##### 



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 June 30, 2006
 OR
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 46000 Center Oak Plaza
Sterling, Virginia 20166
 (571) 434-5400
 þ o
  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, 2005 and June 30, 2006 (unaudited)
    3Unaudited Consolidated Statements of Operations for the three and six months ended June
     530, 2005 and  2006Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2005
     6and  2006Notes to Unaudited Consolidated Financial Statements
     7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
     20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
     29Item 4.
    
    Controls and Procedures
     29PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
     30Item 1A.
    
    Risk Factors
     30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
     30Item 3.
    
    Defaults upon Senior Securities
     30Item 4.
    
    Submission of Matters to a Vote of Security Holders
     30Item 5.
    
    Other Information
     31Item 6.
    
    Exhibits
     31Signatures
    
     31
 2




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##### 



PART I FINANCIAL INFORMATION
 Item 1. Financial Statements
 NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 December 31,
    
    
    June 30,2005
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,529
    
    
    $
    25,464Restricted cash
    
    
    374
    
    
    
    383Short-term investments
    
    
    75,946
    
    
    
    74,266Accounts receivable, net of allowance for doubtful accounts of $494 and
$741, respectively
    
    
    30,982
    
    
    
    43,871Unbilled receivables
    
    
    6,394
    
    
    
    1,064Notes receivable
    
    
    
    
    
    
    1,916Securitized notes receivable
    
    
    1,074
    
    
    
    Prepaid expenses and other current assets
    
    
    8,054
    
    
    
    7,283Deferred costs
    
    
    4,819
    
    
    
    6,177Income tax receivable
    
    
    14,595
    
    
    
    25,985Deferred tax asset
    
    
    12,216
    
    
    
    11,601Total current assets
    
    
    181,983
    
    
    
    198,010Property and equipment, net
    
    
    39,627
    
    
    
    38,630Goodwill
    
    
    51,495
    
    
    
    86,189Intangible assets, net
    
    
    2,655
    
    
    
    24,951Notes
receivable, long-term
    
    
    
    
    
    
    3,934Deferred costs, long-term
    
    
    5,454
    
    
    
    4,853Deferred tax asset, long-term
    
    
    
    
    
    
    8,946Other assets
    
    
    557
    
    
    
    297Total assets
    
    $
    281,771
    
    
    $
    365,810
 See accompanying notes.
 3




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##### 



NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 December 31,
    
    
    June 30,2005
    
    
    2006(unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,119
    
    
    $
    3,482Accrued expenses
    
    
    36,880
    
    
    
    28,719Deferred revenue
    
    
    20,006
    
    
    
    23,711Notes payable
    
    
    1,232
    
    
    
    1,160Capital lease obligations
    
    
    5,540
    
    
    
    4,697Accrued restructuring reserve
    
    
    536
    
    
    
    344Total current liabilities
    
    
    68,313
    
    
    
    62,113Deferred revenue, long-term
    
    
    18,463
    
    
    
    18,829Notes payable, long-term
    
    
    1,019
    
    
    
    416Capital lease obligations, long-term
    
    
    3,440
    
    
    
    1,237Accrued restructuring reserve, long-term
    
    
    2,572
    
    
    
    2,391Other liabilities
    
    
    500
    
    
    
    500Deferred tax liability
    
    
    1,197
    
    
    
    Total liabilities
    
    
    95,504
    
    
    
    85,486Minority interest
    
    
    104
    
    
    
    Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $0.001 par value;
100,000,000 shares authorized; No
shares issued or outstanding as of
December 31, 2005 and June 30, 2006
    
    
    
    
    
    
    Class A common stock, par value
$0.001; 200,000,000 shares authorized;
68,150,690 and 72,834,578 shares
issued and outstanding at December 31,
2005 and June 30, 2006, respectively
    
    
    68
    
    
    
    73Class B common stock, par value
$0.001; 100,000,000 shares authorized;
199,152 and 21,480 shares issued and
outstanding at December 31, 2005 and
June 30, 2006, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    163,741
    
    
    
    218,214Deferred stock compensation
    
    
    (1,446
    )
    
    
    Retained earnings
    
    
    23,800
    
    
    
