##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
|--- | -------------------------------------------------------------------------------------------------------------------------------------

OR



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

Commission file number 000-24389

VASCO Data Security International, Inc.

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 36-4169320                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

1901 South Meyers Road, Suite 210

Oakbrook Terrace, Illinois 60181

(Address of Principal Executive Offices)(Zip Code)

(630) 932-8844

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                             |  |                                             |  |                               
|---------------------------- |  | ------------------------------------------- |  | ------------------------------
|Large accelerated filer     ̈ |  |                                             |  | Accelerated filer    x        
|Non-accelerated filer     ̈   |  | (do not check if smaller reporting company) |  | Smaller reporting company     ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).

Yes   ̈    No  x

There were 37,746,616 shares of Common Stock, $.001 par value per share, outstanding at April 30, 2011.



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VASCO Data Security International, Inc.

Form 10-Q

For The Quarterly
Period Ended March 31, 2011

Table of Contents



|                              |  |                                                                                                                                 |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  | Page No.                                                                                                                       
|                              |  |                                                                                                                                
|Item 1.                       |  | Financial Statements                                                                                                            |  |   
|                              |  |                                                                                                                                
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010                                    |  | 3 
|                              |  |                                                                                                                                
|                              |  | Condensed Consolidated Statements of Operations (Unaudited) for the three month periods ended March 31, 2011 and 2010           |  | 4 
|                              |  |                                                                                                                                
|                              |  | Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three month periods ended March 31, 2011 and 2010 |  | 5 
|                              |  |                                                                                                                                
|                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2011 and 2010                  |  | 6 
|                              |  |                                                                                                                                
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                |  | 7 
|                              |  |                                                                                                                                
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                           |  | 17
|                              |  |                                                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                      |  | 27
|                              |  |                                                                                                                                
|Item 4.                       |  | Disclosure Controls and Procedures                                                                                              |  | 27
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                
|                              |  |                                                                                                                                
|Item 6.                       |  | Exhibits                                                                                                                        |  | 29
|                              | 
|SIGNATURES                    |  | 30                                                                                                                             
|                              | 
|EXHIBIT INDEX                 |  | 31                                                                                                                             







This report may contain
trademarks of VASCO Data Security International, Inc. and its subsidiaries, which include VASCO, the VASCO V design, DIGIPASS, VACMAN, aXsGUARD and IDENTIKEY.



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VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                         |  | March 31,2011 |         |   | December 31,2010 |  
|                                                                                                                                                                         |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Current assets                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Cash and equivalents                                                                                                                                                     |  | $             | 86,022  |   |                  | $ | 85,533  |  
|Accounts receivable, net of allowance for doubtful accounts                                                                                                              |  |               | 20,088  |   |                  |   | 21,702  |  
|Inventories                                                                                                                                                              |  |               | 11,771  |   |                  |   | 10,710  |  
|Prepaid expenses                                                                                                                                                         |  |               | 2,099   |   |                  |   | 1,859   |  
|Foreign sales tax receivable                                                                                                                                             |  |               | 1,419   |   |                  |   | 2,282   |  
|Deferred income taxes                                                                                                                                                    |  |               | 355     |   |                  |   | 369     |  
|Other current assets                                                                                                                                                     |  |               | 1,734   |   |                  |   | 199     |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                     |  |               | 123,488 |   |                  |   | 122,654 |  
|                                                                                                                                                                         |  |              
|Property and equipment:                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Furniture and fixtures                                                                                                                                                   |  |               | 5,068   |   |                  |   | 4,657   |  
|Office equipment                                                                                                                                                         |  |               | 8,581   |   |                  |   | 7,511   |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|                                                                                                                                                                         |  |               | 13,649  |   |                  |   | 12,168  |  
|Accumulated depreciation                                                                                                                                                 |  |               | (8,199  | ) |                  |   | (7,397  | )
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Property and equipment, net                                                                                                                                              |  |               | 5,450   |   |                  |   | 4,771   |  
|                                                                                                                                                                         |  |              
|Goodwill, net of accumulated amortization                                                                                                                                |  |               | 16,377  |   |                  |   | 12,772  |  
|Intangible assets, net of accumulated amortization                                                                                                                       |  |               | 11,308  |   |                  |   | 1,603   |  
|Other assets                                                                                                                                                             |  |               | 1,253   |   |                  |   | 1,141   |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                             |  | $             | 157,876 |   |                  | $ | 142,941 |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|                                                                                                                                                                         |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                     |  |               |         |   |                  |   |         |  
|Current liabilities                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                         |  | $             | 8,989   |   |                  | $ | 8,857   |  
|Deferred revenue                                                                                                                                                         |  |               | 10,766  |   |                  |   | 6,464   |  
|Accrued wages and payroll taxes                                                                                                                                          |  |               | 6,594   |   |                  |   | 4,971   |  
|Income taxes payable                                                                                                                                                     |  |               | 2,600   |   |                  |   | 2,109   |  
|Other accrued expenses                                                                                                                                                   |  |               | 3,716   |   |                  |   | 3,364   |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                |  |               | 32,665  |   |                  |   | 25,765  |  
|                                                                                                                                                                         |  |              
|Deferred compensation                                                                                                                                                    |  |               | 651     |   |                  |   | 456     |  
|Deferred revenue                                                                                                                                                         |  |               | 35      |   |                  |   | 47      |  
|Deferred income taxes                                                                                                                                                    |  |               | 1,007   |   |                  |   | 180     |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                        |  |               | 34,358  |   |                  |   | 26,448  |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Common stock: $.001 par value per share, 75,000 shares authorized; 37,747 and 37,640 shares issued and outstanding at March 31, 2011 and December 31,
2010, respectively |  |               | 38      |   |                  |   | 38      |  
|Preferred stock: 500 shares authorized, none issued and outstanding at March 31, 2011 or December 31, 2010                                                               |  |               | -       |   |                  |   | -       |  
|Additional paid-in capital                                                                                                                                               |  |               | 68,814  |   |                  |   | 68,428  |  
|Accumulated income                                                                                                                                                       |  |               | 50,024  |   |                  |   | 47,524  |  
|Accumulated other comprehensive income                                                                                                                                   |  |               | 4,642   |   |                  |   | 503     |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                               |  |               | 123,518 |   |                  |   | 116,493 |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                               |  | $             | 157,876 |   |                  | $ | 142,941 |  
|                                                                                                                                                                         |  |               |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                            |  |                             |        |  |      |   |        | 
|------------------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                            |  | Three months endedMarch 31, |       
|                                            |  | 2011                        |        |  | 2010 |  
|Revenue                                     |  | $                           | 36,358 |  |      | $ | 23,915 | 
|                                            |  |                            
|Cost of goods sold                          |  |                             | 13,678 |  |      |   | 7,227  | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Gross profit                                |  |                             | 22,680 |  |      |   | 16,688 | 
|                                            |  |                            
|Operating costs:                            |  |                             |        |  |      |   |        | 
|Sales and marketing                         |  |                             | 9,512  |  |      |   | 7,929  | 
|Research and development                    |  |                             | 4,057  |  |      |   | 3,272  | 
|General and administrative                  |  |                             | 5,361  |  |      |   | 4,648  | 
|Amortization of purchased intangible assets |  |                             | 681    |  |      |   | 115    | 
|                                            |  |                             |        |  |      |   |        | 
|Total operating costs                       |  |                             | 19,611 |  |      |   | 15,964 | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Operating income                            |  |                             | 3,069  |  |      |   | 724    | 
|                                            |  |                            
|Interest income, net                        |  |                             | 112    |  |      |   | 71     | 
|Other income, net                           |  |                             | 291    |  |      |   | 60     | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Income before income taxes                  |  |                             | 3,472  |  |      |   | 855    | 
|Provision for income taxes                  |  |                             | 972    |  |      |   | 282    | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Net income                                  |  | $                           | 2,500  |  |      | $ | 573    | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Net income per share:                       |  |                             |        |  |      |   |        | 
|Basic                                       |  | $                           | 0.07   |  |      | $ | 0.02   | 
|                                            |  |                            
|Diluted                                     |  | $                           | 0.06   |  |      | $ | 0.01   | 
|                                            |  |                            
|Weighted average common shares outstanding: |  |                             |        |  |      |   |        | 
|Basic                                       |  |                             | 37,518 |  |      |   | 37,400 | 
|                                            |  |                             |        |  |      |   |        | 
|                                            |  |                            
|Diluted                                     |  |                             | 38,468 |  |      |   | 38,287 | 
|                                            |  |                             |        |  |      |   |        | 

