantages or will not be challenged by
third parties, or that patents of others will not have a material adverse effect
on the Company's business.

There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company expects that companies
in the computer and information security market will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
target market grows. Any such claims or litigation may be time-consuming and
costly, cause product shipment delays, require the Company to redesign its
products or require the Company to enter into royalty or licensing agreements,
any of which could have a material adverse effect on the Company's results of
operations and financial condition.

Despite efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information and software that the Company regards as proprietary. To the extent
the Company believes its proprietary rights are being violated, and regardless
of its desire to do so, it may not have adequate financial resources to engage
in litigation against the party or parties who may infringe on its proprietary
technology. In addition, the laws of some foreign countries do not protect
proprietary and intellectual property rights to as great an extent as do the
laws of the United States. There can be no assurance, however, that the
Company's means of protecting its proprietary and intellectual property rights
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.

PRODUCT LIABILITY RISKS. Customers rely on the Company's token-based and
smartcard security products to prevent unauthorized access to their data. A
malfunction of or design defect in the Company's products could result in tort
or warranty claims. The Company does not presently maintain product liability
insurance for these types of claims. In order to reduce the risk of exposure
from such claims, the Company attempts to obtain warranty disclaimers and
liability limitation clauses in its agreements with distributors, resellers and
end-user clients. There can be no assurance, however, that the Company will be
successful in obtaining such provisions in its agreements or that such measures
will be effective in limiting the Company's liability for any such damages. Any
liability for damages resulting from security breaches could be substantial and
would have a material adverse effect on the Company's results of operations and
financial condition. In addition, a well-publicized actual or perceived security
breach involving token-based and/or smartcard security systems could adversely
affect the market's perception of token-based security products in general, or
the Company's products in particular, regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's products, which would have a material adverse effect on the
Company's results of operations and financial condition.

GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. The Company's 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. While the
Company believes that its products are designed to meet the regulatory standards
of foreign markets, any inability to obtain foreign regulatory approvals on a
timely basis could have a material adverse effect on the Company's financial
condition or results of operations.

Certain products of the Company are also subject to export controls under
U.S. law. The Company believes it has obtained or will obtain all necessary
export approvals as required. There can be no assurance, however, that the list
of products and countries for which export approval is required, and the
regulatory policies with respect thereto will not be revised from time to time.
The inability of the

11
<PAGE>

Company to obtain required approvals under these regulations could materially
adversely affect the ability of the Company to make international sales. For
example, U.S. governmental controls on the exportation of encryption technology
prohibit the Company from exporting some of its products with the more
sophisticated data security encryption technology. As a result, foreign
competitors facing less stringent controls may be able to compete more
effectively than the Company in the global data security market. There can be no
assurance that these factors will not have a material adverse effect on the
Company's financial condition or results of operations.

Similarly, Vasco Data Security NV/SA, the Belgian operating subsidiary of
Old VASCO, is subject to export licensing requirements under Belgian law. The
inability of Vasco Data Security NV/SA to obtain required approvals or licenses
under Belgian law also could have a material adverse effect on the Company's
financial condition or results of operations. For additional information on such
export restrictions and licensing requirements under U.S. and Belgian law, see
"BUSINESS -- Competition."

CURRENCY FLUCTUATIONS. The majority of the supply and sales transactions of
the Company are denominated in U.S. dollars, whereas many of the supply and
sales transactions of VDS NV/SA are denominated in various foreign currencies.
In order to reduce the risks associated with fluctuations in currency exchange
rates, VDS NV/SA began in September 1997 to buy U.S. dollars based on three to
six month estimated future needs for U.S. dollars, has developed price lists
denominated in both U.S. dollars and foreign currencies, and endeavors to
denominate its new supply and sales transactions in U.S. dollars. In this
connection, in September 1997 VDS NV/SA purchased $300,000 in United States
dollars to cover purchases of supplies for a six-month period. VDS NV/SA is also
beginning to attempt to match as to timing of delivery, amount of product and
denomination of currency some purchase orders from vendors with sales orders to
customers. See "RISK FACTORS -- Risks of International Operations."

YEAR 2000 CONSIDERATIONS

Many existing computer systems and software products are coded to accept
only two digits entries in the date code field with respect to year. With the
21st century less than two years away, the date code field must be adjusted to
allow for a four digit year. The Company believes that its internal systems are
Year 2000 compliant, but the Company will need to take the required steps to
make its existing products compliant. The total estimated cost of this exercise
is $150,000, with an anticipated completion date of December 31, 1998. To date,
the Company has spent approximately $110,000 in connection with its Year 2000
compliance efforts. There can be no assurance, however, that the Company will
meet its anticipated completion date or that the total cost will not exceed
$150,000. The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to upgrade their current software systems for Year 2000
compliance. This, in turn, could result in reduced funds available to be spent
on other technology applications, such as those offered by the Company, which
could have a material adverse effect on the Company's business and results of
operations.

DEPENDENCE ON KEY PERSONNEL. The Company depends, to a significant degree,
on the efforts of the Company's President, Chief Executive Officer and the
Chairman of its Board of Directors, T. Kendall Hunt, and those other key
personnel employed by or serving as consultants to its subsidiaries, including
John Haggard, Mario Houthooft, Frank Hoornaert, Hyon Im, Jan Valcke and Richard
Vaden. Messr. Hunt, Haggard, Im, Vaden and Gregory T. Apple have entered into
employment agreements with the Company. See "MANAGEMENT -- Employment
Agreements." In addition, Mr. Houthooft, has entered into a consulting agreement
with VDS NV/SA. Key man insurance in the amount of $1.5 million is currently
maintained by the Company on the life of Mr. Hunt but not on any of the other
key personnel. The loss of the services of Mr. Hunt or one or more of its other
key personnel could have an adverse effect on the Company's business and
operating results.

The Company's continued success is also dependent upon its ability to
attract and retain qualified employees to support its future growth. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key employees or that it can attract, assimilate or retain other
highly qualified personnel in the future.

12
<PAGE>

MANAGEMENT AND CONTROL. Control of the Company is largely in the hands of
its Board of Directors, management and T. Kendall Hunt. Based on the number of
shares of Common Stock outstanding on September 28, 1998, the Board of Directors
of the Company and their spouses own beneficially and of record approximately
56.2% (and Mr. Hunt and his family will own beneficially and of record 49.8%) of
the outstanding shares of Common Stock. As the Chairman of the Company Board of
Directors, and Chief Executive Officer and President of the Company, T. Kendall
Hunt will have control over the direction and operation of the Company and with
his family will be able to elect the directors of the Company and to approve
corporate action requiring majority stockholder approval. Such concentration of
control may have an adverse effect on the market price of Common Stock.

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Securityholders. To the extent that any
Warrants are exercised, the Company will receive the proceeds from such
exercises. The Company intends to use the proceeds, if any, from the exercise of
the Warrants for general corporate purposes.

13
<PAGE>

THE COMPANIES

VASCO DATA SECURITY INTERNATIONAL, INC.

The Company is a Delaware corporation which, through its direct and
indirect operating subsidiaries, designs, develops, markets and supports open
standards-based hardware and software security systems which manage and secure
access to data. The Company's hardware products include time-synchronous
response only, challenge/response and time-synchronous challenge/response user
authentication devices, some of which incorporate an electronic signature
feature to guarantee the integrity of data transmissions. These devices are
commonly referred to as security tokens. The Company's security tokens are based
upon the Company's core encryption technology, which utilizes two widely known
and accepted algorithms, Data Encryption Standard ("DES") and Rivest, Shamir,
Adelman ("RSA"). The Company's Cryptech division produces high speed hardware
and software encryption products used both internally for the Company's security
tokens and for OEM vendors requiring real time encryption services. In addition,
the Company offers a smartcard security token that uses the challenge/response
mode and the X.509 certificate authentication standard. The Company's security
tokens are designed to be used with the Vasco Access Control Manager server
software or to be integrated directly into applications. See "BUSINESS" for
further information about the business of the Company.

VASCO CORP.

Old VASCO is a Delaware corporation and a direct subsidiary of the Company.
Currently, Old VASCO is the owner of the two operating subsidiaries as described
below. Following the Merger, however, the existence of Old VASCO will be
terminated and the Company will become the direct owner of such operating
subsidiaries.

SUBSIDIARY OPERATIONS

The Company is the majority owner of Old VASCO. Through its ownership of
Old VASCO, the Company indirectly owns two operating subsidiaries. VASCO Data
Security, Inc. ("VDSI"), a Delaware corporation headquartered in Oakbrook
Terrace, Illinois, is owned directly by Old VASCO. Old VASCO's other operating
subsidiary, VDS NV/SA is a Belgian corporation headquartered in a suburb of
Brussels, Belgium. VDS NV/SA is owned by the Company's European holding company
subsidiary, VASCO Data Security Europe SA ("VDSE"). VDSI and VDS NV/SA are
engaged in the design, development, marketing and support of open
standards-based hardware and software based security systems which manage and
secure access to data and also provide products that permit their customers to
encrypt data.

VDSI. In November 1989, a Utah corporate predecessor of Old VASCO acquired
an option to purchase a controlling interest in ThumbScan, Inc. ("ThumbScan").
Old VASCO acquired a controlling interest in ThumbScan in January 1991, and in
December 1991 Old VASCO increased its holdings in ThumbScan. Old VASCO
subsequently acquired the remaining shares of ThumbScan. In July 1993, ThumbScan
was renamed VASCO Data Security, Inc.

VDS NV/SA. VDS NV/SA is a combination of two European companies (Lintel
Security NV and Digipass SA) acquired by Old VASCO, through VDSE, in 1996, and
accounts for a substantial portion of the Company's consolidated revenues.

ACQUISITION OF LINTEL SECURITY. Effective March 1, 1996, the Company began
a significant expansion of its computer security business by acquiring, through
VDSE, a 15% interest in Lintel Security NV ("Lintel Security"). Lintel Security,
a then-newly formed Belgian corporation, concurrently purchased from Lintel NV,
a Brussels, Belgium based company, certain assets associated with the
development of security tokens and security technologies for personal computers
("PCS"), computer networks and telecommunications systems using DES and RSA
cryptographic algorithms. Old VASCO acquired the remaining 85% of Lintel
Security in June 1996. At the time of acquisition of Lintel NV's assets by
Lintel Security, Lintel NV was a competitor of Old VASCO in Europe. The purchase
price paid for Lintel

14
<PAGE>

Security was approximately $4.4 million, and was paid in cash, shares of Old
VASCO Common Stock, Old VASCO Warrants and notes that include Old VASCO
Conversion Options. All Old VASCO Common Stock, Old VASCO Warrants and notes
given to Lintel NV were exchanged for securities of the Company during the
Exchange Offer.

ACQUISITION OF DIGIPASS. In July 1996, VDSE acquired the stock of Digipass
SA ("Digipass") for an aggregate purchase price of $8.2 million. Digipass, based
in a suburb of Brussels, was also a developer of security tokens and security
technologies for PCS, computer networks and telecommunications systems using the
DES cryptographic algorithm. At the time of acquisition, Digipass was a
competitor of Old VASCO in Europe.

Prior to VDSE's acquisition of Digipass, certain assets and liabilities of
the interactive voice response ("IVR") business of Digiline SA, an integrator of
IVR products based in Belgium, were transferred to Digipass. Digipass' IVR
products are used primarily in telebanking applications and incorporate
authentication and access control technology. Management determined that the IVR
business was not compatible with the Company product strategy, and, therefore,
sold this business during 1997.

In January 1997, Digipass changed its name to VASCO Data Security NV/SA.
Concurrent with this event Lintel Security's operations were consolidated with
those of VDS NV/SA at a single location near Brussels.

BACKGROUND OF THE COMPANY

On or about March 11, 1998, the Company completed the Exchange Offer
pursuant to which the Company offered to exchange one share of Common Stock for
each outstanding share of Old VASCO Common Stock. As a result of the Exchange
Offer, the Company acquired 97.7% of Old VASCO Common Stock and, consequently,
Old VASCO is now a subsidiary of the Company.

The following is a brief summary of the events leading up to and resulting
in the Exchange Offer.

Certain historical corporate actions taken by Old VASCO and its predecessor
entities were not in compliance with applicable corporate law or are not
reflected in proper documentation (collectively these actions are referred to in
this document as "Corporate Matters").

The following is a brief summary of Old VASCO's history and the Corporate
Matters. THE CORPORATE MATTERS, AS WELL AS AN EXTENSIVE DISCUSSION OF THE TYPES
OF THEORIES OF CLAIMS, REMEDIES AND DEFENSES RELATED TO THE CORPORATE MATTERS
WHICH HAVE BEEN IDENTIFIED BY OLD VASCO AND THE COMPANY ARE MORE FULLY DESCRIBED
IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-4 (FILE NO. 33-35563) FILED
WITH THE COMMISSION ON SEPTEMBER 12, 1997.

Old VASCO's history dates back to May 1984, when VASCO Corp., a
predecessor, but distinct legal entity ("Original VASCO"), of Old VASCO was
incorporated in the State of Delaware. In September 1986, Original VASCO
reorganized with a publicly held Utah company, which later was combined with Old
VASCO in 1990. The documentation and procedure surrounding these corporate
transactions, as well as other corporate actions taken by Old VASCO and its
predecessors, appear to have been irregular and not in full compliance with
requisite corporate law. Included among the following are all of the known
instances of material non-compliance:

-- the failure by Original VASCO to document whether an amendment to
its Certificate of Incorporation was duly authorized or to file a
Certificate of Amendment with the Delaware Secretary of State to amend its
Certificate of Incorporation in December 1984 to effect a three-for-one
stock split, to increase the 50,000 authorized shares of its common stock
to 150,000 authorized common shares, and to provide for 600,000 shares of
non-voting common stock prior to purportedly effecting the stock split and
issuing a number of such non-voting common shares which cannot be
determined due to insufficient documentation concerning any purported
issuance of such non-voting common shares;

-- the failure of Original VASCO to document whether it afforded its
stockholders, in connection with any issuances of Original VASCO capital
stock subsequent to the initial issuance of 50,000 common shares in
connection with the incorporation of Original VASCO in May 1984, the

15
<PAGE>

preemptive rights to purchase, upon the issuance or sale of Original VASCO
stock (or securities convertible into Original VASCO stock), shares (or
securities) in proportion to the amount of Original VASCO common stock then
owned by such holder, subject to conditions and time limitations prescribed
(and at a price determined as permitted by law), by Original VASCO's Board
of Directors, as provided for in the Original VASCO Certificate of
Incorporation;

-- the failure by Original VASCO to document whether director and
stockholder approval was obtained for an amendment to its Certificate of
Incorporation increasing the number of authorized shares of common stock to
6,900,000 shares in September 1986;

-- the failure to document the approval by Old VASCO's directors or
stockholders of the September 1986 reorganization through the share
exchange undertaken by Original VASCO and Ridge Point Enterprises, Inc.
"Ridge Point"), a Utah corporation which concurrently changed its name to
Vasco Corp. ("VASCO Utah"), the failure to document whether all
stockholders of Original VASCO voluntarily exchanged their shares for
shares of Ridge Point/VASCO Utah, and the failure to document the mechanics
of the exchange of 6,900,000 common shares of Original VASCO for 12,800,000
common shares of Ridge Point/VASCO Utah;

-- the failure to properly document any stockholder approval of the
dissolution of Original VASCO and to document actions taken to dissolve,
liquidate and wind-up Original VASCO in August 1987, and the failure to
vest effectively title and ownership in VASCO Utah of Original VASCO's
assets and to document the assumption by VASCO Utah of Original VASCO's
liabilities;

-- the purported issuance of 317,181 shares of preferred stock in
November 1989 by VASCO Utah at a time when the issuance of preferred shares
was not authorized by VASCO Utah's charter;

-- the administrative dissolution of VASCO Utah in July 1990 prior to
the intended merger transaction with Old VASCO and before the filing of a
Certificate of Merger with the State of Delaware in August 1990;

-- the failure of VASCO Utah to document whether it afforded its
stockholders the appraisal rights provided for by Utah law in connection
with the intended 1990 merger of VASCO Utah with Old VASCO;

-- the purported issuance of 317,181 shares of preferred stock by Old
VASCO in connection with the 1990 merger of VASCO Utah with Old VASCO when,
although Old VASCO's Certificate of Incorporation authorized 500,000 shares
of preferred stock, the rights, powers and preferences of such stock were
not specified in Old VASCO's Certificate of Incorporation and its
Certificate of Incorporation did not provide its Board of Directors the
power to designate such rights, powers and preferences;

-- the following procedural irregularities which call into question
the validity of the intended 1990 merger of VASCO Utah and Old VASCO, as
well as Old VASCO's title to the assets of VASCO Utah purportedly succeeded
to by Old VASCO by virtue of the merger:

(1) the incorporation of Old VASCO after the date of the 1990 plan of
merger,

(2) Old VASCO's approval of the plan of merger, including approval of
the plan of merger prior to the incorporation of Old VASCO, the lack of
documented stockholder approval as called for by the plan of merger and the
effectiveness of the approval by Old VASCO's then Board of Directors,

(3) the authorization and issuance of shares of common and preferred
stock by Old VASCO pursuant to the merger,

(4) the adoption of Old VASCO's initial bylaws, the appointment of Old
VASCO's initial directors and the election of its initial officers,

(5) the administrative dissolution of VASCO Utah in July 1990 prior to
the filing of a Certificate of Merger with the State of Delaware in August
1990, and

16
<PAGE>

(6) the failure to file Articles of Merger with the State of Utah in
connection with the intended merger of VASCO Utah and Old VASCO in August
1990; and

-- beginning in 1985, the failure to: document approval by the board
of directors and stockholders of Old VASCO and its predecessors of stock
option plans; specify and authorize the number of shares of stock to be
subject to such plans; reserve the number of shares subject to such plans;
document the authorization for the grant of options pursuant to such plans
and the issuance of shares upon exercise of such options; and design such
plans in a manner that would ensure options granted thereunder would be
treated as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended.

The Corporate Matters identified were brought to the attention of Old VASCO
by its independent legal counsel, who, commencing in 1996, reviewed the
historical corporate proceedings of Old VASCO and its predecessors.

While the Corporate Matters did not hinder Old VASCO's business operations,
they presented problems in obtaining legal opinions as to compliance with
applicable corporate law governing prior reorganizations and certain prior
issuances of Old VASCO's capital stock. The inability to obtain a legal opinion
does not mean that the transactions were invalid but that a legal opinion as to
their compliance with applicable corporate law could not be given. Opinions as
to validity of the issuance of all outstanding shares might have been required
in future financings, stock offerings or other transactions that could be
beneficial to security holders. As a result, the Board of Directors of Old VASCO
felt that the Corporate Matters may hinder or preclude the Old VASCO in its
future efforts to raise capital. Therefore, the Board of Directors of Old VASCO
decided that by conducting an exchange of the outstanding Old VASCO securities
for securities of the Company, efforts to raise capital in the future by the
Company would be facilitated.

As part of the Exchange Offer, and in order to attempt to minimize any
potential claims from the Corporate Matters, those Old VASCO security holders
who participated in the Exchange Offer also executed a release and waiver of the
Corporate Matter claims.

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion is based upon the Company's consolidated results
of operations for the three and six months ended June 30, 1997 as compared to
Old VASCO consolidated results of operations for the three and six months ended
June 30, 1998.

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

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenue for the six months ended
June 30, 1997 and 1998 and the years ended December 31, 1995, 1996 and 1997.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Total revenue ......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................................... 78.1 57.6 51.1 50.4 46.9
----- ----- ----- ----- -----
Gross profit .......................................... 21.9 42.4 48.9 49.6 53.1
Operating costs
Sales and marketing .................................. 6.6 13.8 27.5 29.7 31.4
Research and development ............................. 6.5 5.6 14.6 10.5 13.5
General and administrative ........................... 23.1 35.8 38.8 32.9 16.2
Acquired-in-process research and development ......... -- 72.1 -- -- --
----- ----- ----- ----- -----
Total operating costs ................................ 36.2 127.3 80.9 73.1 61.1
----- ----- ----- ----- -----
Operating (loss) income ............................... (14.4) (84.9) (32.0) (23.5) ( 8.0)
Interest expense ...................................... ( 2.0) ( 3.4) ( 9.3) ( 6.0) (14.3)
Other expense, net .................................... -- ( 0.4) ( 1.8) ( 0.2) ( 1.6)
----- ----- ----- ----- -----
Income (loss) before income taxes ..................... (16.4) (88.8) (43.1) (29.7) (23.9)
Provision (benefit) for income taxes .................. ( 6.8) 1.4 4.9 5.5 2.1
----- ----- ----- ----- -----
Net (loss) income ..................................... ( 9.6) (90.7) (48.0) (35.2) (26.0)
===== ===== ===== ===== =====
</TABLE>

The following discussion is based upon the Company's consolidated results
of operation for the nine months ended June 30, 1997 and 1998 and for the years
ended December 31, 1995, 1996 and 1997.

18
<PAGE>

References to "VASCO NA" mean the Compnay and VDSI, excluding the acquisition of
Lintel Security and Digipass. References to "VASCO Europe" mean the operation of
Lintel Security and Digipass following their acquisition by the Company.
(Percentages in the discussion are rounded to the closest full percentage
point.)

COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998

The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements for the three and six months
ended June 30, 1997 and 1998.

Revenues

Revenues for the three months ended June 30, 1998 were $3,525,000, an
increase of $481,000, or 16%, as compared to the three months ended June 30,
1997. This increase can be attributed to increased demand related to the
Company's newest product, Digipass 300, as well as follow-on orders received
from current customers.

For the six months ended June 30, 1998, revenues decreased 7% to $6,138,000
from $6,592,000 in 1997. This decrease can be attributed, in part, to the
introduction of the Digipass 300 during the first quarter of 1998. Due to the
anticipated release of this product, management believes that many customers
held off ordering existing products, thus curtailing revenue until the shipment
of Digipass 300, which began mid-way through the first quarter of 1998. In
addition, this decrease was due to a reduction in shipments to Concord-Eracom
Nederland BV, the Company's largest customer, during the three months ended
March 31, 1998. However, during 1998, Concord-Eracom Nederland BV has placed
additional orders of approximately $3,750,000. These orders are expected to be
shipped during the second half of 1998 and 1999.

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 1998 was $1,656,000,
an increase of $282,000, or 21%, as compared to the three months ended June 30,
1997. This increase is consistent with the increase in revenues for the same
period.

