##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission
file number 001-32548
 NeuStar, Inc.
  Delaware
    
    52-2141938(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 46000 Center Oak Plaza
Sterling, Virginia 20166
 (571) 434-5400
 þ o
 o þ
 o þ




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##### 



NeuStar, Inc.
Index
 PART I            FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of December 31, 2004 and September 30, 2005 (unaudited)Consolidated Statements of Operations for the three and nine months ended September
30, 2004 and 2005 (unaudited)Consolidated Statements of Cash Flows for the nine months ended September 30, 2004
and 2005 (unaudited)Notes to Unaudited Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II            OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSignatures
 2




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##### 



PART I 3⁄4 FINANCIAL INFORMATION
 Item 1. Financial Statements
 NEUSTAR, INC.
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,019
    
    
    $
    16,029Restricted cash
    
    
    4,835
    
    
    
    1,365Short-term investments
    
    
    44,910
    
    
    
    68,250Accounts receivable, net of allowance
for doubtful accounts of $468 and $557,
respectively
    
    
    29,171
    
    
    
    26,408Unbilled receivables
    
    
    980
    
    
    
    5,212Securitized notes receivable
    
    
    3,325
    
    
    
    1,704Notes receivable
    
    
    965
    
    
    
    437Prepaid expenses and other current assets
    
    
    3,747
    
    
    
    5,660Deferred costs
    
    
    1,570
    
    
    
    2,648Deferred tax asset
    
    
    10,923
    
    
    
    10,398Total current assets
    
    
    119,445
    
    
    
    138,111Restricted cash, long-term
    
    
    835
    
    
    
    Property and equipment, net
    
    
    36,504
    
    
    
    41,253Goodwill
    
    
    49,453
    
    
    
    50,566Intangible assets, net
    
    
    1,250
    
    
    
    2,873Securitized notes receivable, long-term
    
    
    1,074
    
    
    
    Deferred costs, long-term
    
    
    1,932
    
    
    
    4,599Other noncurrent assets
    
    
    961
    
    
    
    740Total assets
    
    $
    211,454
    
    
    $
    238,142
 See accompanying notes.
 3




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##### 



NEUSTAR, INC.
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable
    
    $
    2,828
    
    
    $
    2,143Accrued expenses
    
    
    32,630
    
    
    
    29,445Income taxes payable
    
    
    419
    
    
    
    313Customer credits
    
    
    15,541
    
    
    
    3,635Deferred revenue
    
    
    13,972
    
    
    
    18,511Notes payable
    
    
    4,636
    
    
    
    2,015Capital lease obligations
    
    
    4,813
    
    
    
    5,417Accrued restructuring reserve
    
    
    1,330
    
    
    
    699Total current liabilities
    
    
    76,169
    
    
    
    62,178Deferred revenue, long-term
    
    
    13,812
    
    
    
    16,624Notes payable, long-term
    
    
    1,358
    
    
    
    1,320Capital lease obligations, long-term
    
    
    6,606
    
    
    
    4,552Accrued restructuring reserve, long-term
    
    
    3,719
    
    
    
    2,654Deferred tax liability
    
    
    1,194
    
    
    
    1,405Total liabilities
    
    
    102,858
    
    
    
    88,733Commitments and contingencies
    
    
    
    
    
    
    Series B Voting Convertible Preferred Stock, $0.01
par value; 4,000 shares authorized;
100 shares issued and outstanding at December 31,
2004; no shares authorized, issued or outstanding
at September 30, 2005
    
    
    66
    
    
    
    Series C Voting Convertible Preferred Stock, $0.01
par value; 28,600 shares authorized;
28,570 shares issued and outstanding at December
31, 2004; no shares authorized, issued or
outstanding at September 30, 2005
    
    
    85,717
    
    
    
    Series D Voting Convertible Preferred Stock, $0.01
par value; 10,000 shares authorized;
9,099 shares issued and outstanding at December 31,
2004; no shares authorized, issued or outstanding
at September 30, 2005
    
    
    54,671
    
    
    
    Stockholders (deficit) equity:Class A common stock, par value $0.001; no
shares authorized, issued and outstanding at
December 31, 2004; 200,000 shares authorized,
58,902 shares issued and outstanding at
September 30, 2005
    
    
    
    
    
    
    59Class B common stock, par value $0.001; 100,000
shares authorized; 6,160 and 1,631
shares issued and outstanding at December 31,
2004 and September 30, 2005, respectively
    
    
    6
    
    
    
    2Additional paid-in capital
    
    
    
    
    
    
    140,781Deferred stock compensation
    
    
    (1,733
    )
    
    
    (1,406
    )Treasury stock, at cost, 236 and no shares at
December 31, 2004 and September 30, 2005,
respectively
    
