Form 10-Q

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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.

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

There were 38,972,574 shares of Common Stock, $.001 par value per share, outstanding at October 26, 2012.

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.

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.

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.).

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.

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.

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.

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 nine months ended September 30, 2012, foreign currency transactions resulted in losses of $304 and $259, respectively, compared to losses of $583 and $525, for the same periods in 2011.

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605, Software – Revenue Recognition as amended by ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, ASC 985-605-25, Revenue Recognition – Multiple Element Arrangements as 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.

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.

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:

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

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

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

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 September 30, 2012 include $83,337 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 $12,804 in bank time deposits for which fair value was $12,806 at September 30, 2012. Bank time deposits are valued using level two inputs, as defined by ASC 820.

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, 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 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.

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,

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.

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.

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 nine months ended September 30, 2012.

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.

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

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.

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.

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.

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

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

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

Goodwill activity for the nine months ended September 30, 2012 consisted of the following:

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

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

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

Our effective tax rate for the nine months ended September 30, 2012 is equal to our expected annual tax rate of 22%. 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 half of 2012, our expected annual tax rate was estimated to be 21%. The effective tax rate for the third quarter of 24% reflects the increase in the expected annual tax rate from 21% to 22%.

Our effective tax rate for the nine months ended September 30, 2011 was equal to our expected annual tax rate of 21%. The expected annual rate was lower than the U.S. statutory rate primarily due to income in foreign jurisdictions taxed at lower rates and partial utilization of net operating loss (“NOL”) carryforwards in the U.S., where the tax benefit for these losses had been fully reserved. Actual U. S. income for the full year in 2011 was significantly higher than expected, and all remaining valuation reserves for U.S. NOL carryforwards were reversed in the fourth quarter of 2011.

In the first half of 2011, our estimated annual tax rate was 30%. The effective tax rate of 18% for the third quarter of 2011 reflects the reduction 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.

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.

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.

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 166 issued restricted shares of $1,144 at the date of grant is being amortized over the respective vesting periods of one to four years. The market value of the 96 unissued shares subject to performance criteria of $661 at the date of grant was being amortized over the four-year vesting period beginning in the first quarter of 2012. During the third quarter of 2012, achievement of the performance targets was deemed improbable and prior amortization of $79 recorded in the first and second quarters of 2012 was reversed in the third quarter of 2012.

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 of $662 at the date of grant is being 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 award level of $1,984 was being expensed on a straight-line basis over the four-year vesting period beginning in the second quarter. During the third quarter of 2012, achievement of the performance targets was deemed improbable and prior provisions of $90, recorded in the second quarter of 2012, were reversed in the third quarter of 2012.

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

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 nine months ended September 30, 2012 and 2011 follow:

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.

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”, “projected” 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.

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.

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 Nine months ended September 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 third quarter or first nine 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 53% and 61% of our consolidated revenues for the third quarter and first nine months of 2012, respectively, decreased 31% and 19% when compared to the third quarter and first nine months of 2011. We believe that the reduction in revenues in the third quarter and first nine 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 and the strengthening of the U.S. Dollar compared to the Euro.

On a global basis, we entered 2012 with a lower backlog of orders than in 2011. In addition, while our intake of new customer orders in the third quarter was lower than in the third quarter of 2011, our order intake for the first nine months of 2012 has been stronger than in the same period in 2011.

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

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 or co-location 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 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 U.S. 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 is expected to vary based on:

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 third quarter 2012 and 2011, approximately 94% and 85%, respectively, of our revenue was generated outside the United States. For the nine months ended September 30, 2012 and 2011 approximately 93% and 91%, respectively, of our revenue was generated outside of the United States.

In addition, in the third quarter of 2012 and 2011, approximately 86% and 80%, respectively of our operating expenses were incurred outside the United States. For both the nine months ended September 30, 2012 and 2011, approximately 81% 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.

