##### 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
JUNE 30, 2012

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.    x  Yes     ̈   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  x    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 38,845,924 shares of Common Stock, $.001 par value per share, outstanding at July 27, 2012.









---

##### Table of Contents

VASCO Data Security International, Inc.

Form 10-Q

For The Quarterly Period Ended June 30, 2012

Table of Contents



|                              |  |                                                                                                                                         |    |  |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|                              |  | PageNo.                                                                                                                                 |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                         |    | 
|                              |  |                                                                                                                                        
|Item 1.                       |  | Financial Statements                                                                                                                    |    |  |    | 
|                              |  |                                                                                                                                        
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31,
2011                                             |    |  | 3  | 
|                              |  |                                                                                                                                        
|                              |  | Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended June 30,
 2012 and 2011           |    |  | 4  | 
|                              |  |                                                                                                                                        
|                              |  | Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six month periods ended
 June 30, 2012 and 2011 |    |  | 5  | 
|                              |  |                                                                                                                                        
|                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2012 and 2011                             |    |  | 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                                                                              |    |  | 32 | 
|                              |  |                                                                                                                                        
|Item 4.                       |  | Controls and Procedures                                                                                                                 |    |  | 32 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                         |    | 
|                              |  |                                                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                                                                       |    |  | 33 | 
|                              |  |                                                                                                                                        
|Item 6.                       |  | Exhibits                                                                                                                                |    |  | 33 | 
|                              | 
|SIGNATURES                    |  |                                                                                                                                         | 34 | 
|                              | 
|EXHIBIT INDEX                 |  |                                                                                                                                         | 35 | 



This report may contain trademarks of VASCO Data Security International, Inc. and its subsidiaries, which include VASCO, the VASCO V design, DIGIPASS, Digipass as a Service (DPS), CertiID,
VACMAN, aXsGUARD and IDENTIKEY.



2



---

##### Table of Contents

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                        |  | June 30,2012 |         |   | December 31,2011 |  
|                                                                                                                                                                        |  | (unaudited)  |         |   |                  |  
|ASSETS                                                                                                                                                                  |  |              |         |   |                  |   |         |  
|Current assets                                                                                                                                                          |  |              |         |   |                  |   |         |  
|Cash and equivalents                                                                                                                                                    |  | $            | 85,145  |   |                  | $ | 84,497  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,542 in 2012 and $1,585 in 2011                                                                        |  |              | 33,868  |   |                  |   | 31,618  |  
|Inventories                                                                                                                                                             |  |              | 17,089  |   |                  |   | 16,033  |  
|Prepaid expenses                                                                                                                                                        |  |              | 1,636   |   |                  |   | 1,657   |  
|Foreign sales tax receivable                                                                                                                                            |  |              | 442     |   |                  |   | 683     |  
|Deferred income taxes                                                                                                                                                   |  |              | 1,848   |   |                  |   | 2,382   |  
|Other current assets                                                                                                                                                    |  |              | 1,331   |   |                  |   | 343     |  
|Assets of discontinued operations                                                                                                                                       |  |              | 2,576   |   |                  |   | 2,545   |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                                                    |  |              | 143,935 |   |                  |   | 139,758 |  
|                                                                                                                                                                        |  |             
|Property and equipment:                                                                                                                                                 |  |              |         |   |                  |   |         |  
|Furniture and fixtures                                                                                                                                                  |  |              | 4,863   |   |                  |   | 4,924   |  
|Office equipment                                                                                                                                                        |  |              | 7,782   |   |                  |   | 7,390   |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|                                                                                                                                                                        |  |              | 12,645  |   |                  |   | 12,314  |  
|Accumulated depreciation                                                                                                                                                |  |              | (8,649  | ) |                  |   | (7,909  | )
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Property and equipment, net                                                                                                                                             |  |              | 3,996   |   |                  |   | 4,405   |  
|                                                                                                                                                                        |  |             
|Goodwill, net of accumulated amortization                                                                                                                               |  |              | 12,539  |   |                  |   | 12,910  |  
|Intangible assets, net of accumulated amortization                                                                                                                      |  |              | 7,296   |   |                  |   | 8,091   |  
|Other assets, net of accumulated amortization                                                                                                                           |  |              | 3,195   |   |                  |   | 3,759   |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                            |  | $            | 170,961 |   |                  | $ | 168,923 |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|                                                                                                                                                                        |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |              |         |   |                  |   |         |  
|Current liabilities                                                                                                                                                     |  |              |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                        |  | $            | 4,548   |   |                  | $ | 7,328   |  
|Deferred revenue                                                                                                                                                        |  |              | 7,721   |   |                  |   | 8,649   |  
|Accrued wages and payroll taxes                                                                                                                                         |  |              | 6,124   |   |                  |   | 6,564   |  
|Income taxes payable                                                                                                                                                    |  |              | 0       |   |                  |   | 1,965   |  
|Other accrued expenses                                                                                                                                                  |  |              | 4,119   |   |                  |   | 3,162   |  
|Deferred compensation                                                                                                                                                   |  |              | 2,061   |   |                  |   | 1,908   |  
|Liabilities of discontinued operations                                                                                                                                  |  |              | 1,322   |   |                  |   | 1,592   |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                               |  |              | 25,895  |   |                  |   | 31,168  |  
|                                                                                                                                                                        |  |             
|Deferred compensation                                                                                                                                                   |  |              | 90      |   |                  |   | 1,526   |  
|Deferred revenue                                                                                                                                                        |  |              | 88      |   |                  |   | 106     |  
|Deferred income taxes                                                                                                                                                   |  |              | 195     |   |                  |   | 324     |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                       |  |              | 26,268  |   |                  |   | 33,124  |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                                    |  |              |         |   |                  |   |         |  
|                                                                                                                                                                        |  |             
|Common stock: $.001 par value per share, 75,000 shares authorized; 38,846 and 38,193 shares issued and outstanding at
June 30, 2012 and December 31, 2011, respectively |  |              | 39      |   |                  |   | 38      |  
|Preferred stock: 500 shares authorized, none issued and outstanding at June 30, 2012 or December 31,
2011                                                               |  |              | 0       |   |                  |   | 0       |  
|Additional paid-in capital                                                                                                                                              |  |              | 73,521  |   |                  |   | 71,720  |  
|Accumulated income                                                                                                                                                      |  |              | 74,730  |   |                  |   | 65,658  |  
|Accumulated other comprehensive income                                                                                                                                  |  |              | (3,597  | ) |                  |   | (1,617  | )
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                              |  |              | 144,693 |   |                  |   | 135,799 |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                              |  | $            | 170,961 |   |                  | $ | 168,923 |  
|                                                                                                                                                                        |  |              |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



3



---

##### Table of Contents

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                                      |  | 2012                       |        |   | 2011                     |   |        | 2012 |  |   | 2011   |  
|                                                      |  |                            |        |  
|Net revenue                                           |  | $                          | 46,642 |   |                          | $ | 42,103 |      |  | $ | 78,900 |   |  | $ | 78,169 |  
|                                                      |  |                            |        |  
|Cost of goods sold                                    |  |                            | 17,191 |   |                          |   | 16,397 |      |  |   | 27,571 |   |  |   | 29,835 |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Gross profit                                          |  |                            | 29,451 |   |                          |   | 25,706 |      |  |   | 51,329 |   |  |   | 48,334 |  
|                                                      |  |                            |        |  
|Operating costs:                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing                                   |  |                            | 9,856  |   |                          |   | 10,956 |      |  |   | 19,264 |   |  |   | 19,980 |  
|Research and development                              |  |                            | 4,796  |   |                          |   | 4,836  |      |  |   | 9,497  |   |  |   | 8,658  |  
|General and administrative                            |  |                            | 5,330  |   |                          |   | 5,348  |      |  |   | 10,405 |   |  |   | 10,449 |  
|Amortization of purchased intangible assets           |  |                            | 472    |   |                          |   | 507    |      |  |   | 951    |   |  |   | 999    |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating costs                                 |  |                            | 20,454 |   |                          |   | 21,647 |      |  |   | 40,117 |   |  |   | 40,086 |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Operating income                                      |  |                            | 8,997  |   |                          |   | 4,059  |      |  |   | 11,212 |   |  |   | 8,248  |  
|                                                      |  |                            |        |  
|Interest income, net                                  |  |                            | 68     |   |                          |   | 131    |      |  |   | 145    |   |  |   | 240    |  
|Other income, net                                     |  |                            | 300    |   |                          |   | 326    |      |  |   | 532    |   |  |   | 617    |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Income from continuing operations before income taxes |  |                            | 9,365  |   |                          |   | 4,516  |      |  |   | 11,889 |   |  |   | 9,105  |  
|Provision for income taxes                            |  |                            | 1,967  |   |                          |   | 1,177  |      |  |   | 2,497  |   |  |   | 2,119  |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Net income from continuing operations                 |  |                            | 7,398  |   |                          |   | 3,339  |      |  |   | 9,392  |   |  |   | 6,986  |  
|Income (loss) from discontinued operations            |  |                            | (236   | ) |                          |   | (718   | )    |  |   | (319   | ) |  |   | (1,865 | )
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income                                            |  | $                          | 7,162  |   |                          | $ | 2,621  |      |  | $ | 9,073  |   |  | $ | 5,121  |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Net income per share:                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic income (loss) per share                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Continuing                                            |  | $                          | 0.19   |   |                          | $ | 0.09   |      |  | $ | 0.25   |   |  | $ | 0.19   |  
|                                                      |  |                            |        |  
|Discontinued                                          |  |                            | (0.01  | ) |                          |   | (0.02  | )    |  |   | (0.01  | ) |  |   | (0.05  | )
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Total                                                 |  | $                          | 0.18   |   |                          | $ | 0.07   |      |  | $ | 0.24   |   |  | $ | 0.14   |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Diluted income (loss) per share                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Continuing                                            |  | $                          | 0.19   |   |                          | $ | 0.09   |      |  | $ | 0.24   |   |  | $ | 0.18   |  
|                                                      |  |                            |        |  
|Discontinued                                          |  |                            | (0.01  | ) |                          |   | (0.02  | )    |  |   | (0.01  | ) |  |   | (0.05  | )
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Total                                                 |  | $                          | 0.18   |   |                          | $ | 0.07   |      |  | $ | 0.23   |   |  | $ | 0.13   |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                      |  |                            |        |  
|Weighted average common shares outstanding:           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                 |  |                            | 38,065 |   |                          |   | 37,532 |      |  |   | 37,928 |   |  |   | 37,526 |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                               |  |                            | 38,742 |   |                          |   | 38,752 |      |  |   | 38,597 |   |  |   | 38,611 |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