    
    (1,125
    )
    
    
    (Accumulated deficit) retained earnings
    
    
    (29,006
    )
    
    
    9,973Total stockholders (deficit) equity
    
    
    (31,858
    )
    
    
    149,409Total liabilities and stockholders (deficit) equity
    
    $
    211,454
    
    
    $
    238,142
 See accompanying notes.
 4




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##### 



NEUSTAR, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    

September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenue:Addressing
    
    $
    14,176
    
    
    $
    19,190
    
    
    $
    37,982
    
    
    $
    57,765Interoperability
    
    
    9,314
    
    
    
    12,242
    
    
    
    25,403
    
    
    
    38,819Infrastructure and other
    
    
    21,739
    
    
    
    27,528
    
    
    
    60,168
    
    
    
    82,464Total revenue
    
    
    45,229
    
    
    
    58,960
    
    
    
    123,553
    
    
    
    179,048Operating expense:Cost of revenue (excluding depreciation
and amortization shown separately below)
    
    
    12,874
    
    
    
    17,124
    
    
    
    35,410
    
    
    
    46,154Sales and marketing
    
    
    6,050
    
    
    
    7,186
    
    
    
    15,032
    
    
    
    21,775Research and development
    
    
    1,938
    
    
    
    3,092
    
    
    
    5,409
    
    
    
    8,540General and administrative
    
    
    5,310
    
    
    
    5,626
    
    
    
    13,781
    
    
    
    22,045Depreciation and amortization
    
    
    4,263
    
    
    
    4,223
    
    
    
    13,487
    
    
    
    11,740Restructuring charges (recoveries)
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    (389
    )30,435
    
    
    
    37,268
    
    
    
    83,119
    
    
    
    109,865Income from operations
    
    
    14,794
    
    
    
    21,692
    
    
    
    40,434
    
    
    
    69,183Other (expense) income:Interest expense
    
    
    (527
    )
    
    
    (503
    )
    
    
    (1,873
    )
    
    
    (1,715
    )Interest income
    
    
    380
    
    
    
    559
    
    
    
    1,100
    
    
    
    1,756Income before income taxes
    
    
    14,647
    
    
    
    21,748
    
    
    
    39,661
    
    
    
    69,224Provision for (benefit from) income taxes
    
    
    5,683
    
    
    
    8,691
    
    
    
    (1,504
    )
    
    
    27,653Net income
    
    
    8,964
    
    
    
    13,057
    
    
    
    41,165
    
    
    
    41,571Dividends on and accretion of preferred stock
    
    
    (2,578
    )
    
    
    
    
    
    
    (7,568
    )
    
    
    (4,313
    )Net income attributable to common stockholders
    
    $
    6,386
    
    
    $
    13,057
    
    
    $
    33,597
    
    
    $
    37,258Net income attributable to common
stockholders per common share:Basic
    
    $
    1.10
    
    
    $
    0.22
    
    
    $
    6.05
    
    
    $
    1.49Diluted
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.51
    
    
    $
    0.54Weighted average common shares outstanding:Basic
    
    
    5,804
    
    
    
    60,351
    
    
    
    5,550
    
    
    
    25,016Diluted
    
    
    83,767
    
    
    
    77,462
    
    
    
    81,245
    
    
    
    76,813
 See accompanying notes.
 5




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##### 



NEUSTAR, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months EndedSeptember 30,2004
    
    
    2005Operating activities:Net income
    
    $
    41,165
    
    
    $
    41,571Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    13,487
    
    
    
    11,740Stock-based compensation
    
    
    1,897
    
    
    
    2,541Amortization of deferred financing costs
    
    
    122
    
    
    
    49Deferred income taxes
    
    
    (9,610
    )
    
    
    (263
    )Noncash restructuring benefit
    
    
    
    
    
    
    (389
    )Provision for doubtful accounts
    
    
    809
    
    
    
    551Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (829
    )
    
    
    606Unbilled receivables
    
    
    (874
    )
    
    
    (4,232
    )Notes and securitized notes receivable
    
    
    3,630
    
    
    
    3,224Prepaid expenses and other current assets
    
    
    (3,001
    )
    
    
    (1,535
    )Deferred costs
    
    
    (523
    )
    
    
    (3,746
    )Other assets
    
    
    1,115
    
    
    
    539Accounts payable and accrued expenses
    
    
    2,959
    
    
    
    (2,494
    )Income taxes payable
    
    
    4,757
    
    
    
    (106
    )Accrued restructuring reserve
    
    
    (262
    )
    
    
    (1,306
    )Customer credits
    
    
    (13,500
    )
    
    
    (11,906
    )Deferred revenue
    
    
    3,677
    
    
    
    7,076Net cash provided by operating activities
    
    
    45,019
    
    
    