The U.S. Dollar strengthened by approximately 16% and 10% against the Euro for the quarter and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The U.S. Dollar also strengthened approximately 4% and 1% against the Australian Dollar for the quarter and first nine months ended September 30, 2012, respectively, 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 $1,523 and $1,981, respectively, for the quarter ended September 30, 2012 and a decrease in revenue and operating expenses of approximately $3,374 and $3,748, respectively for the nine months ended September 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 $304 and $259 in the third quarter and first nine months of 2012, respectively, compares to losses aggregating of $583 and $525 in the third quarter and first nine months of 2011, respectively.

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 nine months ended September 30, 2012 and 2011 in each of our major geographic regions follows:

Total revenue in the third quarter of 2012 decreased $5,093, or 12%, from third quarter of 2011. Including the impact of changes in currency exchange rates, the decrease was primarily attributable to an 11% decrease in revenues from the banking market and a 16% decrease in revenues from the enterprise and application security market. As noted above, for the quarter ended September 30, 2012, we estimate that the strengthening of the U.S. Dollar as compared to the Euro resulted in a decrease in revenue of $1,523.

Revenue generated in EMEA during the third quarter of 2012 was $8,480, or 31%, lower than the third quarter of 2011. The decrease in revenues reflected a decrease in revenues from both the banking and enterprise and application security markets.

Revenue generated in the United States during the third quarter of 2012 was $3,895, or 63%, lower than the third quarter of 2011. The decrease in revenues reflected a decrease in revenues from both the banking market and from the enterprise and application security markets. 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 third quarter of 2012 was $7,245, or 213%, higher than the third quarter of 2011. The increase in revenues reflected growth in the banking partially offset by a decline in the enterprise and application security markets.

Revenue generated from Other Countries during the third quarter of 2012 was $37, or 1%, higher than the third quarter of 2011. 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 nine months ended September 30, 2012 decreased $4,362, or 4%, from the first nine months of 2011. Including the impact of changes in currency exchange rates, the decrease was primarily attributable to a 6% decrease in revenues from the banking market partially offset by an 8% increase in revenues from the enterprise and application security market. As noted above, for the nine months ended September 30, 2012, we estimate that the strengthening of the U.S. Dollar as compared to the Euro resulted in a decrease in revenue of $3,374.

Revenue for the nine months ended September 30, 2012 generated in EMEA decreased $15,945, or 19%, from the first nine months of 2011. Revenue from the banking market for the first

nine months of 2012 was approximately 23% lower than in the same period of 2011 while revenues from the enterprise and application security market were comparable to the revenue for the first nine months of 2011.

Revenue for the nine months ended September 30, 2012 generated in the United States decreased $2,983, or 27%, from the first nine months of 2011. The decline in revenues from the U.S. for the first nine months of 2012 was primarily due to a decline in revenues from the banking market.

Revenue for the nine months ended September 30, 2012 from Asia Pacific increased $17,563, or 208%, from the first nine months of 2011. Revenues from Asia Pacific for the first nine months of 2012 reflected an increase in revenues from both the banking market and the enterprise and application security market.

Revenue for the nine months ended September 30, 2012 generated from Other Countries decreased $2,997, or 21%, from the first nine months of 2011. Revenues from Other Countries for the first nine months of 2012 primarily reflected a decrease in revenues from the Latin 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:

Revenue in the third quarter of 2012 from the banking market decreased $3,811, or 11%, from the third quarter of 2011 and revenue from the enterprise and application security market decreased $1,282, or 16%, in the same period.

The decrease in revenues from the banking market in the third quarter of 2012 compared to the third quarter of 2011 reflected a decline in revenues from both hardware and non-hardware products. Revenues from the banking market increased in the Asia Pacific and Other Country regions, but declined in the EMEA and United States 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 decrease in revenues from the enterprise and application security market in the third quarter of 2012 compared to the third quarter of 2011 also reflected a decline in revenues from both hardware and non-hardware products. With the exception of the Other Countries region, revenues in the enterprise and application security market decreased 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 nine months of 2012 from the banking market decreased $5,948, or 6%, compared to the first nine months of 2011, while revenue from the enterprise and application security market increased $1,586 or 8% in the same period.

The decrease in revenues from the banking market for the first nine 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 region, but declined in EMEA, the United States and Other Country regions for the first nine months of 2012.

