Note 1. Basis of Presentation

Interim Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by VeriSign, Inc. ("Verisign" or the "Company") in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in Verisign's fiscal 2010 Annual Report on Form 10-K (the "2010 Form 10-K") filed with the SEC on February 24, 2011.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

Note 2. Cash, Cash Equivalents, and Marketable Securities

The following table summarizes the Company's cash, cash equivalents, and marketable securities:

The following tables summarize the Company's unrealized gains and losses, and fair value of debt and equity securities designated as available-for-sale investments. There were no investments classified as either held-to-maturity or trading as of March 31, 2011.

The unrealized losses as of March 31, 2011, relate to debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies with an aggregate fair value of $121.3 million that have been in a continuous unrealized loss position for less than twelve months. The Company anticipates that it will recover the entire amortized cost basis of these debt securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended March 31, 2011. The Company does not have the intent to sell any of these debt securities and it is more likely than not that it will not be required to sell them, before recovery of the entire amortized cost basis.

The following table presents the contractual maturities of the fixed income securities as of March 31, 2011:

Net gains or losses recognized during the three months ended March 31, 2011 and 2010 related to sales of marketable securities were not material.

Note 3. Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010:

The fair value of the Company's investments in certain money market funds approximates their face value. Such instruments are classified as Level 1 and are included in Cash and cash equivalents.

The fair value of the Company's investments in fixed income securities are obtained using the weighted-average price of available market prices for the underlying securities from various industry standard data providers, large financial institutions and other third-party sources. The fair value of U.S. Treasury bills is based on their quoted market prices. Such instruments are included in either Cash and cash equivalents or Marketable securities.

The fair value of the Company's foreign currency forward contracts is based on foreign currency rates quoted by banks or foreign currency dealers and other public data sources.

The Company has utilized a valuation model based on simulations of stock prices, interest rates, credit ratings and bond prices to estimate the value of the contingent interest derivative. The inputs to the model include risk adjusted interest rates, volatility, average yield curve observations and stock price. As several significant inputs are not observable, the overall fair value measurement of the derivative is classified as Level 3.

The following table summarizes the change in the fair value of the Company's Level 3 contingent interest derivative on Convertible Debentures during the three months ended March 31, 2011 and 2010:

Other

The Company's other financial instruments include accounts receivable, restricted cash, and accounts payable. As of March 31, 2011, the carrying value of these financial instruments approximated their fair value. The fair value of the Company's Convertible Debentures as of March 31, 2011, is $1.5 billion, and is based on quoted market prices.

Note 4. Other Balance Sheet Items

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

Accrued employee compensation primarily consists of employee accrued vacation, accrued payroll and taxes, accruals for employee contributions to the employee stock purchase plan, and accrued bonus. Payables to buyers primarily consists of amounts due to Symantec for certain post-closing purchase price adjustments related to the sale of the Authentication Services business and accrued bonus for employees associated with the Authentication Services business. Accrued bonus as of December 31, 2010, included in Accrued employee compensation was paid during the three months ended March 31, 2011. As of March 31, 2011, Accrued restructuring costs primarily represents restructuring costs related to the sale of the Authentication Services business. Other accrued liabilities consist primarily of interest on the Convertible Debentures, and accruals for products and services. Interest on the Convertible Debentures is paid semi-annually in arrears on August 15 and February 15.

Note 5. Restructuring Charges

2010 Restructuring Plan

In connection with the sale of the Authentication Services business and the migration of its corporate functions from its Mountain View, California facility to its facility in Dulles, Virginia, the Company initiated a restructuring plan in 2010, including workforce reductions, abandonment of excess facilities and other exit costs (the "2010 Restructuring Plan").

Under the 2010 Restructuring Plan, the Company expects to incur total estimated pre-tax cash charges for severance costs and other related employee termination costs of $22.5 million, and excess facility exit costs of $11.5 million, of which the Company has recorded a total of $21.5 million, and $1.0 million, respectively, through March 31, 2011. Additionally, the Company recognized stock-based compensation expenses of $13.4 million, inclusive of amounts for discontinued operations, through March 31, 2011, upon acceleration of stock-based awards for employees notified of termination.

The following table presents the nature of the restructuring charges:

Amounts for the three months ended March 31, 2011 were incurred under the 2010 Restructuring Plan. Amounts for the three months ended March 31, 2010 were incurred under the previous 2008 Restructuring Plan.

The following table presents a rollforward of the accrued restructuring costs:

Note 6. Stockholders' Equity

Comprehensive Income

Comprehensive income consists of Net income adjusted for unrealized gains and losses on marketable securities classified as available-for-sale and foreign currency translation adjustments. The following table presents the components of comprehensive income:

Repurchase of Common Stock

On July 27, 2010, the Board authorized the repurchase of up to approximately $1.1 billion of Verisign's common stock, in addition to the $393.6 million of its common stock remaining available for repurchase under the previous 2008 Share Buyback Program, for a total repurchase of up to $1.5 billion of its common stock (collectively, the "2010 Share Buyback Program"). The 2010 Share Buyback Program has no expiration date. During the three months ended March 31, 2011, the Company repurchased 5.6 million shares of its common stock at an average stock price of $35.54 for an aggregate cost of $199.6 million under the 2010 Share Buyback Program. As of March 31, 2011, $1.2 billion remained available for further repurchase under the 2010 Share Buyback Program.