See accompanying notes to condensed consolidated financial statements.



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VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                    |  |                              |       |  |      |   |        |  
|----------------------------------- |  | ---------------------------- | ----- |  | ---- | - | ------ | -
|                                    |  | Three months endedMarch 
31, |      
|                                    |  | 2011                         |       |  | 2010 |  
|Net income                          |  | $                            | 2,500 |  |      | $ | 573    |  
|                                    |  |                             
|Other comprehensive income (loss) - |  |                              |       |  |      |   |        |  
|Currency translation adjustment     |  |                              | 4,139 |  |      |   | (3,525 | )
|                                    |  |                              |       |  |      |   |        |  
|                                    |  |                             
|Comprehensive income (loss)         |  | $                            | 6,639 |  |      | $ | (2,952 | )
|                                    |  |                              |       |  |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



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VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |  |                             |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Three months endedMarch 31, |        
|                                                                                  |  | 2011                        |         |   | 2010 |  
|Cash flows from operating activities:                                             |  |                             |         |   |      |   |        |  
|Net income                                                                        |  | $                           | 2,500   |   |      | $ | 573    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |        |  
|Depreciation and amortization                                                     |  |                             | 1,120   |   |      |   | 732    |  
|Deferred tax expense (benefit)                                                    |  |                             | (144    | ) |      |   | 42     |  
|Non-cash compensation                                                             |  |                             | 567     |   |      |   | 533    |  
|Changes in assets and liabilities:                                                |  |                             |         |   |      |   |        |  
|Accounts receivable, net                                                          |  |                             | 3,292   |   |      |   | 7,133  |  
|Inventories                                                                       |  |                             | (932    | ) |      |   | 111    |  
|Foreign sales tax receivable                                                      |  |                             | 908     |   |      |   | 552    |  
|Other current assets                                                              |  |                             | (303    | ) |      |   | (43    | )
|Accounts payable                                                                  |  |                             | (780    | ) |      |   | (131   | )
|Income taxes payable                                                              |  |                             | 326     |   |      |   | 245    |  
|Accrued expenses                                                                  |  |                             | 1,177   |   |      |   | 371    |  
|Deferred revenue                                                                  |  |                             | 3,952   |   |      |   | 611    |  
|                                                                                  |  |                             |         |   |      |   |        |  
|Net cash provided by operations                                                   |  |                             | 11,683  |   |      |   | 10,729 |  
|                                                                                  |  |                             |         |   |      |   |        |  
|                                                                                  |  |                            
|Cash flows from investing activities:                                             |  |                             |         |   |      |   |        |  
|Purchase of DigiNotar                                                             |  |                             | (13,168 | ) |      |   | -      |  
|Additions to property and equipment                                               |  |                             | (370    | ) |      |   | (374   | )
|Other assets                                                                      |  |                             | (202    | ) |      |   | (29    | )
|                                                                                  |  |                             |         |   |      |   |        |  
|Net cash used in investing activities                                             |  |                             | (13,740 | ) |      |   | (403   | )
|                                                                                  |  |                             |         |   |      |   |        |  
|                                                                                  |  |                            
|Cash flows from financing activities:                                             |  |                             |         |   |      |   |        |  
|Proceeds from exercise of stock options and warrants                              |  |                             | 14      |   |      |   | -      |  
|                                                                                  |  |                             |         |   |      |   |        |  
|Net cash provided by financing activities                                         |  |                             | 14      |   |      |   | -      |  
|                                                                                  |  |                            
|Effect of exchange rates on cash                                                  |  |                             | 2,532   |   |      |   | (1,807 | )
|                                                                                  |  |                            
|Net increase (decrease) in cash                                                   |  |                             | 489     |   |      |   | 8,519  |  
|Cash and cash equivalents, beginning of year                                      |  |                             | 85,533  |   |      |   | 67,601 |  
|                                                                                  |  |                             |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                           | 86,022  |   |      | $ | 76,120 |  
|                                                                                  |  |                             |         |   |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



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VASCO Data Security International, Inc.

Notes to Condensed Consolidated Financial Statements

(All amounts are in thousands, except per share data)

(Unaudited)

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to VASCO, company, we, our, and
us, refer to VASCO Data Security International, Inc. and its subsidiaries.

Note 1  Summary of Significant Accounting Policies

Nature of Operations

VASCO
Data Security International, Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. VASCO has operations in Austria, Australia, Bahrain,
Belgium, Brazil, China, France, India, Japan, The Netherlands, Singapore, the U.K., the United States (U.S.) and Switzerland.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of VASCO Data Security International,
Inc. and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the companys Annual Report on Form 10-K for the year ended
December 31, 2010.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All
significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year.

Principles of Consolidation

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

Estimates and Assumptions

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



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Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority 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. Translation adjustments arising from differences in exchange rates are charged or
credited to other comprehensive income. Revenue and expenses are translated at average exchange rates prevailing during the year. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations
in other income (expense).

The financial position and results of operations of our operations in Singapore and Switzerland are measured
in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income (expense).

For the three months ended March 31, 2011, gains resulting from foreign currency transactions were $29 compared to losses of $148 for the
three month period ended March 31, 2010.

Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605, Software  Revenue Recognition, ASC 985-605-25, Revenue
Recognition  Multiple Element Arrangements and Staff Accounting Bulletin 104. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the
revenue is probable.

Effective January 1, 2011, we adopted Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable
Revenue Arrangements a Consensus of the FASB Emerging Issues Task Force,which amended ASC 985-605-25, and ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, which amended ASC 985-605. In multiple-element
arrangements, the adoption of these two ASUs will result in some of our products continuing to be accounted for under the software provisions of ASC 985-605 and others to be accounted for under the provisions that relate to the sale of non-software
products.

In our typical multiple-element arrangement, the primary deliverables include:



| | 1. | a client component (i.e., an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a
device the customer already owns),
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | host system software that is installed on the customers systems (i.e., software on the host system that verifies the identity of the person being authenticated) or licenses
for additional users on the host system software if the host system software had been installed previously, and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | post contract services (PCS) in the form of maintenance on the host system software or support.
| | -- | -----------------------------------------------------------------------------------------------

Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue and incidental to
the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our



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customers end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.

Effective January 1, 2011 with the adoption of ASU 2009-13 and 14 there will not be any change in the units of accounting, but there will be a
change in the method we use to allocate the revenue among the elements included in the arrangement.