    62,037Total stockholders equity
    
    
    186,163
    
    
    
    280,324Total liabilities and stockholders equity
    
    $
    281,771
    
    
    $
    365,810
 See accompanying notes.
 4




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##### 



NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Revenue:Addressing
    
    $
    18,854
    
    
    $
    23,448
    
    
    $
    38,575
    
    
    $
    46,862Interoperability
    
    
    13,490
    
    
    
    13,244
    
    
    
    26,577
    
    
    
    27,361Infrastructure and other
    
    
    29,952
    
    
    
    45,571
    
    
    
    54,936
    
    
    
    84,203Total revenue
    
    
    62,296
    
    
    
    82,263
    
    
    
    120,088
    
    
    
    158,426Operating expense:Cost of revenue (excluding depreciation
and amortization shown separately below)
    
    
    15,767
    
    
    
    19,956
    
    
    
    29,030
    
    
    
    40,831Sales and marketing
    
    
    7,571
    
    
    
    11,426
    
    
    
    14,589
    
    
    
    20,569Research and development
    
    
    2,878
    
    
    
    4,016
    
    
    
    5,448
    
    
    
    8,157General and administrative
    
    
    8,829
    
    
    
    8,304
    
    
    
    16,419
    
    
    
    15,585Depreciation and amortization
    
    
    3,935
    
    
    
    5,833
    
    
    
    7,517
    
    
    
    10,281Restructuring charges (recoveries)
    
    
    300
    
    
    
    
    
    
    
    (406
    )
    
    
    39,280
    
    
    
    49,535
    
    
    
    72,597
    
    
    
    95,423Income from operations
    
    
    23,016
    
    
    
    32,728
    
    
    
    47,491
    
    
    
    63,003Other (expense) income:Interest expense
    
    
    (586
    )
    
    
    (340
    )
    
    
    (1,212
    )
    
    
    (687
    )Interest income
    
    
    722
    
    
    
    732
    
    
    
    1,197
    
    
    
    1,401Income before minority interest and income
taxes
    
    
    23,152
    
    
    
    33,120
    
    
    
    47,476
    
    
    
    63,717Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95
    )Income before income taxes
    
    
    23,152
    
    
    
    33,120
    
    
    
    47,476
    
    
    
    63,622Provision for income taxes
    
    
    9,269
    
    
    
    13,168
    
    
    
    18,962
    
    
    
    25,385Net income
    
    
    13,883
    
    
    
    19,952
    
    
    
    28,514
    
    
    
    38,237Dividends on and accretion of preferred stock
    
    
    (2,170
    )
    
    
    
    
    
    
    (4,313
    )
    
    
    Net income attributable to common stockholders
    
    $
    11,713
    
    
    $
    19,952
    
    
    $
    24,201
    
    
    $
    38,237Net income attributable to common
stockholders per common share:Basic
    
    $
    1.45
    
    
    $
    0.28
    
    
    $
    3.43
    
    
    $
    0.54Diluted
    
    $
    0.18
    
    
    $
    0.26
    
    
    $
    0.37
    
    
    $
    0.49Weighted average common shares outstanding:Basic
    
    
    8,097
    
    
    
    72,135
    
    
    
    7,055
    
    
    
    71,242Diluted
    
    
    78,039
    
    
    
    78,200
    
    
    
    76,502
    
    
    
    77,934
 See accompanying notes.
 5




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##### 



NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedJune 30,2005
    
    
    2006Operating activities:Net income
    
    $
    28,514
    
    
    $
    38,237Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    7,517
    
    
    
    10,281Stock-based compensation
    
    
    2,431
    
    
    
    5,355Amortization of deferred financing costs
    
    
    38
    
    
    
    5Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    (38,772
    )Deferred income taxes
    
    
    1,363
    
    
    
    (2,591
    )Non-cash restructuring recoveries
    
    
    (406
    )
    
    
    Provision for doubtful accounts
    
    
    600
    
    
    
    547Minority interest
    
    
    
    
    
    
    95Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (1,485
    )
    
    
    (12,502
    )Unbilled receivables
    
    
    (2,272
    )
    