During the three months ended March 31, 2011, the Company placed 0.2 million shares at an average stock price of $34.47 for an aggregate cost of $7.8 million into treasury stock to cover tax withholdings upon vesting of RSUs.

Note 7. Calculation of Net Income per Share Attributable to Verisign Stockholders

The Company computes basic net income per share attributable to Verisign stockholders by dividing net income attributable to Verisign stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share attributable to Verisign stockholders gives effect to dilutive potential common shares, including outstanding stock options, unvested RSUs, conversion spread relating to the Convertible Debentures, and employee stock purchases using the treasury stock method. The following table presents the computation of weighted-average shares used in the calculation of basic and diluted net income per share attributable to Verisign stockholders:

The following table presents the weighted-average potential shares of common stock that were excluded from the above calculation because their effect was anti-dilutive, and the respective weighted-average exercise prices of the weighted-average stock options outstanding:

Note 8. Stock-based Compensation

Stock-based compensation is classified in the Condensed Consolidated Statements of Operations in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:

The following table presents the nature of the Company's total stock-based compensation, inclusive of amounts for discontinued operations:

Note 9. Non-operating Income, Net

The following table presents the components of Non-operating income, net:

Interest and dividend income is earned principally from Verisign's surplus cash balances and marketable securities. Income from transition services agreements includes fees generated from services provided to the purchasers of divested businesses for a certain period of time to ensure and facilitate the transfer of business operations.

Note 10. Discontinued Operations

For a period of time, the Company will continue to generate cash flows and will report income statement activity in continuing operations that are associated with the Authentication Services business and certain other completed divestitures. These activities are transitional in nature and generally result from agreements ensuring and facilitating the orderly transfer of business operations. The nature, magnitude and duration of the agreements vary depending on the specific circumstances of the service, location or business need. The existing agreements include the following: data center hosting and information services. As of March 31, 2011, the existing agreements have remaining terms from 1 to 28 months in length.

The following table presents the revenues and the components of discontinued operations, net of tax, attributable to Verisign stockholders:

Income from discontinued operations before income taxes for the three months ended March 31, 2011 primarily represents adjustments to gains or losses on divestitures completed in 2009, as a result of the resolution of certain retained litigation of a divested business. Income tax expense for discontinued operations for the three months ended March 31, 2011 includes a $2.9 million discrete charge attributable to a change in the purchase price allocation prepared for income tax purposes related to the divestiture of the Authentication Services business as agreed by the parties in April 2011. Income from discontinued operations before income taxes for the three months ended March 31, 2010, represents the results of operations of the Authentication Services business, and adjustments to gains and losses on divestitures completed in 2009, as a result of certain one-time employee termination costs and settlement of certain retained litigation of the divested businesses.

Note 11. Income Taxes

The following table presents the income tax expense from continuing operations and the effective tax rate:

The effective tax rate for the three months ended March 31, 2011 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, and tax benefits from foreign income taxed at lower rates. The effective tax rate for the three months ended March 31, 2010 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, non-deductible stock-based compensation expense, and tax benefits from foreign income taxed at lower rates.

The Company applies a valuation allowance to certain deferred tax assets when management does not believe that it is more likely than not that they will be realized. Deferred tax assets offset by a valuation allowance relate primarily to investments with differing book and tax bases and net operating losses in certain foreign jurisdictions.

As of March 31, 2011 and December 31, 2010, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $36.2 million and $28.8 million, respectively. During the three months ended March 31, 2011, the Company recorded an increase in unrecognized tax benefits of $7.4 million related to current period activities. As of March 31, 2011 and December 31, 2010, $31.0 million and $24.9 million, respectively, of unrecognized tax benefits, including penalties and interest, would affect the Company's effective tax rate if realized. The balance of the gross unrecognized tax benefits is expected to increase in the next 12 months.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest and penalties related to income tax liabilities, recognized through income tax expense during the three months ended March 31, 2011 and 2010, were not material.

The Company's major taxing jurisdictions are the U.S., the states of California and Virginia, and Switzerland. The Company's tax returns are not currently under examination by these taxing jurisdictions. Because the Company uses historic net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years' income tax returns for the U.S., California and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2006 tax year and forward.