In multiple-element arrangements
that include a hardware client device, we allocate the selling price among the elements based on the percentage of the estimated selling price of that element to the total of the estimated selling price of all of the elements. Any discount provided
on the transaction as a whole will be allocated among each of the elements included in the arrangement and any PCS included in the transaction will be deferred and amortized.

In multiple-element arrangements that include a software client device, we will continue to account for each element under the current standards of ASC 985-605 related to software. When software client device and
host software are delivered elements, we use the Residual Method (ASC 605-25) for determining the amount of revenue to recognize for token and software licenses if we have vendor specific objective evidence (VSOE) for all of the undelivered
elements. Any discount provided to the customer is applied fully to the delivered elements in such an arrangement. We defer the revenue for tokens and software in any multiple element arrangement where we do not have VSOE for any undelivered
element. VSOE of fair value of PCS agreements is based on separate sales transactions on a worldwide basis. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of
the arrangement.

We do not expect a significant change in the pattern or timing of revenue recognition. The adoption of the new ASU
2009-13 and 14 did not have a significant impact on the recognition of revenue for the three months ended March 31, 2011 and is not expected to have a material impact on the recognition of future revenues.

For transactions other than multiple-element arrangements, we recognize revenue as follows:



| | 1. | Hardware Revenue and License Fees: Revenue from the sale of computer security hardware or the license of software is recorded upon shipment or, if an acceptance period is
allowed, at the latter of shipment or customer acceptance. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Maintenance and Support Agreements:Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers.
Revenue on maintenance and technical support is deferred and recognized ratably over the term of the applicable maintenance and support agreement.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Services:Subscription revenue is recognized ratably over the period in which the service is provided.
| | -- | -----------------------------------------------------------------------------------------------------



| | 4. | Consulting and Education Services:We provide consulting and education services to our customers. Revenue from such services is recognized during the period in which the
services are performed.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

All revenue is reported on a net basis, excluding any sales or value added taxes.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost plus accrued interest,
which approximates fair value. Cash equivalents are high-quality short term money market instruments, with original maturities of three months or less. Cash and equivalents are held by a number of U.S. and non-U.S. commercial banks and money market
investment funds. Cash and equivalents at March 31, 2011 include $85,923 in money market investment funds or demand bank deposits for which fair value is equal to cost. These investments are valued using level one inputs, as defined in ASC 820,
Fair Value Measurements and Disclosures. Cash and equivalents also include $99 in bank certificates of deposit for which fair value was $99 at March 31, 2011. Bank certificates of deposit are valued using level two inputs, as defined by
ASC 820.

Accounts Receivable and Allowance for Doubtful Accounts

The credit-worthiness of customers (including distributors and resellers) is reviewed prior to shipment. A reasonable expectation of collection is a requirement for revenue recognition. Verification of credit
and/or the establishment of credit limits are part of the customer contract administration process. Credit limit adjustments for existing customers may result from the periodic review of outstanding accounts receivable. The company records trade
accounts receivable at invoice values, which are generally equal to fair value.

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

Inventories

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

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years. Additions and improvements
are capitalized, while expenditures for maintenance and repairs are



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charged to operations as incurred. Gains or losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the
accounts.

Research and Development Costs

Costs for research and development, principally the design and development of hardware, and the design and development of software prior to the determination of technological feasibility, are expensed as incurred
on a project-by-project basis.

Software Development Costs

We capitalize software development costs in accordance with ASC 985-20. Research costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of
a working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs.
Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. No software development costs were capitalized during the three months ended March
31, 2011. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bear to the total of current and anticipated future gross revenue 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.

Income Taxes

We account for income taxes 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. We measure deferred tax assets and
liabilities 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. We recognize the effect of a change in tax rates on deferred tax assets and
liabilities and in income in the period that includes the enactment date.

We monitor our potential income tax exposures as required by
ASC 740-10.

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

Fair Value of Financial Instruments

At March 31, 2011 and December 31, 2010, our financial instruments were cash equivalents, accounts receivable, accounts payable and accrued liabilities. The estimated fair value of our financial
instruments has been determined by using available market information and appropriate valuation methodologies as described in Cash and Cash Equivalents above. The fair values of the financial instruments were not materially different from their
carrying amounts at March 31, 2011 and December 31, 2010.

Accounting for Leases

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

Goodwill and Other Intangibles

We account for goodwill and indefinite-lived intangible assets in accordance with ASC 350-20. Indefinite-lived intangible assets include customer lists, proprietary technology and other intangible assets.
Intangible assets other than patents with definite lives are amortized over the useful life,



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generally three to seven years for proprietary technology. Patents are amortized over the life of the patent, generally 20 years in the U.S.

We assess the impairment of goodwill and intangible assets with indefinite lives each year-end or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant
changes in the manner of our use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. Once identified, the amount of the impairment is computed by comparing carrying value of the
assets to fair value. Fair value for goodwill is determined using our stock price which is a level 1 valuation, as defined in ASC 820-10. Fair value for trademarks is based on discounted estimated future cash flows, which a level 3 valuation. We
have not recognized any impairment for the three months ended March 31, 2011 as the fair value of our reporting unit substantially exceeds our carrying amount at December 31, 2010 and there were no events or changes in circumstances during
the three months ended March 31, 2011 that indicate that the carrying value may not be recoverable.

Warranty

Warranties are provided on the sale of certain of our products and an accrual for estimated future claims is recorded at the time revenue is
recognized. We estimate the cost based on past claims experience, sales history and other considerations. We regularly assess the adequacy of our estimates and adjust the amounts as necessary. Our standard practice is to provide a warranty on our
hardware products for either a one or two year period after the date of purchase. Customers may purchase extended warranties covering periods from one to four years after the standard warranty period. We defer the revenue associated with the
extended warranty and recognize it into income on a straight-line basis over the extended warranty period. We have historically experienced minimal actual claims over the warranty period.

Note 2  Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable
represents the balance due on credit sales made to customers. The allowance for doubtful accounts is an estimate of losses that may result from customers inability to make payment on their outstanding balances.



|                                |  |               |        |   |                  |   |        |  
|------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                |  | March 31,2011 |        |   | December 31,2010 |  
|Accounts receivable             |  | $             | 21,428 |   |                  | $ | 22,976 |  
|Allowance for doubtful accounts |  |               | (1,340 | ) |                  |   | (1,274 | )
|                                |  |               |        |   |                  |   |        |  
|Accounts receivable, net        |  | $             | 20,088 |   |                  | $ | 21,702 |  
|                                |  |               |        |   |                  |   |        |  



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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 FIFO method.

Inventories are comprised of the following:



|                                   |  |               |        |  |                  |   |        | 
|---------------------------------- |  | ------------- | ------ |  | ---------------- | - | ------ | 
|                                   |  | March 31,2011 |        |  | December 31,2010 |  
|Component parts                    |  | $             | 5,580  |  |                  | $ | 4,716  | 
|Work-in-process and finished goods |  |               | 6,191  |  |                  |   | 5,994  | 
|                                   |  |               |        |  |                  |   |        | 
|Total                              |  | $             | 11,771 |  |                  | $ | 10,710 | 
|                                   |  |               |        |  |                  |   |        | 

Note 4  Acquisition of DigiNotar

On January 10, 2011, we purchased all of the intellectual property of DigiNotar Holding B.V. and its subsidiaries and acquired 100% of the stock of DigiNotar B.V. and DigiNotar Notariaat B.V., each a private
company organized and existing in The Netherlands (collectively, DigiNotar), for aggregate consideration of 10,000
(approximately $13,253 at an exchange rate of 1.32 dollars per Euro) comprised of assumed debt of 64 and cash. Both transactions were
effective January 1, 2011. We funded the transactions from our existing cash balances.