The increase in revenues from the enterprise and application security market for the first nine months of 2012 compared to the same period of 2011 reflected growth in revenues from both hardware and non-hardware products. Revenues in the enterprise and application security market increased in our Asia and Other Country regions, but was essentially flat in our EMEA and United States regions for the first nine months of 2012 compared to first nine months of 2011.

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 nine months ended September 30, 2012 and 2011:

Consolidated gross profit for the quarter ended September 30, 2012 was $23,855, a decrease of $3,897, or 14%, from the quarter ended September 30, 2011. Gross profit as a percentage of revenue (gross profit margin) was 66% for the quarter ended September 30, 2012, as compared to 67% for the quarter ended September 30, 2011. The decrease in gross profit as a percentage of revenue for the third quarter of 2012 compared to 2011 primarily reflects:

Consolidated gross profit for the nine months ended September 30, 2012 was $75,184, a decrease of $902, or 1%, from the comparable period in 2011. Gross profit as a percentage of revenue (gross profit margin) was 65% for the nine months ended September 30, 2012, as compared to 64% for the comparable period in 2011. The increase in the gross profit margin for the first nine months of 2012 compared to 2011 primarily reflects:

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 18% and 19% of our revenue for the third quarter and first nine months of 2012, respectively, compared to 19% and 17% for the third quarter and first nine months of 2011, respectively.

Card readers, which can have a 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 third quarter and first nine months of 2012, respectively, compared to 21% and 22% for the third quarter and first nine 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.

Non-hardware revenue, which includes, but is not limited to software and maintenance, 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. Non-hardware revenue was 23% of revenue for both the quarter and first nine months of 2012 and compares to approximately 25% of total revenue for the third quarter and 22% for the first nine 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 $1,523 for the third quarter and $3,374 first nine 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 1.0 percentage point higher for the nine months ended September 30, 2012.

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.

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 nine months ended September 30, 2012 were $17,579 and $57,696, respectively, a decrease of $2,737, or 13%, from the third quarter of 2011 and a decrease of $2,706, or 4%, from the nine months ended September 30, 2011.

The decrease in consolidated operating expenses for the third quarter of 2012 compared to the third quarter of 2011 was primarily related to:

The decrease in consolidated operating expenses for the first nine months of 2012 compared to the same period in 2011 was primarily related to:

Operating expenses for the third quarter and first nine months of 2012 included $500 and $2,748, respectively, of expenses related to stock-based incentive plan costs compared to $891 and $2,207, respectively, of stock-based incentive plan costs for the third quarter and first nine months of 2011. As noted above, the expense in the third quarter of 2012 related to stock-based incentive plan costs reflects the benefit of $364 related to the reversal of accruals for stock-based incentives where management determined it was improbable that the performance objectives would be met.

Consolidated sales and marketing expenses for the quarter ended September 30, 2012 were $8,889, a decrease of $686, or 7%, from the third quarter of 2011. The decrease in sales and marketing expenses was primarily related to the benefit from currency fluctuations and a decrease in compensation expenses related to the incentive plan adjustments noted above.

Consolidated sales and marketing expenses for the nine months ended September 30, 2012, were $28,152, a decrease of $1,403, or 5%, from the same period of 2011. The decrease in expense for the nine month period is related to the same factors noted above in the comparison of the third quarter of 2012 to the third quarter of 2011.

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, 2012 was 173 and 171, respectively compared to 173 and 172 for the three and nine months ended September 30, 2011, respectively.

We estimate that the changes in currency exchange rates decreased sales and marketing expense for the third quarter and nine months ended September 30, 2012 when compared to the same periods in 2011 by $993 and $1,905, respectively.

Consolidated research and development expenses for the quarter ended September 30, 2012, were $4,488, a decrease of $299 or 6% from the third quarter of 2011. The decrease in research and development expenses was primarily related to lower expenses related to currency fluctuations and a decrease in compensation expense related to the incentive plan adjustments noted above, partially offset by compensation expense related to increased headcount.

