Hi,
I think this has been addressed by Yubico Support over email but I am posting a general reply which could potentially help other readers:
YubiHSM is a hardware device (
http://yubico.com/yubihsm ) that can be used to additionally secure the AES keys on the YubiRADIUS virtual appliance. If you select YubiHSM option for Key Storage Module in YubiRADIUS, you must have a YubiHSM physical device that is configured (as described in YubiRADIUS User Guide) and have it connected to one of the USB ports of the physical host running the YubiRADIUS Virtual Appliance.
If you are using a YubiHSM, also please verify that the USB port is recognized by the YubiRADIUS appliance/server. You can test this out by connecting a YubiKey to a USB port of the physical host and open a text editor then touch the YubiKey button which should send a 44 character OTP into the text editor. If this is working as expected you most likely have a working USB connection. If not, the USB settings on your virtualization platform (e.g. VMWare server) need to be checked and resolved before proceeding.
Unless you have a YubiHSM device, you should set the KSM configuration to the default YubiKey-KSM setting which uses the onboard software based Key Storage Module.
Thanks!
Samir.