The consideration has been allocated to
assets acquired and liabilities assumed based on their respective fair values as of the acquisition date as follows:



|                                              |  |   |        | 
|--------------------------------------------- |  | - | ------ | 
|Current assets                                |  | $ | 2,039  | 
|Property and equipment                        |  |   | 589    | 
|Goodwill                                      |  |   | 2,632  | 
|Intangible assets                             |  |   | 10,139 | 
|                                              | 
|Deferred income tax liabilities  current     |  |   | 414    | 
|Other current liabilities                     |  |   | 1,217  | 
|Deferred income tax liabilities  non-current |  |   | 515    | 

Acquired identifiable intangible assets
totaling $10,139 are being amortized over their respective useful lives ranging from two to seven years and are further described in Note 6.

Purchase consideration includes contingent consideration held in escrow payable upon the achievement of certain one year operating targets. The contingent consideration has been recorded as a current asset at its
estimated fair value of $861 and will be re-measured quarterly with changes in fair value recorded in our statements of operations. The change in fair value for the three months ended March 31, 2011 was not significant.

The acquisition is not material to our unaudited condensed consolidated balance sheet and results of operations. The unaudited condensed financial
statements include the operating results of DigiNotar from the acquisition date



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Note 5  Goodwill

Goodwill as of March 31, 2011 consisted of the following:



|                                 |  |   |        | 
|-------------------------------- |  | - | ------ | 
|Net balance at December 31, 2010 |  | $ | 12,772 | 
|Additions  DigiNotar            |  |   | 2,632  | 
|Net foreign currency translation |  |   | 973    | 
|                                 |  |   |        | 
|Net balance at March 31, 2011    |  | $ | 16,377 | 
|                                 |  |   |        | 

For the three months ended March 31, 2011, all additions to goodwill result from the acquisition of DigiNotar as
further described in Note 4. Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuation.

Note 6 
Intangible Assets

Intangible asset activity for the three months ended March 31, 2011 is detailed in the following table.



|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |        |  
|-------------------------------- |  | --------------------- | ----- | - | ------------------- | - | ----- | ----- |  | - | --------------------- | - |  | - | ------ | -
|                                 |  | CapitalizedTechnology |       |   | Patents &Trademarks |   |       | Other |  |   | TotalIntangibleAssets |  
|Net balance at December 31, 2010 |  | $                     | 544   |   |                     | $ | 1,059 |       |  | $ | -                     |   |  | $ | 1,603  |  
|Additions  DigiNotar            |  |                       | 7,554 |   |                     |   | 318   |       |  |   | 2,267                 |   |  |   | 10,139 |  
|Additions  Other                |  |                       | -     |   |                     |   | 52    |       |  |   | -                     |   |  |   | 52     |  
|Net foreign currency translation |  |                       | 30    |   |                     |   | 20    |       |  |   | 145                   |   |  |   | 195    |  
|Amortization expense             |  |                       | (483  | ) |                     |   | (26   | )     |  |   | (172                  | ) |  |   | (681   | )
|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |        |  
|Net balance at March 31, 2011    |  | $                     | 7,645 |   |                     | $ | 1,423 |       |  | $ | 2,240                 |   |  | $ | 11,308 |  
|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |        |  

Additions  DigiNotar result from the acquisition of DigiNotar as further described in Note 4. Other intangibles
includes a non-compete agreement, exclusive product endorsement, and customer relationships. Certain intangibles are denominated in local currencies and are subject to currency fluctuations.

Note 7  Income Taxes

Our effective tax rate for 2011 is expected to be 28%. This is
lower than the U.S. statutory rate primarily due to income in foreign jurisdictions taxed at lower rates, partially offset by losses in the U.S. for which the tax benefit is fully reserved because we have not deemed that the realization is more
likely than not. The expected tax rate for 2010 was 33% in the first quarter of 2010. The tax rate in the first quarter of 2010 also benefited from income in foreign jurisdictions taxed at lower rates, partially offset by net losses in the U.S.,
that had been fully reserved.

At December 31, 2010, we had U.S. net operating loss (NOL) carryforwards of $21,247. Of this amount,
$14,727 would result in a benefit to earnings. The remainder represents tax deductions for employee stock option gains the benefit for which would be credited to paid-in capital. The U.S. loss



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carryforwards expire in varying amounts beginning in 2020 and continuing through 2029. In addition, if certain substantial changes in the companys ownership were deemed to have occurred,
there would be an annual limitation on the amount of the U.S. carryforwards that could be utilized. At December 31, 2010, we also had foreign NOL carryforwards of $4,834. The foreign NOL carryforwards have no expiration dates. A valuation
reserve has been provided for the U.S. and certain foreign operating loss carryforwards to offset the future benefits because we have not determined that their realization is more likely than not.

Note 8  Warranties

We maintain a
reserve for potential warranty claims related to products sold and recognized in revenue. We regularly reassess the adequacy of our estimates and adjust the amounts as necessary. Our warranty reserve is included in other accrued expenses.

The activity in our warranty liability was as follows:



|                                        |  |                            |     |   |      |   |     |  
|--------------------------------------- |  | -------------------------- | --- | - | ---- | - | --- | -
|                                        |  | Three monthsended March 31 |    
|                                        |  | 2011                       |     |   | 2010 |  
|Balance, beginning of period            |  | $                          | 61  |   |      | $ | 150 |  
|Provision for claims                    |  |                            | 5   |   |      |   | -   |  
|Product or cash issued to settle claims |  |                            | (55 | ) |      |   | (60 | )
|                                        |  |                            |     |   |      |   |     |  
|Balance, end of period                  |  | $                          | 11  |   |      | $ | 90  |  
|                                        |  |                            |     |   |      |   |     |  

At March 31, 2011, deferred revenue from extended warranties was $106.

Note 9  Long-Term Compensation Plan and Stock Based Compensation

In the first quarter of 2011, we awarded 190 shares of restricted stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan consisting of 88 unissued shares subject to future performance
criteria and 102 issued shares. The market value of the restricted shares was $1,588 at the date of grant and will be amortized over the respective vesting periods of one to four years.

The following table details long-term compensation plan and stock-based compensation expense for the three months ended March 31, 2011 and
2010:



|                            |  |                             |     |  |      |   |     | 
|--------------------------- |  | --------------------------- | --- |  | ---- | - | --- | 
|                            |  | Three monthsended March 31, |    
|                            |  | 2011                        |     |  | 2010 |  
|Restricted stock            |  | $                           | 372 |  |      | $ | 374 | 
|Long-term compensation plan |  |                             | 195 |  |      |   | 159 | 
|                            |  |                             |     |  |      |   |     | 
|Total Non-Cash Compensation |  | $                           | 567 |  |      | $ | 533 | 
|                            |  |                             |     |  |      |   |     | 



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Note 10  Common Stock and Earnings per Share

In connection with the 2009 Equity Incentive Plan described above, we issued 102 shares of restricted common shares during the three months ended
March 31, 2011.