4



---

##### Table of Contents

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                               |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | 
|                                                               |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                                               |  | 2012                       |        |   | 2011                     |   |       | 2012 |  |   | 2011   |  
|                                                               |  |                            |        |  
|Net income                                                     |  | $                          | 7,162  |   |                          | $ | 2,621 |      |  | $ | 9,073  |   |  | $ | 5,121  | 
|                                                               |  |                            |        |  
|Other comprehensive income - Cumulative translation adjustment |  |                            | (4,066 | ) |                          |   | 1,514 |      |  |   | (1,980 | ) |  |   | 5,653  | 
|                                                               |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        | 
|                                                               |  |                            |        |  
|Comprehensive income                                           |  | $                          | 3,096  |   |                          | $ | 4,135 |      |  | $ | 7,093  |   |  | $ | 10,774 | 
|                                                               |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        | 

See accompanying notes to condensed consolidated financial statements.



5



---

##### Table of Contents

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                              |  |                          |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                              |  | Six months endedJune 30, |       
|                                                                                                              |  | 2012                     |        |   | 2011 |  
|Cash flows from operating activities:                                                                         |  |                          |        |   |      |   |        |  
|Net income from continuing operations                                                                         |  | $                        | 9,392  |   |      | $ | 6,986  |  
|Adjustments to reconcile net income from continuing operations to net cash provided by continuing operations: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                                                 |  |                          | 1,848  |   |      |   | 2,284  |  
|Deferred tax expense (benefit)                                                                                |  |                          | 1,052  |   |      |   | (1,385 | )
|Non-cash compensation                                                                                         |  |                          | 2,248  |   |      |   | 1,316  |  
|Changes in assets and liabilities:                                                                            |  |                          |        |   |      |   |        |  
|Accounts receivable, net                                                                                      |  |                          | (3,003 | ) |      |   | 1,539  |  
|Inventories                                                                                                   |  |                          | (1,056 | ) |      |   | (3,332 | )
|Foreign sales tax receivable                                                                                  |  |                          | 244    |   |      |   | 1,711  |  
|Other current assets                                                                                          |  |                          | (1,011 | ) |      |   | (350   | )
|Accounts payable                                                                                              |  |                          | (2,745 | ) |      |   | (2,206 | )
|Income taxes payable                                                                                          |  |                          | (1,929 | ) |      |   | 830    |  
|Accrued expenses                                                                                              |  |                          | 409    |   |      |   | 3,090  |  
|Current deferred compensation                                                                                 |  |                          | (1,826 | ) |      |   | 0      |  
|Deferred revenue                                                                                              |  |                          | (915   | ) |      |   | 1,739  |  
|                                                                                                              |  |                          |        |   |      |   |        |  
|Net cash provided by operating activities of continuing operations                                            |  |                          | 2,708  |   |      |   | 12,222 |  
|                                                                                                              |  |                          |        |   |      |   |        |  
|                                                                                                              |  |                         
|Cash flows from investing activities of continuing operations:                                                |  |                          |        |   |      |   |        |  
|Purchase of Alfa & Ariss                                                                                      |  |                          | 0      |   |      |   | (1,301 | )
|Additions to property and equipment                                                                           |  |                          | (524   | ) |      |   | (627   | )
|Additions to intangible assets                                                                                |  |                          | (123   | ) |      |   | (7,554 | )
|Other assets                                                                                                  |  |                          | 184    |   |      |   | (257   | )
|                                                                                                              |  |                          |        |   |      |   |        |  
|Net cash used in investing activities of continuing operations                                                |  |                          | (463   | ) |      |   | (9,739 | )
|                                                                                                              |  |                          |        |   |      |   |        |  
|                                                                                                              |  |                         
|Cash flows from financing activities of continuing operations:                                                |  |                          |        |   |      |   |        |  
|Proceeds from exercise of stock options and warrants                                                          |  |                          | 97     |   |      |   | 17     |  
|                                                                                                              |  |                          |        |   |      |   |        |  
|Net cash provided by financing activities of continuing operations                                            |  |                          | 97     |   |      |   | 17     |  
|                                                                                                              |  |                         
|Cash flows used in discontinued operations:                                                                   |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) operating activities of discontinued operations                                |  |                          | (620   | ) |      |   | (303   | )
|Net cash provided by (used in) investing activities of discontinued operations                                |  |                          | 0      |   |      |   | (5,931 | )
|                                                                                                              |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) discontinued operations                                                        |  |                          | (620   | ) |      |   | (6,234 | )
|                                                                                                              |  |                         
|Effect of exchange rate changes on cash                                                                       |  |                          | (1,074 | ) |      |   | 2,832  |  
|                                                                                                              |  |                         
|Net increase in cash                                                                                          |  |                          | 648    |   |      |   | (903   | )
|Cash and equivalents, beginning of year                                                                       |  |                          | 84,497 |   |      |   | 85,533 |  
|                                                                                                              |  |                          |        |   |      |   |        |  
|Cash and equivalents, end of period                                                                           |  | $                        | 85,145 |   |      | $ | 84,630 |  
|                                                                                                              |  |                          |        |   |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



6



---

##### Table of Contents

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, Switzerland, Singapore, the United Arab Emirates, the United Kingdom, and the United States (U.S.).



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, 2011.

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. All significant intercompany accounts and transactions have been
eliminated in consolidation.

During 2011, our wholly-owned Dutch subsidiary, DigiNotar B.V., was declared bankrupt. The
court-appointed trustee is responsible for the business activities, administration and liquidation of DigiNotar B.V. Accordingly, related assets, liabilities and operating activities are reflected in discontinued operations. Prior periods have been
restated to report continuing and discontinued operations.



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.



7



---

##### Table of Contents



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 and six months ended June 30, 2012, foreign currency transactions resulted in a loss of $49 and a gain of $46,
respectively, compared to gains of $30 and $58, for the same periods in 2011.



Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605, Software  Revenue Recognitionas amended by ASU 2009-14,
Certain Revenue Arrangements That Include Software Elements, ASC 985-605-25, Revenue Recognition  Multiple Element Arrangementsas amended by Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue
Arrangements- a consensus of the FASB Emerging Issues Task Force,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.

In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985-605 and others 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 support (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 customers
end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.



8



---

##### Table of Contents

In multiple-element arrangements that include a hardware client device, we allocate the
selling price among all elements, delivered and undelivered, based on our internal price lists and the percentage of the selling price of that element, per the price list, to the total of the estimated selling price of all of the elements per the
price list. Our internal price lists for both delivered and undelivered elements were determined to be reasonable estimates of the selling price of each element based on a comparison of actual sales made to the price list for each item delivered and
to vendor specific objective evidence (VSOE) for undelivered items.

Undelivered elements primarily are PCS. The method by
which we determine VSOE has validated that the price lists are reasonable estimates of the selling price for PCS. The estimated selling price of PCS items is based on an established percentage of the user license fee attributable to the specific
software and is applied consistently to all PCS arrangements. The percentage we use to establish VSOE, which is also generally consistent with the percentage used in the price list, is developed using the bell curve method. This method
relies on historical data to show that at least 80% of all our renewals are within 15% of the median renewal percentage rate.