    41,920Investing activities:Purchases of property and equipment
    
    
    (9,228
    )
    
    
    (11,169
    )Purchases of investments, net
    
    
    (36,655
    )
    
    
    (23,340
    )Business acquired, net of cash
    
    
    
    
    
    
    (2,164
    )Net cash used in investing activities
    
    
    (45,883
    )
    
    
    (36,673
    )Financing activities:(Issuance) release of restricted cash
    
    
    (8,066
    )
    
    
    4,304Principal repayments on notes payable
    
    
    (7,684
    )
    
    
    (4,322
    )Principal repayments on capital lease obligations
    
    
    (6,006
    )
    
    
    (4,526
    )Proceeds from exercise of common stock options
    
    
    82
    
    
    
    2,571Repurchase of common stock
    
    
    (1,012
    )
    
    
    Payment of preferred stock dividends
    
    
    
    
    
    
    (6,264
    )Net cash used in financing activities
    
    
    (22,686
    )
    
    
    (8,237
    )Net decrease in cash and cash equivalents
    
    
    (23,550
    )
    
    
    (2,990
    )Cash and cash equivalents at beginning of period
    
    
    60,232
    
    
    
    19,019Cash and cash equivalents at end of period
    
    $
    36,682
    
    
    $
    16,029
 See accompanying notes.
 6




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005
 1. DESCRIPTION OF BUSINESS AND ORGANIZATION
   
    
    Addressing. The Company enables CSPs to use critical, shared addressing resources, such
as telephone numbers, several Internet domain names, and Common Short Codes.
    
    Interoperability. The Company enables CSPs to exchange and share critical operating
data so that communications originating on one providers network can be delivered and
received on the network of another CSP. The Company also facilitates order management and
work flow processing among CSPs.
    
    Infrastructure and Other. The Company enables CSPs to more efficiently manage changes
in their own networks by centrally managing certain critical data they use to route
communications over their own networks.
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Unaudited Interim Financial Information
    7




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Unaudited Interim Financial Information (continued)
   Use of Estimates
  Reclassifications
  Revenue Recognition
 Revenue Recognition
  Addressing
  8




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Revenue Recognition (continued)
   Interoperability
  Infrastructure and Other
  Significant Contracts
  9




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Revenue Recognition (continued)
     10




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Accounting for Stock-Based Compensation
 Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of SFAS No. 123 Accounting for Stock Issued to Employees Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Connection with Selling Goods or Services
 11




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Accounting for Stock-Based Compensation (continued)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Pro forma basic net
income attributable
to common
stockholders:Basic net income
attributable to
common
stockholders, as
reported
    
    $
    6,386
    
    
    $
    13,057
    
    
    $
    33,597
    
    
    $
    37,258Add: stock-based
compensation
expense included
in reported net
income
attributable to
common
stockholders
    
    
    312
    
    
    
    66
    
    
    
    1,146
    
    
    
    1,535Deduct: total
stock-based
compensation
expense
determined under
fair value-based
method for all
awards
    
    
    (1,238
    )
    
    
    (1,223
    )
    
    
    (3,138
    )
    
    
    (5,038
    )Pro forma basic net
income attributable
to common
stockholders
    
    $
    5,460
    
    
    $
    11,900
    
    
    $
    31,605
    
    
    $
    33,755Pro forma diluted
net income
attributable to
common stockholders:Basic net income
attributable to
common
stockholders, as
reported
    
    $
    6,386
    
    
    $
    13,057
    
    
    $
    33,597
    
    
    $
    37,258Dividends on and
accretion of
convertible
preferred stock
    
    
    2,578
    
    
    
    
    
    
    
    7,568
    
    
    
    4,313Diluted net
income
attributable to
common
stockholders
    
    
    8,964
    
    
    
    13,057
    
    
    
    41,165
    
    
    
    41,571Add: stock-based
compensation
expense included
in reported net
income
attributable to
common
stockholders
    
    
    312
    
    
    
    66
    
    
    
    1,146
    
    
    
    1,535Deduct: total
stock-based
compensation
expense
determined under
fair value-based
method for all
awards
    
    
    (1,238
    )
    
    
    (1,223
    )
    
    
    (3,138
    )
    
    
    (5,038
    )Pro forma diluted
net income
attributable to
common stockholders
    
    $
    8,038
    
    
    $
    11,900
    
    
    $
    39,173
    
    
    $
    38,068Net income
attributable to
common stockholders
per common share:Basic  as reported
    
    $
    1.10
    
    
    $
    0.22
    
    
    $
    6.05
    
    
    $
    1.49Basic  pro forma
    
    $
    0.94
    
    
    $
    0.20
    
    
    $
    5.69
    
    
    $
    1.35Diluted  as reported
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.51
    