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 to the extent they are not
anti-dilutive. The details of the earnings per share calculations for the three month periods ended March 31, 2011 and 2010 follow:



|                                           |  |                             |        |  |      |   |        | 
|------------------------------------------ |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                           |  | Three monthsended March 31, |       
|                                           |  | 2011                        |        |  | 2010 |  
|Net income                                 |  | $                           | 2,500  |  |      | $ | 573    | 
|                                           |  |                             |        |  |      |   |        | 
|Weighted average common shares outstanding |  |                             |        |  |      |   |        | 
|Basic                                      |  |                             | 37,518 |  |      |   | 37,400 | 
|Incremental shares with dilutive effect:   |  |                             |        |  |      |   |        | 
|Stock options                              |  |                             | 869    |  |      |   | 821    | 
|Restricted stock awards                    |  |                             | 81     |  |      |   | 66     | 
|                                           |  |                             |        |  |      |   |        | 
|Diluted                                    |  |                             | 38,468 |  |      |   | 38,287 | 
|                                           |  |                             |        |  |      |   |        | 
|Net income per share                       |  |                             |        |  |      |   |        | 
|Basic                                      |  | $                           | 0.07   |  |      | $ | 0.02   | 
|Diluted                                    |  | $                           | 0.06   |  |      | $ | 0.01   | 

Note 11  Acquisition of Alfa & Ariss

On April 1, 2011, we acquired all of the stock of Alfa & Ariss B.V. (Alfa & Ariss), an open identity and access
management specialist of Enschede, The Netherlands, in exchange for cash consideration of 1,000 (approximately $1,400 at the exchange
rate of $1.4 Dollars per Euro). The acquisition was funded by our existing cash balances.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except headcount, ratios, time periods and percents)
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 concerning, among other things, the prospects of, and developments and business strategies
for, VASCO and our operations, including the development and marketing of certain new products and the anticipated future growth in certain markets in which we currently market and sell our products or anticipate selling and marketing our products
in the future. These forward-looking statements (1) are identified by use of terms and phrases such as expect, believe, will, anticipate, emerging, intend,
plan, could, may, estimate, should, objective, goal, possible, potential and similar words and expressions, but such words and phrases are
not the exclusive means of identifying them, and (2) are subject to risks and uncertainties and represent our present expectations or beliefs concerning future events. VASCO cautions that the forward-looking statements are qualified by
important factors that could cause actual results to differ materially from those in the forward-looking statements. These risks, uncertainties and other factors have been described in greater detail in our Annual Report on Form 10-K for the year
ended December 31, 2010 and include, but are not limited to, (a) risks of general market conditions, including currency fluctuations and the uncertainties resulting from turmoil in world economic and financial markets, (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, and changing
government regulations, and (c) risks specific to VASCO, including, demand for our products and services, competition from more established firms and others, pressures on price levels and our historical dependence on relatively few products,
certain suppliers and certain key customers. Thus, the results that we actually achieve may differ materially from any anticipated results included in, or implied by these statements.

General

The following discussion is based upon our consolidated results of operations for the
three months ended March 31, 2011 and 2010 (percentages in the discussion may be rounded to the closest full percentage point) and should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-Q and
our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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



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We offer our products either through a product sales and licensing model or through our DIGIPASS as a
Service (DPS) product offering. DPS is our cloud-based authentication platform. DPS will enable application hosts to deploy strong two-factor authentication quickly with minimal upfront costs. Users will benefit from the added security
of strong two-factor authentication available on an increasing number of Internet sites and applications. We expect those applications to include business-to-business applications, business to employee applications (e.g., employees of companies
logging into third party applications operated in the cloud), and business-to-consumer applications. While there were no revenues generated from this product in the first quarter of 2011, we believe that it has the potential for significant future
growth as it will make two-factor authentication more affordable and readily available to users and application markets.

In January
2011, we acquired DigiNotar BV. The acquisition expands the technological breadth of our product line by expanding our abilities to offer PKI technology throughout the product line. We expect that acquisition will enhance our market position in
three areas; (1) as a trusted internet service provider of PKI certificates, which we expect will improve our ability to penetrate government markets (2) as a licensor of PKI-based products to customers for use in their applications, which
we believe will enhance our ability to compete in our traditional business and (3) as a provider of our own PKI-secured applications, such as document signing, registration and storage solutions, which we expect will expand opportunities for us
on our services platform.

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

Comparison of Results for the Three Months Ended March 31, 2011 and 2010

Industry Growth:We believe that, while there are no accurate measurements of the total industrys size, the industry growth rate is increasing and will continue to grow at a significant rate into the
foreseeable future. Growth is being driven by new government regulations, growing awareness of the impact of identity theft, and the growth in commerce that is transacted electronically. The issues driving the growth are global issues and the rate
of adoption in each country is a function of that countrys culture, the competitive position of businesses operating in those countries, the countrys overall economic conditions and the degree to which businesses and consumers within the
country use technology. While industry growth in 2010 was uneven in the various countries in which we operate, we experienced an increase in requests for information and proposals throughout the year and an increase in order intake, especially in
the second half of 2010. We expect that the industry will return to more normal growth in 2011 as both our order intake and our pipeline of potential future deals continued strong in the first quarter of 2011.

Economic Conditions:Our revenue may vary significantly with changes in the economic conditions in the countries in which we sell products.
With our current concentration of revenue in Europe and specifically in the banking/finance vertical market, significant changes in the economic outlook for the European banking market may have a significant effect on our revenue.

Starting in the fourth quarter of 2009, we received an increase in the number of requests for information and requests for proposals. That increase
in activity started to manifest itself into a strong order flow in the second half of 2010. As a result of the increase in orders, we realized a sequential increase in revenue in the third quarter of 2010 compared to the second quarter of 2010,
which was unusual given the seasonality of our business, another sequential increase in revenue in the fourth quarter of 2010 compared to the third quarter of 2010, which we generally expect given the seasonality of our business, and a strong
backlog of orders for delivery in 2011 and beyond. Also, with the apparent abatement of the difficult economic conditions in the fourth quarter of 2009 in many of the countries in which we operate, we initiated a plan to hire staff to support new
product



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development, support new sales initiatives and mitigate risk while strengthening our position in existing markets. These actions continued throughout 2010 and resulted in lower operating earnings
as a percentage of revenue in 2010. These actions are also expected to result in lower operating income as a percentage of revenue in 2011; however, we believe that these actions allowed us to strengthen our overall market position and will result
in higher revenue and higher operating earnings in future years.

Currency Fluctuations: In the first quarter of 2011 and 2010,
approximately 94% and 91%, respectively, of our revenue was generated outside the United States. In addition, approximately 83% of our operating expenses were incurred outside the United States in both the first quarter of 2011 and 2010. Changes in
currency exchange rates, especially from the Euro to U.S. Dollar, can have a significant impact on revenue and expenses.

In
general, to minimize the net impact of currency fluctuations, we attempt to denominate our billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. We expect that changes in currency
rates may also impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. In periods in which the U.S. Dollar is weakening, we expect that our operating earnings will increase as a
result of the change in currency exchange rates. Conversely, in periods in which the U.S. Dollar is strengthening, we expect that our operating earnings will decrease as a result of the change in currency exchange rates.

The U.S. Dollar strengthened by approximately 3% against the Euro and weakened approximately 12% against the Australian Dollar for the quarter
ended March 31, 2011, as compared to the same period in 2010. We estimate that the net effect of changes against these two currencies in 2011 compared to 2010 resulted in a decrease in revenue of approximately $43 for the quarter ended
March 31, 2011, compared to the same period in 2010, and a decrease in operating expenses of approximately $269 for the quarter ended March 31, 2011, compared to the same period in 2010.