In multiple-element arrangements that include a software client device, we account for each element under the 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 VSOE for all of the
undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an arrangement. VSOE of fair value of PCS agreements is based on customer renewal 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.

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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



9



---

##### Table of Contents

All revenue is reported on a net basis, excluding any sales taxes 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 cash equivalents are held by a number of U.S. and non-U.S. commercial banks and money market investment funds. Cash and cash equivalents at June 30, 2012
include $72,551 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 cash
equivalents also include $12,594 in bank time deposits for which fair value was $12,596 at June 30, 2012. Bank time deposits 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 assurance 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 charged to operations as incurred. Gains or losses resulting from sales, disposals, or retirements are
recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts.



Goodwill and Other Intangibles

We account for goodwill and indefinite-lived intangible assets in accordance with ASC Topic 350-20,Goodwill and
Other. Indefinite-lived intangible assets include proprietary technology, patents,



10



---

##### Table of Contents

trademarks and other intangible assets. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology.
Patents are amortized over the life of the patent, generally 20 years in the U.S.

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 and intangible assets is determined using our stock price which is a level 1 valuation, as defined in
ASC 820-10, Fair Value Measurements and Disclosures.



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, Costs of Software to be Sold, Leased, or Marketed. Research
costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software capitalization policy 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. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears 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. No software development costs were capitalized during the three and six
months ended June 30, 2012.



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 in income in the period that includes the enactment date.

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

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 to offset some of these future benefits because we have not determined that their realization is more likely than not.



Fair Value of Financial Instruments

At June 30, 2012 and December 31, 2011, 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 June 30, 2012 and December 31, 2011.



11



---

##### Table of Contents



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.



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.



|                                |  |              |        |   |                  |   |        |  
|------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                |  | June 30,2012 |        |   | December 31,2011 |  
|                                |  |             
|Accounts receivable             |  | $            | 35,410 |   |                  | $ | 33,203 |  
|Allowance for doubtful accounts |  |              | (1,542 | ) |                  |   | (1,585 | )
|                                |  |              |        |   |                  |   |        |  
|Accounts receivable, net        |  | $            | 33,868 |   |                  | $ | 31,618 |  
|                                |  |              |        |   |                  |   |        |  

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:



|                                   |  |              |        |  |                  |   |        | 
|---------------------------------- |  | ------------ | ------ |  | ---------------- | - | ------ | 
|                                   |  | June 30,2012 |        |  | December 31,2011 |  
|Component parts                    |  | $            | 7,154  |  |                  | $ | 6,447  | 
|Work-in-process and finished goods |  |              | 9,935  |  |                  |   | 9,586  | 
|                                   |  |              |        |  |                  |   |        | 
|Total                              |  | $            | 17,089 |  |                  | $ | 16,033 | 
|                                   |  |              |        |  |                  |   |        | 

Note 4  Discontinued Operations

During 2011, our wholly-owned Dutch subsidiary, DigiNotar B.V., was declared bankrupt. The court-appointed trustee is
responsible for the business activities, administration and liquidation of



12



---

##### Table of Contents

DigiNotar B.V. Accordingly, related assets, liabilities and operating activities are reflected in discontinued operations. Prior periods have been restated to report continuing and discontinued
operations.



The income (loss) from discontinued operations, net of tax,
for the three and six months ended June 30, 2012 and 2011 was as follows:



|                                           |  |                           |      |   |                          |   |      |      |  |   |      |   |  |   |        |  
|------------------------------------------ |  | ------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ------ | -
|                                           |  | Three month endedJune 30, |      |   | Six months endedJune 30, |  
|                                           |  | 2012                      |      |   | 2011                     |   |      | 2012 |  |   | 2011 |  
|                                           |  |                           |      |  
|Income (loss) from operations              |  | $                         |     |   |                          | $ | (718 | )    |  | $ |     |   |  | $ | (1,865 | )
|Loss on disposal                           |  |                           | (236 | ) |                          |   |     |      |  |   | (319 | ) |  |   |       |  
|                                           |  |                           |      |   |                          |   |      |      |  |   |      |   |  |   |        |  
|Income (loss) from discontinued operations |  | $                         | (236 | ) |                          | $ | (718 | )    |  | $ | (319 | ) |  | $ | (1,865 | )
|                                           |  |                           |      |   |                          |   |      |      |  |   |      |   |  |   |        |  



At June 30, 2012, assets of discontinued
operations and liabilities of discontinued operations consist of the following:



|                                                                 |  |   |       | 
|---------------------------------------------------------------- |  | - | ----- | 
|Contingent consideration due from escrow                         |  | $ | 1,813 | 
|Due from DigiNotar net of allowance for doubtful account of $952 |  |   | 414   | 
|Income taxes receivable                                          |  |   | 349   | 
|                                                                 |  |   |       | 
|Assets of discontinued operations                                |  | $ | 2,576 | 
|                                                                 |  |   |       | 
|                                                                 | 
|Due to DigiNotar                                                 |  | $ | 1,275 | 
|Accrued professional fees                                        |  |   | 47    | 
|                                                                 |  |   |       | 
|Liabilities of discontinued operations                           |  | $ | 1,322 | 
|                                                                 |  |   |       | 

Note 5  Goodwill



Goodwill activity for the six months ended June 30, 2012 consisted of the following:



|                                 |  |   |        |  
|-------------------------------- |  | - | ------ | -
|Net balance at December 31, 2011 |  | $ | 12,910 |  
|Additions                        |  |   |       |  
|Net foreign currency translation |  |   | (371   | )
|                                 |  |   |        |  
|Net balance at June 30, 2012     |  | $ | 12,539 |  
|                                 |  |   |        |  



13



---

##### Table of Contents

Certain portions of goodwill are denominated in local currencies and are subject to
currency fluctuation.

Note 6  Intangible Assets



Intangible asset activity for the six months ended June 30, 2012 is detailed
in the following table.



|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |       |  
|-------------------------------- |  | --------------------- | ----- | - | ------------------- | - | ----- | ----- |  | - | --------------------- | - |  | - | ----- | -
|                                 |  | CapitalizedTechnology |       |   | Patents &Trademarks |   |       | Other |  |   | TotalIntangibleAssets |  
|Net balance at December 31, 2011 |  | $                     | 6,693 |   |                     | $ | 1,361 |       |  | $ | 37                    |   |  | $ | 8,091 |  
|Additions                        |  |                       |      |   |                     |   | 180   |       |  |   |                      |   |  |   | 180   |  
|Net foreign currency translation |  |                       | (24   | ) |                     |   |      |       |  |   |                      |   |  |   | (24   | )
|Amortization expense             |  |                       | (911  | ) |                     |   | (30   | )     |  |   | (10                   | ) |  |   | (951  | )
|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |       |  
|Net balance at June 30, 2012     |  | $                     | 5,758 |   |                     | $ | 1,511 |       |  | $ | 27                    |   |  | $ | 7,296 |  
|                                 |  |                       |       |   |                     |   |       |       |  |   |                       |   |  |   |       |  

Certain intangible assets are denominated in local currencies and are subject to currency fluctuations.

Note 7  Income Taxes

Our effective tax rate for the six months ended June 30, 2012 is equal to our expected annual tax rate of 21%.
This is lower than the U.S. statutory rate of 34%, primarily due to income in foreign jurisdictions taxed at lower rates. In the first quarter of 2012, our expected annual tax rate was also estimated to be 21%.

Our effective tax rate for the six months ended June 30, 2011 was equal to our expected annual tax rate of 23%. The expected annual
rate was lower than the U.S. statutory rate primarily due to income in foreign jurisdictions taxed at lower rates, offset by expected losses in the U.S., where the tax benefit for these losses was fully reserved. Actual U. S. income for the full
year in 2011 was significantly higher than expected, and the valuation reserves for U.S. net operating loss (NOL) carryforwards were reversed in the fourth quarter of 2011.

In the first quarter of 2011, our estimated annual tax rate was 21%. The effective tax rate of 26% for the second quarter of 2011
reflected the increase in the expected annual rate.

At December 31, 2011, we had $9,907 of U.S. NOL carryforwards, of
which $7,334 represents U.S. tax deductions for employee stock option gains, the tax benefit of which will be credited to additional paid in capital when the NOL carryforwards are utilized. The U.S. loss carryforwards expire in varying amounts
beginning in 2022 and continuing through 2029. 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. NOL carryforwards that could be utilized.



14



---

##### Table of Contents

At December 31, 2011, we had foreign NOL carryforwards of $5,535 and other foreign
deductible carryforwards of $2,770. The foreign NOL carryforwards have no expiration dates and the other deductible carryforwards expire from 2016 to 2018. At December 31, 2011, we had a valuation allowance of $2,088 for certain foreign
deferred tax assets.