    
    $
    0.54Diluted  pro forma
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    0.48
    
    
    $
    0.50
  12




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Accounting for Stock-Based Compensation (continued)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2005
    
    2004
    
    2005Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    67.14
    %
    
    
    55.13
    %
    
    
    67.14
    %
    
    
    62.25
    %Average risk-free interest rate
    
    
    3.43
    %
    
    
    3.94
    %
    
    
    3.43
    %
    
    
    3.90
    %Expected term
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
 Basic and Diluted Net Income Attributable to Common Stockholders per Common Share
  13




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Basic and Diluted Net Income Attributable to Common Stockholders per Common Share (continued)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Basic net income
attributable to
common stockholders
per common share:Net income
    
    $
    8,964
    
    
    $
    13,057
    
    
    $
    41,165
    
    
    $
    41,571Dividends on and
accretion of
convertible
preferred stock
    
    
    (2,578
    )
    
    
    
    
    
    
    (7,568
    )
    
    
    (4,313
    )Basic net income
attributable to
common stockholders
    
    $
    6,386
    
    
    $
    13,057
    
    
    $
    33,597
    
    
    $
    37,258Basic net income
attributable to
common stockholders
per common share
    
    $
    1.10
    
    
    $
    0.22
    
    
    $
    6.05
    
    
    $
    1.49Diluted net income
attributable to
common stockholders
per common share:Basic net
income
attributable
to common
stockholders
    
    $
    6,386
    
    
    $
    13,057
    
    
    $
    33,597
    
    
    $
    37,258Dividends on
and accretion
of
convertible
preferred
stock
    
    
    2,578
    
    
    
    
    
    
    
    7,568
    
    
    
    4,313Diluted net income
attributable to
common stockholders
    
    $
    8,964
    
    
    $
    13,057
    
    
    $
    41,165
    
    
    $
    41,571Diluted net income
attributable to
common stockholders
per common share
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.51
    
    
    $
    0.54Weighted average
common shares
outstanding 
basic
    
    
    5,804
    
    
    
    60,351
    
    
    
    5,550
    
    
    
    25,016Dilutive effect of:Stock options
for the purchase
of common stock
    
    
    7,426
    
    
    
    10,765
    
    
    
    7,051
    
    
    
    10,094Conversion of
preferred stock
and accrued
dividends
payable into
common stock
    
    
    64,241
    
    
    
    
    
    
    
    62,361
    
    
    
    35,367Warrants for the
purchase of
common stock
    
    
    6,296
    
    
    
    6,346
    
    
    
    6,283
    
    
    
    6,336Weighted average
common shares
outstanding 
diluted
    
    
    83,767
    
    
    
    77,462
    
    
    
    81,245
    
    
    
    76,813
 Income Taxes
  14




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Income Taxes (continued)
    Comprehensive Net Income
  Recent Accounting Pronouncements
 Share-Based Payment Statement of Cash Flows
  
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No.
123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date.
 15




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements (continued)
 
    
    A modified retrospective method, which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
  3. ACQUISITION
  Accounting for Income
Taxes
 4. GOODWILL and INTANGIBLE ASSETS
  December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)Goodwill
    
    $
    49,453
    
    
    $
    50,566Other intangible assets:Customer lists
    
    
    996
    
    
    
    3,566Acquired technology
    
    
    2,208
    
    
    
    2,208Total other intangibles
    
    
    3,204
    
    
    
    5,774Accumulated amortization
    
    
    (1,954
    )
    
    
    (2,901
    )Other intangible assets, net
    
    $
    1,250
    
    
    $
    2,873
  16




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##### 



NEUSTAR, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 5. STOCKHOLDERS (DEFICIT) EQUITY (Continued)
 Common Stock
       17




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
   Overview
  Our Company
   
    
    Addressing. We enable CSPs to use critical, shared addressing resources, such as
telephone numbers, Internet top-level domain names, and Common Short Codes.
    
    Interoperability. We enable CSPs to exchange and share critical operating data so that
communications originating on one providers network can be delivered and received on the
network of another CSP. We also facilitate order management and work flow processing among
CSPs.
    