    
    5,690Notes and securitized notes receivable
    
    
    2,568
    
    
    
    (4,776
    )Prepaid expenses and other current assets
    
    
    964
    
    
    
    1,069Deferred costs
    
    
    (2,875
    )
    
    
    (757
    )Income tax receivable
    
    
    
    
    
    
    27,382Other assets
    
    
    (41
    )
    
    
    318Accounts payable and accrued expenses
    
    
    (3,328
    )
    
    
    (10,097
    )Income taxes payable
    
    
    3,923
    
    
    
    Accrued restructuring reserve
    
    
    (627
    )
    
    
    (373
    )Customer credits
    
    
    (7,937
    )
    
    
    Deferred revenue
    
    
    7,291
    
    
    
    3,599Net cash provided by operating activities
    
    
    36,238
    
    
    
    22,710Investing activities:Purchases of property and equipment
    
    
    (7,400
    )
    
    
    (6,235
    )(Purchases) sales of investments, net
    
    
    (21,288
    )
    
    
    1,680Businesses acquired, net of cash
    
    
    (2,164
    )
    
    
    (66,925
    )Net cash used in investing activities
    
    
    (30,852
    )
    
    
    (71,480
    )Financing activities:Release (disbursement) of restricted cash
    
    
    2,920
    
    
    
    (9
    )Principal repayments on notes payable
    
    
    (3,220
    )
    
    
    (809
    )Principal repayments on capital lease obligations
    
    
    (3,085
    )
    
    
    (3,046
    )Proceeds from exercise of common stock options
    
    
    246
    
    
    
    11,797Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    38,772Payment of preferred stock dividends
    
    
    (6,264
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (9,403
    )
    
    
    46,705Net decrease in cash and cash equivalents
    
    
    (4,017
    )
    
    
    (2,065
    )Cash and cash equivalents at beginning of period
    
    
    19,019
    
    
    
    27,529Cash and cash equivalents at end of period
    
    $
    15,002
    
    
    $
    25,464
 See accompanying notes.
 6




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2006
 1. DESCRIPTION OF BUSINESS AND ORGANIZATION
   
    
    Addressing.The Company enables CSPs to use critical, shared
addressing resources, such as telephone numbers, Internet domain
names, and U.S. 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.
    7




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Unaudited Interim Financial Information
   Use of Estimates
  Goodwill
 Goodwill and Other Intangible Assets
  Identifiable Intangible Assets
 Accounting for Impairment or Disposal of Long-Lived Assets
  Years
    
    
    MethodAcquired technologies
    
    
    3 to 4
    
    
    Straight-lineCustomer lists
    
    
    3 to 7
    
    
    VariousTrade name
    
    
    3
    
    
    Straight-line
  8




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Impairment of Long-Lived Assets
  Revenue Recognition
 Revenue Recognition.
  Addressing
    9




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Interoperability
  Infrastructure and Other
  Significant Contracts
   10




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Cost of Revenue and Deferred Costs
   Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards
 Basic and Diluted Net Income Attributable to Common Stockholders per Common Share
  11




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Income Taxes
 Accounting for Income
Taxes .
 Comprehensive Net Income
  Recent Accounting Pronouncements
 Accounting for Uncertainty in
Income Taxes Accounting for Contingencies
 3. ACQUISITIONS
 NeuLevel, Inc.
 Business Combinations
 UltraDNS Corporation
   12




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Accounts receivable
    
    $
    1,221Unbilled receivables
    
    
    360Prepaid expenses and other current assets
    
    
    298Property and equipment
    
    
    1,020Other assets
    
    
    63Deferred tax assets, net
    
    
    8,505Accounts payable
    
    
    (173
    )Accrued expenses
    
    
    (1,175
    )Deferred revenue
    
    
    (472
    )Notes payable
    
    
    (134
    )Other liabilities
    
    
    (14
    )Net tangible assets acquired
    
    
    9,499Definite-lived intangible assets acquired
    
    
    20,000Goodwill
    
    
    33,126Total estimated purchase price
    
    $
    62,625
     13




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006(unaudited)
(in thousands, except per share data)Total revenue
    