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 months endedJune 30 |     |   | Six months endedJune 30 |  
|                                        |  | 2012                      |     |   | 2011                    |   |     | 2012 |  |   | 2011 |  
|Balance, beginning of period            |  | $                         | 96  |   |                         | $ | 11  |      |  | $ | 36   |   |  | $ | 61  |  
|Provision for claims                    |  |                           | 18  |   |                         |   | 8   |      |  |   | 98   |   |  |   | 13  |  
|Product or cash issued to settle claims |  |                           | (26 | ) |                         |   | (19 | )    |  |   | (46  | ) |  |   | (74 | )
|                                        |  |                           |     |   |                         |   |     |      |  |   |      |   |  |   |     |  
|Balance, end of period                  |  | $                         | 88  |   |                         | $ |    |      |  | $ | 88   |   |  | $ |    |  
|                                        |  |                           |     |   |                         |   |     |      |  |   |      |   |  |   |     |  

At June 30, 2012, deferred revenue from extended warranties was $94.

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

Under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan (2009 Equity Incentive Plan), we awarded
262 shares of restricted stock in the first quarter of 2012 consisting of 96 unissued shares subject to future performance criteria and 166 issued shares. The market value of the restricted shares was $1,805 at the date of grant and will be
amortized over the respective vesting periods of one to four years.

In the second quarter of 2012, under the 2009 Equity
Incentive Plan, we awarded and issued 71 shares of restricted stock. The market value of the restricted shares was $662 at the date of grant and will be amortized over the respective vesting period of four years.

Also in the second quarter of 2012, we awarded long-term incentive awards under the 2009 Equity Incentive Plan. The awards are variable
subject to achievement of performance targets established by the Board of Directors. The probable award level of $1,984 is expensed on a straight-line basis over the four-year vesting period.



15



---

##### Table of Contents



The following table details long-term compensation plan and stock-based compensation expense for the three and six months ended June 30, 2012 and 2011:



|                            |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 
|--------------------------- |  | -------------------------- | ----- |  | ------------------------ | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                            |  | Three months endedJune 30, |       |  | Six months endedJune 30, |  
|                            |  | 2012                       |       |  | 2011                     |   |     | 2012 |  |   | 2011  | 
|                            |  |                            |       | 
|Restricted stock            |  | $                          | 845   |  |                          | $ | 375 |      |  | $ | 1,694 |  |  | $ | 746   | 
|Long-term compensation plan |  |                            | 325   |  |                          |   | 374 |      |  |   | 554   |  |  |   | 570   | 
|                            |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 
|Total Non-Cash Compensation |  | $                          | 1,170 |  |                          | $ | 749 |      |  | $ | 2,248 |  |  | $ | 1,316 | 
|                            |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 

Note 10  Common Stock and Earnings per Share

In connection with the 2009 Equity Incentive Plan, during the three months ended March 31, 2012, we issued 391
total shares of restricted common stock, 166 shares for awards granted in the first quarter of 2012 and 225 performance shares related to awards granted in prior years.

During the three months ended June 30, 2012, we awarded and issued 71 shares of restricted stock under the 2009 Equity Incentive Plan.

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 and six months ended June 30, 2012 and 2011 follow:



|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                           |  | 2012                       |        |   | 2011                     |   |        | 2012 |  |   | 2011   |  
|                                           |  |                            |        |  
|Net income - continuing operations         |  |                            | 7,398  |   |                          |   | 3,339  |      |  |   | 9,392  |   |  |   | 6,986  |  
|                                           |  |                            |        |  
|Net (loss) - discontinued operations       |  |                            | (236   | ) |                          |   | (718   | )    |  |   | (319   | ) |  |   | (1,865 | )
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                            |        |  
|Net income                                 |  | $                          | 7,162  |   |                          | $ | 2,621  |      |  | $ | 9,073  |   |  | $ | 5,121  |  
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                            |        |  
|Weighted average common shares outstanding |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                      |  |                            | 38,065 |   |                          |   | 37,532 |      |  |   | 37,928 |   |  |   | 37,526 |  
|Incremental shares with dilutive effect:   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Stock options                              |  |                            | 524    |   |                          |   | 950    |      |  |   | 530    |   |  |   | 910    |  
|Restricted stock awards                    |  |                            | 153    |   |                          |   | 270    |      |  |   | 139    |   |  |   | 175    |  
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                    |  |                            | 38,742 |   |                          |   | 38,752 |      |  |   | 38,597 |   |  |   | 38,611 |  
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                            |        |  
|Basic income (loss) per share              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                      |  | $                          | 0.19   |   |                          | $ | 0.09   |      |  | $ | 0.25   |   |  | $ | 0.19   |  
|Discontinued operations                    |  |                            | (0.01  | ) |                          |   | (0.02  | )    |  |   | (0.01  | ) |  |   | (0.05  | )
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total net income per share                 |  | $                          | 0.18   |   |                          | $ | 0.07   |      |  | $ | 0.24   |   |  | $ | 0.14   |  
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                            |        |  
|Diluted income (loss) per share            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                      |  | $                          | 0.19   |   |                          | $ | 0.09   |      |  | $ | 0.24   |   |  | $ | 0.18   |  
|Discontinued operations                    |  |                            | (0.01  | ) |                          |   | (0.02  | )    |  |   | (0.01  | ) |  |   | (0.05  | )
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total net income per share                 |  | $                          | 0.18   |   |                          | $ | 0.07   |      |  | $ | 0.23   |   |  | $ | 0.13   |  
|                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



16



---

##### Table of Contents

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

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.

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, 2011 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, increasingly sophisticated hacking attempts, 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. Except for
our ongoing obligations to disclose material information as required by the U.S. federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or
circumstances in the future or to reflect the occurrence of unanticipated events.

General

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), many of which incorporate an electronic and digital 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, most of 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. In future years, we expect
that our customers will increasingly use our cloud-based service offering, DIGIPASS as a Service (DPS) as described below.



17



---

##### Table of Contents

We offer our products either through a product sales and licensing model or through our DPS
product offering, which was first made available in the fourth quarter of 2010. DPS is our cloud-based authentication platform. By using our authentication platform, customers can deploy two-factor authentication more quickly, incur less upfront
costs and be able to use strong authentication when logging onto a larger 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 minimal revenues generated from this product in 2011, and we expect that the contribution of DPS will still be limited in
2012, we believe that DPS has the potential for significant future growth as it will make two-factor authentication more affordable and readily available to users and application markets.

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 not only increase the security associated with accessing the
business process, thereby reducing the losses from unauthorized access, but also, in many cases, reduce the cost of the process itself by automating activities that were previously performed manually.

Comparison of Results for the Three and Six Months Ended June 30, 2012 and 2011

Industry Growth:We do not believe that there are any accurate measurements of the total industrys size or the
industrys growth rate. We believe, however, that the industry will grow at a significant rate as the use of the Internet increases and the awareness of the risks of using the Internet grow among applications owners and consumers. We expect
that growth will be 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 that country, the countrys overall economic conditions and the degree to which businesses and consumers within the country use
technology.

Economic Conditions:Our revenue may vary significantly with changes in the economic conditions in the
countries in which we 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.

We acknowledge that there is significant economic uncertainty in Western Europe today regarding the
sovereign debt issue. If the sovereign debt issue escalates to the point that major countries default on their debt and either the European Union, or Euro Monetary Union, disbands or is re-formulated, we expect that the resulting economic
difficulties would have a major negative impact on the global economy, not just the economies of Western Europe, and our business.

We do not believe, however, that the uncertainty surrounding the sovereign debt issue had a measureable negative impact on our business in the second quarter or first six months of 2012 and we do not
expect that it will significantly reduce our business opportunities for the remainder of 2012.

Revenue from our Europe,
Middle East and Africa (EMEA) region, which accounted for 67% and 64% of our consolidated revenues for the second quarter and first six months of 2012, respectively, decreased 2% and 13% when compared to the second quarter and first six
months of 2011. We believe that the reduction in revenues in the second quarter and first six months of 2012 compared to the same periods of 2011 was not due to a change in the economic environment, but primarily reflected the timing of when orders
are received and goods are shipped. While we entered 2012 with a lower backlog of orders than in 2011, our intake of new customer orders in the second quarter and first six months 2012 has been stronger than in the same periods in 2011.



18



---

##### Table of Contents

Cybersecurity:Our use of technology is increasing and is critical in three areas of
our company:



| | 1. | The use of software and information systems that we use to help us run our business more efficiently and cost effectively;
| | -- | --------------------------------------------------------------------------------------------------------------------------



| | 2. | The products we have traditionally sold and continue to sell to our customers for integration into their software applications contains technology that incorporates the
use of secret numbers and encryption technology; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | New products and services that we are introducing to the market, such as DIGIPASS as a Service, are focused on processing information through our servers (or in the
cloud from our customers perspective).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that the risks and consequences of potential incidents
in each of the above areas are different.

In the case of the information systems we use to help us run our business, we
believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on our overall results. To minimize this risk, we actively use various forms
of security and monitor the use of our systems regularly to detect potential incidents as soon as possible.