The financial position and results of operations of most of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland and
Singapore (in which the functional currency is the U.S. Dollar), are generally measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the
balance sheet date. Translation adjustments arising from differences in exchange rates are included as a separate component of stockholders equity. Revenue and expenses are translated at average exchange rates prevailing during the period.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other non-operating income (expense). Foreign exchange transaction gains aggregating $29 in the first quarter of 2011 compare
to losses of $148 in the first quarter of 2010.



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Revenue

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



|                             |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ------------ | - | ----- | ----------- |  | - | -------------- | - |  | ----- | ----- | - |  | - | ------ | -
|                             |  | EMEA |        |   | UnitedStates |   |       | AsiaPacific |  |   | OtherCountries |   |  | Total |      
|Three months ended March 31: |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|Total Revenue:               |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2011                         |  | $    | 26,480 |   |              | $ | 2,282 |             |  | $ | 2,317          |   |  | $     | 5,279 |   |  | $ | 36,358 |  
|2010                         |  |      | 16,208 |   |              |   | 2,125 |             |  |   | 1,285          |   |  |       | 4,297 |   |  |   | 23,915 |  
|                             |  |      |        |   |             
|Percent of Total:            |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2011                         |  |      | 73     | % |              |   | 6     | %           |  |   | 6              | % |  |       | 15    | % |  |   | 100    | %
|2010                         |  |      | 68     | % |              |   | 9     | %           |  |   | 5              | % |  |       | 18    | % |  |   | 100    | %

Total revenue in the first quarter of
2011 increased $12,443, or 52%, over first quarter 2010. The increase was primarily attributable to growth in the number of units shipped to the banking/finance (Banking) market in all regions, partially offset by a decrease in the average selling
price per unit. The decline in the average price per unit generally reflects our approach to pricing, which provides lower prices for higher order quantities.

Revenue generated in EMEA during the first quarter 2011 was $10,272, or 63%, higher than the first quarter of 2010. The increase was primarily attributable to factors noted above related to the quarter as a whole
and reflected increased revenue in both the Banking market and the Enterprise and Application Security market.

Revenue generated in the
United States during the first quarter was $157, or 7%, higher than the first quarter of 2010. The increase was primarily attributable to factors noted above related to the quarter as a whole and reflected increased revenue in the Banking market
partially offset by a decline in the Enterprise and Application Security market. The U.S. market continues to defer the adoption of two factor authentication for retail internet banking applications, but we believe that we are well positioned to
meet the needs of the U.S. market when banks decide to deploy strong user authentication to their retail banking customers.

Revenue
generated in the Asia Pacific region during the first quarter was $1,032, or 80%, higher than the first quarter of 2010. The increase was primarily attributable to an increase in the Banking market as noted above.

Revenue generated from other countries during the first quarter was $982, or 23%, higher than the first quarter of 2010. The increased revenue from
other countries was primarily due to increases in the Banking markets in Central and South America and an increase in the Enterprise and Application Security market in Australia. VASCO continues to invest in new markets by hiring new sales and
support staff to help penetrate the developing markets for strong user authentication.

Given the relatively small size of the revenue
in regions other than EMEA, the results may vary substantially quarter-to quarter and year-to-year on both an absolute and on a percentage basis depending upon the timing of the receipt and delivery of a large new order or the completion of a large
rollout. We believe that the variability in results will lessen as we develop a larger base of Banking customers, further develop our distribution channel for the Enterprise and Application Security market and expand revenues from the Services
market.



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Revenue by Target Market:Revenue is generated currently from two primary markets, Banking and
Enterprise and Application Security, through the use of both direct and indirect sales channels. The Enterprise and Application Security market includes corporations, business-to-business, business-to-consumer, e-commerce, e-government, services
revenues, including DigiNotar, and various other vertical application markets that are not related to banking or finance. The breakdown of revenue between the two primary markets was as follows:



|                             |  |         |        |   |                                 |   |       |       |  |   |        |  
|---------------------------- |  | ------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                             |  | Banking |        |   | Enterprise &ApplicationSecurity |   |       | Total | 
|Three months ended March 31: |  |         |        |   |                                 |   |       |       | 
|Total Revenue:               |  |         |        |   |                                 |   |       |       |  |   |        |  
|2011                         |  | $       | 30,254 |   |                                 | $ | 6,104 |       |  | $ | 36,358 |  
|2010                         |  |         | 17,671 |   |                                 |   | 6,244 |       |  |   | 23,915 |  
|                             |  |         |       
|Percent of Total:            |  |         |        |   |                                 |   |       |       |  |   |        |  
|2011                         |  |         | 83     | % |                                 |   | 17    | %     |  |   | 100    | %
|2010                         |  |         | 74     | % |                                 |   | 26    | %     |  |   | 100    | %

Revenue in the first quarter of 2011
from the Banking market increased $12,583, or 71%, over the first quarter of 2010 and revenue from the Enterprise and Application Security market decreased $140, or 2%, in the same period.

We believe that the increase in revenue in the Banking market reflected a return of the banks to their more traditional ways of doing business
(e.g., larger orders for delivery over several quarters) following the banking crisis and economic slowdown that started in the fourth quarter of 2008.

We believe that the decrease in revenue in the Enterprise and Application Security markets reflected the carryover impact of a strong fourth quarter of 2010. We believe that the increased volume in the fourth
quarter of 2010 reflected the improving economic conditions for corporations and their year-end push to spend available budget amounts. We expect that the revenues from the Enterprise and Application Security markets will increase in the coming
quarters as long as the economic recovery continues.



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##### Table of Contents

Gross Profit and Operating Expenses

The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of revenue for the three months ended March 31, 2011 and 2010:



|                                            |  |           |       |   |      |  |       |  
|------------------------------------------- |  | --------- | ----- | - | ---- |  | ----- | -
|                                            |  | March 31, |      
|                                            |  | 2011      |       |   | 2010 | 
|Revenues                                    |  |           | 100.0 | % |      |  | 100.0 | %
|                                            |  |          
|Cost of goods sold                          |  |           | 37.6  | % |      |  | 30.2  | %
|                                            |  |           |       |   |      |  |       |  
|                                            |  |          
|Gross profit                                |  |           | 62.4  | % |      |  | 69.8  | %
|                                            |  |          
|Operating costs:                            |  |           |       |   |      |  |       |  
|Sales and marketing                         |  |           | 26.2  | % |      |  | 33.2  | %
|Research and development                    |  |           | 11.2  | % |      |  | 13.7  | %
|General and administrative                  |  |           | 14.7  | % |      |  | 19.4  | %
|Amortization of purchased intangible assets |  |           | 1.9   | % |      |  | 0.5   | %
|                                            |  |           |       |   |      |  |       |  
|Total operating costs                       |  |           | 54.0  | % |      |  | 66.8  | %
|                                            |  |           |       |   |      |  |       |  
|Operating income                            |  |           | 8.4   | % |      |  | 3.0   | %
|                                            |  |          
|Interest income                             |  |           | 0.3   | % |      |  | 0.3   | %
|Other income (expense)                      |  |           | 0.8   | % |      |  | 0.3   | %
|                                            |  |           |       |   |      |  |       |  
|                                            |  |          
|Income before income taxes                  |  |           | 9.5   | % |      |  | 3.6   | %
|Provision for income taxes                  |  |           | 2.6   | % |      |  | 1.2   | %
|                                            |  |           |       |   |      |  |       |  
|                                            |  |          
|Net income                                  |  |           | 6.9   | % |      |  | 2.4   | %
|                                            |  |           |       |   |      |  |       |  