    Infrastructure and Other. We enable CSPs to more efficiently manage changes in their
own networks by centrally managing certain critical data they use to route communications
over their own networks.
 18




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##### 



Critical Accounting Policies and Estimates
   19




---



##### 



Revenue Recognition
  Addressing
  Interoperability
 Infrastructure and Other
 Significant Contracts
  20




---



##### 



Service Level Standards
   Valuation of Goodwill and Intangible Assets
  Impairment of Long-Lived Assets
 Accounting for the
Impairment or Disposal of Long-Lived Assets
 21




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##### 



Accounts Receivable, Revenue Recovery Collections, and Allowance for Doubtful Accounts
  Deferred Income Taxes
  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Connection with Selling Goods or Services
 Acquisitions
  22




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##### 



Current Trends Affecting Our Results of Operations
         23




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##### 



Consolidated Results of Operations
 Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2005
  Three Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004 vs. 2005$
    
    
    $
    
    
    $ Change
    
    
    % Change(in thousands, except per share data)Revenue:Addressing
    
    $
    14,176
    
    
    $
    19,190
    
    
    $
    5,014
    
    
    
    35.4
    %Interoperability
    
    
    9,314
    
    
    
    12,242
    
    
    
    2,928
    
    
    
    31.4Infrastructure and other
    
    
    21,739
    
    
    
    27,528
    
    
    
    5,789
    
    
    
    26.6Total revenue
    
    
    45,229
    
    
    
    58,960
    
    
    
    13,731
    
    
    
    30.4Operating expense:Cost of revenue (excluding
depreciation and
amortization shown
separately below)
    
    
    12,874
    
    
    
    17,124
    
    
    
    4,250
    
    
    
    33.0Sales and marketing
    
    
    6,050
    
    
    
    7,186
    
    
    
    1,136
    
    
    
    18.8Research and development
    
    
    1,938
    
    
    
    3,092
    
    
    
    1,154
    
    
    
    59.5General and administrative
    
    
    5,310
    
    
    
    5,626
    
    
    
    316
    
    
    
    6.0Depreciation and amortization
    
    
    4,263
    
    
    
    4,223
    
    
    
    (40
    )
    
    
    (0.9
    )Restructuring charges
    
    
    
    
    
    
    17
    
    
    
    17
    
    
    
    30,435
    
    
    
    37,268
    
    
    
    6,833
    
    
    
    22.5Income from operations
    
    
    14,794
    
    
    
    21,692
    
    
    
    6,898
    
    
    
    46.6Other (expense) income:Interest expense
    
    
    (527
    )
    
    
    (503
    )
    
    
    24
    
    
    
    4.6Interest income
    
    
    380
    
    
    
    559
    
    
    
    179
    
    
    
    47.1Income before income taxes
    
    
    14,647
    
    
    
    21,748
    
    
    
    7,101
    
    
    
    48.5Provision for income taxes
    
    
    5,683
    
    
    
    8,691
    
    
    
    3,008
    
    
    
    52.9Net income
    
    
    8,964
    
    
    
    13,057
    
    
    
    4,093
    
    
    
    45.7Dividends on and accretion of
preferred stock
    
    
    (2,578
    )
    
    
    
    
    
    
    2,578
    
    
    
    Net income attributable to
common stockholders
    
    $
    6,386
    
    
    $
    13,057
    
    
    
    6,671
    
    
    
    104.5
    %Net income attributable to
common stockholders per common
share:Basic
    
    $
    1.10
    
    
    $
    0.22Diluted
    
    $
    0.11
    
    
    $
    0.17Weighted average common shares
outstanding:Basic
    
    
    5,804
    
    
    
    60,351Diluted
    
    
    83,767
    
    
    
    77,462
 24




---



##### 



Revenue
 Total revenue
 Addressing
 Interoperability
 Infrastructure and other
 Expense
 Cost of revenue
 Sales and marketing
 Research and development
 25




---



##### 



General and administrative
 Depreciation and amortization
 Restructuring charges
 Interest expense
 Interest income
 Provision for income taxes
 26




---



##### 



Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2005
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004 vs. 2005$
    
    
    $
    
    
    $ Change
    
    
    % Change(in thousands, except per share data)Revenue:Addressing
    
    $
    37,982
    
    
    $
    57,765
    
    
    $
    19,783
    
    
    
    52.1
    %Interoperability
    
    
    25,403
    
    
    
    38,819
    
    
    
    13,416
    
    
    
    52.8Infrastructure and other
    
    
    60,168
    
    
    
    82,464
    
    
    
    22,296
    
    
    
    37.1Total revenue:
    
    
    123,553
    
    
    
    179,048
    
    
    
    55,495
    
    
    
    44.9Operating expense:Cost of revenue (excluding
depreciation and
amortization shown
separately below)
    
    
    35,410
    
    
    
    46,154
    
    
    
    10,744
    
    
    
    30.3Sales and marketing
    
    
    15,032
    
    
    
    21,775
    
    
    
    6,743
    
    
    
    44.9Research and development
    
    
    5,409
    
    
    
    8,540
    
    
    
    3,131
    
    
    
    57.9General and administrative
    
    
    13,781
    
    
    
    22,045
    
    
    
    8,264
    
    
    
    60.0Depreciation and amortization
    
    
    13,487
    
    
    
    11,740
    
    
    