In the case of
products that we have traditionally sold, we believe that the risk of a potential cyber incident is minimal. We offer our customers the ability to either create the secret numbers themselves or have us create the numbers on their behalf. When asked
to create the numbers, we do so in a secure environment with limited physical access and store the numbers on a system that is not connected to our network, and similarly, is not connected to the Internet. Were such an incident to occur, our
business could be subject to significant disruption and we could suffer significant monetary losses and significant reputational harm.

In the case of our new products and services, which involve the active daily processing of the secret numbers on our servers or servers managed by others in a hosted environment, we believe a cyber
incident could have a material impact on our future business. We believe these products may be more susceptible to cyber attacks than our traditional products since they involve the active processing of transactions using the secret numbers. While
we do not have a significant amount of revenue from these products today, we believe that these products have the potential to provide substantial future growth. A cyber incident involving these products in the future could substantially impair our
ability to grow the business in this area and we could suffer significant monetary and other losses and significant reputational harm.

To minimize the risk, we review our security procedures on a regular basis. Our reviews include the processes and software programs we are currently using as well as new forms of cyber incidents and new
or updated software programs that may be available in the market that would help mitigate the risk of incidents. While we do not insure against cyber incidents today, we would likely review insurance policies related to our new product offering in
the future. Overall, we expect the cost of securing our networks will increase in future periods, whether through increased staff, systems or insurance coverage.

Income Taxes:Our effective tax rate reflects our global structure related to the ownership of our intellectual property (IP). All our IP is owned by two subsidiaries, one in the U.S.
and one in Switzerland. Our two subsidiaries have entered into agreements with most of the other VASCO entities under which those other entities provide services to our U.S. and Swiss subsidiaries on either a percentage of revenue or on a cost plus
basis or both. Under this structure, the earnings of our



19



---

##### Table of Contents

service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings tend to flow to the
US and Swiss companies.

We expect earnings flowing to the U.S. will be taxed at rates approximating the U.S. statutory tax
rate, but with the majority of our revenues being generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign
operations reflect changes in the geographic mix of where the earnings are realized and the respective tax rates in each of the countries in which earnings are realized. The statutory tax rate for the primary foreign tax jurisdictions ranges from 8%
to 34%. For 2012, we expect that total earnings in foreign countries where the IP is owned by our subsidiary in Switzerland will be taxed at a rate that is 10 to 15 percentage points lower than the U.S. rate. For years after 2012, we expect that the
rate differential for foreign countries, when compared to the U.S. statutory rate, will increase as the buy-in payments related to the original purchase of the IP are completed (i.e., taxable income in the foreign countries will decrease in the
higher tax rate jurisdictions and increase in the lower tax rate jurisdictions as the Swiss and U.S. companies no longer make payments to the higher rate foreign countries related to the original purchase of the IP).

The geographic mix of earnings of our foreign subsidiaries will primarily depend on the level of our service provider subsidiaries
pretax income, which is recorded as expense in the two entities that own our intellectual property (i.e., subsidiaries in the U.S. and Switzerland), and the benefit that is realized in Switzerland through the sales of product. The level of pretax
income in our service provider subsidiaries are expected to vary based on:



| | 1. | the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or
| | -- | ----------------------------------------------------------------------------------------------------------------------



| | 2. | the amount of the payments made by the U.S. and Swiss entities related to the purchase of the service providers original IP (which payments are scheduled to cease
at the end of 2012), or
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | the changes in exchange rates related to the currencies in the service provider subsidiaries, or
| | -- | ------------------------------------------------------------------------------------------------



| | 4. | the amount of revenues that the service provider subsidiaries generate.
| | -- | -----------------------------------------------------------------------

For items 1, 2 and 3 above, there is a direct impact in the opposite direction on earnings in the U.S. and Swiss entities. Any change from item 4 is generally expected to result in a larger change in
income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits) than the change
in the service provider entities.

In addition to the provision of services, the intercompany agreements transfer the
majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success
in the market.

Given the wide range of tax rates in the jurisdictions in which we operate, we expect that our tax rate will
be volatile in 2012 and beyond. Our tax rate in any given period will be largely dependent on the geographic location of the earnings. We expect that our tax rate will be higher when the mix of earnings favors the territories in which our U.S.
subsidiary owns the IP and similarly will be lower when the mix of earnings favors the territories in which our Swiss subsidiary owns the IP.

Currency Fluctuations: In the second quarter of both 2012 and 2011, approximately 94% of our revenue was generated outside the United States. For the six months ended June 30, 2012 and 2011
approximately 93% and 94%, respectively, of our revenue was generated outside of the United States.



20



---

##### Table of Contents

In addition, in the second quarter of 2012 and 2011, approximately 80% and 81%,
respectively of our operating expenses were incurred outside the United States. For the six months ended June 30, 2012 and 2011, approximately 79% and 81%, respectively, of our operating expenses were incurred outside of the United States.

Changes in currency exchange rates, especially 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 11% and 7% against the Euro for the quarter and six months ended
June 30, 2012, respectively, compared to the same periods in 2011. The U.S. Dollar also strengthened approximately 4% against the Australian Dollar for the quarter but was flat for six months ended June 30, 2012 as compared to the
same periods in 2011. We estimate that the changes in the exchange rate of the U.S. Dollar to these two currencies in 2012 compared to 2011 resulted in a decrease in revenue and operating expenses of approximately $1,672 and $1,469,
respectively, for the quarter ended June 30, 2012 and a decrease in revenue and operating expenses of approximately $1,852 and $1,767, respectively for the six months ended June 30, 2012 compared to the same periods in 2011.

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 losses aggregating $49 and gains aggregating
$46 in the second quarter and first six months of 2012, respectively, compares to gains aggregating of $30 and $58 in the second quarter and first six months of 2011, respectively.



21



---

##### Table of Contents

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 for the three and six months ended June 30, 2012 and 2011 in each of our
major geographic regions follows:



|                            |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|--------------------------- |  | ---- | ------ | - | ------------ | - | ----- | ----------- |  | - | -------------- | - |  | ----- | ----- | - |  | - | ------ | -
|                            |  | EMEA |        |   | UnitedStates |   |       | AsiaPacific |  |   | OtherCountries |   |  | Total |      
|                            |  |      |        |  
|Three months ended June 30: |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   | 
|                            |  |      |        |   |             
|Revenue:                    |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2012                        |  | $    | 31,367 |   |              | $ | 2,914 |             |  | $ | 8,815          |   |  | $     | 3,546 |   |  | $ | 46,642 |  
|2011                        |  |      | 32,021 |   |              |   | 2,646 |             |  |   | 2,579          |   |  |       | 4,857 |   |  |   | 42,103 |  
|                            |  |      |        |   |             
|Percent of Total:           |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2012                        |  |      | 67     | % |              |   | 6     | %           |  |   | 19             | % |  |       | 8     | % |  |   | 100    | %
|2011                        |  |      | 76     | % |              |   | 6     | %           |  |   | 6              | % |  |       | 12    | % |  |   | 100    | %
|                            |  |      |        |   |             
|Six months ended June 30:   |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|                            |  |      |        |   |             
|Revenue:                    |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2012                        |  | $    | 50,744 |   |              | $ | 5,840 |             |  | $ | 15,367         |   |  | $     | 6,949 |   |  | $ | 78,900 |  
|2011                        |  |      | 58,209 |   |              |   | 4,928 |             |  |   | 5,049          |   |  |       | 9,983 |   |  |   | 78,169 |  
|                            |  |      |        |   |             
|Percent of Total:           |  |      |        |   |              |   |       |             |  |   |                |   |  |       |       |   |  |   |        |  
|2012                        |  |      | 64     | % |              |   | 7     | %           |  |   | 19             | % |  |       | 9     | % |  |   | 100    | %
|2011                        |  |      | 74     | % |              |   | 6     | %           |  |   | 7              | % |  |       | 13    | % |  |   | 100    | %

Total revenue in the second quarter of 2012 increased $4,539, or 11%, from second quarter of 2011.
Including the impact of changes in currency exchange rates, the increase was primarily attributable to a 10% increase in revenues from the banking market and a 17% increase in revenues from the enterprise and application security market. As noted
above, for the quarter ended June 30, 2012, we estimate that the strengthening of the U.S. Dollar as compared to the Euro resulted in a decrease in revenue of $1,672.

Revenue generated in EMEA during the second quarter of 2012 was $654, or 2%, lower than the second quarter of 2011. The decrease in
revenues reflected an increase in revenues from the enterprise and application security market partially offset by a decline in revenues from the banking market.

Revenue generated in the United States during the second quarter of 2012 was $268, or 10%, higher than the second quarter of 2011. The increase in revenues reflected an increase in products sold in both
the banking market and from the enterprise and application security market. The banking market in the United States uses our technology primarily for corporate banking applications and, as a result, is relatively small. Given the size of the market,
our results may vary significantly period to period based on the size and timing of shipment of individual orders.