For the six months ended June 30, 1998, cost of goods sold decreased 13% to
$2,877,000 from $3,296,000 in 1997. This decrease is consistent with the
decrease in revenues for the same period. The cost of goods sold for security
products, however, decreased as a percentage of revenues at a quicker pace than
revenues for security products due to efficiencies realized in the manufacture
of the products.

Gross Profit

The Company's gross profit for the three months ended June 30, 1998 was
$1,869,000, an increase of $199,000, or 12%, as compared to the three months
ended June 30, 1997. This represents a gross margin of 53% as compared to 55%
for the same period in 1997. The decrease reflects the increased involvement of
the Company's indirect channel during the second quarter of 1998, which results
in a slightly lower margin.

For the six months ended June 30, 1998, gross profit was $3,260,000, a
decrease of $35,000, or 1%, as compared to 1997. This represents a gross margin
of 53% as compared to 50% for the same period in 1997. Margins have remained
steady during 1998. With the introduction of the Digipass 300 during the first
quarter of 1998, the Company anticipates improved gross margins as acceptance of
the Digipass 300 increases.

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended June 30, 1998 were
$1,047,000, an increase of $175,000, or 20%, over the three months ended June
30, 1997. Selling and marketing expenses also increased 20% in the first six
months of 1998 to $1,929,000 from $1,603,000 in the first six months of 1997.
The increases are attributed to increased sales efforts including, in part,
increased travel costs and an increase in marketing activities, including the
development of a company-wide marketing program and other efforts.

19
<PAGE>

Research and Development

Research and development costs for the three months ended June 30, 1998
were $391,000, an increase of $125,000, or 47%, as compared to the three months
ended June 30, 1997. Research and development costs increased 54% in the first
six months of 1998 to $828,000 from $537,000 in the first six months of 1997.
The increases are due to the addition of R&D personnel, in both the U.S. and
Europe.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30,
1998 were $418,000, a decrease of $545,000, or 57%, compared to the three months
ended June 30, 1997. General and administrative expenses decreased 45% in the
first six months of 1998 to $994,000 from $1,802,000 in the first six months of
1997. The decreases were due to economies of scale being realized as a result of
the combination of the operations of Lintel Security and VDS during 1997, as
well as a favorable experience with regard to bad debt recovery and the recovery
of legal fees associated with the Exchange Offer. In addition, the Company was
preparing for the Exchange Offer during 1997, thus generating significant legal
and accounting expenses.

Interest Expense

Interest expense for the three months ended June 30, 1998 was $670,000,
compared to $282,000, an increase of 138% over the same period of 1997. Interest
expense increased 91% in the first six months of 1998 to $880,000 from $460,000
in the first six months of 1997. The increases can be attributed to an increased
borrowing base during 1998.

Operating Income (Loss)

The Company's operating income for the three months ended June 30, 1998 was
$14,000, compared to an operating loss of $430,000 for the three months ended
June 30, 1997. The Company had an operating loss of $491,000 for the first six
months of 1998, as compared to $647,000 for the first six months of 1997, a
decrease of 24%.

Liquidity and Capital Resources

Since inception, the Company has financed its operations through a
combination of the issuance of equity securities, private borrowings, short-term
commercial borrowings, cash flow from operations, and loans from Mr. T. Kendall
Hunt, its Chief Executive Officer and one of the stockholders of the Company's
original corporate predecessor.

The Company's cash and cash equivalents were $2,246,000 at June 30, 1998,
which is an increase of approximately $348,000 from $1,898,000 at December 31,
1997. As of June 30, 1998, the Company had working capital of $1,425,000.

Capital expenditures during the first six months of 1998 were $160,000 and
consisted primarily of computer equipment and office furniture and fixtures.

The Company intends to seek acquisitions of businesses, products and
technologies that are complementary or additive to those of the Company. While
from time to time the Company engages in discussions with respect to potential
acquisitions, the Company has no present plans, commitments or agreements with
respect to any such acquisitions as of the date of this Form 10-Q and currently
does not have excess cash for use in making acquisitions. There can be no
assurance that any such acquisitions will or will not be made.

The Company believes that its current cash balances and anticipated cash
generated form operations will be sufficient to meet its anticipated cash needs
through December 31, 1998. Continuance of the Company's operations beyond
December 31, 1998, however, will depend on the Company's ability to obtain
adequate financing. In March 1998, the Company entered into a loan agreement in
the amount of $3 million with Lernout & Hauspie Speech Products N.V. ("L&H");
the funding of this occurred in April 1998. The loan bears interest at the prime
rate plus 1%, payable quarterly, and matures on January 4, 1999.

20
<PAGE>

The Company has previously entered into engagement letters with Banque
Paribas S.A. and Generale Bank dated June 20, 1997 and June 26, 1997,
respectively, for a possible future public offering. Further, the Company has
had preliminary discussions regarding other possible debt or equity financing.
There can be no assurance, however, that the Company will be successful in
effecting a public offering or obtaining other additional financing.

1997 COMPARED TO 1996

The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements for the years ended December 31,
1997 and 1996.

Revenues

The Company's consolidated revenues for the year ended December 31, 1997
were $12,302,000, an increase of $2,110,000, or 21%, as compared to the year
ended December 31, 1996. VDS NV/SA contributed $9,518,000, or 77%, of total
consolidated revenues, with VASCO NA contributing the remaining $2,784,000, or
23%. Revenues (and other operating results) attributable to VDS NV/SA for 1996
are included only from the time of acquisition of Lintel Security and of
Digipass.

VASCO NA's revenues were $2,784,000 for 1997, a decrease of $2,034,000, or
42%, as compared to 1996 and accounted for 23% of consolidated revenues in 1997.
The decrease can be attributed, in part, to a temporary reduction in shipments
to Concord-Eracom Nederland BV during 1997. Concord-Eracom Nederland BV
represented approximately $4,200,000 in revenue for 1996, as compared to
$2,000,000 in 1997. However, during 1998 Concord-Eracom Nederland BV has placed
an additional order with VASCO NA of approximately $1,250,000. VPS, the former
technical and training unit which was sold in August of 1996, had revenues of
$204,000 in 1996 and accounted for 4% of the Company's revenues in 1996.

Cost of Goods Sold

The Company's consolidated cost of goods sold for the year ended December
31, 1997 was $6,287,000, an increase of $416,000, or 7%, as compared to the year
ended December 31, 1996. This increase is primarily attributable to the
inclusion of VDS NV/SA for the entire year 1997. VDS NV/SA's cost of goods sold
was $4,929,000, accounting for 78% of the consolidated cost of goods sold.

VASCO NA's cost of goods sold was $1,358,000 in 1997, representing a
decrease of $1,135,000, or 46%, from 1996. This decrease is consistent with the
42% decrease in revenues for the same period and, as discussed above under
"Revenues," is due to a temporary reduction in shipments to Concord-Eracom
Nederland BV during 1997. However, the cost of goods sold for security products
decreased as a percentage at a slightly quicker pace than revenues for security
products. This is due to certain improvements in the manufacture of the
products, as well as economies of scale being realized as the 1996 acquisitions
of Lintel Security and Digipass were fully integrated.

Gross Profit

The Company's consolidated gross profit for the year ended December 31,
1997 was $6,015,000, an increase of $1,694,000, or 39%, over 1996. This
represents a consolidated gross margin of 49%, as compared to 1996's
consolidated gross margin of 42%. VDS NV/SA contributed $4,589,000 to the
consolidated gross profit representing a gross margin of 48% as compared to 37%
for the prior year. VASCO NA contributed $1,426,000 to the 1997 gross profit as
compared to $2,325,000 for 1996, a decrease of $899,000 or 39%. This represented
a gross margin of 51% as compared to 48% for the prior year. The increase in
gross margin is due to certain improvements in the manufacture of the products,
as well as economies of scale being realized as the 1996 acquisitions of Lintel
Security and Digipass were fully integrated.

Sales and Marketing Expenses

Consolidated sales and marketing expenses for the year ended December 31,
1997 were $3,381,000, an increase of $1,976,000, or 141%, over 1996. The
increase can be attributed to the addition of VDS NV/SA for the full year 1997;
increased sales efforts including, in part, increased travel costs; an increase
in marketing activities, including print media campaigns and other efforts, and
an increased presence at trade shows.

21
<PAGE>

Research and Development

Consolidated R&D costs for the year ended December 31, 1997 were
$1,802,000, an increase of $1,228,000, or 214%, as compared to the year ended
December 31, 1996. R&D costs represented 15% of consolidated revenues for 1997
as compared to 6% for 1996. The increase is due to the addition of R&D
headcount, both in the U.S. and Europe, and to the acquisition of the VACMan
product from Shiva Corporation and the related integration efforts surrounding
it. R&D efforts are undertaken by both VASCO NA and VDS NV/SA on behalf of the
consolidated group of companies. Whereas VASCO NA is primarily responsible for
the development of software products, VDS NV/SA is responsible for hardware
development. Consequently, management of the Company believes it is not
meaningful to address R&D costs separately at the operating company level.

The Company expensed, as cost of goods sold, $0 and $180,000 in 1997 and
1996, respectively, reflecting the amortization of capitalized development
costs. As of December 31, 1997 and 1996, the Company did not carry any product
development costs on its books as an asset. There were no product development
costs capitalized in 1997 or 1996.

General and Administrative Expenses

Consolidated general and administrative expenses for the year ended
December 31, 1997 were $4,768,000, an increase of $1,120,000, or 31%, over 1996.
The majority of this increase can be attributed to the legal, accounting and
printing costs associated with the preparation of the Exchange Offer held by the
Company during the first quarter of 1998. In addition, the full-year impact of
the Lintel Security and Digipass acquisitions and the amortization of
intangibles associated with those acquisitions increased general and
administrative expenses in 1997.

Acquired In-process Research and Development

During 1996, the Company expensed $7,351,000 pertaining to the in- process
research and development acquired in the Lintel Security and Digipass
acquisitions. Based upon independent appraisals, approximately 67% of the
acquisition premium has been expensed in accordance with U.S. Generally Accepted
Accounting Principles. As of December 31, 1997, there remains a net balance of
$2,314,000 representing the intangible assets related to the acquisitions, which
are carried on the Company's books and amortized over an additional 18-66
months. Amortization expenses amounted to $1,083,000 and $440,000 for the years
ended December 31, 1997 and 1996, respectively.

Operating Loss

The Company's consolidated operating loss for the year ended December 31,
1997 was $3,935,000, compared to the consolidated operating loss of $8,658,000
for 1996. Of the 1997 loss, VASCO NA contributed a loss in the amount of
$4,130,000 and VDS NV/SA contributed income in the amount of $195,000. The 1996
consolidated operating loss included a write-off of acquired in-process research
and development in the amount of $7,351,000 and $440,000 of amortization expense
relating to intangible assets in 1996. The 1996 operating loss, before the
write- off and the amortization, was $867,000.

The Company's 1997 operating loss, excluding the amortization of
intangibles, was attributable to continued investment in R&D (primarily for
Digipass 300), sales and marketing investments in North America, the expenses
for development of corporate infrastructure, such as sales personnel and
administrative staff and office equipment, and the legal, accounting and
printing costs incurred during 1997 associated with the preparation of the
Exchange Offer held by the Company during the first quarter of 1998.

Interest Expense

Consolidated interest expense in 1997 was $1,148,000 compared to $346,000
in 1996. The increase can be attributed to average borrowings in 1997 being
substantially above those levels of the previous year. See "Liquidity and
Capital Resources" below.

22
<PAGE>

Income Taxes

VASCO recorded tax expense for the year ended December 31, 1997 of $200,000
for VASCO NA and $407,000 for VDS NV/SA. The tax expense recorded for VASCO NA
represents the revaluation (write-down) of deferred tax assets. As of December
31, 1997, VASCO reflected a net deferred tax asset of $83,000, which represented
the amount that management deemed would more likely than not be realized. The
net deferred tax asset was net of a valuation allowance of $831,000, which was
established during 1996 and adjusted during 1997, considering the effects of
reversing deferred tax liabilities, projected future earnings, which were
revised substantially as a result of the acquisitions of Lintel Security and
Digipass, and tax planning strategies.

At December 31, 1997, the Company had net operating loss carryforwards of
$4,722,000 and foreign net operating loss carryforwards approximating
$1,025,000, which may be used to offset future taxable income of VASCO generated
in the United States. The net operating loss carryforwards expire in various
amounts beginning in 2002 and continuing through 2012.

Dividends and Accumulated Deficit

The Company paid dividends of $82,000 and $108,000 during the years ended
December 31, 1997 and 1996, respectively. These dividend payments were
attributable to 9,000 shares of the Company's Series B Preferred Stock issued in
1994. During 1997, all 9,000 shares of VASCO Series B Preferred Stock were
converted into Old VASCO's Common Stock. The Company began 1997 with an
accumulated deficit of $9,903,000. As a result of the 1997 net loss, this
deficit has increased to $15,902,000. The Company's 1997 increase in accumulated
deficit can be attributed primarily to increased legal, accounting and printing
costs incurred during 1997 associated with the Exchange Offer held by the
Company during the first quarter of 1998, the amortization of intangibles
related to the 1996 acquisitions of Lintel Security and Digipass, strategic
marketing programs implemented during 1997 and a product acquisition.

1996 COMPARED TO 1995

The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements for the years ended December 31,
1996 and 1995.

Revenues

The Company's consolidated revenues for the year ended December 31, 1996
were $10,192,000, an increase of $6,497,000, or 176%, as compared to the year
ended December 31, 1995. VDS NV/SA contributed $5,374,000, or 53%, of total
consolidated revenues. Of the $5,374,000 total revenues contributed by VDS
NV/SA, $5,180,000, or 96%, represent data security product revenues, with the
remaining $194,000, or 4%, representing revenues from the IVR products. Revenues
(and other operating results) attributable to VDS NV/SA are included only from
the time of acquisition of Lintel Security and of Digipass.

Taking into account Lintel Security and Digipass on a full year basis for
each of 1995 and 1996, the Company's consolidated revenues on a pro forma basis
were $11,623,000 and $13,654,000 for the years ended December 31, 1995 and 1996,
respectively. This represents an increase of $2,031,000, or 17%.

VDS NV/SA revenues were $4,818,000 for 1996, an increase of $1,118,000, or
30%, as compared to 1995 and accounted for 47% of consolidated revenues in 1996.
Security product sales increased $2,157,000 to $4,614,000 in 1996, representing
a 88% increase over 1995. Conversely, VPS, the former technical and training
unit which was sold in August of 1996, had revenues of $204,000 in 1996,
representing a decrease of $1,034,000, or 84%, for the comparable period in
1995. VPS accounted for just 4% of the Company's revenues in 1996, down from 33%
in 1995.

Cost of Goods Sold

Consolidated cost of goods sold for the year ended December 31, 1996 was
$5,871,000, an increase of $2,984,000, or 103%, as compared to the year ended
December 31, 1995. This increase is primarily attributable to the acquisition of
VDS NV/SA in 1996 and offset to some extent by a decrease in VASCO NA's combined
cost of goods sold. VDS NV/SA cost of goods sold was $3,378,000, accounting for
58% of the consolidated cost of goods sold.

23
<PAGE>

The Company's consolidated cost of sales on a pro forma basis, i.e.,
including Lintel Security and Digipass for the entire year, were $7,422,000 and
$7,460,000 for the years ended December 31, 1995 and 1996, respectively. This
represents an increase of $38,000.

VASCO NA's cost of goods sold was $2,493,000 in 1996, representing a
decrease of $394,000, or 14%, from 1995. This decrease was primarily a result of
a decrease of $814,000, attributable to VPS's operations prior to its disposal.
This was partially offset by an increase in cost of goods sold related to
security products of $420,000. VASCO NA's cost of goods sold for security
products was $2,453,000 in 1996, as compared to $2,033,000 in 1995, representing
an increase of 21%. The cost of goods sold for security products increased as a
percentage less than revenues for security products. This is due to certain
non-recurring costs related to capitalized development costs (approximately
$350,000) and inventory write-downs (approximately $100,000) included in the
cost of goods sold for 1995.

The non-recurring charge for capitalized development costs in the fourth
quarter of 1995 related to several PC security products that were not expected
to generate future revenues. In addition, two authentication products were
deemed to have a shorter useful life than originally estimated resulting in the
acceleration of amortization expense as a result of the change in estimate. The
useful lives were reduced due to technological advances in the market, as well
as the Company's development activities with regard to its AKIII successor
product.

The non-recurring inventory write-downs resulted in the fourth quarter of
1995 from managements' review of discontinued products and various electronic
components. As a result of this review, reserves were established to write-down
the inventory to its estimated net realizable value.

Gross Profit

The Company's consolidated gross profit for the year ended December 31,
1996 was $4,321,000, an increase of $3,513,000, or 435%, over 1995. This
represents a consolidated gross margin of 42%, as compared to 1995's
consolidated gross margin of 22%. VDS NV/SA contributed $1,996,000 to the
consolidated gross profit representing a gross margin of 37%. VASCO NA
contributed $2,325,000 to the 1996 gross profit as compared to $808,000 for
1995, an increase of $1,517,000 or 188%. Data security products accounted for
93% of VASCO NA's 1996 gross profit due to the reduction in VPS activity and the
eventual disposition of VPS during the year. Data security products only
accounted for 57% of gross profit during 1995, with VPS accounting for the
remaining 43% of gross profit.

Assuming that the Company had acquired Lintel Security and Digipass as of
January 1, 1995, the Company's consolidated gross profit on a pro forma basis
was $4,201,000 and $6,194,000 for the years ended December 31, 1995 and 1996,
respectively. This represents an increase of $1,993,000, or 47%, and a gross
margin of 36% and 45% for 1995 and 1996, respectively.

VASCO NA's gross margin increased in 1996 to 46% from 22% in 1995. This is
attributable to 1995 non-recurring costs related to capitalized development
costs and write-down of certain inventory, and increased sales of higher margin
security products as opposed to lower margin VPS services.

Sales and Marketing Expenses

Consolidated sales and marketing expenses for the year ended December 31,
1996 were $1,405,000, an increase of $1,160,000, or 473%, over 1995. Of the
total increase, $548,000, or 47%, can be attributed to the addition of VDS
NV/SA. Sales and marketing expenses increased by $612,000, or 250%, for VASCO
NA. The increase for VASCO NA can be attributed to increased sales efforts,
including, in part, the addition of four sales people, and increased travel
costs; an increase in marketing activities, including print media campaigns and
other efforts, and an increased presence at trade shows.

Research and Development

Consolidated R&D costs for the year ended December 31, 1996 were $575,000,
an increase of $333,000, or 138%, as compared to the year ended December 31,
1995. R&D costs represented 6% of consolidated revenues for 1996, approximately
the same percentage as 1995. R&D efforts are under-

24
<PAGE>

taken by both VASCO NA and VDS NV/SA on behalf of the consolidated group of
companies. Whereas VASCO NA is primarily responsible for the development of
software products, VDS NV/SA is responsible for hardware development.
Consequently, management of the Company believes it is not meaningful to address
R&D costs separately at the operating company level.

The Company expensed, as cost of goods sold, $180,000 and $445,000 in 1996
and 1995, respectively, reflecting the amortization of capitalized development
costs. In the fourth quarter of 1995 the Company accelerated the amortization of
capitalized development costs to reflect an adjustment to the estimated economic
life of certain products. The accelerated portion of 1995 amortization amounted
to approximately $350,000.

Net product development costs carried on the Company's books as an asset
were $0 and $157,000 at December 31, 1996 and December 31, 1995, respectively.
There were no product development costs capitalized in 1996 or 1995.

General and Administrative Expenses

Consolidated general and administrative expenses for the year ended
December 31, 1996 were $3,648,000, an increase of $2,793,000, or 326%, over
1995. Of the total increase, $1,426,000, or 51%, can be attributed to the
addition of VDS NV/SA. General and administrative expenses increased by
$1,367,000, or 160%, for VASCO NA. The increase for VASCO NA can be attributed
to an increase in administrative infrastructure to support the efforts of other
areas of the Company, as well as amortization of intangibles associated with the
acquisitions of Lintel Security and Digipass.

Acquired In-process Research and Development

The Company has expensed, as an operating expense, $7,351,000 pertaining to
the in-process research and development acquired in the Lintel Security and
Digipass acquisitions. Based upon independent appraisals, approximately 67% of
the acquisition premium has been expensed in accordance with GAAP. As of
December 31, 1996, there remains $3,372,000 of intangible assets related to the
acquisitions which will be carried on the Company's books and be amortized over
an additional 30 - 78 months. As noted above, $440,000 of the intangible assets
were amortized to expense in 1996.

Operating Loss

The Company's consolidated operating loss for the year ended December 31,
1996 was $8,658,000, compared to the consolidated operating loss of $534,000 for
1995. The 1996 consolidated operating loss included a write-off of acquired
in-process research and development in the amount of $7,351,000 and the $440,000
of intangible assets amortized to expense in 1996. The operating loss, before
the write-off and the amortization of intangibles expensed, was $867,000. Of
this amount, VASCO NA contributed a loss of $911,000 and VDS NV/SA contributed
net operating income of $44,000.

The Company's 1996 operating loss, before the write-off of acquired
in-process research and development and the amortization of intangibles
expensed, was attributable to continued investment in R&D (primarily for
Digipass 300), sales and marketing investments in North America, one-time
professional fees associated with the acquisitions of Lintel Security and
Digipass, the expenses for development of corporate infrastructure, such as
sales personnel and administrative staff and office equipment, and, in general,
the costs associated with consolidating and assimilating the Lintel Security and
Digipass acquisitions.

Taking into account the results of Lintel Security and Digipass for the
full fiscal years, the Company's consolidated operating loss on a pro forma
basis was $339,000 and $7,868,000 for the years ended December 31, 1995 and
1996, respectively. This represents an increase of $7,529,000. This increase is
related principally to the write-off of in-process research and development
acquired in conjunction with the acquisitions of Lintel Security and Digipass.

25
<PAGE>

Interest Expense

Consolidated interest expense in 1996 was $346,000 compared to $74,000 in
1995. The increase can be attributed to average borrowings in 1996 being
substantially above those levels of the previous year. See "Liquidity and
Capital Resources" below.