Consolidated research and development expenses for the nine months ended September 30, 2012, were $13,986, an increase of $541, or 4%, from the same period of 2011. The increase in research and development expenses for the nine month period was primarily due to increased compensation expense related to increased headcount, partially offset by the benefit related to currency fluctuations and a decrease in compensation related expenses related to the incentive plan adjustments noted above.

Average full-time research and development employee headcount for the three and nine months ended September 30, 2012 was 143 and 140, respectively, compared to 135 and 127 for the three and nine months ended September 30, 2011, respectively. The increase in headcount was approximately 6% and 10% for the third quarter and nine months ended September 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 third quarter and nine months ended September 30, 2012 by $581 and $1,070, respectively, when compared to the same periods in 2011.

Consolidated general and administrative expenses for the quarter ended September 30, 2012, were $3,726, a decrease of $1,742, or 32%, from the third quarter of 2011. The decrease in general and administrative expenses was primarily related to lower expense related to currency fluctuations, a decrease in compensation expense related to the incentive plan adjustments noted above and a decrease in average headcount.

Consolidated general and administrative expenses for the nine months ended September 30, 2012, were $14,131, a decrease of $1,786 or 11%, from the same period of 2011. The decrease in expenses for the nine month period was related to the same factors noted above in the comparison of the third quarter of 2012 to the third quarter of 2011.

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

We estimate that the changes in currency exchange rates decreased general and administrative expense for the third quarter and nine months ended September 30, 2012 by $406 and $773, respectively, when compared to the same periods in 2011.

Amortization of intangible assets for the third quarter and first nine months of 2012 was $476 and $1,427, respectively, a decrease of $10 when compared to the third quarter of 2011 and a decrease of $58 when compared to the nine months ended September 30, 2011. The decrease in amortization expense primarily reflects the strengthening of the U.S. Dollar compared to the Euro.

Consolidated net interest income was $62 in the third quarter of 2012 as compared to income of $164 in the third quarter of 2011. For the nine months ended September 30, 2012, interest income was $207 compared to $404 for the same period of 2011. The decrease in interest income for the third quarter and first nine months of 2012 compared to the same periods in 2011 reflects a reduction in the average interest rate earned on the invested balances partially offset by an increase in the average invested balance.

Our average cash balance in the third quarter and first nine months of 2012 of $91,363 and $89,930 was 12% and 8% higher, respectively, than in the third quarter and first nine months of 2011. Our annual return on invested cash was approximately 0.3% for the both third quarter and nine months ended September 30, 2012, respectively, compared to 0.8% and 0.7% for the quarter and first nine months, respectively, in 2011.

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 expense for the third quarter of 2012 was $183 and compares to $359 for the third quarter of 2011. The decrease in other expense primarily reflects lower foreign exchange transaction losses. Other income (expense) included exchange losses of $304 for the quarter ended September 30, 2012 compared to exchange losses of $583 for the quarter ended September 30, 2011.

Other income for the first nine months of 2012 was $349 and compares to $258 for the first nine months of 2011. The increase in other income primarily reflects lower foreign exchange transaction losses. Other income included exchange losses of $259 for the nine months ended September 30, 2012 compared to an exchange loss of $525 for the nine months ended September 30, 2011.

Income tax expense for the third quarter of 2012 was $1,473, an increase of $159 from the third quarter of 2011. The increase in tax expense is attributable to lower pretax income offset by an increase in our effective tax rate. The effective tax rate was 24% for the third quarter of 2012 compared to 18% for the third quarter of 2011. The tax rate in the third quarter of 2012 was negatively impacted by an adjustment to increase our estimated full-year tax rate from 21% to 22%. The tax rate in the third quarter of 2011 benefited from a decrease in our estimate of our full-year tax rate from 30% to 21%.

Income tax expense for the first nine months of 2012 was $3,970, an increase of $537 from the same period in 2011. The increase in tax expense reflects higher pre-tax income and an increase in our estimated full-year effective tax rate. The effective tax rate was 22% for the first nine months of 2012 and compares to 21% for the first nine 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 increase in the tax rate is primarily attributable to a change in the geographic mix of our earnings. 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.