    $
    64,965
    
    
    $
    83,365
    
    
    $
    125,083
    
    
    $
    163,653Net income
    
    $
    12,875
    
    
    $
    20,069
    
    
    $
    26,636
    
    
    $
    37,608Net income
attributable to
common stockholders
per common share:Basic
    
    $
    1.32
    
    
    $
    0.28
    
    
    $
    3.16
    
    
    $
    0.53Diluted
    
    $
    0.16
    
    
    $
    0.26
    
    
    $
    0.35
    
    
    $
    0.48
 4. GOODWILL AND INTANGIBLE ASSETS
  December 31,
    
    
    June 30,2005
    
    
    2006(unaudited)Goodwill
    
    $
    51,495
    
    
    $
    86,189
  Weighted-AverageDecember 31,
    
    
    June 30,
    
    
    Amortization Period2005
    
    
    2006
    
    
    (In Years)(unaudited)Intangible assets:Customer lists
    
    $
    3,566
    
    
    $
    22,667
    
    
    6.2Accumulated amortization
    
    
    (1,441
    )
    
    
    (2,762
    )Customer lists, net
    
    
    2,125
    
    
    
    19,905Acquired technology
    
    
    2,208
    
    
    
    7,007
    
    
    3.2Accumulated amortization
    
    
    (1,678
    )
    
    
    (2,148
    )Acquired technology, net
    
    
    530
    
    
    
    4,859Trade names
    
    
    
    
    
    
    200
    
    
    3.0Accumulated amortization
    
    
    
    
    
    
    (13
    )Trade names, net
    
    
    
    
    
    
    187Intangible assets, net
    
    $
    2,655
    
    
    $
    24,951
 14




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  5. STOCKHOLDERS EQUITY
 Stock-Based Compensation
      15




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005(in thousands, exceptper share data)Pro forma basic net income attributable to common stockholders:Basic net income attributable to common stockholders, as reported
    
    $
    11,713
    
    
    $
    24,201Add: stock-based compensation expense included in reported net
income attributable to common stockholders
    
    
    66
    
    
    
    1,468Deduct: total stock-based compensation expense determined under
fair value-based method for all awards
    
    
    (901
    )
    
    
    (3,806
    )Pro forma basic net income attributable to common stockholders
    
    $
    10,878
    
    
    $
    21,863Pro forma diluted net income attributable to common stockholders:Basic net income attributable to common stockholders, as reported
    
    $
    11,713
    
    
    $
    24,201Dividends on and accretion of convertible preferred stock
    
    
    2,170
    
    
    
    4,313Diluted net income attributable to common stockholders
    
    
    13,883
    
    
    
    28,514Add: stock-based compensation expense included in reported net
income attributable to common stockholders
    
    
    66
    
    
    
    1,468Deduct: total stock-based compensation expense determined under
fair value-based method for all awards
    
    
    (901
    )
    
    
    (3,806
    )Pro forma diluted net income attributable to common stockholders
    
    $
    13,048
    
    
    $
    26,176Net income attributable to common stockholders per common share:Basic  as reported
    
    $
    1.45
    
    
    $
    3.43Basic  pro forma
    
    $
    1.34
    
    
    $
    3.10Diluted  as reported
    
    $
    0.18
    
    
    $
    0.37Diluted  pro forma
    
    $
    0.17
    
    
    $
    0.34
   16




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2006Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    36.54
    %
    
    
    38.66
    %Risk-free interest rate
    
    
    4.95
    %
    
    
    4.67
    %Expected
life of options (in years)
    
    4.61
    
    
    4.56
    Share-Based
Payment
   Weighted-AverageShares
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    12,621,553
    
    
    $
    4.81Options granted
    
    
    1,401,500
    
    
    
    31.06Options exercised
    
    
    (4,417,726
    )
    
    
    2.67Options canceled
    
    
    (153,798
    )
    
    
    8.16Outstanding at June 30, 2006
    
    
    9,451,529
    
    
    
    9.65Exercisable at June 30, 2006
    
    
    5,164,273
    
    
    
    3.38
 17




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Weighted-AverageGrant DateShares
    