Revenue
generated in the Asia Pacific region during the second quarter of 2012 was $6,236, or 242%, higher than the second quarter of 2011. The increase in revenues reflected growth in both the banking and the enterprise and application security markets.

Revenue generated from Other Countries during the second quarter of 2012 was $1,311, or 27%, lower than the second quarter
of 2011. The decrease in Other Countries was primarily due to a decrease in revenues from the South American banking market. We expect that revenues from Other Countries will be more volatile than from our other regions given their earlier stage of
development of the authentication market in those countries. VASCO, however, plans to continue to invest in new markets based on our estimates of the each markets demand for strong user authentication.

Total revenue for the six months ended June 30, 2012 increased $731, or 1%, from the first six months of 2011. Including the impact
of changes in currency exchange rates, the increase was primarily attributable to a 23% increase in revenues from the enterprise and application security market partially offset by a 3% decrease in revenues from the banking market. As noted above,
for the six months ended June 30, 2012, we estimate that the weakening of the U.S. Dollar as compared to the Euro resulted in a decrease in revenue of $1,852.



22



---

##### Table of Contents

Revenue for the six months ended June 30, 2012 generated in EMEA decreased $7,465, or
13%, from the first six months of 2011. Revenue from the banking market for the first six months of 2012 was approximately 17% lower than in the same period of 2011 while revenues from the enterprise and application security market increased
approximately 8%.

Revenue for the six months ended June 30, 2012 generated in the United States increased $912, or 19%,
from the first six months of 2011. Revenues from the U.S. for the first six months of 2012 reflected strong growth from both the banking market and the enterprise and application security market.

Revenue for the six months ended June 30, 2012 from Asia Pacific increased $10,318, or 204%, from the first six months of 2011.
Revenues from Asia Pacific for the first six months of 2012 reflected an increase in revenues from both the banking market and the enterprise and application security market.

Revenue for the six months ended June 30, 2012 generated from Other Countries decreased $3,034, or 30%, from the first six months of 2011. Revenues from Other Countries for the first six months of
2012 primarily reflected a decrease in revenues from the South American banking market.

Revenue by Target Market:Revenue is generated currently from two primary markets, banking/finance (banking) and enterprise and application security, through the use of both direct and indirect sales channels. The enterprise and application security market includes
products used by employees of corporations to secure their internal networks (i.e., enterprise security market) and business-to-business, business-to-consumer, e-commerce, e-government, e-gaming and other vertical applications (i.e., the application
security market) that are not related to banking or finance. In addition, revenue from services-related activities, such as maintenance and support are included in the Enterprise and Application Security markets. Management currently views the
enterprise and application security market as one market because the same products are sold through the same channels to both customer groups. Sales to the enterprise security and application market are generally for smaller quantities and higher
prices than sales made to the banking market. The breakdown of revenue between the two primary markets was as follows:



|                            |  |         |        |   |                                 |   |        |       |  |   |        |  
|--------------------------- |  | ------- | ------ | - | ------------------------------- | - | ------ | ----- |  | - | ------ | -
|                            |  | Banking |        |   | Enterprise &ApplicationSecurity |   |        | Total | 
|                            |  |        
|Three months ended June 30: |  |         |        |   |                                 |   |        |       | 
|                            |  |         |       
|Revenue:                    |  |         |        |   |                                 |   |        |       |  |   |        |  
|2012                        |  | $       | 38,836 |   |                                 | $ | 7,806  |       |  | $ | 46,642 |  
|2011                        |  |         | 35,459 |   |                                 |   | 6,644  |       |  |   | 42,103 |  
|                            |  |         |       
|Percent of Total:           |  |         |        |   |                                 |   |        |       |  |   |        |  
|2012                        |  |         | 83     | % |                                 |   | 17     | %     |  |   | 100    | %
|2011                        |  |         | 84     | % |                                 |   | 16     | %     |  |   | 100    | %
|                            |  |         |       
|Six months ended June 30:   |  |         |        |   |                                 |   |        |       |  |   |        |  
|                            |  |         |       
|Revenue:                    |  |         |        |   |                                 |   |        |       |  |   |        |  
|2012                        |  | $       | 63,576 |   |                                 | $ | 15,324 |       |  | $ | 78,900 |  
|2011                        |  |         | 65,714 |   |                                 |   | 12,455 |       |  |   | 78,169 |  
|                            |  |         |       
|Percent of Total:           |  |         |        |   |                                 |   |        |       |  |   |        |  
|2012                        |  |         | 81     | % |                                 |   | 19     | %     |  |   | 100    | %
|2011                        |  |         | 84     | % |                                 |   | 16     | %     |  |   | 100    | %



23



---

##### Table of Contents

Revenue in the second quarter of 2012 from the banking market increased $3,377, or 10%,
from the second quarter of 2011 and revenue from the enterprise and application security market increased $1,162, or 17%, in the same period.

The increase in revenues from the banking market in the second quarter of 2012 compared to the second quarter of 2011 reflected growth in revenues from both hardware and non-hardware products. Revenues
from the banking market increased in the Asia Pacific and United States regions and declined in EMEA and Other Country regions. While we believe that the global banking market is relatively stable, our revenues may vary significantly period to
period and region to region based on the size and timing of shipment of individual orders.

The increase in revenues from the
enterprise and application security market in the second quarter of 2012 compared to the second quarter of 2011 also reflected growth in revenues from both hardware and non-hardware products. Revenues in the enterprise and application security
market increased in all of our geographic areas. The size of the enterprise and application security market in all regions other than EMEA is relatively small and, as a result, our revenues may vary significantly period to period based on the size
and timing of shipment of individual orders.

Revenue for the first six months of 2012 from the banking market decreased
$2,137, or 3%, compared to the first six months of 2011, while revenue from the enterprise and application security market increased $2,869 or 23% in the same period.

The decrease in revenues from the banking market for the first six months of 2012 compared to the same period of 2011 reflected a decline in revenues from hardware products partially offset by an increase
from non-hardware products. Revenues from the banking market increased in the Asia Pacific and United States regions and declined in EMEA and Other Country regions for the first six months of 2012.

The increase in revenues from the enterprise and application security market for the first six months of 2012 compared to the same
period of 2011 reflected growth in revenues from both



24



---

##### Table of Contents

hardware and non-hardware products. Revenues in the enterprise and application security market increased in all of our geographic areas for the first six months of 2012 compared to first six
months of 2011.

Gross Profit and Operating Expenses

The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of revenue from continuing operations for the three months and six months ended June 30,
2012 and 2011:



|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|----------------------------------------------------- |  | -------- | ----- | - | -------- |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                      |  | June 30, |       |   | June 30, | 
|                                                      |  | 2012     |       |   | 2011     |  |       | 2012 |  |  | 2011  |  
|                                                      |  |          |       |  
|Revenues                                              |  |          | 100.0 | % |          |  | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                                      |  |          |       |  
|Cost of goods sold                                    |  |          | 36.9  | % |          |  | 39.0  | %    |  |  | 35.0  | % |  |  | 38.2  | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|                                                      |  |          |       |  
|Gross profit                                          |  |          | 63.1  | % |          |  | 61.0  | %    |  |  | 65.0  | % |  |  | 61.8  | %
|                                                      |  |          |       |  
|Operating costs:                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|Sales and marketing                                   |  |          | 21.1  | % |          |  | 26.0  | %    |  |  | 24.4  | % |  |  | 25.5  | %
|Research and development                              |  |          | 10.3  | % |          |  | 11.5  | %    |  |  | 12.0  | % |  |  | 11.1  | %
|General and administrative                            |  |          | 11.4  | % |          |  | 12.7  | %    |  |  | 13.2  | % |  |  | 13.4  | %
|Amortization of purchased intangible assets           |  |          | 1.0   | % |          |  | 1.2   | %    |  |  | 1.2   | % |  |  | 1.3   | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|Total operating costs                                 |  |          | 43.8  | % |          |  | 51.4  | %    |  |  | 50.8  | % |  |  | 51.3  | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|                                                      |  |          |       |  
|Operating income                                      |  |          | 19.3  | % |          |  | 9.6   | %    |  |  | 14.2  | % |  |  | 10.5  | %
|                                                      |  |          |       |  
|Interest income                                       |  |          | 0.2   | % |          |  | 0.3   | %    |  |  | 0.2   | % |  |  | 0.3   | %
|Other income (expense)                                |  |          | 0.6   | % |          |  | 0.8   | %    |  |  | 0.7   | % |  |  | 0.8   | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|                                                      |  |          |       |  
|Income from continuing operations before income taxes |  |          | 20.1  | % |          |  | 10.7  | %    |  |  | 15.1  | % |  |  | 11.6  | %
|Provision for income taxes                            |  |          | 4.2   | % |          |  | 2.8   | %    |  |  | 3.2   | % |  |  | 2.7   | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  
|                                                      |  |          |       |  
|Net income from continuing operations                 |  |          | 15.9  | % |          |  | 7.9   | %    |  |  | 11.9  | % |  |  | 8.9   | %
|                                                      |  |          |       |   |          |  |       |      |  |  |       |   |  |  |       |  