Net Loss Before Taxes

As a result of the above factors, the Company reported a net loss before
taxes of $9,047,000 for the year ended December 31, 1996. This compares to a net
loss before taxes of $608,000 for the previous year. The pretax loss was
$1,206,000 for VASCO NA, with VDS NV/SA posting pretax income of $21,000. The
remainder of the loss, $7,862,000, was attributed to write-off of acquired
in-process research and development of $7,351,000, the $440,000 of intangibles
expensed and $71,000 for interest expense.

The Company's consolidated net loss before taxes on a pro forma basis
(including Lintel Security and Digipass for the full 1995 and 1996 fiscal year
periods) was $380,000 and $8,397,000 for the years ended December 31, 1995 and
1996, respectively. This represents an increase of $8,017,000, due primarily to
the write-off of in-process research and development described above, or 2110%.

Income Taxes

The Company recorded tax expense for the year ended December 31, 1996 of
$162,000 for VASCO NA and $32,000 for VDS NV/SA. The tax expense recorded for
VASCO NA represents the revaluation (write-down) of deferred tax assets. As of
December 31, 1996, the Company reflected a net deferred tax asset of $283,000,
which represented the amount that management deemed would more likely than not
be realized. The net deferred tax asset was net of a valuation allowance of
$631,000, which was established during 1996, considering the effects of
reversing deferred tax liabilities, projected future earnings, which were
revised substantially as a result of the acquisitions of Lintel Security and
Digipass, and tax planning strategies.

The Company has net operating loss carryforwards of $1,626,000 as of
December 31, 1996, which may be used to offset future taxable income of the
Company generated in the United States. The net operating loss carryforwards
expire in various amounts beginning in 2010 and continuing through 2011.

Dividends and Accumulated Deficit

The Company paid dividends of $108,000 in each of 1996 and 1995. These
dividend payments were attributable to 9,000 shares of the Company's Series B
Preferred Stock issued in 1994. The Company began 1996 with an accumulated
deficit of $554,000. As a result of the 1996 net loss, this deficit has
increased to $9,903,000.

The Company's 1996 loss before taxes, the resulting net loss after taxes,
and the resulting increase in accumulated deficit, can be attributed primarily
to the acquisitions of Lintel Security and Digipass and the write-off of
acquired in-process research and development. The write-off of acquired
in-process research and development accounted for 81% of the Company's 1996 loss
before taxes.

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<PAGE>

BUSINESS

GENERAL

The Company designs, develops, markets and supports open standards-based
hardware and software security systems which manage and secure access to
information assets. The Company's hardware products include time-synchronous
response only, challenge/response and time-synchronous challenge/ response user
authentication devices, some of which incorporate an electronic digital
signature feature to guarantee the integrity of data transmissions. These
devices are commonly referred to as security tokens.

The Company's security tokens are based upon its core encryption
technology, which utilizes two widely known and accepted algorithms, DES and
RSA. The Company's Cryptech division produces high speed hardware and software
encryption products used both internally for its security tokens and for
original equipment manufacturers ("OEM") vendors requiring real time encryption
services. In addition, the Company has introduced a smartcard security token
that uses the challenge/response mode and the X.509 certificate authentication
standard.

The Company's security tokens are designed to be used with the VASCO Access
Control Manager ("VACMan") server software or to be integrated directly into
applications. Together, the Company's software and hardware products provide
what it believes is an economical state-of-the-art authentication, authorization
and accounting security system.

As of July 31, 1998, the Company has over 2.2 million security token
devices, its primary product line, in use. The Company's security products are
sold primarily to value-added resellers and distributors, and to a lesser extent
end-users.

The Company has embarked upon an aggressive campaign to expand its
distributor and reseller network. Distributors and resellers that have entered
into agreements with the Company's operating subsidiaries include, among others,
Concord-Eracom Nederland BV, Protect Data Norge AS, Sirnet AB, All Tech Data
Systems, Inc., Clark Data Systems, Inc. and HUCOM, Inc.

Representative end-users of the Company's products include ABN-AMRO Bank,
Generale Bank, Artesia Bank N.V. (formerly Banque Paribas Belgigue S.A.),
Rabobank, S-E Banken, Volvo Data North America, Inc., France Telecom, Manitoba
Telephone and Andrew Corp.

INDUSTRY BACKGROUND

THE DATA SECURITY INDUSTRY. The increasing use and reliance upon
proprietary or confidential data by businesses, government and educational
institutions that is accessible remotely by users, together with the growth in
electronic commerce, has made data security a paramount concern. The Company
believes that data security concerns will spur significant growth in the demand
for both enterprise and consumer security solutions.

ENTERPRISE SECURITY. With the advent of personal computers and distributed
systems in the form of wide area networks ("WANs"), intranets which connect
users in disparate facilities, local area networks ("LANs"), which connect users
located in a single facility and the public network known as the Internet/ World
Wide Web (the "Internet"), and 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. As a
result of the increased number of users having direct and remote access to
enterprise networks and data, including a growing number of mobile computer
users and telecommuters that perform some or all of their work from home or
other remote locations, data has become increasingly vulnerable to unauthorized
access.

Unauthorized access can range from users who are authorized to access
portions of an enterprise's computing resources accessing unauthorized portions,
to hackers who have no legitimate access breaking into a network and stealing or
corrupting data. The consequences of such unauthorized access, which can often
go undetected, can range from theft of proprietary information or other assets
to the alteration or destruction of stored data. As a result of unauthorized
access stemming from the increased use of

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<PAGE>

enterprise-wide computing and remote access, network security has become a
primary concern to most companies that use and rely on data. This increased
attention to data security has stimulated demand for data security products. The
Company believes that enterprises are seeking solutions which will continue to
allow them to expand access to data while maintaining adequate security.

CONSUMER SECURITY. In addition to the need for enterprise-wide security,
the proliferation of PCs in both home and office, combined with widespread
access to the Internet, have created significant opportunities for electronic
commerce such as electronic bill payment, home banking and home shopping. All of
these activities are primarily based on the use of the Internet. According to
published reports, the growth in the number of Internet users worldwide is
expected to increase from approximately 28 million in 1996 to approximately 175
million by the end of 2001.

The public generally perceives that there is a risk involved in using
credit cards to make purchases via the Internet and this perception has hampered
the development of consumer-based electronic commerce. Accordingly, the Company
believes that successful expansion of electronic commerce requires the
implementation of improved security measures which accurately identify users and
reliably encrypt data transmissions over the Internet.

PRODUCTS

Current Data Security Solutions

"Product Graphic"

Data security and secured access to on-line commerce generally consist of
five components:

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

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

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Access Control: Includes firewalls, which limit a user's access to
data to only that data which he or she is authorized to access, and
authorization and accounting systems, which also limit access to data and
keep track of a user's activities after access has been granted.

Anti-Virus: Programs that scan for and, in many cases, remove
destructive computer programs known as computer viruses that can become
imbedded into programs residing on a computer.

Administration and Management Tools: Set, implement and monitor
security policies, the access to which is typically regulated by access
control systems. These tools are extremely important to the overall
effectiveness of a security system.

The most effective security policies employ most, if not all, of these five
components. However, most companies only implement a patchwork combination of
these components, which can result in their security systems being compromised.

Historically, the Company's primary products have been security tokens.
Security tokens are an integral part of identification and authentication
systems, which in turn serve as the foundation for each of the five components
of data security outlined above. The Company has sought to leverage its
identification and authentication expertise by expanding its product offerings
to include the other components of data security, in each case incorporating the
Company's security tokens. The Company has sought to expand its product
offerings to reach its ultimate goal of supplying a full range of security
products for integrated, enterprise-wide security solutions, which will meet the
needs of the emerging data security market.

IDENTIFICATION AND AUTHENTICATION. Identification and authentication
systems provide the foundation for security systems by validating the identity
of each user attempting to access information or data contained in a system,
regardless of location. The most common use of an identification and
authentication device is to authenticate local and remote users who have
established a network connection to a company's computer network. Authentication
is often done in conjunction with a firewall to authenticate internal users of
stand-alone PCs on networks or to authenticate customers and suppliers who have
been granted access to a restricted portion of the Company's data or other
information.

There are three basic methods used to authenticate a user. The first method
identifies who the user is, utilizing a hard-to-forge physical attribute such as
the user's fingerprints, voice patterns or eye retina patterns. In each case,
the physical attribute, or biometric, must be capable of being scanned and
converted to a digital document. While biometric devices offer a high level of
authentication, they are susceptible to replay attacks. Replay attacks collect
samples of a user's biometric "print" (i.e., voice, finger, retina) and then
replay the "print" to access a target system. Furthermore, current technology
requires additional hardware to acquire, or read, the biometric "print." The
added hardware presents two challenges for biometric solutions: one is the cost
and the second is installation and maintenance.

The second authentication method is identifying what the user knows,
usually a password known only to the specific user. Passwords, while easy to
use, are also the least secure because they tend to be short and static, and are
often transmitted without encryption ("clear text"). As a result, passwords are
vulnerable to decoding or observation and subsequent use by unauthorized
persons. Once a user's password has been compromised, the integrity of the
entire computer network can be compromised.

The third authentication method identifies what the user has, generally a
physical device or token intended for use by that specific user. Tokens are
small devices ranging from simple credit card-like devices to more complex
devices capable of generating time-synchronized challenge/response access codes.
Early examples of simple tokens include building access passes.

Certain token-based systems require both possession of the token itself and
a PIN to indicate that the token is being used by an authorized user. Such an
approach, referred to as two-factor authentication, provides much greater
security than single factor systems such as passwords or simple possession of a
token. Early implementations of two-factor authentication include automatic
teller machine ("ATM")

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<PAGE>

cards. ATM cards require the user to possess the card and to know the PIN before
engaging in the transaction. The Company believes that the use of the two-factor
authentication system is the optimal solution for reliable computer and network
security and has targeted its products toward this end.

SECURITY TOKENS. A security token is a small, portable computing device
designed to generate a one-time password. They are normally difficult to
counterfeit and are assigned to an individual user. The user transmits a
token-generated password, along with an assigned user ID, to a host or
authentication server, requesting access, generally to a network.
Token-generated passwords are derived from a secret key or seed value. An
authentication server on the network receives and decrypts the token password
with a corresponding decryption key, validates the user, and (if validated)
grants access. Currently available security tokens are event-based,
time-synchronous, response only or challenge/response based.

Event-based tokens have the same list of predetermined passwords as the
authentication server. Passwords are generated by the token in a predetermined
manner, which is expected by the server, and the passwords remain valid for
indefinite periods of time. As a result of the passwords being generated from a
predetermined list and their ease of calculation by unauthorized users,
event-based tokens are the easiest to compromise.

Time-synchronous tokens require the authentication server and the token to
be password time-synchronous. When used, the token will calculate and display a
password using a stored secret seed value and the current time of day. The
server then determines whether the password received is correct for the time
frame that it was used in. The principal drawbacks for time-synchronous tokens
are extensive maintenance with respect to clock synchronization and the
possibility of multiple uses within the specified time frame. Usually, steps are
taken to limit the re-use of a password, however, when a time-synchronous token
is defined to multiple authentication servers, a common practice, then there is
a risk of a password being re-used to access other servers. Nevertheless, these
devices provide a higher level of security than event-based tokens.

Response only tokens use either an "event" or time to calculate the
response only password. Response only tokens require the user to activate the
token and read the password.

Challenge/response tokens provide the highest level of security. The
authentication server responds to a request for access by issuing a randomly
generated challenge in the form of a numeric or alphanumeric sequence. The
token, using its embedded seed value, or key, encrypts the challenge. The result
is an encrypted response which the user then transmits back to the
authentication server via the user's PC keyboard. The server in turn retrieves
the key that has been assigned to that user and decrypts the user's response.
Assuming a match exists, the server authenticates the user and grants access.

As with time-synchronous tokens, challenge/response tokens do not transmit
an encryption key. However, unlike time-synchronous tokens, passwords of
challenge/response tokens are one-time passwords that can never be re-used. In
addition, there is no opportunity to initiate a second, illegal session with a
challenge/response token. Each attempt at access is accompanied by a new
challenge and a correspondingly unique password response.

Although challenge/response tokens generate true one-time passwords, it is
possible to compromise the internal seed value of pure challenge/response tokens
that only use the seed value and the challenge to calculate the response.

Time synchronous challenge/response tokens can be used to add another
variable in the calculation of the one-time password. In addition to the secret
seed value and the challenge from the host server, the time of day can be used.
Because there is a challenge, the time synchronization does not have to be
nearly as exact as with time-synchronous tokens. When time is used as an input
variable for challenge response tokens, it is impossible, with today's most
advanced computers, to use dictionary attacks to compromise the token.

SMARTCARDS. Smartcards are credit card sized devices that contain an
embedded microprocessor, memory and secure operating system. Smartcards have
been used in many applications, for example, as stored value cards, either for
making general purchases or for specific applications such as prepaid

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<PAGE>

calling cards, and as health care cards, which are used to store patient and
provider information and records. Major smartcard chip and card manufacturers
include Gemplus SA, Schlumberger Ltd., Philips Electronics N.V., Siemens A.G.
and Groupe Francois Charles Oberthur (FCO). These vendors, together with
cryptographic vendors, have worked to make smartcard standards compatible with
cryptographic standards to offer a security solution with authentication and
digital signature capabilities.

THE COMPANY'S SOLUTION

The following illustrates a sample configuration of a network and
components of a security system:

"Security System Graphic"

To date, most approaches to network security have been limited in scope and
have failed to address critical aspects of data security. The Company believes
that the computer security industry is moving away from incremental or point
solutions to enterprise-wide, fully integrated solutions. The Company believes
that an effective enterprise-wide solution must address and assimilate issues
relating to the following: ease of use and administration, reliability,
interoperability with heterogeneous enterprise environments and existing
customer applications, and scaleability. The Company also believes that, in
order to capitalize on this growing market need for enterprise-wide security
solutions, network security products must embody both hardware and software
components and provide an industry-accepted, open standards-based solution.

Accordingly, the Company has adopted the following approach to data
security:

(i) In designing its products, it has sought to incorporate all
industry-accepted, open, non-proprietary, remote access protocols, such as
RADIUS and TACACS+. This permits interoperability between the Company's
security token products and leading remote access servers.

(ii) It has incorporated the two most widely known and accepted
algorithms - the DES and RSA algorithms - into its products and has sought
to refine its offering of single-function, multi-function,
challenge/response, response only and digital signature security token
products. The Company believes that its combination of software and
hardware products provide security with added speed, cryptographic
functionality, reliability and flexibility not attainable with
software-only programs. Its products provide two-factor authentication
requiring the authorized user to possess both the token and the appropriate
PIN.

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<PAGE>

(iii) In addition to providing identification and authentication
features in its security products, the Company has included accounting and
auditing features that allow customers to track and analyze all user access
and attempted access to network systems. This permits easier customer
implementation and monitoring of corporate security policies.

(iv) The Company has designed its security systems to support various
platforms - such as Windows NT and Unix - thereby allowing customers to
ensure the same security for remote users as is provided to office-based
users.

(v) The Company has sought to design products that are easy to use and
competitively priced. It also is increasing its customer support
capabilities to ensure the smooth installation and maintenance of its
systems.

As a result of this approach, the Company believes that it has positioned
itself to market a new generation of open standards-based hardware and software
security systems, including those designed to provide security to Internet
users, and it intends to continue to grow to provide a full range of
identification and authentication and other security products. See "The
Company's Strategy" below.

SECURITY TOKEN PRODUCTS. Generally, the Company's challenge/response tokens
work as follows: when a user logs onto a computer or enters a program or network
with a user ID, the computer generates a numeric or alphanumeric challenge and
displays both the challenge and a flashing bar pattern on the terminal screen.
The user holds a token up to the flashing pattern on the screen, and the token
reads and interprets the pattern and then displays a unique, or one-time,
password on its liquid crystal display. The user then enters this password on
the computer keyboard and, if a match exists, access to the computer, program or
network is granted. If the terminal screen is not able to display a flashing bar
pattern, the user can enter the numeric or alphanumeric challenge into the
keypad on the token. PIN protected, break-in attempts to unlock the key are
tracked by the token internally. After a pre-programmed number of invalid
attempts, the token will be locked out of the system for a specified period of
time.

Some of the Company's products also are able to perform "digital
signatures" for applications which require proof that a transaction was
authorized. A combination of numbers from the transaction are entered into a
token which produces an encrypted number that only that specific token, and the
information from the transaction, could have created. This number is then
entered as part of the transaction, acting as a digital signature authorizing
the transaction.

The Company's security tokens include AccessKey II and AuthentiCard, each
an optical, hand-held challenge/response security token with a liquid crystal
display and numeric keypad that generates a unique password each time it is
used, and Digipass 500, a time-synchronous response only token that generates a
one-time password, to authenticate users of PCs and networks and to verify data
transmissions by electronic signature. During the first quarter of 1998, the
Company began full production and shipping of its Digipass 300, which is an
optical, hand-held multiple-mode security token capable of operating in
time-synchronous response only, challenge/response and time synchronous
challenge/ response modes and of performing digital signature functions.

Smartcards are also emerging as viable security devices. The Company
currently offers a smartcard product, VACMan/CryptaPak, that combines two
authentication standards on one smartcard. VACMan/ CryptaPak is a standards
based smartcard solution that secures Internet applications based on the X.509
authentication standard and also secures remote dial-in access based on the
RADIUS authentication standard. It includes a smartcard, smartcard reader and
software that enables Netscape Communications Corporation's Communicator to
authenticate users via the X.509 certificate standard and software that enables
remote dial-in users to be authenticated via the RADIUS authentication standard.
See "The Company's Security Products" below.

ENCRYPTION PRODUCTS. Hardware encryption product offerings from the Company
include DES and RSA microprocessor chips that perform algorithmic functions for
use in, among other things, ATMs, fax machines, modems and security servers. The
Company's DES and RSA chips are also the central component of its PC DES/RSA
Cards, which are printed circuit boards that enable software applications to

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<PAGE>

provide encryption security. The Company also has acquired a software encryption
application, Point 'n Crypt, which resides on a PC workstation and enables the
user to encrypt or decrypt Windows files or folders. See "The Company's Security
Products" below.

ACCESS CONTROL PRODUCTS. The Company has, through a strategic relationship,
developed the VACMan access control system, which centralizes security services
in a single location, supports all of the Company's token devices, and is based
on industry standard protocols to maximize interoperability. VACMan also
incorporates authorization and accounting features. See "The Company's Security
Products" below.

THE COMPANY'S STRATEGY

The Company's objective is to establish itself as a single source data
security solutions vendor and to become a leader in the data security market.
The Company's growth is largely dependent on the successful implementation of
its business strategy. There can be no assurance that the Company will be able
to successfully implement its business strategy or that, if implemented, such
strategy will be successful. See -- "Factors That May Affect Future Results"
below. Key elements of the Company's strategy for achieving this objective are
listed below:

INCREASE NAME RECOGNITION. The Company intends to increase the name
recognition of its products. It believes that by establishing itself as a brand
name, it will obtain a key competitive advantage. The Company believes that the
market for data security products is confused by multiple technologies and
conflicting claims and that end-users will ultimately be more comfortable buying
a well-known product. The Company intends to increase its name recognition by
emphasizing sales to well-known visible end-users, expanding its distribution
network, increasing its presence at technology trade shows and other increased
marketing activities such as print media campaigns.

EXPAND PRODUCT LINE. The Company plans to continue to broaden its line of
security products to meet its customers' needs and to establish itself as a
single source security solutions vendor. The Company intends to accomplish this
by continuing to develop identification and authentication expertise, as well as
by seeking strategic relationships and acquiring complementary assets or
businesses.

EXPAND GLOBAL PRESENCE. The implementation of data security products for
electronic banking in the European market has become widespread and as a result,
the market for the Company's products has grown more quickly in Europe than in
North America. Sales by the Company's European subsidiary, VDS NV/SA, and its
U.S. subsidiary, VDSI, represented 77% and 23%, respectively, of the Company's
total revenue for the year ended December 31, 1997. Nevertheless, sales to U.S.
customers represented just 8% of the Company's sales for the year ended December
31, 1997. The Company believes that there are significant opportunities for its
products in the developing North American market and further believes it is well
positioned to take advantage of this growing market. The Company intends to
maintain and expand its leadership role in the identification, authentication,
authorization and accounting markets in Europe and to leverage its European
expertise to introduce and promote the Company's identification, authentication,
authorization and accounting products to the North American and other global
markets. Enterprises that allow remote access to proprietary databases or
information, or need to ensure secure data transmission for purposes of
electronic commerce (including via the Internet), are potential customers for
the Company's security products. The Company intends to pursue these potential
customers through its growing network of distributors and resellers. See "Expand
Marketing Channels" below.

EXPAND MARKETING CHANNELS. The Company intends to recruit and support a
network of value added resellers worldwide that specialize in both vertical
(banking, financial, health, telecommunications and government) markets and
horizontal (remote access and Internet application) markets. By undertaking
these activities, the Company intends to address and fulfill the requirements of
the growing remote access market that is in need of advanced identification,
authentication, authorization and accounting products. Some of the distributors
and resellers that have entered into agreements to distribute the Company's
products in various strategic markets include:

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<PAGE>

EUROPE NORTH AND SOUTH AMERICA ASIA
- --------------------------- ----------------------------- ------------------
Concord-Eracom Nederland BV All Tech Data Systems, Inc. Horizon Systems
(Netherlands) (Midwestern United States) (Hong Kong)
Protect Data Norge AS Clark Data Systems, Inc. HUCOM, Inc.
(Scandinavia) (Southwestern United States) (Japan)
Secureware Excelsys, SA
(France) (Chile)
Sirnet AB LatinWare Ltda.
(Scandinavia) (Colombia)

DEVELOP STRATEGIC RELATIONSHIPS. To accomplish its strategic goals, the
Company has established and is developing strategic relationships with other
vendors of complementary security products and may seek to acquire complementary
assets or businesses. Also, the Company has identified vendors of security or
remote access products that relied solely on static passwords that the Company
believes its products can enhance.