    Fair ValueNon-vested December 31, 2005
    
    
    5,000
    
    
    $
    31.95Granted
    
    
    88,490
    
    
    
    31.35Vested
    
    
    3⁄4
    
    
    
    3⁄4Forfeited
    
    
    3⁄4
    
    
    
    3⁄4Non-vested June 30, 2006
    
    
    93,490
    
    
    
    31.39
  18




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##### 



NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 6. BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Basic net income attributable to common
stockholders:Net income
    
    $
    13,883
    
    
    $
    19,952
    
    
    $
    28,514
    
    
    $
    38,237Dividends on and accretion of
convertible preferred stock
    
    
    (2,170
    )
    
    
    
    
    
    
    (4,313
    )
    
    
    Basic net income attributable to common
stockholders
    
    $
    11,713
    
    
    $
    19,952
    
    
    $
    24,201
    
    
    $
    38,237Basic net income attributable to common
stockholders per common share
    
    $
    1.45
    
    
    $
    0.28
    
    
    $
    3.43
    
    
    $
    0.54Diluted net income attributable to common
stockholders:Basic net income attributable to
common stockholders
    
    $
    11,713
    
    
    $
    19,952
    
    
    $
    24,201
    
    
    $
    38,237Dividends on and accretion of
convertible preferred stock
    
    
    2,170
    
    
    
    
    
    
    
    4,313
    
    
    
    Diluted net income attributable to common
stockholders
    
    $
    13,883
    
    
    $
    19,952
    
    
    $
    28,514
    
    
    $
    38,237Diluted net income attributable to common
stockholders per common share
    
    $
    0.18
    
    
    $
    0.26
    
    
    $
    0.37
    
    
    $
    0.49Weighted average common shares outstanding
 basic
    
    
    8,097
    
    
    
    72,135
    
    
    
    7,055
    
    
    
    71,242Dilutive effect of:Stock options for the purchase of common
stock
    
    
    10,372
    
    
    
    6,065
    
    
    
    9,758
    
    
    
    6,692Conversion of preferred stock and
accrued dividends payable into common
stock
    
    
    53,231
    
    
    
    
    
    
    
    53,358
    
    
    
    Warrants for the purchase of common stock
    
    
    6,339
    
    
    
    
    
    
    
    6,331
    
    
    
    Weighted average common shares outstanding
 diluted
    
    
    78,039
    
    
    
    78,200
    
    
    
    76,502
    
    
    
    77,934
 7. SUBSEQUENT EVENT
  19




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
    Critical Accounting Policies and Estimates
  20




---



##### 



Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash Flows
   Share-Based Payment
 Acquisitions
    21




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##### 



Consolidated Results of Operations
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2006
  Three Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005 vs. 2006$
    
    
    $
    
    
    $ Change
    
    
    % Change(in thousands, except per share data)Revenue:Addressing
    
    $
    18,854
    
    
    $
    23,448
    
    
    $
    4,594
    
    
    
    24.4
    %Interoperability
    
    
    13,490
    
    
    
    13,244
    
    
    
    (246
    )
    
    
    (1.8
    )Infrastructure and other
    
    
    29,952
    
    
    
    45,571
    
    
    
    15,619
    
    
    
    52.1Total revenue
    
    
    62,296
    
    
    
    82,263
    
    
    
    19,967
    
    
    
    32.1Operating expense:Cost of revenue (excluding depreciation
and amortization shown separately below)
    
    
    15,767
    
    
    
    19,956
    
    
    
    4,189
    
    
    
    26.6Sales and marketing
    
    
    7,571
    
    
    
    11,426
    
    
    
    3,855
    
    
    
    50.9Research and development
    
    
    2,878
    
    
    
    4,016
    
    
    
    1,138
    
    
    
    39.5General and administrative
    
    
    8,829
    
    
    
    8,304
    
    
    
    (525
    )
    
    
    (5.9
    )Depreciation and amortization
    
    
    3,935
    
    
    
    5,833
    
    
    
    1,898
    
    
    
    48.2Restructuring charges
    
    
    300
    
    
    
    3⁄4
    
    
    
    (300
    )
    