    (1,747
    )
    
    
    (13.0
    )Restructuring recoveries
    
    
    
    
    
    
    (389
    )
    
    
    (389
    )
    
    
    83,119
    
    
    
    109,865
    
    
    
    26,746
    
    
    
    32.2Income from operations
    
    
    40,434
    
    
    
    69,183
    
    
    
    28,749
    
    
    
    71.1Other (expense) income:Interest expense
    
    
    (1,873
    )
    
    
    (1,715
    )
    
    
    158
    
    
    
    8.4Interest income
    
    
    1,100
    
    
    
    1,756
    
    
    
    656
    
    
    
    59.6Income before income taxes
    
    
    39,661
    
    
    
    69,224
    
    
    
    29,563
    
    
    
    74.5(Benefit from) provision for
income taxes
    
    
    (1,504
    )
    
    
    27,653
    
    
    
    29,157
    
    
    
    (1938.6
    )Net income
    
    
    41,165
    
    
    
    41,571
    
    
    
    406
    
    
    
    1.0Dividends on and accretion of
preferred stock
    
    
    (7,568
    )
    
    
    (4,313
    )
    
    
    3,255
    
    
    
    43.0Net income attributable to
common stockholders
    
    $
    33,597
    
    
    $
    37,258
    
    
    $
    3,661
    
    
    
    10.9
    %Net income attributable to
common stockholders per common
share:Basic
    
    $
    6.05
    
    
    $
    1.49Diluted
    
    $
    0.51
    
    
    $
    0.54Weighted average common shares
outstanding:Basic
    
    
    5,550
    
    
    
    25,016Diluted
    
    
    81,245
    
    
    
    76,813
 27




---



##### 



Revenue
 Total revenue
 Addressing
 Interoperability
 Infrastructure and other
 Expense
 Cost of revenue
 Sales and marketing
 28




---



##### 



Research and development
 General and administrative
 Depreciation and amortization
 Restructuring recoveries
 Interest expense
 Interest income
 (Benefit from) provision for income taxes
 29




---



##### 



Liquidity and Capital Resources
     Discussion of Cash Flows
 Cash flows from operations
  Cash flows from investing
  Cash flows from financing
  Recent Accounting Pronouncements
 Share-Based Payment Statement of Cash Flows
 30




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##### 




    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No.
123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date.
    
    A modified retrospective method, which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
  Off-Balance Sheet Arrangements
  Additional Factors That May Affect Future Results
  Risks Related to Our Business
 Failures or interruptions of our clearinghouse could materially harm our revenues and
impair our ability to conduct our operations.
  
    
    damage to or failure of our computer software or hardware or our connections and
outsourced service arrangements with third parties;
    
    errors in the processing of data by our system;
    
    computer viruses or software defects;
    
    physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
    
    increased capacity demands or changes in systems requirements of our customers; or
    
    errors by our employees or third-party service providers.
 31




---



##### 




    
    we may experience damage to our reputation, which may adversely affect our ability to
attract or retain customers for our existing services, and may also make it more difficult
for us to market our services;
    
    we may be subject to significant damages claims, under our contracts or otherwise,
including the requirement to pay substantial penalties related to service level
requirements in our contracts;
    
    our operating expenses or capital expenditures may increase as a result of corrective
efforts that we must perform;
    
    our customers may postpone or cancel subsequently scheduled work or reduce their use of
our services; or
    
    one or more of our significant contracts may be terminated early, or may not be renewed.
  Security breaches could result in an interruption of service or reduced quality of service,
which could increase our costs or result in a reduction in the use of our services by our
customers.
  The loss of, or damage to, a data center could interrupt our operations and materially harm
our revenues and growth.
  The failure of the third-party software and equipment used by our customers or that we use
in our clearinghouse could cause interruptions or failures of our systems.
  32




---



##### 



Our seven contracts with North American Portability Management, LLC represent in the
aggregate a substantial portion of our revenues, are not exclusive and could be terminated
or modified in ways unfavorable to us, and we may be unable to renew these contracts at the
end of their term.
   Our contracts with North American Portability Management, LLC contain provisions that may
restrict our ability to use data that we administer in our clearinghouse, which may limit
our ability to offer services that we currently, or intend to, offer.
  Certain of our other contracts may be terminated or we may be unable to renew these contracts,
which may reduce the number of services we can offer and damage our reputation.
  