Gross Profit

Consolidated gross profit for the quarter ended March 31, 2011 was $22,680, an increase of $5,992, or 36%, from the quarter ended March 31, 2010. Gross profit as a percentage of revenue (gross margin) was
62% for the quarter ended March 31, 2011, as compared to 70% for the quarter ended March 31, 2010. The decrease in gross margin for the first quarter of 2011 compared to 2010 is primarily related to:



| |  |  | a decrease in gross margins from sales in the Banking market,
| | - |  | -------------------------------------------------------------

| |  |  | a decrease in the percentage of our revenue that came from the Enterprise and Application Security Market and
| | - |  | -------------------------------------------------------------------------------------------------------------

| |  |  | a decrease in non-hardware revenues as a percentage of total revenue.
| | - |  | ---------------------------------------------------------------------

The decline in gross margin from the Banking market reflected an increase in large orders from banks which, consistent with our approach to pricing, are at lower average selling prices per unit. As mentioned
earlier, revenue from our Enterprise and Application Security market, which generally has margins that are 20 to 30 percentage points higher than the Banking market, was 17% of our total revenue in the first quarter of 2011 compared to 26% in the
first quarter of 2010. Our non-hardware revenues were approximately 22% of total revenue in the first quarter of 2011 compared with 24% in the first quarter of 2010.



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Operating Expenses

Our operating expenses are generally based on anticipated revenue levels and the majority of such expenses are fixed over short periods of time. As a result, small variations in the amount of revenue recognized in
any given quarter could cause significant variations in the quarter-to-quarter comparisons of either the absolute amounts of operating income or operating income as a percentage of revenue.

On a consolidated basis, our operating expenses for the three months ended March 31, 2011 were $19,611, an increase of $3,647 or 23% from the
quarter ended March 31, 2010. The increase in consolidated operating expenses was primarily related to the impact of our hiring program in 2010 and our acquisition of DigiNotar in January of 2011.

In most quarters, the most significant factor driving our operating expenses is our headcount. Direct compensation and benefit plan expenses
generally represent between 55% and 60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount.

During the first quarter of 2010, in anticipation of strong growth in our markets in the later part of 2010 and into 2011, we began an aggressive hiring program that resulted in an increase in our staff by 48
persons, or approximately 16% for the full year. We estimate that the addition of the staff in 2010 resulted in an increase of direct compensation expense of approximately $1,401 in for the three months ended March 31, 2011 as compared to the
three months ended March 31, 2010.

Operating expenses associated with the acquisition of DigiNotar were approximately $1,550 for
the first quarter of 2011 and included $992 of expenses related to operations and $558 related to the amortization of purchased intangible assets.

Sales and Marketing Expenses

Consolidated
sales and marketing expenses for the quarter ended March 31, 2011 were $9,512, an increase of $1,583, or 20%, from the first quarter of 2010. This increase in sales and marketing expenses was primarily related to:



| |  |  | an increase in compensation related to higher average headcount,
| | - |  | ----------------------------------------------------------------

| |  |  | the acquisition of DigiNotar, and
| | - |  | ---------------------------------

| |  |  | an increase in expenses related to marketing activities.
| | - |  | --------------------------------------------------------

The average full-time sales, marketing, support and operations employee headcount for the three months ended March 31, 2011, including headcount related to DigiNotar, was 186 compared to 158 for the three
months ended March 31, 2010, an increase of 18%.

Research and Development Expenses

Consolidated research and development expenses for the quarter ended March 31, 2011, were $4,057, an increase of $785, or 24%, from the first
quarter of 2010. This increase in research and development expenses was primarily due to the addition of staff and the acquisition of DigiNotar as noted above.

The average full-time research and development employee headcount for the three months ended March 31, 2011, including headcount related to DigiNotar, was 123 compared to 94 for the three months ended
March 31, 2010, an increase of 31%.



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With the acquisition of Alfa & Ariss B.V. (Alfa & Ariss) on April 1, 2011, we
expect our consolidated research and development expenses to increase in the second quarter of 2011.

General and Administrative Expenses

Consolidated general and administrative expenses for the quarter ended March 31, 2011, were $5,361, an increase of $713, or
15%, from the first quarter of 2010. This increase in general and administrative expenses was primarily related to:



| |  |  | an increase in compensation related to higher average headcount,
| | - |  | ----------------------------------------------------------------

| |  |  | the acquisition of DigiNotar, and
| | - |  | ---------------------------------

| |  |  | an increase in professional services
| | - |  | ------------------------------------

partially offset by



| |  |  | a reduction in the provision for uncollectible accounts receivable.
| | - |  | -------------------------------------------------------------------

The average full-time general and administrative employee headcount for the three months ended March 31, 2011, including headcount related to DigiNotar, was 62 compared to 50 for the three months ended
March 31, 2010, an increase of 24%.

Amortization of Intangible Assets

Amortization of intangible assets for the first quarter of 2011 increased $566, or 492% over the comparable periods in 2010. The increase in
amortization expense reflects the impact of the amortization of the purchased intangible assets resulting from our acquisition of DigiNotar.

With the acquisition of Alfa & Ariss on April 1, 2011, we expect our amortization of intangible assets to increase in the second quarter of 2011.

Interest Income

Consolidated net interest
income was $112 in the first quarter of 2011 as compared to $71 in the first quarter of 2010. The increase in interest income reflects slightly higher interest rates paid on higher average cash balances. Our average cash balance in the first quarter
of 2011 of $83,122 was $12,411, or 18%, higher than in the first quarter of 2010.

Other Income (Expense), Net

Other income (expense) primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our
subsidiaries functional currencies, subsidies received from foreign governments in support of our export business in those countries and other miscellaneous non-operational expenses. Other income for the first quarter of 2011 was $291 and
compares to $60 for the first quarter of 2010. The increase in other income primarily reflects lower exchange losses ($29 gain in the first quarter of 2011 compared to $148 loss in the first quarter of 2010).

Income Taxes

Income tax expense for the
first quarter of 2011 was $972, an increase of $690 from the first quarter of 2010. The increase in tax expense is attributable to an increase in pretax income partially offset by a lower effective tax rate. The effective tax rate was 28% for the
first quarter of 2011 and compares to 33% for the first quarter of 2010. The effective tax rate for both periods reflects our estimate of our full-year tax rate at the end of each respective period. We believe that our effective tax rate may vary
significantly quarter to quarter as actual earnings or losses are realized in countries with lower tax rates or with loss carryforwards that have been reserved.



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At December 31, 2010, we had U.S. net operating loss (NOL) carryforwards of $21,247. Of this
amount, $14,727 would result in a benefit to earnings. The remainder represents tax deductions for employee stock option gains the benefit for which would be credited to paid-in capital. The U.S. loss carryforwards expire in varying amounts
beginning in 2020 and continuing through 2029. In addition, if certain substantial changes in the companys ownership were deemed to have occurred, there would be an annual limitation on the amount of the U.S. carryforwards that could be
utilized. At December 31, 2010, we also had foreign NOL carryforwards of $4,834. The foreign NOL carryforwards have no expiration dates. A valuation reserve has been provided for the U.S. and certain foreign operating loss carryforwards to
offset the future benefits because we have not determined that their realization is more likely than not.