Gross Profit

Consolidated gross profit for the quarter ended June 30, 2012 was $29,451, an increase of $3,745, or 15%, from the quarter ended June 30, 2011. Gross profit as a percentage of revenue (gross
profit margin) was 63% for the quarter ended June 30, 2012, as compared to 61% for the quarter ended June 30, 2011. The increase in gross profit as a percentage of revenue for the second quarter of 2012 compared to 2011 primarily reflects:



| |  |  | an increase in revenues from the enterprise and application security market as a percentage of total revenue,
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in the percentage of our total revenue that came from sales of card readers, and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | a decrease in non-product costs associated with the customization and a reduction in the cost of the expedited delivery of products,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

partially offset by



25



---

##### Table of Contents

| |  |  | a decrease in the gross profit margin from the enterprise and application security market as a result of an increase in the quantity of hardware
products sold, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease due to the negative impact on revenue and gross profit of changes in foreign currency rates.
| | - |  | -------------------------------------------------------------------------------------------------------

Consolidated gross profit for the six months ended June 30, 2012 was $51,329, an increase of $2,995, or 6%, from the comparable
period in 2011. Gross profit as a percentage of revenue (gross profit margin) was 65% for the six months ended June 30, 2012, as compared to 62% for the comparable period in 2011. The increase in the gross profit margin for the first six months
of 2012 compared to 2011 primarily reflects the same factors impacting the comparison of the second quarter of 2012 to the second quarter of 2011, but also reflects an increase in non-hardware revenues as a percentage of total revenue.

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 revenue for the second quarter and 19% of revenue for the first six months of 2012 compared to 16% for both the second quarter and first six months of 2011, respectively.

Card readers, which can have a lower gross profit margin that is approximately 10 to 20 percentage points lower than other
hardware-related margins due to competitive pricing pressures, were 13% of our revenue for both the second quarter and first six months of 2012, respectively, compared to 27% and 22% for the second quarter and first six months of 2011, respectively.
We expect that the relatively low gross profit margin on card readers will continue into the foreseeable future as there are a number of competitors in the EMV (Europay, MasterCard and Visa) market that produce card reader products with fewer
features than our products at a lower cost.

The decline in gross profit margin on revenues from the enterprise and
application security market for the second quarter and first six months of 2012 compared to the same periods in 2011, reflected an increase in the quantity of hardware products sold. The reduction in the gross profit margin related to the larger
orders is consistent with our approach to pricing, which is to offer lower average selling prices per unit for large volume purchase orders.

Non-hardware revenue, which can have a gross profit margin that is approximately 20 to 30 percentage points higher than hardware-related revenue, depending on the model and quantity of the hardware units
sold, was 20% of revenue for the quarter and 24% of revenue for the first six months of 2012 and compares to approximately 20% of total revenue for the second quarter and 21% for the first six months of 2011. We plan to continue to focus on sales of
our non-hardware revenue items and expect that they will increase as a percentage of our total revenue in future periods.

The majority of our inventory purchases are denominated in U.S. Dollars. Also, as previously noted, our sales are denominated in various
currencies including the Euro and Australian Dollar. As the U.S. Dollar has strengthened, when compared to the Euro and Australian Dollar in the same periods in the prior year, revenue from sales made in Euros and Australian Dollars decreased,
as measured in U.S. Dollars, without a corresponding change in cost of goods sold. As noted earlier, the impact from changes in currency rates is estimated to have decreased revenue by approximately $1,672 for the second quarter and $1,852 first six
months of 2012. Had the currency rates in 2012 been equal to the rates in 2011, the gross profit margin would have been approximately 1.3 percentage points higher for the quarter and 0.8 percentage points higher for the six months ended
June 30, 2012.

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.



26



---

##### Table of Contents

The most significant factor driving our operating expenses is our headcount. Direct
compensation and benefit plan expenses generally represent between 55% and 65% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of
the economic environments in which we operate and the investments that we believe we need to make to help ensure that our infrastructure is able to support future growth and ensure that our products are competitive.

On a consolidated basis, our operating expenses for the quarter and six months ended June 30, 2012 were $20,454 and $40,117,
respectively, a decrease of $1,193, or 6%, from the second quarter of 2011 and an increase of $31, or less than 1%, from the six months ended June 30, 2011.

The decrease in consolidated operating expenses for the second quarter of 2012 compared to the second quarter of 2011 was primarily related to the benefit from the change in currency exchange rates
partially offset by a 2% increase in average headcount and an increase in stock-based incentive plan costs. We estimate that our operating expenses were $1,469 lower in the second quarter of 2012 than in the second quarter of 2011 due to the changes
in currency exchange rates.

Consolidated operating expenses for the first six months of 2012 compared to the same period in
2011 were essentially flat as the benefit from the change in currency exchange rates was offset by a 3% increase in average headcount and an increase in stock-based incentive plan costs. We estimate that our operating expenses were $1,767 lower for
the first six months of 2012 than in the comparable period of 2011 due to the changes in currency exchange rates.

Operating
expenses for the second quarter and first six months of 2012 included $1,170 and $2,248 of expenses related to stock-based incentive plan costs, respectively, compared to $749 and $1,316 of stock-based incentive plan costs for the second quarter and
first six months of 2011, respectively.

Sales and Marketing Expenses

Consolidated sales and marketing expenses for the quarter ended June 30, 2012 were $9,856, a decrease of $1,100, or 10%, from the
second quarter of 2011. The decrease in sales and marketing expenses reflected a decrease in compensation related expenses, in part related to a decrease in headcount, and lower expense related to currency fluctuations.

Consolidated sales and marketing expenses for the six months ended June 30, 2012, were $19,264, a decrease of $716, or 4%, from the
same period of 2011. The decrease in expense for the six month period is related to the same factors noted above in the comparison of the second quarter of 2012 to the second quarter of 2011.

Average full-time sales, marketing, support, and operating employee headcount for the three and six months ended June 30, 2012 was
171 and 169, respectively compared to 175 and 172 for the three and six months ended June 30, 2011, respectively. The decrease in headcount was approximately 2% for both the second quarter and six months ended June 30, 2012 when compared
to the same periods in 2011.

We estimate that the changes in currency exchange rates decreased sales and marketing expense
for the second quarter and six months ended June 30, 2012 when compared to the same periods in 2011 by $748 and $912, respectively.



27



---

##### Table of Contents

Research and Development Expenses

Consolidated research and development expenses for the quarter ended June 30, 2012, were $4,796, a decrease of $40, or less than 1%,
from the second quarter of 2011. This decrease was primarily due to the benefit related to the strengthening of the U.S. Dollar compared to the Euro and other currencies partially offset by increased compensation expense related to increased
headcount.

Consolidated research and development costs for the six months ended June 30, 2012, were $9,497, an increase
of $839, or 10%, from the same period of 2011. The increase in expense for the six month period is due to increased compensation expense related to increased headcount partially offset by the benefit related to the strengthening of the
U.S. Dollar compared to the Euro and other currencies.

Average full-time research and development employee headcount
for the three and six months ended June 30, 2012 was 140 and 138, respectively, compared to 127 and 124 for the three and six months ended June 30, 2011, respectively. The increase in headcount was approximately 10% and 11% for the second
quarter and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

We estimate that
the changes in currency exchange rates decreased research and development expense for the second quarter and six months ended June 30, 2012 by $423 and $489, respectively, when compared to the same periods in 2011.

General and Administrative Expenses

Consolidated general and administrative expenses for the quarter ended June 30, 2012, were $5,330, a decrease of $18, or less than 1%, from the second quarter of 2011. The decrease in general and
administrative expenses reflected a decrease in compensation related expenses, in part related to a decrease in headcount, and lower expense related to the strengthening of the U.S. Dollar compared to the Euro and other currencies.

Consolidated general and administrative expenses for the six months ended June 30, 2012, were $10,405, a decrease of $44 or less
than 1%, from the same period of 2011. The decrease in expense for the six month period is related to the same factors noted above in the comparison of the second quarter of 2012 to the second quarter of 2011.

Average full-time general and administrative employee headcount for both the three and six months ended June 30, 2012 was 55
compared to 56 for both the three and six months ended June 30, 2011.

We estimate that the changes in currency exchange
rates decreased general and administrative expense for the second quarter and six months ended June 30, 2012 by $298 and $367, respectively, when compared to the same periods in 2011.

Amortization of Intangible Assets

Amortization of intangible assets for
the second quarter and first six months of 2012 was $472 and $951, respectively, a decrease of $35 when compared to the second quarter of 2011 and a decrease of $48 when compared to the six months ended June 30, 2011. The decrease in
amortization expense primarily reflects the strengthening of the U.S. Dollar compared to the Euro.