We reported an after-tax loss from discontinued operations of $173 and $493 for the quarter and nine months ended September 30, 2012, respectively. The loss for the quarter and the nine months ended September 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 $3,691 and $5,557 for the quarter and nine months ended September 30, 2011, respectively, reflect the results of the DigiNotar operation during those time periods.

Our net cash balance was $96,141 at September 30, 2012, an increase of $10,996 or 13%, from $85,145 at June 30, 2012, and an increase of $11,644, or 14%, from $84,497 at December 31, 2011. The increase in cash from June 30, 2012 was attributable to the positive cash flow from operations, the weakening of the U.S. dollar to the Euro and most all of the currencies in other countries in which we operate and favorable 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 the Euro. At September 30, 2012, the exchange rate for the Euro to the U.S. dollar was approximately 1.29 and compares to 1.26 and 1.30 at June 30, 2012 and December 31, 2011, respectively.

As of September 30, 2012, we held $63,608 of cash in banks outside of the United States. Of that amount, $63,088 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 September 30, 2012 we had working capital of $123,754, an increase of $5,714, or 5%, from $118,040 at June 30, 2012 and an increase of $15,164 or 14% from $108,590 reported at December 31, 2011. The increase in working capital for the quarter and nine months ended September 30, 2012 was primarily related to cash flow related to our earnings.

EBITDA from continuing operations for the three months ending September 30, 2012 was $6,981, a decrease of $1,052 or 13% from the same period in 2011. For the nine month period ending September 30, 2012, EBITDA was $20,573, an increase of $1,768 or 9% compared to the same period in the prior year. A reconciliation of EBITDA to net income for the quarter and nine months ended September 30, 2012, and 2011 follows:

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.

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.

There have been no material changes in our market risk during the three and nine months ended September 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.

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.

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 nine months ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

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.

The updated risk factor set forth below should be considered together with the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.

The effects of new regulations relating to conflict minerals may adversely affect our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals and derivatives referred to as “conflict minerals” which may originate from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC established new annual disclosure and reporting requirements for those companies who use “conflict” minerals in their products, whether or not the products are manufactured by third parties. These new requirements will require due diligence efforts for the 2013 calendar year, with initial disclosure requirements beginning in May 2014. We are currently examining whether we will be subject to these new disclosure requirements, but the types of minerals covered by these rules are present in most electronic devices, and consequently we believe we are likely to be subject to these new disclosure requirements.

If we are subject to these new requirements, we will incur additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. As these new requirements are implemented, they could affect the pricing, sourcing and availability of minerals used in the manufacture of components in our devices, and in turn could affect the costs and availability of such components. Our supply chain is complex

and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stakeholders if we are unable to certify that our products are conflict free.

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 November 2, 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 November 2, 2012.

Exhibit 32.1 - Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2012.

Exhibit 32.2 - Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2012.

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 November 2, 2012.

VASCO Data Security International, Inc.

/s/ T. Kendall Hunt

T. Kendall Hunt

Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

/s/ Clifford K. Bown

Clifford K. Bown

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

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 November 2, 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 November 2, 2012.

Exhibit 32.1 - Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2012.

Exhibit 32.2 - Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2012.


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011		3

	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine month periods ended September 30, 2012 and 2011		4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine month periods ended September 30, 2012 and 2011.		5

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 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 1A.	Risk Factors		33

Item 6.	Exhibits		34

SIGNATURES			35

EXHIBIT INDEX			36


	September 30, 2012			December 31, 2011
	(unaudited)
ASSETS
Current assets
Cash and equivalents	$	96,141		$	84,497
Accounts receivable, net of allowance for doubtful accounts of $1,537 in 2012 and $1,585 in 2011		29,572			31,618
Inventories		17,695			16,033
Prepaid expenses		1,819			1,657
Foreign sales tax receivable		1,046			683
Deferred income taxes		1,196			2,382
Other current assets		188			343
Assets of discontinued operations		2,592			2,545

Total current assets		150,249			139,758

Property and equipment:
Furniture and fixtures		4,881			4,924
Office equipment		8,189			7,390

		13,070			12,314
Accumulated depreciation		(9,140	)		(7,909	)