The Company also has entered into co-development agreements with certain
companies to gain access to technology critical to the acceptance and adoption
of the Company's technology and products. As an example, the Company entered
into a co-development agreement with SHIVA Corp., a leader in remote access
communications equipment, pursuant to which the Company licensed from SHIVA
Corp. a generic security server. The resulting product, VACMan, enables the
Company's technology and products to be inserted into virtually any organization
that allows remote dial-in access to its computer networks. In addition, the
Company entered into an original equipment manufacturer agreement with Netscape
Communications Corporation ("Netscape") to bundle Netscape technology and
products with the Company's products

SECURITY PRODUCTS

The Company's family of hardware products include time-synchronous response
only, challenge/ response and time-synchronous challenge/response user
authentication token devices or security tokens. As of July 31, 1998, the
Company has over 2.0 million security tokens (AccessKey II, AuthentiCard and
Digipass 500) in use. In addition, the Company offers a smartcard security token
that uses the challenge/ response mode and the X.509 certificate authentication
standard. The Company also designs, develops and markets encryption chips and
encryption boards through a division called Cryptech. The primary customers of
the Cryptech products are OEMs of telecommunications equipment that require real
time encryption.

All the Company's security tokens are used with its software authentication
server, VACMan, to provide a complete identification, authentication,
authorization and accounting security system. VACMan supports each of the
Company's security devices and permits users to centralize their security
systems in a single server or network of servers. It is designed for small,
medium and large enterprises and Internet service providers, and it provides a
centralized and flexible solution for managing network access. VACMan is
scaleable for large remote access systems and a single server can support
numerous distributed network access servers.

The Company also offers numerous additional products to extend the security
services of VACMan/ Server to platforms and/or applications that do not yet
support the RADIUS protocol. Examples of such products are VACMan/Client NT,
VACMan/Client Enterprise (Netscape Web server), VACMan/Client IIS (Microsoft Web
Server), and VACMan/Client Solaris. In addition the Company offers workstation
software to enhance network connections when using advanced products like
Digipass 300, AuthentiCard, AccessKey II or VACMan/CryptaPak. These products
have unique workstation requirements to generate a terminal flash pattern for
the security tokens and to communicate to a smartcard reader attached to the
workstation in the case of VACMan/CryptaPak.

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<PAGE>

The Company also provides a software development kit ("SDK") that can be
used by other vendors or by clients to build RADIUS support into their products
or applications. This SDK enables them to perform one integration project and
gain support for all RADIUS compliant security servers. The SDKs are written in
the C programming language and can be used in numerous operating system
environments such as MVS, VMS, UNIX, Windows, NetWare and DOS. The SDKs enable
the Company's strategic partners to integrate the Company's products into their
own product offerings.

The following chart describes each of the Company's principal products:

HARDWARE FEATURES
- ------------------ ----------------------------------------------------
Digipass 300 -- Multiple mode token capable of operating in
time-synchronous response only, challenge/response,
and time-synchronous challenge response
-- Utilizes DES algorithm
-- Operates optically and/or numerically
-- PIN protection and token lock/unlock feature
-- Digital signature function
-- Storage of multiple secret keys for up to 3
tokens/applications in one
Digipass 500 -- Time-synchronous, response only token generates
one-time password
-- Utilizes DES algorithm
-- PIN protection feature
-- Digital signature function
-- Storage of multiple secret keys for up to 8
tokens/applications in one
AuthentiCard -- Time-synchronous, challenge/response token generates
one-time password with each use
-- Utilizes DES algorithm
-- Operates optically or numerically
-- PIN protection and token lock/unlock feature
-- Programmable user messages

AccessKey II -- Time-synchronous, challenge/response token generates
one-time password with each use by application of
patented technology
-- Optical interface reads flashing pattern on computer
screen from which token generates one-time password
DES and RSA
Microprocessors -- Incorporate DES or RSA algorithms
-- Cryptographic functionality
-- Potential uses include ATMs, wireless telephone
networks, modems, fax machines, PCs, servers
PC DES/RSA Card -- Printed circuit boards incorporating VASCO's DES/RSA
microprocessor chips
-- Can be integrated into applications requiring
encryption security or used as development and
evaluation tool for DES/RSA microprocessor chips
-- Development package includes technical manuals,
layouts and documented programming source code for
DOS, Windows, Windows NT, OS/2 and SCO/UNIX

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VACMan/
CryptaPak
(including smart-
card) -- Hardware and software package
-- Includes smartcard token, smartcard reader and
enabling software
-- Provides challenge/response and X.509 authentication
based identification and authentication

SOFTWARE FEATURES
- ------------------ ----------------------------------------------------
VACMan Suite -- Centralizes security services (authentication,
authorization and accounting) into a single set of
security servers to manage network access
-- Supports all VASCO tokens
-- Bundled with Netscape Directory Server
-- Open standards based, supports RADIUS and TACACS+
industry standard protocols and offers numerous
additional RADIUS client products to extend the
security services of VACMan/Server to a broad
rangeof platforms
-- Utilizes either ODBC (Other Data Base Compatibility)
compliant relational databases for administration
and reporting, or an LDAP (Lightweight Directory
Access Protocol) compliant directory server
-- Scaleable for large remote access systems
-- Interoperability with a majority of remote access
servers including SHIVA, Ascend Communications,
Cisco Systems and US Robotics (3COM)
VACMan/Point 'n
Crypt -- Encryption software application
-- Resides on PC workstation
-- Encrypts and decrypts Windows files or folders
-- When used with VASCO's VACMan/CryptaPak, user's
encryption key can be stored on the user's
smartcard
VACMan/AVAST -- Full-scale anti-virus product; can detect macro and
polymorphic viruses
-- Faster, more accurate and reliable detection of
viruses
-- Resident scanner enabling protection against
viruses, even under Windows NT
-- Ability to send warning messages by way of Microsoft
Network
-- Ability to run any applications while the system or
main application starts
-- On screen display of scanning results

VASCO, AccessKey, VACMan Server and VACMan/CryptaPak are trademarks of the
Company, applications for which are pending in the United States. In addition,
AuthentiCard and Digipass are trademarks registered in Belgium.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company relies on a combination of patent, copyright, trademark and
trade secret laws, as well as employee and third-party non-disclosure agreements
to protect its proprietary rights. In particular, the Company holds several
patents in the United States and a corresponding patent in certain European
countries, which cover certain aspects of its technology. The majority of its
patents cover the Company's

36
<PAGE>

AccessKey II, Digipass 300, Digipass 500 and AuthentiCard tokens. The U.S.
patents expire between 2003 and 2010; the European patent expires in 2008. The
Company believes these patents to be valuable property rights and relies on the
strength of its patents and trade secret law to protect its intellectual
property rights. To the extent that the Company believes its patents are being
infringed upon, it intends to assert vigorously its patent protection rights,
including but not limited to, pursuing all available legal remedies.

While the Company believes that its patents are material to its future
success, there can be no assurance that the Company's present or future patents,
if any, will provide a competitive advantage. It also may be possible for others
to develop products with similar or improved functionality that will not
infringe upon the Company's intellectual property rights. Furthermore, to the
extent that the Company believes that its proprietary rights are being violated,
and regardless of its desire to do so, it may not have adequate financial
resources to engage in litigation against the party or parties who may infringe
on its proprietary technology.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are concentrated on product
enhancement, new technology development and related new product introductions.
The Company employs 13 full-time engineers and, from time to time, independent
engineering firms to conduct non-strategic R&D efforts on its behalf. For the
fiscal years ended December 31, 1995, 1996 and 1997, the Company expended
$242,000, $575,000, and $1,802,000, respectively, on R&D, representing
approximately 6.5%, 5.6%, and 14.6% of consolidated revenues for 1995, 1996 and
1997, respectively.

While management is committed to enhancing its current product offerings,
and introducing new products, there can be no assurance that the Company's R&D
activities will be successful. Furthermore, there can be no assurance that the
Company will have the financial resources required to identify and develop new
technologies and bring new products to market in a timely and cost effective
manner, or that any such products will be commercially successful if and when
they are introduced.

PRODUCTION

The Company's security hardware products are manufactured by third parties
pursuant to purchase orders issued by the Company. Its hardware products are
comprised primarily of commercially available electronic components which are
purchased globally. The Company's software products are controlled in-house by
Company personnel and can be produced either in-house or by several outside
sources in North America and in Europe. At July 31, 1998, the Company had firm
purchase orders from customers for an aggregate of 335,000 AccessKey II,
AuthentiCard, Digipass 300 and Digipass 500 security token units, exclusive of
the units shipped under those orders as of that date.

With the exception of the AccessKey II token, the Company's security tokens
utilize commercially available programmable microprocessors, or chips. The
Company uses two microprocessors, made by Samsung and Epson, for the various
hardware products produced other than the AccessKey II token. The Samsung
microprocessors are purchased from Samsung Semiconductor in Belgium, and the
Epson microprocessors are purchased from Alcom Electronics NV/SA, also located
in Belgium. The microprocessors are the only components of the Company's
security tokens that are not commodity items readily available on the open
market. While there is an inherent risk associated with each supplier of
microprocessors, the Company believes having two sources reduces the overall
risk.

AccessKey II uses a custom-designed and fabricated microprocessor which is
currently available from a single source, Micronix Integrated Systems, in the
United States. The Company does not have a long-term contract with Micronix, but
rather submits blanket purchase orders for the AccessKey II microprocessor. The
Company expects AccessKey II production to be reduced during 1998 as production
of Digipass 300 increases, which employs a widely available microprocessor.

Orders of microprocessors and some other components generally require a
lead time of 12-16 weeks. The Company attempts to maintain a sufficient
inventory of all parts to handle short term spikes in orders. Large orders that
would significantly deplete the Company's inventory are typically required to be
placed with more than 12 weeks of lead time, allowing the Company to attempt to
make appropriate arrangements with its suppliers.

37
<PAGE>

The Company purchases the majority of its product components and arranges
for shipment to third parties for assembly and testing in accordance with design
specifications. The Company's three security token products are assembled
exclusively by two independent companies, each of which is based in Hong Kong.
Purchases from one of the companies are made on a purchase order by purchase
order basis. Purchases from the other company are under a contract that extends
to January 21, 1999, with automatic one-year renewals and subject to termination
on six months notice. Each of these companies assembles the Company's security
tokens at facilities in mainland China. One of the companies also maintains
manufacturing capacity in Hong Kong. Equipment designed to test product at the
point of assembly is supplied by the Company and periodic visits are made by
Company personnel for purposes of quality assurance, assembly process review and
supplier relations.

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

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. The industry is comprised of many
companies offering hardware, software and services that range from simple
locking mechanisms to sophisticated encryption technologies. The Company
believes that competition in this market is likely to intensify as a result of
increasing demand for security products. The Company's competition comes from a
number of sources, including (i) software operating systems suppliers and
application software vendors that incorporate a single-factor static password
security system into their products, and (ii) token-based password generator
vendors promoting response only and/or challenge/ response technology, such as
ActivCard, Inc., AXENT Technologies, Inc. CRYPTOCard, Inc., Leemah DataCom
Security Corporation, Racal-Guardata, Inc., Secure Computing Corp., and Security
Dynamics Technologies, Inc.

In some cases, these vendors also support the Company's products and those
of its competitors. The Company also may face competition in the future from
these and other parties that develop computer and network security products
based upon approaches similar to or different from those employed by the
Company. There can be no assurance, however, that the market for computer and
network security products will not ultimately be dominated by approaches other
than the approach marketed by the Company.

The Company believes that the principal competitive factors affecting the
market for computer and network security products include name recognition,
technical features, ease of use, quality/reliability, level of security,
customer service and support, distribution channels and price. Although the
Company believes that its products currently compete favorably with respect to
such factors, other than name recognition in certain markets, there can be no
assurance that the Company can maintain its competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources.

Many of the Company's present and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, 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 the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire
significant market share. If this were to occur, the financial condition or
results of operations of the Company could be materially adversely effected.

38
<PAGE>

The Company's 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 Company 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 the Company for market
share. See "RISK FACTORS -- Competition."

SALES AND MARKETING

The Company's computer and network security products are marketed primarily
through an indirect sales channel and distribution network and, to a lesser
extent, directly to end-users. The Company markets its products primarily in
North America and Europe through a combination of value-added resellers,
original equipment manufacturers, independent distributors and direct sales
efforts. A sales staff of 12 coordinates sales through the distribution network
and makes direct sales calls either alone or with sales personnel of vendors of
computer systems. The sales staff also provides product education seminars to
sales personnel of vendors and distributors with whom the Company has working
relations and to potential end-users of the Company's products.

In January of 1997, the Company introduced the VASCO Advantage Reseller
("VAR") program. The goal of this program is to expand the Company's marketing
channels by engaging companies already proficient in reselling computer network
products and security solutions to distribute the Company's products.

The Company works with these value added resellers, resellers, OEM's and
distributors (collectively referred to as "Resellers") through its United States
and European operating subsidiaries, VDSI and VDS NV/SA. VDSI, which is
primarily responsible for North America, South America and Japan, started in
1997 with one Reseller. Since January 1, 1997, arrangements have been made with
51 additional Resellers, for a total of 52. VDS NV/SA, which is generally
responsible for developing sales in the remainder of the world, had an existing
base of 17 Resellers prior to the announcement of the VAR program. Since January
1, 1997, VDS NV/SA has engaged an additional 37 Resellers, for a total of 54.

The Company's 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. While the Company believes its products are
designed to meet the regulatory standards of foreign markets, any inability to
obtain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's financial condition or results of operations.

The Company's products are subject to export restrictions and controls as
administered by the National Security Agency, the Department of State and the
Department of Commerce. Encryption products are eligible for export depending
upon the level of encryption technology incorporated into the product. U.S.
export laws also prohibit the export of encryption products to a number of
specified hostile countries. Until recently, the Company did not need to obtain
U.S. export licenses for its products. However, two new encryption products,
VACMan/CryptaPak and VACMan/Point'n Crypt, introduced to the Company product
line in August 1997, require a License Exception (i.e., authorization to export,
under stated conditions, subject to Export Administration Regulations). The
Company believes it is able to obtain License Exceptions for both its
VACMan/CryptaPak and VACMan/Point'n Crypt products for sales to international
banking and financial institutions.

There can be no assurance, however, that the list of products and countries
for which export approval is required, and the regulatory policies with respect
thereto will not be revised from time to time. The inability of the Company to
obtain required approvals under these regulations could materially adversely
affect the ability of the Company to make international sales of the products
under U.S. export control.

The Company's core authentication products, AccessKey II, Digipass 300, and
Digipass 500 do not, nor are they likely to, fall under U.S. encryption export
control regulations. Although all of the Company's authentication products
utilize encryption technologies, the products cannot read and encrypt client
data. Thus, they are not subject to the U.S. encryption export control
regulations.

39
<PAGE>

Similarly, VDS NV/SA, the Belgian operating subsidiary of the Company, is
subject to export licensing requirements under Belgian law. The inability of VDS
NV/SA to obtain required approvals or licenses under Belgian law also could have
a material adverse effect on the Company's financial condition or results of
operations.

The Belgian export of VDS NV/SA's cryptographic products, consisting of DES
and RSA microprocessors and PC/DES and RSA cards (including software development
kit(s)), is subject to European Community regulations. VDS NV/SA's cryptographic
products are considered to be "goods of dual use" under those regulations, i.e.,
goods that can be used for both civil and military purposes. As such, a national
individual export license is required for their export, except to Luxembourg and
the Netherlands. Only the VDS NV/SA products that perform encryption of data for
confidentiality reasons require an individual export license, and VDS NV/SA has
obtained such licenses for the export of these products.

VDS NV/SA, as owner and exporter of the cryptographic products, must apply
to the Belgian Ministry of Economic Affairs for an export license for each
company to which it exports such products. An export license is valid for one
customer for one year from the date of issue. It can be reused for several
consecutive deliveries to that customer until the total export quantity, as
indicated on the license, has been exhausted. If the quantity is not completely
exported during the one year license period, the license can be renewed once for
another year. VDS NV/SA applies for such licenses for customers that wish to
purchase cryptographic products.

CUSTOMERS AND MARKETS

Customers for the Company's security products include, to some extent,
businesses that purchase products directly from the Company for use by their
employees, clients or vendors, but the majority are value-added resellers or
distributors of related security products or services who in turn sell to other
businesses.

To date, virtually all of the Company's security products have been sold in
Europe. Sales to one European distributor, Sirnet/Protect Data, accounted for
23% of the Company's consolidated revenues in 1997. Additionally, Rabo Bank and
Concord-Eracom Nederland NV each accounted for approximately 16% of the
Company's total revenues.

The Company is aware of the risks associated with this degree of customer
concentration and expects to further minimize its reliance on these customers in
1998 and beyond. There can be no assurance, however, that the Company's efforts
to minimize this risk will ultimately be successful or that the Company can
sustain comparable sales volume with these customers. Furthermore, the loss of
these customers' business, or an inability to maintain reasonable profit margins
on these sales, may have an adverse effect on the Company. See "RISK FACTORS --
Dependence on Major Customers" and "-- Risks of International Operations."

EMPLOYEES

As of July 31, 1998, the Company employed 42 full-time employees and 3
full-time consultants. Of these, 25 were located in North America and 20 were
located in Europe. Of the 45 total, 23 were involved in sales, marketing and
customer support, 12 in product production, research and development and 10 in
administration.

PROPERTY

The Company's corporate offices and North American administrative, sales
and marketing, research and development and support facilities are located in
the United States in an office complex in Oakbrook Terrace, Illinois, a western
suburb of Chicago. These facilities are leased through November 15, 1999, and
consist of approximately 10,000 square feet. The Company recently moved from
leased quarters covering approximately 5,100 square feet located in Lombard,
Illinois, a western suburb of Chicago. The Company believes that the new
Oakbrook Terrace facilities will be adequate for its present growth plans.

40
<PAGE>

The Company's European administrative, sales and marketing, research and
development and support facilities are located in Belgium in an industrial park
in a southwestern suburb of Brussels. These facilities consist of approximately
10,000 square feet of office space which are occupied under a lease expiring in
July of 1999. The Company believes that these facilities are adequate through
the term of the current lease. nsiderations

Many existing computer systems and software products are coded to accept
only two digits entries in the date code field with respect to year. With the
21st century less than two years away, the date code field must be adjusted to
allow for a four digit year. The Company believes that its internal systems are
Year 2000 compliant, but the Company will need to take the required steps to
make its existing products compliant. The total estimated cost of this exercise
is $150,000, with an anticipated completion date of December 31, 1998. There can
be no assurance, however, that the Company will meet its anticipated completion
date or that the total cost will not exceed $150,000. The Company believes that
the purchasing patterns of customers and potential customers may be affected by
Year 2000 issues as companies expend significant resources to upgrade their
current software systems for Year 2000 compliance. This, in turn, could result
in reduced funds available to be spent on other technology applications, such as
those offered by the Company, which could have a material adverse effect on the
Company's business and results of operations.

LITIGATION

Although the Company has not yet been served as of the date hereof, it has
been informed that a lawsuit been filed against it by Security Dynamics
Technologies, Inc. alleging patent infringement. The Company believes that it is
protected by its patents and that this lawsuit is without merit.

41
<PAGE>

MANAGEMENT

DIRECTORS AND OFFICERS OF THE COMPANY

The officers and Directors of the Company and key personnel of its
subsidiaries, and their respective ages as of July 31, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- --------------------------------------------------------------
<S> <C> <C>
T. Kendall Hunt 55 Chief Executive Officer, President, Chairman of the Board and
Director
Forrest D. Laidley 54 Secretary and Director
Robert E. Anderson 49 Director (1)(2)
Michael A. Mulshine 59 Director (1)(2)
Michael P. Cullinane 48 Director (1)(2)
Mario R. Houthooft 45 Director, Managing Director (3)
Gregory T. Apple 32 Vice President - Finance and Administration
</TABLE>

KEY PERSONNEL OF THE COMPANY

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------- ----- -------------------------
<S> <C> <C>
John C. Haggard 39 Chief Technology Officer
</TABLE>

KEY PERSONNEL OF VDSI

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- ------------------------------------------------
<S> <C> <C>
Richard M. Vaden, Jr. 41 Vice President - Business Development and Sales
Hyon C. Im 36 Vice President - Research and Development
</TABLE>

KEY PERSONNEL OF VDS NV/SA

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------- ----- -------------------------
<S> <C> <C>
Frank Hoornaert 36 Technical Manager
Jan Valcke 43 Direct Sales Manager (4)
</TABLE>

- ----------
(1) Member of the Audit Committee of the Company's Board of Directors.

(2) Member of the Compensation Committee of the Company's Board of Directors.

(3) Mr. Houthooft is not an employee of VDS NV/SA, but serves as an officer of
VDS NV/SA and performs services pursuant to a consulting agreement with VDS
NV/SA. See "-- Consulting Arrangements -- Mario Houthooft Consulting
Agreement" below.

(4) Mr. Valcke is not an employee of VDS NV/SA, but serves as a consultant.

T. KENDALL "KEN" HUNT -- Mr. Hunt is Chairman of the Board, Chief Executive
Officer and President of the Company. He has been a director of the Company
since July 1997. He also serves, since 1990, as a Director, the Chairman of the
Board and President of Old VASCO and prior thereto served in similar capacities
during certain periods from 1984 with Old VASCO's predecessors.

FORREST D. LAIDLEY -- Mr. Laidley is Secretary of the Company. He has been
a director of the Company since July 1997. He also serves, since 1990, as a
Director, Secretary and General Counsel of Old VASCO. He has been involved with
Old VASCO and its predecessors for certain periods in these capacities since
1984. He is currently and has been a partner in the law firm of Laidley & Porter
(and

42
<PAGE>

predecessor firm) in Libertyville, Illinois since 1985. He serves on the
Advisory Council on Main Street Libertyville and is a director of Harris Bank
Libertyville, an Illinois chartered banking institution, and Carmel High School,
Mundelein, Illinois.

ROBERT E. ANDERSON -- Mr. Anderson has been a director of the Company since
July 1997. Mr. Anderson is a member of the Company's Compensation and Audit
Committees. He also serves, since 1990, as a director of Old VASCO and as
Chairman of its Audit Committee. In addition, he served, from 1990 to 1997, as
Chairman of its Compensation Committee. Mr. Anderson was involved with VASCO
Corp. and its predecessors since 1984 as a consultant and served as Executive
Vice President and Chief Financial Officer of one of VASCO Corp.'s predecessors
between 1987 and 1989. Since 1994 he has been an independent consultant.

MICHAEL A. MULSHINE -- Mr. Mulshine has been a director of the Company
since July 1997. He also serves, since 1992, as a director of Old VASCO. He is a
member of the Company's Audit Committee and the Company's Compensation
Committee. He is, and since 1997 has been, a principal of Osprey Partners, a
management consulting firm. Since 1985 he has been a director and Secretary of
Scangraphics, Inc. a provider of Geographic Information Systems database
management software products and a leader in large format color scanning and
image processing technology. Additionally, Mr. Mulshine is a director of
Production Systems, Inc., a software engineering company specializing in the
technology of modeling and simulation, and a director of Inresco, Inc., a
manufacturer of high-performance circuit protection devices.