Interest Income

Consolidated net interest income was $68 in the second quarter of 2012 as compared to income of $131 in the second quarter of 2011. For
the six months ended June 30, 2012, interest income was $145 compared to $240 for the same period of 2011. The decrease in interest income for the second quarter and first six months of 2012 compared to the same periods in 2011 reflects an
increase in the average invested balance and a reduction in the average interest rate earned on the invested balances.



28



---

##### Table of Contents

Our average cash balance in the second quarter and first six months of 2012 of $88,867 and
$89,216 was 4% and 6% higher, respectively, than in the second quarter and first six months of 2011. Our annual return on invested cash was approximately 0.3% for the both second quarter and six months ended June 30, 2012, respectively,
compared to 0.6% for both of the comparable periods in 2011.

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, non-recurring expenses.

Other income for the second quarter of 2012 was $300 and compares to other income of $326 for the second quarter of 2011. The decrease
in other income primarily reflects the impact of the strengthening of the U.S. Dollar to the Euro and increased foreign exchange transaction losses. Other income (expense) included exchange losses of $49 for the quarter ended June 30, 2012
compared to an exchange gain of $30 for the quarter ended June 30, 2011.

Other income for the first six months of 2012
was $532 and compares to $617 for the first six months of 2011. The decrease in other income primarily reflects the impact of the strengthening of the U.S. Dollar to the Euro. Other income included exchange gains of $46 for the six months ended
June 30, 2012 compared to an exchange gain of $58 for the six months ended June 30, 2011.

Income Taxes

Income tax expense for the second quarter of 2012 was $1,967, an increase of $790 from the second quarter of 2011. The increase in tax
expense is attributable to higher pretax income partially offset by a lower effective tax rate. The effective tax rate was 21% for the second quarter of 2012 compared to 26% for the second quarter of 2011. The tax rate in the second quarter of 2011
was negatively impacted by an adjustment to increase our estimated full-year tax rate from 21% to 23%.

Income tax expense for
the first six months of 2012 was $2,497, an increase of $378 from the same period in 2011. The increase in tax expense reflects higher pre-tax income partially offset by a lower effective tax rate. The effective tax rate was 21% for the first six
months of 2012 and compares to 23% for the first six months of 2011.

The effective tax rate for both periods reflects our
estimate of our full-year tax rate at the end of each respective period. The decrease in the tax rate is primarily attributable to an increase in pretax income in tax jurisdictions that either have a lower statutory tax rate or have tax loss
carryforwards that have been reserved. 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.

At December 31, 2011, we had $9,907 of U.S. NOL carryforwards, of which $7,334 represents U.S. tax deductions for
employee stock option gains, the tax benefit of which will be credited to additional paid in capital when the NOL carryforwards are utilized. The U.S. loss carryforwards expire in varying amounts beginning in 2022 and continuing through 2029. 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. NOL carryforwards that could be utilized.

At December 31, 2011, we had foreign NOL carryforwards of $5,535 and other foreign deductible carryforwards of $2,770. The foreign
NOL carryforwards have no expiration dates and the other deductible carryforwards expire from 2016 to 2018. At December 31, 2011, we had a valuation allowance of $2,088 for certain foreign deferred tax assets.



29



---

##### Table of Contents

Loss from Discontinued Operations

We reported an after-tax loss from discontinued operations of $236 and $319 for the quarter and six months ended June 30, 2012,
respectively. The loss for the quarter and the six months ended June 30, 2012 include ongoing expenses related to the bankruptcy and discontinuation of the DigiNotar business in the third quarter of 2011. The after tax losses of $718 and $1,865
for the quarter and six months ended June 30, 2011, respectively, reflect the results of the DigiNotar operation during those time periods.

Liquidity and Capital Resources

Our net cash balance was $85,145 at
June 30, 2012, a decrease of $8,232 or 9%, from $93,377 at March 31, 2012, and an increase of $648, or 1%, from $84,497 at December 31, 2011. The decrease in cash from March 31, 2012 was attributable to the strengthening of the
U.S. dollar to the Euro and most all of the currencies in other countries in which we operate and unfavorable changes in other key elements of working capital. The increase in cash from December 31, 2011, was primarily attributable to positive
cash flow from operations, partially offset by a negative impact on cash of the strengthening of the U.S. dollar to other foreign currencies.

The negative impact of changes in exchange rates compared to March 31, 2012 and December 31, 2011 primarily reflected the fact that the U.S. dollar has continued to strengthen against the Euro
for the first six months of 2012. At June 30, 2012, the exchange rate for the Euro to U.S. dollar was approximately 1.26 and compares to 1.33 and 1.30 at March 31, 2012 and December 31, 2011, respectively.

As of June 30, 2012, we held $61,806 of cash in banks outside of the United States. Of that amount, $60,925 is not subject to
significant repatriation restrictions, but may be subject to taxes upon repatriation. We have not provided for taxes on our unremitted foreign earnings as we consider them to be permanently invested.

We believe that our cash resources will be sufficient to meet our operating needs for the next twelve months.

At June 30, 2012 we had working capital of $118,040, an increase of $5,345, or 5%, from $112,695 at March 31, 2012 and an
increase of $9,450 or 9% from $108,590 reported at December 31, 2011. The increase in working capital for the quarter and six months ended June 30, 2012 was primarily related to cash flow related to our earnings.



30



---

##### Table of Contents

EBITDA from continuing operations for the three months ending June 30, 2012 was
$10,205, an increase of $4,846 or 90% from the same period in 2011. For the six month period ending June 30, 2012, EBITDA was $13,592, an increase of $2,820 or 26% compared to the same period in the prior year. A reconciliation of EBITDA to net
income for the quarter and six months ended June 30, 2012, and 2011 follows:



|                                      |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                      |  | Three months endedJune 30, |        |   | Six months endedJune 30,  |  
|                                      |  | 2012                       |        |   | 2011                      |   |        | 2012 |  |   | 2011   |  
|                                      |  | (in thousands, unaudited)  |        |   | (in thousands, unaudited) |  
|                                      |  |                            |        |  
|EBITDA from continuing operations     |  | $                          | 10,205 |   |                           | $ | 5,359  |      |  | $ | 13,592 |   |  | $ | 10,772 |  
|                                      |  |                            |        |  
|Interest income, net                  |  |                            | 68     |   |                           |   | 131    |      |  |   | 145    |   |  |   | 240    |  
|Provision for income taxes            |  |                            | (1,967 | ) |                           |   | (1,177 | )    |  |   | (2,497 | ) |  |   | (2,119 | )
|Depreciation and amortization         |  |                            | (908   | ) |                           |   | (974   | )    |  |   | (1,848 | ) |  |   | (1,907 | )
|                                      |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net income from continuing operations |  | $                          | 7,398  |   |                           | $ | 3,339  |      |  | $ | 9,392  |   |  | $ | 6,986  |  
|                                      |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

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 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 for 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 further. 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, 2011.



31



---

##### Table of Contents

Recently Issued Accounting Pronouncements

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 and six months ended June 30, 2012. 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, 2011.

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 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 Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three and six months ended June 30, 2012, 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



32



---

##### Table of Contents

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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On
September 19, 2011, one of our wholly-owned subsidiaries, DigiNotar B.V., a company organized and existing in The Netherlands, filed a bankruptcy petition under Article 4 of the Dutch Bankruptcy Act in the Haarlem District Court, The
Netherlands. On September 20, 2011, the court declared DigiNotar B.V. bankrupt and appointed a bankruptcy trustee and a bankruptcy judge to manage all affairs of DigiNotar B.V. through the bankruptcy process. The trustee took over management of
DigiNotar B.V.s business activities and is responsible for the administration and liquidation of DigiNotar B.V.

On
September 26, 2011, we received a Civil Investigative Demand from the Federal Trade Commission (FTC) in connection with its non-public investigation of the hacking incidents at DigiNotar B.V. In March 2012, we were informed by the FTC that the
investigation had been completed. The FTC has not alleged any wrongdoing on our part.

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 August 3, 2012.

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 August 3, 2012.

Exhibit 32.1  Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated August 3, 2012.

Exhibit 32.2  Section 1350 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 3, 2012.

Exhibit 101.INS  XBRL Instance
Document(1)

Exhibit 101.SCH  XBRL Taxonomy Extension Schema Document(1)

Exhibit 101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document(1)

Exhibit 101.LAB  XBRL Taxonomy Extension Label Linkbase Document(1)

Exhibit 101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document(1)



|(1) | Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to
this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



---

##### 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 August 3, 2012.



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)




34



---

##### 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 August 3, 2012.

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 August 3, 2012.

Exhibit 32.1  Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated August 3, 2012.

Exhibit 32.2  Section 1350 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 3, 2012.

Exhibit 101.INS  XBRL Instance
Document(1)

Exhibit 101.SCH  XBRL Taxonomy Extension Schema Document(1)

Exhibit 101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document(1)

Exhibit 101.LAB  XBRL Taxonomy Extension Label Linkbase Document(1)

Exhibit 101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document(1)



|(1) | Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to
this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35