Property and equipment, net		3,930			4,405

Goodwill, net of accumulated amortization		12,820			12,910
Intangible assets, net of accumulated amortization		6,904			8,091
Other assets, net of accumulated amortization		4,208			3,759

Total assets	$	178,111		$	168,923

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	5,110		$	7,328
Deferred revenue		7,661			8,649
Accrued wages and payroll taxes		6,576			6,564
Income taxes payable		37			1,965
Other accrued expenses		3,451			3,162
Deferred compensation		2,295			1,908
Liabilities of discontinued operations		1,365			1,592

Total current liabilities		26,495			31,168

Deferred compensation		0			1,526
Deferred revenue		94			106
Deferred income taxes		168			324

Total liabilities		26,757			33,124

Stockholders’ equity
Common stock: $.001 par value per share, 75,000 shares authorized; 38,973 and 38,193 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		39			38
Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2012 or December 31, 2011		0			0
Additional paid-in capital		73,970			71,720
Accumulated income		79,239			65,658
Accumulated other comprehensive income		(1,894	)		(1,617	)

Total stockholders’ equity		151,354			135,799

Total liabilities and stockholders’ equity	$	178,111		$	168,923


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net revenue	$	36,292		$	41,385		$	115,192		$	119,554

Cost of goods sold		12,437			13,633			40,008			43,468

Gross profit		23,855			27,752			75,184			76,086

Operating costs:

Sales and marketing		8,889			9,575			28,152			29,555
Research and development		4,488			4,787			13,986			13,445
General and administrative		3,726			5,468			14,131			15,917
Amortization of purchased intangible assets		476			486			1,427			1,485

Total operating costs		17,579			20,316			57,696			60,402

Operating income		6,276			7,436			17,488			15,684

Interest income, net		62			164			207			404
Other income (expense), net		(183	)		(359	)		349			258

Income from continuing operations before income taxes		6,155			7,241			18,044			16,346
Provision for income taxes		1,473			1,314			3,970			3,433

Net income from continuing operations		4,682			5,927			14,074			12,913
Income (loss) from discontinued operations		(173	)		(3,691	)		(493	)		(5,557	)

Net income	$	4,509		$	2,236		$	13,581		$	7,356

Net income per share:
Basic income (loss) per share
Continuing	$	0.12		$	0.16		$	0.37		$	0.34
Discontinued		(0.00	)		(0.10	)		(0.01	)		(0.14	)

Total	$	0.12		$	0.06		$	0.36		$	0.20

Diluted income (loss) per share
Continuing	$	0.12		$	0.15		$	0.36		$	0.33
Discontinued		(0.00	)		(0.09	)		(0.01	)		(0.14	)

Total	$	0.12		$	0.06		$	0.35		$	0.19

Weighted average common shares outstanding:
Basic		38,136			37,539			37,997			37,531

Diluted		38,833			38,606			38,676			38,610


	Three months ended September 30,					Nine months ended September 30,
	2012		2011			2012			2011
Net income	$	4,509	$	2,236		$	13,581		$	7,356

Other comprehensive income - Cumulative translation adjustment		1,703		(4,653	)		(277	)		1,000

Comprehensive income	$	6,212	$	(2,417	)	$	13,304		$	8,356

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if smaller reporting company)

Smaller reporting company


	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income from continuing operations	$	14,074		$	12,913
Adjustments to reconcile net income from continuing operations to net cash provided by continuing operations:
Depreciation and amortization		2,736			2,863
Deferred tax expense (benefit)		796			(216	)
Non-cash compensation		2,748			2,207
Changes in assets and liabilities:
Accounts receivable, net		1,913			(6,382	)
Inventories		(1,661	)		(6,097	)
Foreign sales tax receivable		(363	)		1,537
Other current assets		(19	)		44
Accounts payable		(2,209	)		(4,042	)
Income taxes payable		(1,924	)		572
Accrued expenses		(18	)		3,416
Current deferred compensation		(1,825	)		0
Deferred revenue		(990	)		1,406

Net cash provided by operating activities of continuing operations		13,258			8,221