    
    North American Numbering Plan Administrator, under which we maintain the authoritative
database of telephone numbering resources in North America;
    
    National Pooling Administrator, under which we perform the administrative functions
associated with the administration and management of telephone number inventory and
allocation of pooled blocks of unassigned telephone numbers;
    
    provider of number portability services in Canada;
    
    operator of the .us registry; and
    
    operator of the .biz registry.
  33




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##### 



Failure to comply with neutrality requirements could result in loss of significant
contracts.
  Regulatory and statutory changes that affect us or the communications industry in general
may increase our costs or impair our growth.
  
    
    increase regulatory oversight over the services we provide;
    
    adopt or modify statutes, regulations, policies, procedures or programs that are
disadvantageous to the services we provide, or that are inconsistent with our current or
future plans, or that require modification of the terms of our existing contracts,
including the manner in which we charge for certain of our services. For example, Bellsouth Corporation recently
filed a petition with the FCC seeking changes in the way our customers are billed for services
provided by us under our contracts with North American Portability Management LLC;
    
    prohibit us from entering into new contracts or extending existing contracts to provide
services to the communications industry based on actual or suspected violations of our
neutrality requirements, business performance concerns, or other reasons;
    
    adopt or modify statutes, regulations, policies, procedures or programs in a way that
could cause changes to our operations or costs or the operations of our customers;
    
    appoint, or cause others to appoint, substitute or add additional parties to perform the
services that we currently provide; and
    
    prohibit or restrict the provision or export of new or expanded services under our
contracts, or prevent the
 34




---



##### 



introduction of other services not under the contracts based upon restrictions within the
contracts or in FCC policies.
  If we do not adapt to rapid technological change in the communications industry, we could
lose customers or market share.
  The market for certain of our addressing, interoperability, and infrastructure services is
competitive, which could result in fewer customer orders, reduced revenues or margins or
loss of market share.
  Our failure to achieve or sustain market acceptance at desired pricing levels could impact
our ability to maintain profitability or positive cash flow.
  
    
    competitors offering our customers services at reduced prices, or bundling and pricing
services in a manner that makes it difficult for us to compete. For example, a competing
provider of interoperability services might offer its services at lower rates than we do,
or a competing domain name registry provider may reduce its prices for domain name
registration;
    
    customers with a significant volume of transactions may have enhanced leverage in
pricing negotiations with us; and
    
    if our prices are too high, potential customers may find it economically advantageous to
handle certain functions internally instead of using us.
 35




---



##### 



A decline in the volume of transactions we handle could have a material adverse effect on
our results of operations.
  If we are unable to manage our growth, our revenues and profits could be adversely
affected.
  We may be unable to complete suitable acquisitions, or we may undertake acquisitions that
could increase our costs or liabilities or be disruptive to our business.
  36




---



##### 



Our potential expansion into international markets may be subject to uncertainties that
could increase our costs to comply with regulatory requirements in foreign jurisdictions,
disrupt our operations, and require increased focus from our management.
  Our senior management is important to our customer relationships, and the loss of one or
more of our senior managers could have a negative impact on our business.
  We must recruit and retain skilled employees to succeed in our business, and our failure to
recruit and retain qualified employees could harm our ability to maintain and grow our
business.
  37




---



##### 



We will continue to incur increased costs as a public company as a result of recently
enacted and proposed changes in laws and regulations.
  We may need additional capital in the future and it may not be available on acceptable
terms.
  
    
    not be able to continue to meet customer demand for service quality, availability and
competitive pricing;
    
    be forced to reduce our operations;
    
    not be able to expand or acquire complementary businesses; and
    
    not be able to develop new services or otherwise respond to changing business conditions
or competitive pressures.
 Risks Related to Our Common Stock
 Our common stock price may be volatile.
  
    
    our perceived prospects and the prospects of the telephone and Internet industries in
general;
    
    differences between our actual financial and operating results and those expected by
investors and analysts;
    
    changes in analysts recommendations or projections;
    
    changes in general valuations for communications companies;
    
    adoption or modification of regulations, policies, procedures or programs applicable to our business;
    
    sales of our Class A common stock by our officers, directors or principal stockholders;
    
    sales of our Class A common stock due to a required divestiture under the terms of our
certificate of incorporation; and
    
    changes in general economic or market conditions and broad market fluctuations.
  One of our stockholders holds a significant block of shares in our company and, as a
result, may have significant influence over our company.
  38




---



##### 



The existence of shares eligible for future sale may cause our stock price to decline.
      39




---



##### 



Delaware law and provisions in our certificate of incorporation and bylaws could make a
merger, tender offer or proxy contest difficult, and the market price of our Class A common
stock may be lower as a result.
  