MICHAEL P. CULLINANE -- Mr. Cullinane has been a director of the Company
since April 10, 1998. He is the Chairman of the Company's Compensation Committee
and a member of the Company's Audit Committee. Mr. Cullinane has served as
Executive Vice President, Chief Financial Officer and treasurer of PLATINUM
technology, inc. since 1988. PLATINUM technology provides software products and
consulting services that help Global 10,000 IT organizations manage and improve
their IT infrastructure, which consists of data, systems, and applications. Mr.
Cullinane is a director of PLATINUM Entertainment, Inc.

MARIO R. HOUTHOOFT -- Mr. Houthooft serves, since January 1, 1997, as
Managing Director of VDS NV/SA pursuant to a consulting agreement. Mr. Houthooft
was elected to the Board of Directors of the Company as of April 10, 1998. From
1992 until joining VDS NV/SA, he served in various management positions with
Lintel Security. Prior thereto, he was with Cryptech Company from 1986 where he
served in various positions.

GREGORY T. APPLE -- Mr. Apple is Vice President and Treasurer of the
Company. He also serves, since 1996, as Vice President of Finance and
Administration of Old VASCO. His responsibilities encompass all accounting and
administrative aspects of the Company and its subsidiaries. Before joining Old
VASCO in 1996, he was employed as Controller and Vice President of Finance of a
privately held software company, Napersoft, Inc., from 1993 until 1996, with
essentially similar responsibilities. From 1988 until joining Napersoft, he was
an auditor for KPMG Peat Marwick LLP.

CONSULTING ARRANGEMENT

Mario Houthooft Consulting Agreement. Mr. Houthooft was one of the two
principals of Lintel NV, the company that sold certain assets relating to data
security products to Lintel Security, which was then acquired by Old VASCO. Mr.
Houthooft's services as Managing Director of VDS NV/SA are rendered pursuant to
a management agreement by and between VDS NV/SA and LINK BVBA, the company that
employs Mr. Houthooft. The management agreement has an indefinite term, although
it is terminable by either party upon six months notice, or without prior notice
upon payment of a specified amount. Mr. Houthooft is to devote at least
forty-five hours per week to his VDS NV/SA duties pursuant to the agreement,
which also contains confidentiality obligations and precludes Mr. Houthooft from
soliciting VDS NV/SA employees or engaging in competing businesses during the
term of the agreement. The agreement further provides that Mr. Houthooft will
not render services to a competitor or start a competing business in Belgium,
the Netherlands and Luxembourg for a one month period following termination of
the agreement. In addition to these restrictions, Mr. Houthooft is subject to a

43
<PAGE>

covenant not to compete contained in the Lintel Security acquisition agreements
pursuant to which Mr. Houthooft agreed not to compete, directly or indirectly,
with Old VASCO (or any of its affiliates) in the manufacture and sale of
computer security products through December 31, 2001.

Term of Office of Directors and Officers. Each Director holds office for a
one-year term and until his respective successor has been duly elected and
qualified. Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors of the Company.

BOARD COMMITTEES

The Board of Directors of the Company currently maintains two standing
committees, the Audit Committee and the Compensation Committee. The Audit
Committee, currently comprised of directors Robert E. Anderson, Michael P.
Cullinane, and Michael A. Mulshine, recommends to the Board of Directors the
engagement of the Company's independent accountants, reviews with such
accountants the plan, scope and results of their audit of the consolidated
financial statements and reviews the independence of such accountants. The
Compensation Committee, currently comprised of the same directors as the Audit
Committee, reviews and makes recommendations to the Board of Directors regarding
all forms of compensation to be provided to the executive officers and directors
of, and consultants to, the Company and its subsidiaries.

COMPENSATION OF DIRECTORS

Directors of the Company are reimbursed for expenses incurred in connection
with their attendance at periodic Board meetings. Directors receive no cash
compensation for their services; however, non-employee directors are eligible to
receive stock option grants from time to time. In 1998 the non- employee
directors of the Company, Messrs. Laidley, Anderson, Cullinane and Mulshine,
each received options to purchase 8,000 shares of Common Stock, at an exercise
price of $5.5625 per share, pursuant to the Company's Stock Option Program.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee is comprised of Messrs. Anderson,
Cullinane and Mulshine. Mr. Anderson served as the Company's Chief Financial
Officer and Executive Vice President from 1987 through 1989 and served the
Company as a consultant from January 1996 through March 1997.

Forrest D. Laidley serves as Director and Secretary of the Company. Mr.
Laidley is also a partner in the law firm of Laidley & Porter which has
performed various legal services for the Company since its inception. Mr.
Laidley and his partners have made equity investments in the Company from time
to time through various private placements and are currently stockholders and
warrant holders. Mr. Laidley's firm is currently performing legal services for
the Company. Mr. Laidley's services currently are and during 1997 were on a
noncompensation basis, although his firm is compensated for services rendered to
the Company by attorneys other than Mr. Laidley. Mr. Laidley's firm was paid
approximately $55,000 in 1997, $47,000 of which was for services rendered in
1996.

From January 1996 until March 1997, pursuant to an oral arrangement, Robert
Anderson served as a consultant to the Company. Pursuant to this arrangement,
Mr. Anderson was compensated in the amount of $50,000 in 1996 and $15,000 in
1997. The oral arrangement between the Company and Mr. Anderson called for
compensation in the amount of $5,000 per month, and is no longer in effect.

On June 2, 1992 the Company entered into an Investment Banking and
Management Consulting Agreement with Osprey Partners ("Osprey"), pursuant to
which, among other things, the Company agreed to appoint Michael A. Mulshine as
a member of the Company's Board of Directors. Mr. Mulshine, a Director of the
Company, is a principal of Osprey. In 1993 and 1994 Osprey provided services to
the Company in connection with obtaining financing for the Company and, pursuant
to the Agreement, Osprey was paid fees aggregating $60,000 during 1993, 1994 and
1995. The Agreement also granted Osprey a warrant to purchase 400,000 shares of
the Company's common stock at a price of $.25 per

44
<PAGE>

share. On January 20, 1996 the Company exercised its election to terminate the
Agreement and deemed that 200,000 of the 400,000 shares of Common Stock
underlying the warrant were earned and vested as of that date. Osprey may
exercise its right to purchase such 200,000 shares of common stock at $.25 per
share anytime before June 1, 1999.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company and its subsidiaries, including Old
VASCO, in all capacities during the year ended December 31, 1997 for the
Company's Chief Executive Officer and President and the Chief Technology
Officer, who are the only executive officers of the Company and its subsidiaries
whose salary and bonus for such year exceeded $100,000 (collectively, Messrs.
Hunt and Haggard are referred to herein as the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ -------------
SECURITIES
UNDERLYING ALL OTHER
OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL YEAR SALARY BONUS (#) ($)
- ------------------------------------------------ ------ ----------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
T. Kendall Hunt ................................ 1997 $150,000 0 125,000 0
President and Executive Chairman of 1996 116,457 0 0 0
the Board and Director of the Company ......... 1995 71,700 0 0 0
John C. Haggard ................................ 1997 $125,000 0 40,000 0
Chief Technology .............................. 1996 105,750 0 40,000 0
Officer of the Company ........................ 1995 64,167 0 157,500 0
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth all options granted to the Named Executive
Officers during 1997. The options granted were by Old VASCO for shares of Old
VASCO common stock. However, pursuant to the Exchange Offer the Old VASCO
options have been exchanged for Company options and the shares underlying the
options are for Common Stock.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
TOTAL APPRECIATION FOR
NUMBER OF OPTIONS OPTION
SECURITIES GRANTED TO EXERCISE TERM (2)
UNDERLYING EMPLOYEES PRICE EXPIRATION -------------------
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE (1) 5% ($) 10% ($)
- ------------------------- ----------------- ---------------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
T. Kendall Hunt ......... 125,000 24.4% 4.000 6/16/07 314,447 796,871
John C. Haggard ......... 40,000 7.8 4.375 1/31/07 110,057 278,905
</TABLE>

- ----------
(1) The options vest as follows: 25% at the time of the grant, and 25% on each
subsequent anniversary of the grant.

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

45
<PAGE>

YEAR-END OPTION VALUES

The following table sets forth the aggregate value as of December 31, 1997
of unexercised stock options held by the Named Executive Officers. The Named
Executive Officers did not exercise any stock options during 1997 and the
relevant columns have therefore been omitted. The stock options in 1997
represented VASCO Corp. stock options. Pursuant to the Exchange Offer the stock
options were exchanged for stock options of the Company and the underlying
shares are for shares of the Company's Common Stock.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE (1) UNEXERCISED OF
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END ($)
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
T. Kendall Hunt ......... 31,250 93,750 31,250 93,750
John C. Haggard ......... 148,125 89,375 588,150 222,750
</TABLE>

- ----------
(1) Market value of underlying securities is based on the average of the bid
and asked price per share ($5.00) of VASCO Corp. common stock as reported
on the OTC BB on December 31, 1997 minus the exercise price.

(2) Options vest as follows: 25% at the time of the grant, and 25% on each
subsequent anniversary of the grant. Options indicated as exercisable are
those options which were vested as of December 31, 1997. All options which
had not vested as of December 31, 1997 are indicated to be unexercisable.

EMPLOYMENT AGREEMENTS

Messrs. Hunt, Haggard, Im, Vaden and Apple have each entered into
Employment Agreements with the Company (the "Employment Agreements"), each
effective July 1, 1998. With the exception of the specific job titles and
responsibilities applicable to each individual covered by an Employment
Agreement as well as each individual's annual base salary, each of the
Employment Agreements contains substantially similar terms and conditions.

The Employment Agreements do not provide for a specific term of employment.
Rather, the Employment Agreements provide that the employees may be terminated
upon death or Disability (as defined in the Employment Agreements), for Cause
(as defined in the Employment Agreements), or without cause. In the event an
employee is terminated without cause, the employee is entitled to certain
severance benefits. The Employment Agreements contain provisions restricting the
ability of the employees to compete against the Company in the event their
employment with the Company is terminated.

The Employment Agreements provide each of the employees with a base salary
which is subject to review in accordance with the Company's normal practice for
executive salary review from time to time in effect. In addition, each employee
is entitled to receive an annual bonus as determined by the Company's
Compensation Committee, in accordance with the Company's Executive Incentive
Compensation Plan..

In the event an employee is terminated by the Company upon a "Change of
Control" (as defined in the Employment Agreements, each employee is entitled to
certain severance benefits consisting of continued salary payments for a set
period of time.

STOCK PERFORMANCE CHART

The graph below compares the cumulative total stockholder return on the
Common Stock for the period from March 31, 1998 through August 31, 1998 with the
cumulative total return on (1) Standard and Poor's SmallCap 600 Index and (ii)
Hambrecht & Quist's Growth Index. The comparison assumes the investment of $100
on March 31, 1998 in the Common Stock and in each of the indices and, in each
case, assumes reinvestment of all dividends. Prior to March 1998, the Common
Stock was not registered under the Exchange Act.

46
<PAGE>

<TABLE>
<CAPTION>
MARCH , MARCH 31, AUGUST 31,
1998 1998 1998
--------- ----------- ------------
<S> <C> <C> <C>
VASCO Data Security International, Inc. ......... 100 -- --
S&P SmallCap 600 Index& ......................... 100 -- --
Hambrecht & Quist Growth Index .................. 100 -- --
</TABLE>

- ----------
* [Partial returns are not available for the S&P MidCap Computer Software
Index and the S&P SmallCap 600 Index and therefor returns for these two
indices were measured from .]

DESCRIPTION OF SECURITIES

The Company's authorized capital stock consists of 75,000,000 share of
common stock, par value $.001 per share, and 500,000 shares of preferred stock,
par value $.01 per share. No shares of preferred stock are designated or have
been issued, and as of September 28, 1998, there were 20,336,057 shares of
Common Stock, are issued and outstanding.

COMMON STOCK

The holders of Common Stock will be entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
There is no cumulative voting with respect to the election of directors. As a
result, subject to the rights of holders of any series of the Company preferred
stock that may be designated in the future, holders of more than 50% of the
outstanding shares of Common Stock can elect all of the directors. Subject to
the rights of any outstanding shares of any series of preferred stock then
outstanding, the holders of Common Stock will be entitled to such dividends as
may be declared at the discretion of the Company Board of Directors out of funds
legally available therefor. Holders of Common Stock will be entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
preferred stock then outstanding.

The holders of Common Stock will have no preemptive or other subscription
rights to purchase shares of the Company. Shares of Common Stock will not be
subject to any redemption provisions and will not be convertible into any other
securities of the Company. All shares of Common Stock will be, when issued
pursuant to the Merger, fully paid and nonassessable.

PREFERRED SHARES

The preferred stock authorized in the Company's Certificate of
Incorporation, as amended, may be issued from time to time by the Company Board
of Directors as shares of one or more series. Subject to the provisions of the
Company's Certificate of Incorporation, as amended, and limitations imposed by
law, the Company Board of Directors is expressly authorized to adopt resolutions
to issue the shares, to fix the number of shares and to change the number of
shares constituting any series, and to provide for the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
preferred stock, in each case subject to the rights of the holders of any series
of preferred stock then outstanding, but without any further action or vote by
the holders of Common Stock.

One of the effects of undesignated preferred stock may be to enable the
Company is Board of Directors to render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to afford time to the Board of Directors to
determine whether such change in control is in the best interests of the Company
and all its shareholders. The issuance of shares of preferred stock pursuant to
the Board of Directors' authority described herein may adversely affect the
rights of the holders of Common Stock. For example, preferred stock issued by
the Company may rank prior to the Common Stock as to dividend rights, liqui-

47
<PAGE>

dation preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares of
preferred stock may discourage bids for the Common Stock at a premium or may
otherwise adversely affect the market price of the Common Stock.

OPTIONS

The purpose of the Company 1997 Stock Option Plan is to promote the
long-term success of the Company and its subsidiaries for the benefit of the
Company's stockholders by encouraging officers and employees of the Company and
its subsidiaries to have meaningful investments in the Company so that, as
stockholders themselves, those individuals will be more likely to represent the
views and interests of other stockholders and by providing incentives to such
officers and employees for continued service. The Company believes that the
possibility of participation under the Company 1997 Stock Option Plan will
provide this group of officers and employees an incentive to perform more
effectively and will assist the Company and its subsidiaries in attracting and
retaining people of outstanding training, experience and ability. The Company
1997 Stock Option Plan also allows for the grant of stock options to directors
of, and consultants and advisors to, the Company and its subsidiaries.

The Company 1997 Stock Option Plan was adopted by Old VASCO, the Company's
sole stockholder at the time of such approval. The Company 1997 Stock Option
Plan will remain in effect until terminated by the Company Board of Directors or
a committee appointed by the Company Board of Directors to administer the plan
(the "Committee"), which has exclusive authority to make awards under the
Company 1997 Stock Option Plan and all interpretations and determinations
affecting the Company 1997 Stock Option Plan. Participation in the Company 1997
Stock Option Plan is limited to officers, directors, employees, consultants and
advisers of the Company and its subsidiaries who are selected from time to time
by the Committee. Participants in the Company 1997 Stock Option Plan may also
participate in other incentive plans of the Company. The Company 1997 Stock
Option Plan provides for the grant of either ISOs or non-qualified stock options
for tax purposes.

5,000,000 shares of Common Stock are available for issuance under the
Company 1997 Stock Option Plan, subject to adjustment by the Committee under
certain circumstances. Such shares may consist in whole or in part of authorized
and unissued shares of Common Stock, or treasury shares.

As of July 31, 1998, there were 1,443,500 options outstanding for an
aggregate of 1,443,500 shares of Common Stock with exercise prices ranging
between $0.1875 and $6.00 per share, of which options for 1,062,500 shares were
fully vested and exercisable.

WARRANTS

As of July 31, 1998, there were outstanding warrants to purchase an
aggregate of 1,004,034 shares of Common Stock with exercise prices ranging from
$0.25 to $10.00.

CONVERTIBLE NOTES

GENERALE BANK. The Company presently has outstanding five notes which are
held by Generale Bank, a bank based in Belgium, and represent indebtedness in
the aggregate principal amount of $2.5 million. Each of these notes is in the
principal amount of $500,000, bears interest, payable quarterly, at the rate of
3.25% per annum, and matures on October 31, 1998, at which time 116% of the
principal amount becomes due and payable. In the event the Company completes a
public offering prior to September 30, 1998, the holder of a note has the option
to require the note to be repaid at 100% of the principal amount thereof, at the
holder's election, in cash or in common shares (valued at the public offering
price) and additional special interest is payable in the amount of $125,000. The
notes are convertible from the date a public offering of stock occurs until the
close of business on the maturity date of the notes at a conversion price equal
to the price per share at which the shares are sold in the public offering. If
the notes have neither been repaid nor converted prior to the September 30, 1998
maturity date, and remain unpaid on October 31, 1998, then beginning on November
1, 1998 until such time as the note is repaid in full, in the event a public
offering has not been completed the bank may convert the principal amount into
shares of Common Stock (i) at a conversion price equal to a historical

48
<PAGE>

20 day trading price in the United States if the stock is listed or quoted on
the Nasdaq, Easdaq or another national U.S. stock exchange, plus the payment of
$250,000 in special interest, payable in cash or shares at the option of the
bank, or (ii) if the shares are not so listed, at a conversion price of $1.00.
These notes are not prepayable.

ARTESIA BANK N.V. Effective August, 1997, VDSE entered into a convertible
loan agreement with Artesia Bank N.V. (formerly known as Banque Paribas Belgique
S.A.) in the principal amount of $3.4 million. The principal amount is
convertible into shares of Common Stock. This loan bears interest at the rate of
3.25%, payable annually, and matures on September 30, 2002. The loan is
convertible, commencing on the earlier of January 1, 1999 or the date of a
public offering of the Company shares on the Easdaq and/or Nasdaq and
terminating on August 31, 2002, at a conversion price equal to the per share
public offering price, provided, however, that if no such offering has occurred
prior to January 1, 1999, and thereafter no public offering has occurred, the
conversion price is the average closing market price for shares of Common Stock
on the OTC BB for the 20 trading days prior to the date of the notice of
conversion, less 10%. In the event a public offering is completed, the holder of
the note may at its option require the principal amount of the note to be repaid
in cash, in which case additional special interest is payable as follows:
$510,000 if repayment is between July 1, 1998 and December 31, 1998 (both dates
inclusive), and $680,000 if repayment is on January 1, 1999 or later.

The Company has two additional convertible notes outstanding. The first is
a convertible note in the aggregate principal amount of $5 million matures on
May 29, 2001 and bears interest at an annual rate of 9%. Interest on the note is
payable quarterly, and at the option of the holder interest payments are to be
made either in cash or in a number of shares of Common Stock determined on the
basis of an average market price. The Company Conversion Option of this note
provides that the note is convertible in whole or in part at any time, at the
option of the holder, into shares of Common Stock at a conversion price of
$12.00 per share. The note by its terms is not prepayable; however, the Company
and the holder of this note have amended the note to provide that, if during the
term of the note the Company receives funds of $30,000,000 or more from a public
offering of its common stock, the holder shall have the right to require the
Company to pay in cash all amounts due and owing pursuant to the note within 30
days of receipt by the Company of notice from the holder of the exercise of this
right.

The second convertible note in the aggregate principal amount of $3 million
matures on January 4, 1999 and bears interest at an annual rate of 9.5%.
Interest on the note is payable quarterly. The conversion option of this note
provides that the note is convertible in whole or in part at any time, at the
option of the holder, into shares of Common Stock at a conversion price of
$5.6813 per share.

REGISTRATION AND OTHER ARRANGEMENTS

The Company has entered into agreements with a number of holders of the
Company securities giving them registration rights under certain circumstances.

The registration rights agreement between the Company and Kyoto Securities,
Ltd. (the "Kyoto Agreement") provides that, before June 1, 2001, each time the
Company proposes to file a registration statement for the public sale of shares
of Common Stock, the Company must allow the holder to include in the
registration statement Common Stock held by the holder. The Company may offer
some or none of the Common Stock if, in the opinion of the managing underwriter,
the sale of the Common Stock would be materially detrimental to the success of
the offering. The holder must agree to offer its shares on the same terms and
conditions as the shares being offered by the Company.

The registration agreement by and between the Company, VDSE, Mario
Houthooft and Guy Denudt provides that each of Mario Houthooft and Guy Denudt
may include up to 27,143 shares of Common Stock in a the Company registration
statement (except those filed on Form S-4 or Form S-8). The managing underwriter
must determine that inclusion of Mr. Denudt's and Mr. Houthooft's shares will
not interfere with the successful marketing of the issuance.

REGISTRATION RIGHTS AGREEMENTS WITH HOLDERS OF THE COMPANY WARRANTS. Under
the Registration Rights Agreement, the Company must also include the shares of
Common Stock underlying the Company warrants in a registration statement if the
investors elect to register such shares. For a description of the Registration
Rights Agreement, see "-- Registration Rights Agreements with Holders of Common
Stock" above.

49
<PAGE>

The Kyoto Agreement provides that the holder may include in a registration
statement the shares of Common Stock underlying the Company warrants held by the
holder under the agreement in a registration statement filed before June 1,
2001. The Company may offer some or none of the shares of Common Stock
underlying the Company warrants if, in the opinion of the managing underwriter,
the sale of the Common Stock would be materially detrimental to the success of
the offering.

The warrants held by Osprey Partners, a management consulting firm, Mario
Houthooft, and others, provide that the shares of Common Stock underlying the
warrants have piggy back registration rights and must be included in the next
registration statement to be filed with the Securities and Exchange Commission.
Michael A. Mulshine, a Director of the Company, is a principal of Osprey
Partners.

REGISTRATION RIGHTS AGREEMENTS WITH HOLDERS OF THE COMPANY CONVERSION
OPTIONS. VDSE entered a convertible loan agreement with Artesia Bank N.V.,
giving the bank the option to convert its loan into shares of Common Stock.
Artesia Bank N.V. can exercise its conversion right on or after a "Share
Offering" by the Company on Easdaq or Nasdaq. The loan is to be converted into
shares of Common Stock listed on Nasdaq or Easdaq. The conversion rate is at a
price per share equal to the offering price. The conversion rights extend to a
public offering made by a new company set up by the Company for the purpose of
the public offering.