Cash flows from investing activities of continuing operations:
Purchase of Alfa & Ariss		0			(1,301	)
Additions to property and equipment		(838	)		(742	)
Additions to intangible assets		(233	)		(7,241	)
Other assets		134			(146	)

Net cash used in investing activities of continuing operations		(937	)		(9,430	)

Cash flows from financing activities of continuing operations:
Proceeds from exercise of stock options		190			40

Net cash provided by financing activities of continuing operations		190			40

Cash flows used in discontinued operations:
Net cash used in operating activities of discontinued operations		(767	)		(545	)
Net cash used in investing activities of discontinued operations		0			(5,761	)

Net cash used in discontinued operations		(767	)		(6,306	)

Effect of exchange rates on cash		(100	)		(564	)

Net increase (decrease) in cash		11,644			(8,039	)
Cash and cash equivalents, beginning of year		84,497			85,533

Cash and cash equivalents, end of period	$	96,141		$	77,494


	September 30, 2012			December 31, 2011
Accounts receivable	$	31,109		$	33,203
Allowance for doubtful accounts		(1,537	)		(1,585	)

Accounts receivable, net	$	29,572		$	31,618


	September 30, 2012		December 31, 2011
Component parts	$	7,484	$	6,447
Work-in-process and finished goods		10,211		9,586

Total	$	17,695	$	16,033


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Income (loss) from operations	$	0		$	271		$	0		($	1,595	)
Loss on disposal		(173	)		(3,962	)		(493	)		(3,962	)

Income (loss) from discontinued operations	($	173	)	($	3,691	)	($	493	)	($	5,557	)


Contingent consideration due from escrow	$	1,813
Due from DigiNotar net of allowance for doubtful account of $952		414
Income taxes receivable		365

Assets of discontinued operations	$	2,592

Due to DigiNotar	$	1,275
Accrued professional fees		90

Liabilities of discontinued operations	$	1,365


Net balance at December 31, 2011	$	12,910
Additions		0
Net foreign currency translation		(90	)

Net balance at September 30, 2012	$	12,820


	Capitalized Technology			Patents & Trademarks			Other			Total Intangible Assets
Net balance at December 31, 2011	$	6,693		$	1,361		$	37		$	8,091
Additions		0			257			0			257
Net foreign currency translation		(17	)		0			0			(17	)
Amortization expense		(1,372	)		(41	)		(14	)		(1,427	)

Net balance at September 30, 2012	$	5,304		$	1,577		$	23		$	6,904


	Three months ended September 30						Nine months ended September 30
	2012			2011			2012			2011
Balance, beginning of period	$	88		$	0		$	36		$	61
Provision for claims		12			7			110			20
Product or cash issued to settle claims		(71	)		(7	)		(117	)		(81	)

Balance, end of period	$	29		$	0		$	29		$	0


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Restricted stock	$	356	$	436	$	2,060	$	1,182
Long-term compensation plan		144		455		688		1,025

Total Non-Cash Compensation	$	500	$	891	$	2,748	$	2,207


	EMEA			United States			Asia Pacific			Other Countries			Total
Three months ended September 30:

Revenue:
2012	$	19,160		$	2,272		$	10,651		$	4,209		$	36,292
2011		27,640			6,167			3,406			4,172			41,385

Percent of Total:
2012		53	%		6	%		29	%		12	%		100	%
2011		67	%		15	%		8	%		10	%		100	%

Nine months ended September 30:

Revenue:
2012	$	69,904		$	8,112		$	26,018		$	11,158		$	115,192
2011		85,849			11,095			8,455			14,155			119,554

Percent of Total:
2012		61	%		7	%		22	%		10	%		100	%
2011		72	%		9	%		7	%		12	%		100	%


	Banking			Enterprise & Application Security			Total
Three months ended September 30:

Revenue:
2012	$	29,592		$	6,700		$	36,292
2011		33,403			7,982			41,385

Percent of Total:
2012		82	%		18	%		100	%
2011		81	%		19	%		100	%

Nine months ended September 30:

Revenue:
2012	$	93,168		$	22,024		$	115,192
2011		99,116			20,438			119,554

Percent of Total:
2012		81	%		19	%		100	%
2011		83	%		17	%		100	%