    
    authorize the issuance of blank check preferred stock that could be issued by our
board of directors to thwart a takeover attempt;
    
    prohibit cumulative voting in the election of directors, which would otherwise enable
holders of less than a majority of our voting securities to elect some of our directors;
    
    establish a classified board of directors, as a result of which the successors to the
directors whose terms have expired will be elected to serve from the time of election and
qualification until the third annual meeting following election;
    
    require that directors only be removed from office for cause;
    
    provide that vacancies on the board of directors, including newly-created directorships,
may be filled only by a majority vote of directors then in office;
    
    disqualify any individual from serving on our board if such individuals service as a
director would cause us to violate our neutrality requirements;
    
    limit who may call special meetings of stockholders;
    
    prohibit stockholder action by written consent, requiring all actions to be taken at a
meeting of the stockholders; and
    
    establish advance notice requirements for nominating candidates for election to the
board of directors or for proposing matters that can be acted upon by stockholders at
stockholder meetings.
 In order to comply with our neutrality requirements, our certificate of incorporation
contains ownership and transfer restrictions relating to telecommunications service
providers and their affiliates, which may inhibit potential acquisition bids that you and
other stockholders may consider favorable, and the market price of our Class A common stock
may be lower as a result.
  
    
    if one of our stockholders experiences a change in status or other event that results in
the stockholder violating this restriction, or if any transfer of our stock occurs that, if
effective, would violate the 5% restriction, we may elect to purchase the excess shares
(i.e., the shares that cause the violation of the restriction) or require that the excess
shares be sold to a third party whose ownership will not violate the restriction;
    
    pending a required divestiture of these excess shares, the holder whose beneficial
ownership violates the 5% restriction may not vote the shares in excess of the 5%
threshold; and
    
    if our board of directors, or its permitted designee, determines that a transfer,
attempted transfer or other event violating this restriction has taken place, we must take
whatever action we deem advisable to prevent or refuse to give effect to the transfer,
including refusal to register the transfer, disregard of any vote of the shares by the
prohibited owner, or the institution of proceedings to enjoin the transfer.
 40




---



##### 




    
    discourage industry participants that might have otherwise been interested in acquiring
us from making a tender offer or proposing some other form of transaction that could
involve a premium price for our shares or otherwise be in the best interests of our
stockholders; and
    
    discourage investment in us by other investors who are telecommunications service
providers or who may be deemed to be affiliates of a telecommunications service provider.
  
    
    owns 10% or more of the total outstanding equity of the other party;
    
    has the power to vote 10% or more of the securities having ordinary voting power for the
election of the directors or management of the other party; or
    
    has the power to direct or cause the direction of the management and policies of the
other party.
  Holders of our options may have rescission rights against us, and we may be subject to
fines and sanctions under federal and state securities laws.
  41




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Item 4. Controls and Procedures
   42




---



##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings.
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   Item 3. Defaults upon Senior Securities.
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  43




---



##### 



Item 6. Exhibits
  Exhibit No.
    
    Description3.1
    
    Restated Certificate of Incorporation.*3.2
    
    Amended and Restated Bylaws.*4.1
    
    Specimen Class A Common Stock Certificate.*4.2
    
    Specimen Class B Common Stock Certificate.*4.3
    
    Stockholders Agreement, dated June 28, 2005, by and among NeuStar, Inc. and the stockholders named
therein.¢4.4
    
    Registration Rights Agreement, dated as of June 5, 2001, by
and among NeuStar, Inc. and the stockholders named therein.*4.5
    
    Form of Warrants dated December 7, 1999.^10.3.2
    
    Amendment to National Thousands-Block Pooling Administration
agreement awarded to NeuStar, Inc. by the Federal
Communications Commission.$10.3.3
    
    Amendment to National Thousands-Block Pooling Administration
agreement awarded to NeuStar, Inc. by the Federal
Communications Commission.^10.4.1
    
    Amendment to North American Numbering Plan Administrator
agreement awarded to NeuStar, Inc. by the Federal
Communications Commission. $10.5.1
    
    Amendment to .us Top-Level Domain Registry Management and
Coordination agreement awarded to NeuStar, Inc. by the
National Institute of Standards and Technology on behalf of
the Department of Commerce.^10.5.2
    
    Amendment to .us Top-Level Domain Registry Management and
Coordination agreement awarded to NeuStar, Inc. by the
National Institute of Standards and Technology on behalf of
the Department of Commerce.^31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.^31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.^32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.^
 
 ^
    
    Filed herewith.*
    
    Incorporated by reference to NeuStar, Inc.s registration statement on Form S-1 (File No.
333-123635).$
    
    Incorporated by reference to NeuStar, Inc.s report on Form 8-K, filed on September 15, 2005.¢
    
    Incorporated by reference to NeuStar, Inc.s quarterly report on Form 10-Q filed on August 15, 2005 (File No.
001-32548). 44




---



##### 



NeuStar, Inc.Date: November 10, 2005
    
    By:
    
    /s/ JEFFREY A. BABKAJeffrey A. BabkaChief Financial Officer(Principal Financial and Accounting Officerand Duly Authorized Officer)
 45