    
    (100.0
    )39,280
    
    
    
    49,535
    
    
    
    10,255
    
    
    
    26.1Income from operations
    
    
    23,016
    
    
    
    32,728
    
    
    
    9,712
    
    
    
    42.2Other (expense) income:Interest expense
    
    
    (586
    )
    
    
    (340
    )
    
    
    246
    
    
    
    (42.0
    )Interest income
    
    
    722
    
    
    
    732
    
    
    
    10
    
    
    
    1.4Income before income taxes
    
    
    23,152
    
    
    
    33,120
    
    
    
    9,968
    
    
    
    43.1Provision for income taxes
    
    
    9,269
    
    
    
    13,168
    
    
    
    3,899
    
    
    
    42.1Net income
    
    
    13,883
    
    
    
    19,952
    
    
    
    6,069
    
    
    
    43.7Dividends on and accretion of preferred stock
    
    
    (2,170
    )
    
    
    3⁄4
    
    
    
    2,170
    
    
    
    (100.0
    )Net income attributable to common stockholders
    
    $
    11,713
    
    
    $
    19,952
    
    
    $
    8,239
    
    
    
    70.3
    %Net income attributable to common stockholders
per common share:Basic
    
    $
    1.45
    
    
    $
    0.28Diluted
    
    $
    0.18
    
    
    $
    0.26Weighted average common shares outstanding:Basic
    
    
    8,097
    
    
    
    72,135Diluted
    
    
    78,039
    
    
    
    78,200
 22




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##### 



Revenue
 Total revenue
 Addressing
 Interoperability
 Infrastructure
and other
 Expense
 Cost of revenue
 Sales and marketing
 Research and development
 23




---



##### 



General and administrative.
 Depreciation and amortization
 Restructuring charges
 Interest
expense
 Interest income
 Provision for income taxes
 24




---



##### 



Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2006
  Six Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005 vs. 2006$
    
    
    $
    
    
    $ Change
    
    
    % Change(in thousands, except per share data)Revenue:Addressing
    
    $
    38,575
    
    
    $
    46,862
    
    
    $
    8,287
    
    
    
    21.5
    %Interoperability
    
    
    26,577
    
    
    
    27,361
    
    
    
    784
    
    
    
    2.9Infrastructure and other
    
    
    54,936
    
    
    
    84,203
    
    
    
    29,267
    
    
    
    53.3Total revenue
    
    
    120,088
    
    
    
    158,426
    
    
    
    38,338
    
    
    
    31.9Operating expense:Cost of revenue (excluding depreciation and
amortization shown separately below)
    
    
    29,030
    
    
    
    40,831
    
    
    
    11,801
    
    
    
    40.7Sales and marketing
    
    
    14,589
    
    
    
    20,569
    
    
    
    5,980
    
    
    
    41.0Research and development
    
    
    5,448
    
    
    
    8,157
    
    
    
    2,709
    
    
    
    49.7General and administrative
    
    
    16,419
    
    
    
    15,585
    
    
    
    (834
    )
    
    
    (5.1
    )Depreciation and amortization
    
    
    7,517
    
    
    
    10,281
    
    
    
    2,764
    
    
    
    36.8Restructuring recoveries
    
    
    (406
    )
    
    
    3⁄4
    
    
    
    406
    
    
    
    (100.0
    )72,597
    
    
    
    95,423
    
    
    
    22,826
    
    
    
    31.4Income from operations
    
    
    47,491
    
    
    
    63,003
    
    
    
    15,512
    
    
    
    32.7Other (expense) income:Interest expense
    
    
    (1,212
    )
    
    
    (687
    )
    
    
    525
    
    
    
    (43.3
    )Interest income
    
    
    1,197
    
    
    
    1,401
    
    
    
    204
    
    
    
    17.0Income before minority interest and income taxes
    
    
    47,476
    
    
    
    63,717
    
    
    
    16,241
    
    
    
    34.2Minority interest
    
    
    3⁄4
    
    
    
    (95
    )
    
    
    (95
    )
    
    
    3⁄4Income before income taxes
    
    
    47,476
    
    
    
    63,622
    
    
    