The Kyoto Agreement also grants the Company Conversion Options under a
convertible note. If the Company registers shares of Common Stock at a price of
not less than $15 per share with gross proceeds of $5 million or more, the
Company's obligations under the convertible note are automatically converted
into shares of Common Stock at the conversion price then applicable. As noted
above, the Company may offer some or none of the shares of Common Stock if, in
the opinion of the managing underwriter, the sale of the Common Stock would be
materially detrimental to the success of the offering. For a description of the
Kyoto Agreement, see "-- Registration Rights Agreements with Holders of Common
Stock" above.

OTHER ARRANGEMENTS. The Company entered into an agreement with Old VASCO
that provided for the Company's assumption, upon consummation of the Exchange
Offer, of certain of Old VASCO's obligations under a financing agreement with
Generale Bank for a $2.5 million loan and with respect to a registration rights
agreement with certain holders of Old VASCO Equity Equivalent Securities, as
well as for the substitution of Common Stock for Old VASCO Common Stock that may
be issued after the Exchange Offer pursuant to the Old VASCO Equity Equivalent
Securities and other agreements of Old VASCO.

The Company has entered into agreements comparable to those entered into by
Old VASCO with certain of its security holders to provide for registration
rights with respect to the shares of Old VASCO Common Stock that such holders
owned and converted pursuant to the Exchange Offer. The Company entered into
registration rights agreements with such holders containing provisions
substantially the same as those of the respective registration rights agreements
entered into by Old VASCO that were not performed prior to the completion of the
Exchange Offer.

DIVIDENDS. Neither Old VASCO nor the Company currently pays cash dividends
on Old VASCO Common Stock or Common Stock (as the case may be), and the Company
anticipates that it will not pay dividends in the foreseeable future.

50
<PAGE>

SELLING SECURITYHOLDERS

The following table sets forth certain information with respect to the
Warrant and Warrant Shares beneficially owned as of August 31, 1998 by the
Selling Securityholders. Such amounts reflect the maximum number of Warrants or
Warrant Shares that may be resold by each Selling Securityholder. All such
amounts individually represent less than one percent of the Common Stock
outstanding.

<TABLE>
<CAPTION>
NUMBER OF WARRANT/
SELLING SHAREHOLDER WARRANT SHARES
- -------------------------------------------------------------------- -------------------
<S> <C>
Anderson, John B.(1) ............................................... 853
B.B. Wiggen and B.A. Wiggen ........................................ 75,000
Bernhardt B. Wiggen ................................................ 7,568
Bernhardt Braa Wiggen, TTEE, FBO Bernhardt Braa Wiggen U/A 12/27/94 5,564
Bonnie D. Wiggen ................................................... 18,469
Bouck, Steven ...................................................... 3,555
Carol E. Dill, Trustee U/A 7/14/89 ................................. 1,750
Clark, Stephen D. .................................................. 7,510
David W. Sutter .................................................... 5,883
Denudt, Guy ........................................................ 162,500
Eugene Wong ........................................................ 16,000
First Analysis Securities Corp. .................................... 4,445
Forrest D. Laidley(1) .............................................. 5,8883
Generale Bank ...................................................... 40,000
Graham, Michael R. TTEE F/B/O Michael R. Graham L/T U/T/A/D 8/4/94 . 833
Graham, William M. ................................................. 833
Houthooft, Mario A.(1) ............................................. 162,500
Irwin Schlass Enterprises, Inc. .................................... 16,000
Jack P. Schleifer .................................................. 33,320
Jeffrey A. Krogh ................................................... 2,942
Sally J. Krogh ..................................................... 2,941
Keith Bates ........................................................ 5,000
Kevin P. Wiggen .................................................... 1,200
Kyoto Securities, Ltd. ............................................. 166,943
Linda Bilut ........................................................ 300
McMurrough, Marilyn & Mark ......................................... 4,165
Merrill Lynch IRA #208-84178 ....................................... 5,800
Michael Simplenski ................................................. 889
Mini-Flix, Inc. .................................................... 833
Monte Engler ....................................................... 17,336
Osprey Partners(2) ................................................. 200,000
Paine Webber, Inc. ................................................. 2,499
Parrish, Charles D. ................................................ 833
Parrish, Charles E. ................................................ 833
Remmers, Calvin C. & Nancy A. ...................................... 4,757
Richard Groberg .................................................... 800
Richard M. Vaden, Jr. .............................................. 638
Roache, James P. ................................................... 833
Robert W. Baird & Co., Inc. ........................................ 1,666
Seibert, Mary Jo ................................................... 833
Smith Barney Shearson IRA #567-61212-I-1-596 ....................... 7,568
Wiggen, Michael B. ................................................. 3,750
Wiggen, Patricia A. TTEE F/B/O Patricia A. Wiggen U/T/A/D .......... 563
Wiggen, Ralph E. ................................................... 833
Wright, Jeffrey A. ................................................. 833
</TABLE>

- ----------
(1) Current director of the Company.

(2) Mr. Mulshine, a current director of the Company, is a principal of Osprey
Partners.

51
<PAGE>

PLAN OF DISTRIBUTION

The Warrants and the Warrant Shares may be offered and sold from time to
time to purchasers directly by the Selling Securityholders or to or through
underwriters, broker-dealers or agents, who may receive compensation in the form
of underwriting discounts, concessions or commissions from the Selling
Securityholders or the purchasers of such securities for whom they may act as
agents. The Selling Securityholders and any underwriters, broker-dealers or
agents that participate in the distribution of Warrants or the Warrant Shares
may be deemed to be "underwriters" within the meaning of the Securities Act, and
any profit on the sale of the Warrants or the Warrant Shares and any discounts,
commissions, concessions or other compensation received by any such underwriter,
broker-dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.

The Warrants and the Warrant Shares may be sold from time to time by the
Selling Securityholders in one or more transactions at fixed prices, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
prices. The sale of the Warrants and the Warrant Shares may be effected in
transactions (which may involve crosses or block transactions) in the
over-the-counter market. In addition, any Warrants or Warrant Shares that
qualify for sale pursuant to Rule 144 under the Securities Act may be sold
pursuant to such Rule rather than pursuant to this Prospectus. At the time a
particular offering of the Warrants or the Warrant Shares is made, a supplement
to this Prospectus (a "Prospectus Supplement") will, to the extent required, be
distributed which will set forth the aggregate amount of Warrants or Warrant
Shares being offered and the terms of the offering, including the name or names
of any underwriters, broker-dealers or agents, any discounts, commissions and
other terms constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers. Each broker-dealer receiving the Warrants or Warrant Shares for
its own account pursuant to this Prospectus must acknowledge that it will
deliver the Prospectus and any Prospectus Supplement in connection with any sale
of such Warrants or Warrant Shares.

To comply with the securities laws of certain jurisdictions, to the extent
applicable, the Warrants and Warrant Shares will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Warrants and Warrant Shares may not be
offered or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with.

The Selling Securityholders will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder, which provisions may limit the timing of purchases and sales of any
of the Warrants or Warrant Shares by the Selling Securityholders. The foregoing
may affect the marketability of such securities.

Pursuant to the Warrant Agreement, certain expenses of the registration of
the Warrants and Warrant Shares will be paid by the Company, including, without
limitation, Commission filing fees, the fees and expenses of counsel and the
costs of compliance with state securities or "blue sky" laws; provided, however,
that the Selling Securityholders will pay all underwriting discounts, selling
commissions and transfer taxes, if any, applicable to any sales of the Warrants
and Warrant Shares.

EXPERTS

The consolidated financial statements and related financial statement
schedule of the Company as of December 31, 1996 and 1997 and for each of the
years in the three-year period ended December 31, 1997 appearing in this
Registration Statement have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as set forth in their reports thereon appearing
elsewhere herein. Such consolidated financial statements and related financial
statement schedule are included herein in reliance on such reports given on the
authority of said firm as experts in auditing and accounting.

52
<PAGE>

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

Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) ................ F-5
Consolidated Statements of Cash Flows .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7

F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of VASCO Data
Security International, Inc. and subsidiaries (the "Company") as of December 31,
1996 and 1997 and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VASCO Data Security
International, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP

Chicago, Illinois
March 13, 1998

F-2

<PAGE>

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- JUNE 30,
1996 1997 1998
--------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................. $ 1,813,593 $ 1,897,666 $ 2,245,602
Accounts receivable, net of allowance for doubtful accounts of
$452,000, $429,000 and $69,000 in 1996, 1997 and 1998, respec-
tively .............................................................. 3,242,618 2,458,451 2,185,590
Inventories, net ...................................................... 2,182,743 1,001,294 1,554,531
Prepaid expenses ...................................................... 471,902 86,426 660,160
Notes receivable ...................................................... 225,141 -- --
Deferred income taxes ................................................. 283,000 83,000 83,000
Other current assets .................................................. 399,963 221,572 341,084
------------ ------------- -------------
Total current assets ................................................ 8,618,960 5,748,409 7,069,967
Property and equipment:
Furniture and fixtures ................................................ 143,560 488,338 554,383
Office equipment ...................................................... 592,965 322,434 414,800
------------ ------------- -------------
736,525 810,772 969,183
Accumulated depreciation .............................................. (360,079) (497,381) (586,145)
------------ ------------- -------------
376,446 313,391 383,038
Goodwill, net of accumulated amortization of $59,000, $198,000
and $263,000 in 1996, 1997 and 1998, respectively.................... 819,041 704,124 639,667
Other assets .......................................................... 2,553,108 1,609,901 1,269,756
------------ ------------- -------------
Total assets ........................................................... $ 12,367,555 $ 8,375,825 $ 9,362,428
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-debt ....................................... $ 91,160 $ 3,185,400 $ 2,633,163
Accounts payable ...................................................... 1,945,644 1,083,965 716,408
Customer deposits ..................................................... 1,022,195 426,914 429,356
Other accrued expenses ................................................ 658,084 1,606,810 1,865,706
------------ ------------- -------------
Total current liabilities ........................................... 3,717,083 6,303,089 5,644,633
Long-term debt, including stockholder notes of $5,713,750 in 1996
and 1997 and $5,000,000 in 1998........................................ 9,113,750 8,442,946 11,470,524
Common stock subject to redemption ..................................... 741,894 494,668 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 8% cumulative series A convertible, $.01 par value -- 317,181
shares authorized; 117,171 shares issued and outstanding in 1996; -0- shares
issued and outstanding in 1997
and 1998 ............................................................ 1,172 -- --
Preferred stock, 12% cumulative series B convertible, $.01 par value
-- 9,500 shares authorized; 9,000 shares issued and outstanding
in 1996; -0- shares issued and outstanding in 1997 and 1998 ......... 90 -- --
Common stock, $.001 par value -- 50,000,000 shares authorized;
18,453,332 shares issued and outstanding in 1996; 20,132,968 shares issued
and outstanding in 1997; 20,331,057 shares issued
and outstanding in 1998 ............................................. 18,454 20,133 20,331
Additional paid-in capital ............................................ 8,783,425 9,186,726 9,796,543
Accumulated deficit ................................................... (9,903,257) (15,901,575) (17,504,393)
Accumulated other comprehensive income -- Cumulative transla-
tion adjustment ..................................................... (105,056) (170,162) (65,210)
------------ ------------- -------------
Total stockholders' equity (deficit) ................................... (1,205,172) (6,864,878) (7,752,729)
------------ ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ................... $ 12,367,555 $ 8,375,825 $ 9,362,428
============ ============= =============
</TABLE>

F-3

<PAGE>

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------------- --------------- ----------------
<S> <C> <C> <C>
Revenue:
Data security products ............................... $ 2,457,587 $ 9,988,885 $ 12,302,185
Training and consulting .............................. 1,237,546 203,600 --
----------- ------------ ------------
Total revenues ..................................... 3,695,133 10,192,485 12,302,185
Cost of goods sold: ...................................
Data security products ............................... 2,033,186 5,678,223 6,286,688
Training and consulting .............................. 854,217 193,245 --
----------- ------------ ------------
Total cost of goods sold ........................... 2,887,403 5,871,468 6,286,688
----------- ------------ ------------
Gross profit .......................................... 807,730 4,321,017 6,015,497
----------- ------------ ------------
Operating costs:
Sales and marketing .................................. 245,212 1,405,453 3,380,777
Research and development ............................. 242,002 574,766 1,801,575
General and administrative ........................... 854,979 3,647,760 4,768,378
Acquired in-process research and development ......... -- 7,350,992 --
----------- ------------ ------------
Total operating costs .............................. 1,342,193 12,978,971 9,950,730
----------- ------------ ------------
Operating loss ........................................ (534,463) (8,657,954) (3,935,233)
Interest expense ...................................... (73,576) (346,248) (1,148,183)
Other expense, net .................................... -- (42,407) (226,423)
----------- ------------ ------------
Loss before income taxes .............................. (608,039) (9,046,609) (5,309,839)
Provision (benefit) for income taxes .................. (251,000) 194,000 606,579
----------- ------------ ------------
Net loss .............................................. (357,039) (9,240,609) (5,916,418)
Preferred stock dividends ............................ (108,254) (108,160) (81,900)
----------- ------------ ------------
Net loss available to common stockholders ............. $ (465,293) $ (9,348,769) $ (5,998,318)
=========== ============ ============
Basic loss per common share ........................... $ (0.03) $ (0.53) $ (0.31)
=========== ============ ============
Shares used to compute basic loss per common share..... 14,817,264 17,533,369 19,105,684
=========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SIX MONTHS ENDED
JUNE 30,
--------------------------------
1997 1998
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Data security products ............................... $ 6,591,694 $ 6,137,729
Training and consulting .............................. -- --
------------ ------------
Total revenues ..................................... 6,591,694 6,137,729
Cost of goods sold: ...................................
Data security products ............................... 3,296,091 2,877,416
Training and consulting .............................. -- --
------------ ------------
Total cost of goods sold ........................... 3,296,091 2,877,416
------------ ------------
Gross profit .......................................... 3,295,603 3,260,313
------------ ------------
Operating costs:
Sales and marketing .................................. 1,603,009 1,929,140
Research and development ............................. 537,338 827,966
General and administrative ........................... 1,802,343 993,942
Acquired in-process research and development ......... -- --
------------ ------------
Total operating costs .............................. 3,942,690 3,751,048
------------ ------------
Operating loss ........................................ (647,087) (490,735)
Interest expense ...................................... (460,137) (879,585)
Other expense, net .................................... (72,750) (101,155)
------------ ------------
Loss before income taxes .............................. (1,179,974) (1,471,475)
Provision (benefit) for income taxes .................. 57,171 131,343
------------ ------------
Net loss .............................................. (1,237,145) (1,602,818)
Preferred stock dividends ............................ (54,000) --
------------ ------------
Net loss available to common stockholders ............. $ (1,291,145) $ (1,602,818)
============ ============
Basic loss per common share ........................... $ (0.07) $ (0.08)
============ ============
Shares used to compute basic loss per common share..... 18,495,858 20,363,002
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SERIES B PREFERRED
SERIES A PREFERRED STOCK STOCK
------------------------ --------------------
DESCRIPTION SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT 12/31/94 ............................... 317,181 $ 3,172 9,000 $ 90
Net loss ......................................... -- -- -- --
Cash dividends paid on preferred B ............... -- -- -- --
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- --
Issuance of treasury stock ....................... -- -- -- --
Stock compensation ............................... -- -- -- --
Exercise of stock options ........................ -- -- -- --
Common stock subject to redemption ............... -- -- -- --
------- -------- ----- -----
BALANCE AT 12/31/95 ............................... 317,181 3,172 9,000 90
Net loss ......................................... -- -- -- --
Cash dividends paid on preferred B ............... -- -- -- --
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- --
Exercise of stock options ........................ -- -- -- --
Issuance of common stock ......................... -- -- -- --
Issuance of common stock in connection with
Lintel acquisition ............................... -- -- -- --
Conversion of Series A preferred stock ........... (200,000) (2,000) -- --
Cumulative translation adjustment ................ -- -- -- --
Common stock subject to redemption ............... -- -- -- --
-------- -------- ----- -----
BALANCE AT 12/31/96 ............................... 117,181 1,172 9,000 90
Net loss ......................................... -- -- -- --
Cash dividends paid on preferred B ............... -- -- -- --
Exercise of stock options ........................ -- -- -- --
Cancellation of common stock ..................... -- -- -- --
Issuance of common stock ......................... -- -- -- --
Conversion of Series A preferred stock ........... (117,181) (1,172) -- --
Conversion of Series B preferred stock ........... -- -- (9,000) (90)
Repurchase of common stock ....................... -- -- -- --
Legal fees associated with sale of stock ......... -- -- -- --
Cumulative translation adjustment ................ -- -- -- --
-------- -------- ------ -----
BALANCE AT 12/31/97 ............................... -- $ -- -- $ --
1998 ACTIVITY (UNAUDITED):
Net loss ......................................... -- -- -- --
Exercise of stock options ........................ -- -- -- --
Exercise of stock warrants ....................... -- -- -- --
Cumulative translation adjustment ................ -- -- -- --
Reclass of put option ............................ -- -- -- --
Effect of Exchange Offer ......................... -- -- -- --
-------- -------- ------ -----
BALANCE AT 6/30/98 ................................ -- $ -- -- $ --
======== ======== ====== =====

<CAPTION>
COMMON STOCK
--------------------------- ACCUMULATED
DESCRIPTION SHARES AMOUNT APIC DEFICIT
- --------------------------------------------------- -------------- ------------ --------------- ------------------
<S> <C> <C> <C> <C>
BALANCE AT 12/31/94 ............................... 15,693,575 $ 15,694 $ 1,394,588 $ (89,195)
Net loss ......................................... -- -- -- (357,039)
Cash dividends paid on preferred B ............... -- -- -- (108,000)
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- (254)
Issuance of treasury stock ....................... -- -- 159,688 --
Stock compensation ............................... 50,000 50 66,708 --
Exercise of stock options ........................ 50,000 50 78,244 --
Common stock subject to redemption ............... -- -- (190,694) --
---------- -------- ----------- --------------
BALANCE AT 12/31/95 ............................... 15,793,575 15,794 1,508,534 (554,488)
Net loss ......................................... -- -- -- (9,240,609)
Cash dividends paid on preferred B ............... -- -- -- (108,000)
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- (160)
Exercise of stock options ........................ 24,000 24 5,215 --
Issuance of common stock ......................... 1,161,773 1,162 4,252,240 --
Issuance of common stock in connection with
Lintel acquisition ............................... 140,651 141 3,387,769 --
Conversion of Series A preferred stock ........... 1,333,333 1,333 667 --
Cumulative translation adjustment ................ -- -- -- --
Common stock subject to redemption ............... -- -- (371,000) --
---------- -------- ----------- --------------
BALANCE AT 12/31/96 ............................... 18,453,332 18,454 8,783,425 (9,903,257)
Net loss ......................................... -- -- -- (5,916,418)
Cash dividends paid on preferred B ............... -- -- -- (81,900)
Exercise of stock options ........................ 189,375 189 42,281 --
Cancellation of common stock ..................... (16,489) (17) -- --
Issuance of common stock ......................... 83,714 83 418,079 --
Conversion of Series A preferred stock ........... 778,383 779 391 --
Conversion of Series B preferred stock ........... 644,653 645 (555) --
Repurchase of common stock ....................... -- -- -- --
Legal fees associated with sale of stock ......... -- -- (56,895) --
Cumulative translation adjustment ................ -- -- -- --
---------- -------- ----------- --------------
BALANCE AT 12/31/97 ............................... 20,132,968 $ 20,133 $ 9,186,726 $ (15,901,575)
1998 ACTIVITY (UNAUDITED):
Net loss ......................................... -- -- -- (1,602,818)
Exercise of stock options ........................ 653,257 653 114,694 --
Exercise of stock warrants ....................... 14,472 (15 (15) --
Cumulative translation adjustment ................ -- -- -- --
Reclass of put option ............................ -- -- 494,668 --
Effect of Exchange Offer ......................... (469,640) (470) 470 --
---------- -------- ----------- --------------
BALANCE AT 6/30/98 ................................ 20,331,057 $ 20,331 $ 9,796,543 $ (17,504,393)
========== ======== =========== ==============

<CAPTION>
TREASURY STOCK
CUMULATIVE ---------------------------
DESCRIPTION TRANSLATION ADJ. SHARES AMOUNT TOTAL
- --------------------------------------------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
BALANCE AT 12/31/94 ............................... $ -- 1,201,250 $ (40,650) $ 1,283,699
Net loss ......................................... -- -- -- (357,039)
Cash dividends paid on preferred B ............... -- -- -- (108,000)
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- (254)
Issuance of treasury stock ....................... -- (217,352) 7,349 167,037
Stock compensation ............................... -- (250,975) 8,486 75,244
Exercise of stock options ........................ -- (445,000) 17,706 96,000
Common stock subject to redemption ............... -- -- -- (190,694)
----------- --------- ---------- -------------
BALANCE AT 12/31/95 ............................... -- 287,923 (7,109) 965,993
Net loss ......................................... -- -- -- (9,240,609)
Cash dividends paid on preferred B ............... -- -- -- (108,000)
Dividends payable on pref. A upon conver-
sion ............................................. -- -- -- (160)
Exercise of stock options ........................ -- -- -- 5,239
Issuance of common stock ......................... -- -- -- 4,253,402
Issuance of common stock in connection with
Lintel acquisition ............................... -- (287,923) 7,109 3,395,019
Conversion of Series A preferred stock ........... -- -- -- --
Cumulative translation adjustment ................ (105,056) -- -- (105,056)
Common stock subject to redemption ............... -- -- -- (371,000)
----------- --------- ---------- -------------
BALANCE AT 12/31/96 ............................... (105,056) -- -- (1,205,172)
Net loss ......................................... -- -- -- (5,916,418)
Cash dividends paid on preferred B ............... -- -- -- (81,900)
Exercise of stock options ........................ -- -- -- 42,470
Cancellation of common stock ..................... -- -- -- (17)
Issuance of common stock ......................... -- (32,504) 227,528 645,690
Conversion of Series A preferred stock ........... -- (2,824) 19,768 19,766
Conversion of Series B preferred stock ........... -- -- -- --
Repurchase of common stock ....................... -- 35,328 (247,296) (247,296)
Legal fees associated with sale of stock ......... -- -- -- (56,895)
Cumulative translation adjustment ................ (65,106) -- -- (65,106)
----------- --------- ---------- -------------
BALANCE AT 12/31/97 ............................... $ (170,162) -- $ -- $ (6,864,878)
1998 ACTIVITY (UNAUDITED):
Net loss ......................................... -- -- -- (1,602,818)
Exercise of stock options ........................ -- -- -- 115,347
Exercise of stock warrants ....................... -- -- -- --
Cumulative translation adjustment ................ 104,952 -- -- 104,952
Reclass of put option ............................ -- -- -- 494,668
Effect of Exchange Offer ......................... -- -- -- --
----------- --------- ---------- -------------
BALANCE AT 6/30/98 ................................ $ (65,210) -- $ -- $ (7,752,729)
=========== ========= ========== =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE>