Note 12. Contingencies

Legal Proceedings

On May 31, 2007, plaintiffs Karen Herbert, et al., on behalf of themselves and a nationwide class of consumers ("Herbert"), filed a complaint against Verisign, m-Qube, Inc., and other defendants alleging that defendants collectively operated an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show "Deal or No Deal" to incur premium text message charges in order to participate in an interactive television promotion called "Lucky Case Game." The lawsuit is pending in the U.S. District Court for the Central District of California, Western Division. On June 5, 2007, plaintiffs Cheryl Bentley, et al., on behalf of themselves and a nationwide class of consumers ("Bentley"), filed a complaint against Verisign, m-Qube, Inc., and other defendants alleging that defendants collectively operated an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show "The Apprentice" to incur premium text message charges in order to participate in an interactive television promotion called "Get Rich With Trump." The defendants' motion to dismiss the Herbert matter was denied by the district court on December 3, 2007 and that ruling was appealed. On July 8, 2010, the Court of Appeals for the Ninth Circuit dismissed the appeal for lack of jurisdiction and remanded the case to the district court. The Bentley and Herbert cases, although not consolidated, are proceeding on a coordinated basis before the same judge in the District Court. Certain defendants have asserted indemnity claims against Verisign in connection with these matters.

Verisign has been named as a defendant in litigation brought by the plaintiff Coalition for Internet Corporation for Assigned Names and Numbers Transparency, Inc. ("CFIT") asserting claims, among others, under Sections 1 and 2 of the Sherman Antitrust Act (the "Sherman Act") in connection with the .com and .net Registry Agreements. Following the dismissal with prejudice of CFIT's second amended complaint by the United States District Court for the Northern District of California on May 14, 2007, and CFIT's appeal to the U.S. Court of Appeals for the Ninth Circuit, the case was remanded to the U.S. District Court for the Northern District of California by an Order and Amended Opinion issued on July 9, 2010. Upon remand, the District Court scheduled (i) a trial to begin December 5, 2011, (ii) a summary judgment hearing on threshold issues (including standing, the role of the U.S. government and ICANN, immunity, as well as CFIT's right to a jury trial) for March 2011 and (iii) a final summary judgment hearing for October 2011. On December 16, 2010, the District Court granted CFIT's unopposed motion for leave to file a third amended complaint. The third amended complaint contained new allegations regarding the .net Registry Agreement, sought disgorgement of profits, eliminated all claims for damages and removed all claims regarding the alleged expiring names registration services market. Verisign filed a motion to dismiss CFIT's third amended complaint on December 30, 2010. A hearing on Verisign's motion to dismiss was held on February 4, 2011, whereupon the District Court took the matter under advisement. On February 11, 2011, the District Court issued an order granting Verisign's motion to dismiss CFIT's third amended complaint (the "Order"). The Order dismissed the complaint in its entirety, with leave, in part, to amend the complaint again. First, the Order dismissed the complaint in its entirety on the grounds that the third amended complaint failed to identify members of CFIT or their continuous standing to assert the claims in the complaint against Verisign. The Order granted CFIT leave to amend the complaint to the extent CFIT can sufficiently allege standing from the commencement of the action. Second, the Order dismissed the claims concerning the .net Registry Agreement on the grounds that CFIT's allegations were too conclusory to plausibly state a claim for relief. The Order granted CFIT leave to amend its claims concerning the .net Registry Agreement to the extent it could allege specific facts sufficient to state a claim for relief. Third, the Order dismissed without leave to amend CFIT's claim for disgorgement of domain name registration fees CFIT alleges were improperly collected. Finally, the Order denied CFIT's request for a jury trial. Thus, any claims in the case should be tried to the District Court rather than a jury. Verisign filed a motion for summary judgment on February 4, 2011 on certain threshold issues as discussed above. The district court heard oral argument on the motion on March 11, 2011 and thereafter took the matter under advisement. CFIT filed a Fourth Amended Complaint on February 22, 2011. The Fourth Amended Complaint again asserts claims under Sections 1 and 2 of the Sherman Act with respect to the .com Registry Agreement. It does not assert any claims, however, for damages or disgorgement with respect to the .com Registry Agreement. The Fourth Amended Complaint also does not assert any claims with respect to the .net Registry Agreement. Verisign filed an Answer to the Fourth Amended Complaint on March 8, 2011.

Indemnifications

In connection with the sale of the Authentication Services business to Symantec, the Company has agreed to indemnify Symantec for certain potential legal claims arising from the operation of the Authentication Services business for a period of sixty months after the closing of the sale transaction. The Company's indemnification obligations in this regard are triggered only when indemnifiable claims exceed in the aggregate $4 million. Thereafter, the Company is obligated to indemnify Symantec for 50% of all indemnifiable claims. The Company's maximum indemnification obligation with respect to these claims is capped at $125 million.

While certain legal proceedings and related indemnification obligations to which the Company is a party specify the amounts claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of the litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.

Verisign is involved in various other investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in its opinion, will have a material effect on its business. The Company cannot assure you that it will prevail in any litigation. Regardless of the outcome, any litigation may require the Company to incur significant litigation expense and may result in significant diversion of management attention.

Note 13. Subsequent Events

On April 27, 2011, the Board declared a special dividend of $2.75 per share of the Company's common stock, totaling approximately $463.3 million. The special dividend will be paid on May 18, 2011 to shareholders of record as of the close of business on May 9, 2011. Further, the Board has designated the special dividend as an extraordinary dividend for the purposes of the indenture governing the Convertible Debentures. As a result, contingent interest of $100.0 million will also be paid on May 18, 2011 to the holders of record of the Convertible Debentures at the close of business on May 9, 2011.