Liquidity and Capital Resources

Our net cash balance was $86,022 at March 31, 2011, an increase of $489, or less than 1%, from $85,533 at December 31,
2010. The increase in cash from December 31, 2010 primarily reflects the strong cash flow from operations and the benefit of a stronger Euro compared to the U.S. dollar partially offset by cash used to purchase DigiNotar in January 2011.

At March 31, 2011, we had working capital of $90,823, a decrease of $6,066, or 6%, from $96,889 reported at December 31,
2010. The decrease in working capital was primarily related to the acquisition of DigiNotar.

EBITDA from continuing operations for the
three months ended March 31, 2011 and 2010 was $4,480 and $1,516, respectively, an increase of $2,964, or 196%, from the same period of the prior year. A reconciliation of EBITDA to net income for the three months ended March 31, 2011, and
2010 follows:



|                              |  |                             |        |   |      |   |       |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                              |  | Three monthsended March 31, |       
|                              |  | 2011                        |        |   | 2010 |  
|                              |  | (in thousands,unaudited)    |       
|EBITDA                        |  | $                           | 4,480  |   |      | $ | 1,516 |  
|                              |  |                            
|Interest income, net          |  |                             | 112    |   |      |   | 71    |  
|Provision for income taxes    |  |                             | (972   | ) |      |   | (282  | )
|Depreciation and amortization |  |                             | (1,120 | ) |      |   | (732  | )
|                              |  |                             |        |   |      |   |       |  
|Net income                    |  | $                           | 2,500  |   |      | $ | 573   |  
|                              |  |                             |        |   |      |   |       |  

EBITDA is a non-GAAP financial measure within the meaning of applicable U.S. Securities and Exchange Commission rules
and regulations. We use EBITDA as a measure of performance, a simplified tool for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that
EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation and amortization we are able to evaluate performance without considering decisions that, in most cases,
are not directly related to meeting our customers requirements and were either made in prior periods (e.g., depreciation and amortization), or deal with the structure or financing of the business (e.g., interest) or reflect the application of
regulations that are outside of the control of our management team (e.g., taxes). Similarly, we find that the comparison of our results to those of our competitors is facilitated when we do not need to consider the impact of those items on our
competitors results.

EBITDA should be considered in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with accounting principles generally accepted in the United States. While we believe that EBITDA, as defined above, is useful within the context



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described above, it is in fact incomplete and not a measure that should be used to evaluate our full performance or our prospects. Such an evaluation needs to consider all of the complexities
associated with our business including, but not limited to, how past actions are affecting current results and how they may affect future results, how we have chosen to finance the business and how regulations and the other aforementioned items
affect the final amounts that are or will be available to shareholders as a return on their investment. Net income determined in accordance with U.S. GAAP is the most complete measure available today to evaluate all elements of our performance.
Similarly, our Consolidated Statement of Cash Flows, which will be filed as part of our annual report on Form 10-K, provides the full accounting for how we have decided to use resources provided to us from our customers, lenders and shareholders.

While we believe that our financial resources are adequate to meet our operating needs over the next twelve months, we anticipate that
the difficult current economic conditions that exist on a worldwide basis today may require us to modify our business plans. In the current economic environment there is an increased risk that customers may delay their orders until the economic
conditions stabilize or improve. If a significant number of orders are delayed for an indefinite period of time, our revenue and cash receipts may not be sufficient to meet the operating needs of the business. If this is the case, we may need to
significantly reduce our workforce, sell certain of our assets, enter into strategic relationships or business combinations, discontinue some or all of our operations, or take other similar restructuring actions. While we expect that these actions
would result in a reduction of recurring costs, they also may result in a reduction of recurring revenue and cash receipts. It is also likely that we would incur substantial non-recurring costs to implement one or more of these restructuring
actions. For additional information related to risks, refer to Certain Factors noted in Managements Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Recently Issued Accounting Pronouncements

Software

In October 2009, the FASB issued ASU 2009-14, Software, Certain Revenue Arrangements That Include Software Elements. ASU
2009-14 provides guidance to determine if products should be accounted for as software under ASC 985-605. Arrangements that are no longer defined as software are accounted for under ASC 605-25, for separating consideration in multiple-deliverable
arrangements. Under ASU 2009-14, tangible products containing software components and non-software components that function together to deliver the tangible products essential functionality will no longer fall within the scope of ASC 985-605.

Revenue Recognition

In October
2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. ASU 2009-13 amends the criteria in ASC 605-25 for separating consideration in multiple-deliverable arrangements and provides the ability to separate deliverables in
more circumstances than was previously allowed under U.S. GAAP. In addition, the amendments in ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based
on VSOE if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. Under this update, the term fair valuewas replaced with selling price to clarify
that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.

ASU
2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method
allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverables selling price.



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##### Table of Contents

Both ASU 2009-13 and ASU 2009-14 were effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We adopted both Updates effective January 1, 2011. As a result of adoption of the Updates:



| | 1. | The sales of some of our products are defined as software sales and continue to be accounted for using ASC 985-605. Sales of some of our other products, however, no longer
qualify as sales of software and are accounted for under ASC 605-25.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | For items continuing to be classified as software, we do not expect that the allocation of consideration will be significantly different than prior to adoption as we have
vendor-specific objective evidence for the most common type of undelivered items, such as maintenance and support. Further, we continue to use the Residual Method when we have vendor-specific objective evidence of any undelivered elements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | For sales of products that no longer qualify as software sales, we allocate the arrangement consideration among each of the accounting units based on relative selling price of
each of the units with any discount on the transaction being split proportionately between delivered and undelivered accounting units. We do not expect that the allocation of purchase price among delivered and undelivered elements to be
significantly different than under our accounting practices prior to adoption because, as noted above, we have vendor-specific objective evidence for the most common type of undelivered items and generally do not provide discounts that will
significantly impact the value determined using VSOE.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three months ended March 31, 2011, the adoption of ASU
2009-13 and ASU 2009-14 did not have a significant impact on revenue. Further, we do not expect that adopting ASU 2009-13 and ASU 2009-14 will have a material impact on the amount, pattern or timing of the recognition of future revenue.

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



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

There have been no material changes in our market risk during the three months ended March 31, 2011. For additional information, refer to Item 7A. Quantitative and Qualitative Disclosures about Market
Risk, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.



|Item 4. | Controls and Procedures
|------- | -----------------------

Our management, with
the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal



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##### Table of Contents

executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no
changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2011, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, our management,
including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well
designed and implemented, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are
detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.



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##### Table of Contents

PART II. OTHER INFORMATION

Item 6. Exhibits.

Exhibit 31.1  Rule 13a-14(a)/15d-14(a)
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.

Exhibit 31.2  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated May 6, 2011

Exhibit 32.1  Section 1350 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.

Exhibit 32.2  Section 1350 Certification of Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 6, 2011.



VASCO Data Security International, Inc./s/ T. Kendall HuntT. Kendall HuntChief Executive Officer and Chairman of
the Board of Directors (Principal Executive
Officer)






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




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##### Table of Contents

EXHIBIT INDEX

Exhibit 31.1  Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated May 6, 2011.

Exhibit 31.2  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.

Exhibit 32.1  Section 1350 Certification of Principal
Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.

Exhibit 32.2  Section
1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011.



31