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

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (357,039) $ (9,240,609) $ (5,916,418)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Acquired in-process research and development ............. -- 7,350,992 --
Depreciation and amortization ............................ 483,545 728,734 1,248,807
Interest paid in shares of common stock .................. -- 118,750 418,196
Deferred income taxes .................................... (251,000) 162,000 200,000
Compensation expense ..................................... 75,244 -- --
Changes in current assets and current liabilities:
Accounts receivable, net ............................... 168,858 (1,067,374) 784,167
Inventories, net ....................................... 53,302 578,143 1,181,449
Other current assets ................................... (48,640) (279,940) 563,867
Accounts payable ....................................... (23,911) 459,068 (861,679)
Customer deposits ...................................... -- 1,022,195 (595,281)
Other accrued expenses ................................. (41,660) (1,728,397) 948,726
---------- ------------ ------------
Net cash provided by (used in) operations ................... 58,699 (1,896,438) (2,028,166)
---------- ------------ ------------
Cash flows from investing activities:
Acquisition of Lintel/Digipass ............................. -- (4,461,144) --
Additions to property and equipment ........................ (93,749) (283,142) (127,646)
---------- ------------ ------------
Net cash used in investing activities ....................... (93,749) (4,744,286) (127,646)
---------- ------------ ------------
Cash flows from financing activities:
Series B preferred stock dividends ......................... (108,000) (108,000) (81,900)
Net proceeds from issuance of common stock ................. 443,237 4,133,605 (56,895)
Proceeds from exercise of stock options .................... -- 5,238 42,470
Redemption of common stock ................................. -- -- (247,261)
Proceeds from issuance of debt ............................. 810,986 4,986,096 2,716,141
Repayment of debt .......................................... (404,697) (1,202,178) (67,564)
---------- ------------ ------------
Net cash provided by financing activities ................... 741,526 7,814,761 2,304,991
Effect of exchange rate changes on cash ..................... -- (105,056) (65,106)
---------- ------------ ------------
Net increase in cash ........................................ 706,476 1,068,981 84,073
Cash, beginning of period ................................... 38,136 744,612 1,813,593
---------- ------------ ------------
Cash, end of period ......................................... $ 744,612 $ 1,813,593 $ 1,897,666
========== ============ ============
Supplemental disclosure of cash flow information:
Interest paid ............................................... $ 67,087 $ 51,929 $ 53,865
Income taxes paid ........................................... $ -- $ 120,319 $ 415,480
Supplemental disclosure of noncash investing and financing
activities:
Fair value of assets acquired from Lintel/Digipass ......... $ 12,003,644
Cash paid .................................................. (4,461,144)
------------
Notes payable, common stock and warrants issued ............ $ 7,542,500
============
Common stock issued upon conversion of Series A
preferred stock ........................................... $ -- $ 2,000 $ 1,172
========== ============ ============
Common stock issued upon conversion of Series B
preferred stock ........................................... $ -- $ -- $ 90
========== ============ ============

<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (1,237,145) $ (1,602,818)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Acquired in-process research and development ............. -- --
Depreciation and amortization ............................ 528,939 494,719
Interest paid in shares of common stock .................. 193,196 --
Deferred income taxes .................................... -- --
Compensation expense ..................................... -- --
Changes in current assets and current liabilities:
Accounts receivable, net ............................... 470,472 272,861
Inventories, net ....................................... 305,836 (553,237)
Other current assets ................................... 85,422 (693,246)
Accounts payable ....................................... (1,084,972) (367,557)
Customer deposits ...................................... (564,158) 2,442
Other accrued expenses ................................. 123,050 258,897
------------ ------------
Net cash provided by (used in) operations ................... (1,179,360) (2,187,939)
------------ ------------
Cash flows from investing activities:
Acquisition of Lintel/Digipass ............................. -- --
Additions to property and equipment ........................ (39,870) (159,765)
------------ ------------
Net cash used in investing activities ....................... (39,870) (159,765)
------------ ------------
Cash flows from financing activities:
Series B preferred stock dividends ......................... (54,000) --
Net proceeds from issuance of common stock ................. (56,895) 115,347
Proceeds from exercise of stock options .................... 28,938 --
Redemption of common stock ................................. (247,261) --
Proceeds from issuance of debt ............................. 2,716,141 3,027,578
Repayment of debt .......................................... (32,126) (552,237)
------------ ------------
Net cash provided by financing activities ................... 2,354,797 2,590,688
Effect of exchange rate changes on cash ..................... (86,470) 104,952
------------ ------------
Net increase in cash ........................................ 1,049,097 347,936
Cash, beginning of period ................................... 1,813,593 1,897,666
------------ ------------
Cash, end of period ......................................... $ 2,862,690 $ 2,245,602
============ ============
Supplemental disclosure of cash flow information:
Interest paid ............................................... $ 106,411 $ 175,901
Income taxes paid ........................................... $ -- $ 133,014
Supplemental disclosure of noncash investing and financ-
ing activities:
Fair value of assets acquired from Lintel/Digipass .........
Cash paid ..................................................
Notes payable, common stock and warrants issued ............
Common stock issued upon conversion of Series A
preferred stock ........................................... $ -- $ --
============ ============
Common stock issued upon conversion of Series B
preferred stock ........................................... $ -- $ --
============ ============

</TABLE>

See accompanying notes to consolidated financial statements.

F-6

<PAGE>

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

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Exchange Offer

VASCO Data Security International, Inc. ("VDSI, Inc." or the "Company") was
organized in 1997 as a subsidiary of VASCO Corp., a Delaware corporation ("VASCO
Corp."). Pursuant an exchange offer ("Exchange Offer") by VDSI Inc. for
securities of VASCO Corp. that was completed March 11, 1998, VDSI Inc. acquired
97.7% of the common stock of VASCO Corp. Consequently, VASCO Corp. became a
subsidiary of VDSI Inc., with the remaining 2.3% of VASCO Corp. shareholders
representing a minority interest. The impact of the minority interest is not
material to the Company's consolidated financial statements. The accompanying
consolidated financial statements have been restated to account for the Exchange
Offer as a transaction between entities under common control in a manner similar
to a pooling of interests. The assets and liabilities of VASCO Corp. were
recorded by VDSI Inc. at their historical carrying values.

Nature of Operations

VDSI, Inc. and its subsidiaries offer a variety of computer security
products and services. The Company's patented and proprietary hardware and
software products provide computer security, Advanced Authentication Technology
and RSA/DES encryption for financial institutions, industry and government. The
primary market for these products is Europe.

Use of Estimates

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

Principles of Consolidation

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

Revenue Recognition

Revenues from the sale of computer security hardware and imbedded software
are recorded upon shipment. No significant Company obligations exist with regard
to delivery or customer acceptance following shipment.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from three to seven years. Additions and improvements are capitalized,
while expenditures for maintenance and repairs are charged to operations as
incurred. The cost and accumulated depreciation of property sold or retired are
removed from the respective accounts and the resultant gains or losses, if any,
are included in current operations.

Software Costs

The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86. Research and
development costs, prior to the establishment of technological feasibility,
determined based upon the creation of a working model, are expensed as

F-7

<PAGE>

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

incurred. The Company's policy is to amortize capitalized costs by the greater
of (a) the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product,
generally two to five years, including the period being reported on. Unamortized
capitalized costs determined to be in excess of the net realizable value of a
product are expensed at the date of such determination.

The Company expensed $444,795, $180,275 and $0 in 1995, 1996 and 1997,
respectively, for the amortization of capitalized software costs.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Fair Value of Financial Instruments and Long-Lived Assets

The following disclosures of the estimated fair value of financial
instrument are made in accordance with the requirements of SFAS No. 107,
"Disclosures and Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. The fair values of the Company's
financial instruments were not materially different from their carrying amounts
at December 31, 1996 and 1997, except for notes payable and long-term debt, for
which the fair value is not determinable.

On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
under which the Company has reviewed long-lived assets and certain intangible
assets and determined that their carrying values as of December 31, 1997 are
recoverable in future periods.

Stock-Based Compensation

On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize the compensation
expense associated with the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees," and provide pro forma net income and earnings per
share disclosures as if the fair value method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion 25 and
provide the pro forma disclosures of SFAS No. 123.

Foreign Currency Translation and Transactions

The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Accordingly, assets and liabilities are translated into U.S. dollars using
current exchange rates as of the balance sheet date. Revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.

F-8

<PAGE>

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

Goodwill

Goodwill is amortized on a straight-line basis over the expected period to
be benefited, which is seven years. Adjustments to the carrying value of
goodwill are made if the sum of expected future undiscounted net cash flows from
the business acquired is less than the book value of goodwill.

Loss Per Common Share

In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which established new methods for computing and presenting earnings
per share ("EPS") and replaced the presentation of primary and fully-diluted EPS
with basic ("Basic") and diluted EPS. Basic earnings per share is based on the
weighted average number of shares outstanding and excludes the dilutive effect
of unexercised common stock equivalents. Diluted earnings per share is based on
the weighted average number of shares outstanding and includes the dilutive
effect of unexercised common stock equivalents. Because the Company reported a
net loss for the years ended December 31, 1995, 1996 and 1997, per share amounts
have been presented under the basic method only.

Had the Company reported net earnings for the years ended December 31,
1995, 1996 and 1997, the weighted average number of shares outstanding would
have potentially been diluted by the following common equivalent securities (not
assuming the effects of applying the treasury stock method to outstanding stock
options or the if-converted method to convertible securities):

<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Stock options ............................. 1,425,382 1,661,632 1,945,257
Warrants .................................. 200,000 928,578 1,056,922
Convertible notes (June 1996) ............. -- 518,595 518,595
Convertible notes (July 1997)* ............ -- -- 657,895
Convertible notes (August 1997)* .......... -- -- 893,632
--------- --------- ---------
1,625,382 3,108,805 5,072,301
========= ========= =========
</TABLE>

- ----------
* Due to the contingent nature of the conversion feature of these notes, a
20-day average market price was used to calculate the diluted number of
shares.

Additionally, net earnings applicable to common stockholders for the years
ended December 31, 1996 and 1997 would have been increased by interest expense
related to the convertible notes of $265,450 and $980,250, respectively.

Interim Financial Statements

The accompanying unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods. All such adjustments
are of a normal recurring nature. The interim results are not necessarily
indicative of those for the full year.

NOTE 2 -- ACQUISITIONS

Effective March 1, 1996, the Company acquired a 15% interest in Lintel NV
(Lintel). On June 1, 1996, the Company acquired the remaining 85% of Lintel.
Lintel, located in Brussels, Belgium, was a developer of security technologies
for personal computers, computer networks and telecommunications systems, using
cryptographic algorithms such as DES and RSA. The results of Lintel's operations
are included in the Company's consolidated statement of operations from March 1,
1996 with minority interest being reflected in other expense in the consolidated
statement of operation for the period from March 1, 1996 to June 1, 1996. The
purchase price was $4,432,000, consisting of $289,482 in cash, $747,500

F-9

<PAGE>

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

in 8% convertible notes payable due May 30, 1998 and convertible to common stock
at a rate of $7.00 per share, 428,574 shares of Common Stock valued at $7.00 per
share, and 100,000 purchase warrants for Common Stock at an exercise price of
$7.00. The warrants were recorded at their fair value on the date of grant.

The acquisition of Lintel was accounted for as a purchase and, accordingly,
the acquired assets have been recorded at their estimated fair values at the
date of the acquisition. Acquired in-process research and development in the
amount of $2,900,000 was expensed during 1996 in conjunction with the
acquisition, based upon an independent third-party valuation. Goodwill related
to this transaction was $387,000, which is being amortized over a period of
seven years.

Effective July 1, 1996, the Company acquired Digipass s.a. (Digipass).
Digipass, located in Belgium, was a developer of security technologies for
personal computers, computer networks and telecommunications systems using the
DES cryptographic algorithm. Prior to the Company's acquisition of Digipass, the
assets of the interactive voice response (IVR) business of Digiline SA were
transferred to Digipass. Digipass' IVR products are used primarily in
telebanking applications and in corporate authentication and access control
technology. The purchase price was $8,200,000, with $4,800,000 being paid at the
effective date of acquisition, and the balance of $3,400,000 in the form of a
note, which was paid in August 1997.

The acquisition of Digipass was accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the date of the acquisition. Acquired in-process
research and development in the amount of $4,451,000 was expensed during 1996,
based upon an independent third-party valuation. Goodwill related to this
transaction was $491,000, which is being amortized over a period of seven years.
The results of operations for Digipass have been included in the consolidated
statement of operations subsequent to July 1, 1996.

Other assets, resulting from the acquisitions of Lintel and Digipass, are
comprised of the following at December 31, 1997 and 1996 (net of accumulated
amortization):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Software and hardware technology ......... $1,540,417 $ 988,417
Workforce ................................ 514,167 200,388
Customer lists ........................... 498,524 421,096
---------- ----------
$2,553,108 $1,609,901
========== ==========
</TABLE>

Software and hardware technology is being amortized over a period of three
to four years while workforce and customer lists are being amortized over a
period of seven years. Amortization of these assets was $374,892 and $943,207
for the years ended December 31, 1996 and 1997, respectively. Included in the
1997 amortization is a write-down in the amount of $234,493 related to the
workforce of Digipass, due to attrition realized during the year.

The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions has occurred at the beginning of 1996. This
summary is provided for informational purposes only. If does not necessarily
reflect the actual results that would have occurred had the acquisitions been
made as of those dates or of results that may occur in the future.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Total revenues .................... $ 11,622,809 $ 13,654,420
Net loss .......................... (1,738,359) (9,507,076)
Net loss per common share ......... (0.12) (0.53)
</TABLE>

F-10

<PAGE>

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

NOTE 3 -- INVENTORIES

Inventories, consisting principally of hardware and component parts, are
stated at the lower of cost or market. Cost is determined using the
first-in-first-out (FIFO) method.

Inventories are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
--------------- -------------
<S> <C> <C>
Component parts ............................ $ 338,325 $ 569,922
Work-in-process and finished goods ......... 1,998,286 595,133
Obsolescence reserves ...................... (153,868) (163,761)
----------- ----------
$ 2,182,743 $1,001,294
=========== ==========
</TABLE>

The Company uses multiple suppliers for the microprocessors used in the
production of hardware products, as well as for the assembly of the products.
The microprocessors are the only components of the Company's hardware devices
that would be considered non-commodity items and may not be readily available on
the open market. There is, however, an inherent risk associated with each
supplier of microprocessors. In order to increase orders of microprocessors, a
lead time of 12 weeks is typically needed. The Company maintains a sufficient
inventory of all component parts to handle short-term spikes in order
quantities.

NOTE 4 -- OTHER ACCRUED EXPENSES

Other accrued expenses are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- -------------
<S> <C> <C>
Accrued expenses .......... $330,919 $ 553,683
Accrued interest .......... 126,966 657,799
Accrued payroll ........... -- 171,231
Accrued dividends ......... 196,977 168,509
Other ..................... 3,222 55,588
-------- ----------
$658,084 $1,606,810
======== ==========

</TABLE>

NOTE 5 -- INCOME TAXES

At December 31, 1997, the Company has net operating loss carryforwards
approximating $4,722,000 and foreign net operating loss carryforwards
approximating $1,025,000. Such losses are available to offset future taxable
income at VDSI, Inc. and its U.S. subsidiary and expire in varying amounts
beginning in 2002 and continuing through 2012. In addition, if certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the carryforwards which could be utilized. In
fiscal 1995, the Company had no current tax provision due to the utilization of
approximately $66,000 of loss carryforward benefits.

F-11

<PAGE>

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

Pretaxloss from continuing operations was taxed in the following
jurisdictions:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997
--------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic ......... $ (608,039) $ (1,205,853) $ (4,655,220)
Foreign .......... -- (7,840,756) (654,619)
----------- ------------- -------------
Total ........... $ (608,039) $ (9,046,609) $ (5,309,839)
=========== ============= =============
</TABLE>

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
--------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal ......... $ -- $ -- $ --
State ........... -- -- --
Foreign ......... -- 31,670 406,579

Deferred:
Federal ......... $ (219,846) $ 142,182 $ 175,176
State ........... (31,154) 20,148 24,824
Foreign ......... -- -- --
----------- --------- ---------
Total ........... $ (251,000) $ 194,000 $ 606,579
=========== ========= =========

</TABLE>

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

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Expected tax benefit at the statutory rate ............ $ (121,393) $ (3,075,847) $ (1,805,345)
Increase (decrease) in income taxes resulting from:
State tax expense, net of federal benefit ............ (29,319) (56,414) (144,937)
Foreign taxes at rates other than 34% ................ -- 163,107 149,549
Change in valuation allowance ........................ -- 631,000 1,779,000
Nondeductible acquired in-process technology ......... -- 2,499,337 --
Nondeductible expenses ............................... (85,340) 2,831 622,257
Other, net ........................................... (14,948) 29,986 6,055
---------- ------------ ------------
$ (251,000) $ 194,000 $ 606,579
========== ============ ============

</TABLE>

F-12

<PAGE>

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

The deferred income tax balances are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforward ............ $ 631,000 $ 1,833,000
Foreign net operating loss carryforward ......... -- 412,000
Inventory ....................................... 60,000 44,000
Accounts receivable ............................. 175,000 149,000
Fixed assets .................................... 44,000 30,000
Other ........................................... 4,000 25,000
---------- ------------
Total gross deferred income tax assets ........... 914,000 2,493,000
Less valuation allowance ......................... (631,000) (2,410,000)
---------- ------------
Net deferred income taxes ........................ $ 283,000 $ 83,000
========== ============
</TABLE>

The net change in the total valuation allowance for the years ended
December 31, 1996 and 1997 was an increase of $631,000 and $1,779,000,
respectively. In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
period in which these temporary differences become deductible. This assessment
was performed considering the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies. The Company has
determined that it is more likely than not that $83,000 of deferred tax assets
will be realized. The remaining valuation allowance of $2,410,000 is maintained
on deferred tax assets which the Company has not determined to be more likely
than not realizable as of December 31, 1997. This valuation allowance will be
reviewed on a regular basis and adjustments made as appropriate.

NOTE 6 -- DEBT

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Convertible stockholder note, interest payable at 9% .................... $ 5,000,000 $ 5,000,000
Convertible stockholders' notes, interest payable at 8% ................. 713,750 636,921
Note related to Digipass acquisition, interest payable at 5.33% ......... 3,400,000 --
Convertible note, interest payable at 3.25% ............................. -- 3,400,000
Convertible note, interest payable at 3.25% ............................. -- 2,500,000
Installment notes payable ............................................... 88,578 91,425
Installment notes payable, secured by certain equipment ................. 2,582 --
----------- ------------
9,204,910 11,628,346
Less current maturities ................................................. (91,160) (3,185,400)
----------- ------------
Long-term debt .......................................................... $ 9,113,750 $ 8,442,946
=========== ============
</TABLE>

In June 1997, the Company entered into a new financing agreement with a
European bank. The new agreement provides for $2.5 million in financing, matures
on September 30, 1998, bears interest at a rate of 3.25% annually and is
convertible into common stock of the Company at the option of the bank, at
conversion prices as specified in the agreement. In the event the Company
completes a public offering prior to September 30, 1998, the holder of a note
has the option within seven days after the completion of a public offering to
require the note to be repaid at 100% of the principal amount thereof in cash or

F-13

<PAGE>

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

in common stock (valued at the public offering price), at the holder's election,
together with all accrued and unpaid interest to the date of repayment plus
additional special interest payable in cash as follows: $88,235 if repayment is
between January 1, 1998 and March 31, 1998 and $125,000 if repayment is between
April 1, 1998 and September 30, 1998.

In August 1997, the Company renegotiated the guarantee related to the final
payment for the 1996 acquisition of Digipass into a term loan in the amount of
$3.4 million. The note matures on September 30, 2002 and bears interest at a
rate of 3.25% annually. In the event a public offering is completed, the lender
may at its option require the principal amount of the loan to be repaid in cash,
in which case additional special interest is payable as follows: $340,000 if
repayment is on or before June 30, 1998, $510,000 if repayment is between July
1, 1998 and December 31, 1998 and $680,000 if repayment is on January 1, 1999 or
later. In addition, the note is convertible into common stock of the Company at
the option of the bank, at a conversion prices as specified in the agreement.

During 1996, the Company acquired two companies located in Europe (see Note
2). To facilitate the first acquisition, Lintel, one component of the purchase
price was represented by two convertible notes, each payable in the amount of
$373,750 ($747,500 total) due May 30, 1998. The notes are convertible at the
holders' option at a rate of $7.00 per share of common stock. During 1996 and
1997, these notes were paid down by $33,750 and $76,829, respectively. Each of
these notes bears an interest rate of 8%, with interest payments made on a
quarterly basis. At the holders' option, the interest may be paid either in cash
or in common stock of the Company. In calculating the shares of common stock to
be issued in lieu of cash interest, the average closing price for Common Stock
for the previous 20 trading days is used.

During 1996, the Company continued to raise capital privately, including a
private placement consisting of the issuance of 666,666 shares of common stock
and a $5,000,000 convertible note due May 29, 2001. The note bears interest at
9%, with interest payable to the holder on a quarterly basis. The holder may, at
its option, elect to receive interest payments in cash or common stock. In
calculating the shares of common stock to be issued in lieu of cash interest,
the average closing price for Common Stock for the previous 20 trading days is
used.

Aggregate maturities of debt at December 31, 1997 are as follows:

<TABLE>
<S> <C>
1998 ........................ $ 3,185,400
1999 ........................ 20,223
2000 ........................ 22,723
2001 ........................ 5,000,000
2002 and thereafter ......... 3,400,000
-----------
Total ....................... $11,628,346
===========
</TABLE>

Interest expense to stockholders was $12,900, $265,565 and $507,100 for the
years ended December 31, 1995, 1996 and 1997, respectively.

NOTE 7 -- STOCKHOLDERS' EQUITY

Preferred Stock

The Company has the authority to issue 500,000 shares of preferred stock of
which 317,181 have been designated Series A, 8% convertible preferred stock and
9,500 have been designated Series B, 12% convertible preferred stock. The
remaining 173,319 shares are undesignated.

The Series A, 8% convertible preferred stock (Series A Shares) consists of
317,181 shares that carry a cumulative dividend, payable upon conversion, of 8%
per annum. During 1996, 200,000 Series A Shares were converted into 1,333,333
shares of common stock; the remaining 117,181 Series A Shares were converted
into 781,207 shares of common stock during 1997.

F-14

<PAGE>

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

The Series B, 12% convertible preferred stock (Series B Shares) consists of
9,000 shares that carry a cumulative dividend, payable monthly, of 12% per annum
based on a liquidation value of $100 per share. On September 17, 1997, all 9,000
Series B Shares were converted into 644,653 shares of common stock.

Common Stock

During 1995, the Company privately placed 108,676 equity units, each
consisting of two shares of common stock reissued from treasury with one warrant
to purchase one share of common stock at $6.00. Included in the 108,676 equity
units are 53,000 equity units subject to redemption, at the option of the
holder, at a price of $7.00 per share, or $14.00 per equity unit. In March 1997,
17,664 of these equity units (representing 35,328 shares of common stock and
17,664 warrants) were redeemed at $14.00 per equity unit, with 70,667 warrants
to purchase one share of common stock at $5.19 being issued to the holders of
the redeemed units.

In July 1997, the Company reissued 2,824 shares of common stock from
treasury and 778,383 original issue shares in conjunction with the conversion of
the 117,181 Series A Shares (see Preferred Stock above). Additionally, in
September 1997, the Company issued 644,653 shares of common stock in conjunction
with the conversion of the 9,000 Series B Shares (see Preferred Stock above).

Additional common stock transactions during 1997 were as follows: 189,375
shares of common stock were issued as a result of the exercise of options under
the Company's incentive stock option plan (see Note 8) for total proceeds of
$42,470; 16,489 shares of common stock that had been issued in December 1996
were subsequently canceled; and 116,218 shares of common stock were issued in
lieu of interest related to the $5,000,000 convertible note placed during 1996
(see Note 6).

During 1996, the Company reissued 287,923 shares of treasury stock, issued
140,651 shares of common stock and 100,000 warrants to purchase one share of
common stock at $7.00 as a part of the acquisition of Lintel (see Note 2). The
warrants were recorded at their fair value on the date of grant. In addition,
the Company continued to raise money through private placements of its common
stock. In the first quarter of 1996, the Company privately placed 167,482 shares
of common stock and 83,741 warrants to purchase one share of common stock at
$6.00, generating $284,720 in net proceeds. The warrants are exercisable at the
option of the holder, however, the Company maintains the right to require
exercise of the warrants 30 days prior to a public offering of the Company's
stock.

During the second quarter of 1996, the Company placed 666,666 shares of
common stock with 137,777 warrants to purchase one share of common stock at
$4.50. Total issue fees and costs of $170,000 have been netted against
$3,000,000 of proceeds from the placement in the Company's financial statements.
In addition, 55,555 shares of common stock and 8,889 warrants to purchase one
share of common stock at $4.50 were issued as commissions related to the
placement.

The Company raised additional funds in 1996 in a private placement of
237,060 shares of common stock with 35,329 warrants to purchase one share of
common stock at $4.50. Total issue fees and costs of $47,885 have been netted
against the $1,066,770 in total proceeds from the placement in the Company's
financial statements. In addition, 16,489 shares of common stock were issued as
commissions related to the placement, but were canceled in 1997.

Additional common stock transactions during 1996 were as follows: 1,333,333
shares of common stock were issued pursuant to the conversion of 200,000 shares
of Series A preferred stock; 24,000 shares of common stock were issued as a
result of the exercise of options under the Company's incentive stock option
plan (see Note 8) for total proceeds of $5,238; and 20,021 shares of common
stock were issued in lieu of an interest payment in the amount of $118,750
related to the private debt placement that occurred during 1996 (see Note 6).

F-15

<PAGE>

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

NOTE 8 -- STOCK OPTION PLAN

The Company's 1987 Stock Option Plan, as amended, (Option Plan) is designed
and intended as a performance incentive. The Option Plan is administered by the
Compensation Committee as appointed by the Board of Directors of the Company
(Compensation Committee).

The Option Plan permits the grant of options to employees of the Company to
purchase shares of common stock intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (Code). All
options granted to employees are for a period of ten years, are granted at a
price equal to the fair market value of the common stock on the date of the
grant and are vested 25% on the date of grant and an additional 25% on each
subsequent anniversary of the grant.

The Option Plan further permits the grant of options to directors,
consultants and other key persons (non-employees) to purchase shares of common
stock not intended to qualify as incentive stock options under the Code. All
options granted to non-employees are for a period of ten years, are granted at a
price equal to the fair market value of the common stock on the date of the
grant, and may contain vesting requirements and/or restrictions as determined by
the Compensation Committee at the time of grant. These options are vested 50%
six months from the date of grant and the remaining 50% on the first anniversary
of the date of grant.

During 1996, the Compensation Committee increased the shares authorized
under the Option Plan by 500,000 to 3,000,000.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Option Plan. Had compensation cost for the Option Plan been
determined consistent with SFAS No. 123, the Company's net loss available to
common stockholders and net loss per common share would have been the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss available to common stockholders
As reported ............................ $ (465,293) $ (9,348,769) $ (5,998,318)
Pro forma .............................. (472,846) (9,542,493) (6,271,420)
Net loss per common share
As reported ............................ $ (0.03) $ (0.53) $ (0.31)
Pro forma .............................. (0.03) (0.54) (0.33)

</TABLE>

For purposes of calculating the compensation cost consistent with SFAS No.
123, the fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1995, 1996 and 1997: dividend yield of 0%;
expected volatility of 50%; risk free interest rates ranging from 6.29% to
6.80%; and expected lives of five years.

F-16

<PAGE>

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

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

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING PRICE EXERCISABLE PRICE
------------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 ......... 1,848,257 $ 0.20 1,761,382 $ 0.19
Granted .................................. 411,000 0.20
Exercised ................................ (495,000) 0.18
Forfeited ................................ (338,875) 0.18
--------- -------
Outstanding at December 31, 1995 ......... 1,425,382 0.20 1,232,257 0.20
Granted .................................. 335,000 4.65
Exercised ................................ (24,000) 0.23
Forfeited ................................ (74,750) 2.14
--------- -------
Outstanding at December 31, 1996 ......... 1,661,632 1.01 1,299,757 0.57
Granted .................................. 512,500 4.18
Exercised ................................ (189,375) 0.22
Forfeited ................................ (39,500) 3.91
--------- -------
Outstanding at December 31, 1997 ......... 1,945,257 $ 1.85 1,460,629 $ 1.29
========= ======= ========= ======
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- -------------------------- ----------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$3.00 -- 6.00............. 774,500 8.68 years $ 4.36 365,497 $ 4.55
$0.125 -- 0.375........... 1,170,757 3.09 years $ 0.20 1,095,132 $ 0.20
</TABLE>

NOTE 9 -- EMPLOYEE BENEFIT PLAN

The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code which
provides benefits for eligible employees of the Company. The Company made no
contributions to the plan during the years ended December 31, 1995, 1996 and
1997.

NOTE 10 -- GEOGRAPHIC AND CUSTOMER INFORMATION

During 1995, 1996 and 1997, sales to one customer (a reseller of the
Company's product) aggregated approximately $2,259,000, $4,297,000 and
$1,994,000 respectively, representing 61%, 44% and 16% of the total revenues,
respectively. Accounts receivable from this customer represented 31% and 40% of
the Company's gross accounts receivable balance at December 31, 1996 and 1997,
respectively. United States sales to unaffiliated customers includes export
sales from the Company's United States operations to unaffiliated customers in
the Netherlands of approximately $2,318,000, $4,297,000 and $1,994,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.

F-17

<PAGE>

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

Information regarding geographic areas for the year ended December 31, 1995
is as follows:

<TABLE>
<CAPTION>
UNITED STATES BELGIUM ELIMINATIONS TOTAL
--------------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers .......... $3,695,000 $-- $-- $3,695,000
Operating income (loss) .................. (534,000) -- -- (534,000)
Identifiable assets ...................... 2,414,000 -- -- 2,414,000
</TABLE>

Information regarding geographic areas for the year ended December 31, 1996
is as follows:

<TABLE>
<CAPTION>
UNITED STATES BELGIUM ELIMINATIONS TOTAL
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers .......... $4,758,000 $5,434,000 $ -- $ 10,192,000
Operating income (loss) .................. (2,919,000) (5,739,000) -- (8,658,000)
Identifiable assets ...................... 12,738,000 8,756,000 (9,126,000) 12,368,000
</TABLE>

Information regarding geographic areas for the year ended December 31, 1997
is as follows:

<TABLE>
<CAPTION>
UNITED STATES BELGIUM ELIMINATIONS TOTAL
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers .......... $ 2,974,000 $9,566,000 $ (238,000) $ 12,302,000
Operating income (loss) .................. (3,988,000) 53,000 -- (3,935,000)
Identifiable assets ...................... 10,653,000 5,689,000 (7,966,000) 8,376,000
</TABLE>

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment under operating lease
agreements expiring at various times through 2000.

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

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998 .................................................. $226,421
1999 .................................................. 139,304
2000 .................................................. 539

</TABLE>

Rent expense under operating leases aggregated approximately $60,000,
$158,000 and $213,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.

During a period of time extending from the mid-1980s to the mid-1990s the
Company engaged in certain matters that were not in compliance with requisite
corporate law. There have been no lawsuits asserted or filed against the Company
related to these matters. Management cannot assess the likelihood that a lawsuit
would be filed nor can management estimate a potential range of loss.

The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated. These
actions, when ultimately concluded and determined, will not, in the opinion of
management, have a material adverse impact on the financial position, results of
operations and liquidity of the Company.

F-18

<PAGE>

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

NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)

Loan Agreement/License Agreement. On March 31, 1998, the Company entered
into two agreements with Lernout & Hauspie Speech Products N.V. ("L&H"),
consisting of a loan agreement and a license agreement. The loan agreement, in
the amount of $3 million, bears interest at the prime rate plus 1%, payable
quarterly, and matures on January 4, 1999. This loan is convertible at the
option of the holder into shares of common stock based upon the average closing
price of VASCO Corp.'s common stock for the 10 trading days prior to March 11,
1998, the date the Exchange Offer closed. This loan was funded in April 1998.

The license agreement with L&H is for the use of L&H's speech recognition
and speech verification technology for data security, telecom and physical
access applications. This license agreement includes a prepayment of royalties
by the Company in the amount of $600,000, payable no later than June 30, 1998
and an additional prepayment in the amount of $200,000, payable no later than
March 31, 1999. L&H is an international leader in the development of advanced
speech technology for various commercial applications and products.

F-19

<PAGE>
INDEPENDENT AUDITORS' REPORT

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

Under date of March 13, 1998, we reported on the consolidated balance
sheets of VASCO Data Security International, Inc. and subsidiaries (the
"Company") as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements and our report thereon are included in the
annual report on Form 10-K for the year ended December 31, 1997. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/ KPMG Peat Marwick LLP

Chicago, Illinois
March 13, 1998

S-1
<PAGE>
SCHEDULE II
VASCO DATA SECURITY INTERNATIONAL, INC.

VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS BEGINNING BAD DEBT ACCOUNTS ENDING
FOR TRADE ACCOUNTS RECEIVABLE BALANCE EXPENSE WRITTEN OFF BALANCE
- -------------------------------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 ......... $ 96,000 $165,000 $ (79,000) $182,000
Year ended December 31, 1996 ......... 182,000 346,000 (76,000) 452,000
Year ended December 31, 1997 ......... 452,000 97,000 (120,000) 429,000
</TABLE>

BEGINNING OBSOLESCENCE INVENTORY ENDING
RESERVE FOR OBSOLETE INVENTORIES BALANCE EXPENSE WRITTEN OFF BALANCE
- -------------------------------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 ......... $ 15,000 $ 99,000 $ -- $114,000
Year ended December 31, 1996 ......... 114,000 40,000 -- 154,000
Year ended December 31, 1997 ......... 154,000 101,000 (91,000) 164,000
</TABLE>

S-2

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Estimated expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting compensation, are as
follows:

Securities and Exchange Commission registration fee ......... $ *
Legal fees and expenses ..................................... *
Accountants' fees and expenses .............................. *
Printing and engraving expenses ............................. *
Transfer Agent and Registrar fees and expenses .............. *
Miscellaneous ............................................... *
Total ...................................................... $ *
======

- ----------
* To be completed by amendment.

The Company will bear all of the foregoing fees and expenses.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify directors, officers, employees and agents against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement in connection with specified actions, suits, or proceedings whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation -- a "derivative action"), if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification is permitted only for expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such action, and the
statute requires court approval before there can be any indemnification for
expenses where the person seeking indemnification has been found liable to the
corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, bylaws,
disinterested director vote, stockholder vote, agreement, or otherwise.

Article V of the Bylaws of Registrant provides that Registrant shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person (an "Indemnitee")
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Registrant or, while a director or officer of the Registrant, is or was serving
at the written request of the Registrant as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in Section 3 of Article V, the
Registrant shall be required to indemnify an Indemnitee in connection with a
proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors.

Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that such provision may not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the

II-1
<PAGE>

corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (relating to unlawful dividends or unlawful stock
purchases or redemptions), or (iv) for any transaction from which the director
derived an improper personal benefit.

Article SIXTH of Registrant's Certificate of Incorporation provides that a
director of Registrant shall not be liable to Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Law. Any amendment, modification or
repeal of Article SIXTH shall not adversely affect any right or protection of a
director of Registrant in respect of any act or omission occurring prior to such
amendment, modification or repeal.

Registrant has a binder for directors' and officers' liability insurance
which provides for payment, on behalf of the directors and officers of
Registrant and its subsidiaries, of certain losses of such persons (other than
matters uninsurable under law) arising from claims, including claims arising
under the Securities Act of 1933, as amended, for acts or omissions by such
persons while acting as directors or officers of Registrant and/or its
subsidiaries as the case may be.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the three years preceding the filing of this Registration Statement, the
Company sold the following securities that were not registered under the
Securities Act: [to be completed by amemdment]

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------
<S> <C>
+3.1 Certificate of Incorporation of Registrant, as amended.
+3.2 Bylaws of Registrant, as amended and restated.
4.1 Intentionally Omitted.
+4.2 Specimen of Registrant's Common Stock Certificate.
4.3 Intentionally Omitted.
+4.4 Form of Letter of Transmittal and Release.
+4.5 Form of Registrant's Warrant Agreement.
+4.6 Form of Registrant's Option Agreement.
+4.7 Form of Registrant's Convertible Note Agreement.
+5.1 Opinion of Jenner & Block.
+10.1 Netscape Communications Corporation OEM Software Order Form dated March 18, 1997
between VASCO Data Security, Inc. and Netscape Communications Corporation.**
+10.2 License Agreement between VASCO Data Security, Inc. and SHIVA Corporation effective
June 5, 1997.**
+10.3 Heads of Agreement between VASCO Corp., VASCO Data Security Europe S.A., Digiline
International Luxembourg, Digiline S.A., Digipass S.A., Dominique Colard and Tops S.A.
dated May 13, 1996.
+10.4 Agreement relating to additional terms and conditions to the Heads of Agreement dated July
9, 1996, among the parties listed in Exhibit 10.3.
+10.5 Agreement between VASCO Corp., VASCO Data Security Europe SA/NV, Mario Houthooft
and Guy Denudt dated March 1, 1996.
+10.6 Asset Purchase Agreement dated as of March 1996 by and between Lintel Security SA/NV
and Lintel SA/NV, Mario Houthooft and Guy Denudt.
+10.7 Management Agreement dated January 31, 1997 between LINK BVBA and VASCO Data
Security NV/SA (concerning services of Mario Houthooft).
+10.8 Sublease Agreement by and between VASCO Corp. and APL Land Transport Services, Inc.
dated as of August 29, 1997.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
<S> <C>
+10.9 Office Lease by and between VASCO Corp. and LaSalle National Bank, not personally, but as
Trustee under Trust Agreement dated September 1, 1997, and known as Trust Number 53107,
dated July 22, 1985.
+10.10 Lease Agreement by and between TOPS sa and Digipass sa effective July 1, 1996.
+10.11 Lease Agreement by and between Perkins Commercial Management Company, Inc. and
VASCO Data Security, Inc. dated November 21, 1995.
+10.12 Asset Purchase Agreement by and between VASCO Corp. and Wizdom Systems, Inc. dated
August 20, 1996.
+10.13 1997 VASCO Data Security International, Inc. Stock Option Plan, as amended.
+10.14 Distributor Agreement between VASCO Data Security, Inc. and Hucom, Inc. dated June 3,
1997.**
+10.15 Non-Exclusive Distributor Agreement by and between VASCO Data Security, Inc. and
Concord-Eracom Nederland BV dated May 1, 1994.**
+10.16 Banque Paribas Belgique S. A. Convertible Loan Agreement for $3.4 million.
+10.17 Pledge Agreement dated July 15, 1997 by and between T. Kendall Hunt and Banque Paribas
Belgique S.A.
+10.18 Engagement Letter between Banque Paribas S.A. and VASCO Corp. dated June 20, 1997, as
amended.
+10.19 Financing Agreement between Generale Bank and VASCO Corp. dated as of June 27, 1997.
+10.20 Letter Agreement between Generale Bank and VASCO Corp. dated June 26, 1997.
+10.21 Form of Warrant dated June 16, 1997 (with Schedule).
+10.22 Form of Warrant dated October 31, 1995 (with Schedule).
+10.23 Form of Warrant dated March 7, 1997 (with Schedule).
+10.24 Form of Warrant dated August 13, 1996 (with Schedule).
+10.25 Form of Warrant dated June 27, 1996 (with Schedule).
+10.26 Form of Warrant dated June 27, 1996 (with Schedule).
+10.27 Convertible Note in the principal amount of $500,000.00, payable to Generale de Banque
dated July 1, 1997 (with Schedule).
+10.28 Agreement by and between VASCO Data Security NV/SA and S.I. Electronics Limited effec-
tive January 21, 1997.**
+10.29 Agreement effective May 1, 1993 by and between Digipass s.a. and Digiline s.a.r.l.
+10.30 VASCO Data Security, Inc. purchase order issued to National Electronic & Watch Co. LTD.
**
+10.31 VASCO Data Security, Inc. purchase order issued to Micronix Integrated Systems.**
+10.32 Agreement between Registrant and VASCO Corp. dated as of August 25, 1997.
+10.33 Convertible Note dated June 1, 1996 made payable to Mario Houthooft in the principal amount
of $373,750.00.
+10.34 Convertible Note dated June 1, 1996 made payable to Guy Denudt in the principal amount of
$ 373,750.00.
+10.35 Osprey Partners Warrant (and Statement of Rights to Warrant and Form of Exercise) issued
June 1, 1992.
+10.36 Registration Rights Agreement dated as of October 19, 1995 between certain purchasing
shareholders and VASCO Corp.
+10.37 First Amendment to Registration Rights Agreement dated July 1, 1996.
+10.38 Second Amendment to Registration Rights Agreement dated March 7, 1997.
+10.39 Purchase Agreement by and between VASCO Corp. and Kyoto Securities Ltd.
+10.40 Convertible Note dated May 28, 1996 payable to Kyoto Securities, Ltd. in principal amount of
$5 million.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------
<S> <C>
+10.41 Amendment to Purchase Agreement and Convertible Note by and between VASCO Corp.
and Kyoto Securities, Ltd.
+10.42 Executive Incentive Compensation Plan.
+10.43 Letter for Credit granted by Generale de Banque to Digipass SA dated January 27, 1997.
++10.44 License Agreement dated as of March 25, 1998 by and between VASCO Data Security Inter-
national, Inc., for itself and its subsidiaries, and Lernout & Hauspie Speech Products N.V.
++10.45 Loan Agreement dated as of March 31, 1998 by and between Lernout & Hauspie Speech
Products N.V. and VASCO Data Security International, Inc.
++10.46 Convertible Note dated April 1, 1998 payable to Lernout & Hauspie Speech Products N.V. in
the principal amount of $3 million.
21 Subsidiaries of Registrant.*
23.1 Consent of Independent Auditors.*
+23.2 Consent of Jenner & Block (included in Exhibit 5).
</TABLE>

- ----------
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-4, as amended (Registration No. 333-35563), originally filed with
the Commission on September 12, 1997.
++ Incorporated by reference to the Registrant's Annual Report on Form 10-K,
originally filed with the Commission on May 5, 1998.
* To be filed by amendment.
** Confidential treatment has been granted for the omitted portions of this
document.

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,

(ii) To reflect in the prospectus any facts or events arising after
the Effective Time of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.

(2) The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(3) The undersigned Registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities which
remain unsold at the termination of the offering.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is,

II-4
<PAGE>

therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Post-Effective Amendment No. 2 to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Oakbrook Terrace, State of Illinois, on ___________, 1998.

VASCO Data Security International, Inc.

By:
---------------------------------

T. Kendall Hunt,
Chairman of the Board, Chief
Executive Officer and President

Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed on the _____ day of ______________,
1998 by the following persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------- --------------------------------------------------
<S> <C>
Chairman of the Board, Chief Executive Officer,
- -------------------------------------
President and Director
T. Kendall Hunt
Vice President and Treasurer (Principal Financial
- -------------------------------------
Officer and Principal Accounting Officer)
Gregory T. Apple
Secretary and Director
- -------------------------------------
Forrest D. Laidley
Director
- -------------------------------------
Robert E. Anderson
Director
- -------------------------------------
Michael A. Mulshine
Director
- -------------------------------------
Michael P. Cullinane
Director
- -------------------------------------
Mario R. Houthooft

</TABLE>

II-6

EXHIBIT 23.1

The Board of Directors of
Vasco Data Security International, Inc.:

We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.

KPMG Peat Marwick

Chicago, Illinois
September 30, 1998