    16,146
    
    
    
    34.0Provision for income taxes
    
    
    18,962
    
    
    
    25,385
    
    
    
    6,423
    
    
    
    33.9Net income
    
    
    28,514
    
    
    
    38,237
    
    
    
    9,723
    
    
    
    34.1Dividends on and accretion of preferred stock
    
    
    (4,313
    )
    
    
    3⁄4
    
    
    
    4,313
    
    
    
    (100.0
    )Net income attributable to common stockholders
    
    $
    24,201
    
    
    $
    38,237
    
    
    $
    14,036
    
    
    
    58.0
    %Net income attributable to common stockholders
per common share:Basic
    
    $
    3.43
    
    
    $
    0.54Diluted
    
    $
    0.37
    
    
    $
    0.49Weighted average common shares outstanding:Basic
    
    
    7,055
    
    
    
    71,242Diluted
    
    
    76,502
    
    
    
    77,934
 Revenue
 Total revenue.
 25




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##### 



Addressing.
 Interoperability.
 Infrastructure and other.
 Expense
 Cost of revenue.
 Sales and marketing
 Research and development
 General and administrative.
 26




---



##### 



Depreciation and amortization $
 Restructuring recoveries
 Interest
expense
 Interest income
 Provision for income taxes
 Liquidity and Capital Resources
      27




---



##### 



Discussion of Cash Flows
 Cash flows from operations
  Cash flows from investing
  Cash flows from financing
  Recent
Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Contingencies
 Off-Balance Sheet Arrangements
  28




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##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Item 4. Controls and Procedures
    29




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##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
   Item 1A. Risk Factors
  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
     30




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##### 



Election of DirectorsNominee
    
    For*
    
    Withheld*Andre Dahan
    
    
    66,383,860
    
    
    
    63,066Ross Ireland
    
    
    66,383,860
    
    
    
    63,066
 For*
    
    Against*
    
    Abstain*Ratification of appointment of
Ernst & Young LLP as independent
registered public accounting firm
for the fiscal year ended December
31, 2006
    
    
    66,169,262
    
    
    
    263,113
    
    
    
    14,551
 
 *
    
    The votes cast are an aggregate of the holders of our Class A common stock and Class B
common stock, which voted together as a single class on the matters put up for a vote at our 2006
Annual Meeting of Stockholders. Item 5. Other Information
  Item 6. Exhibits
 Exhibit No.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of April 19, 2006, by
and among NeuStar, Inc., UDNS Merger Sub, Inc., UltraDNS
Corporation, and Ron Lachman as the Holder Representative,
incorporated herein by reference to NeuStar, Inc.s report on
Form 8-K, filed on April 25, 2006 (File No. 001-32548) (the schedules and exhibits to this agreement
have been omitted pursuant to Item 601(b)(2) of Regulation S-K*).3.1
    
    Restated Certificate of Incorporation, incorporated herein
by reference to Exhibit 3.1 to Amendment No. 7 to NeuStars
Registration Statement on Form S-1, filed June 28, 2005 (File
No. 333-123635).3.2
    
    Amended and Restated Bylaws,
incorporated herein by reference to Exhibit 3.2 to Amendment
No. 7 to NeuStars Registration Statement on Form S-1, filed
June 28, 2005 (File No. 333-123635).10.1.2
    
    Amendments to the contractor services agreement by and
between NeuStar, Inc. and North American Portability
Management LLC, as amended.10.1.3
    
    Amendments to the contractor services
agreement by and between NeuStar, Inc. and North American Portability
Management LLC, as amended.**10.2.3
    
    Amendment to the contractor services agreement between
Canadian LNP Consortium Inc. and NeuStar, Inc.**10.3.4
    
    Amendments to National Thousands-Block Pooling Administration
agreement awarded to NeuStar, Inc. by the Federal
Communications Commission.10.4.2
    
    Amendments to North American Numbering Plan Administrator
agreement awarded to NeuStar, Inc. by the Federal
Communications Commission.10.48
    
    Form of Indemnification Agreement.10.51
    
    Summary Description of Non-Management Director Compensation,
incorporated herein by reference to Exhibit 99.1 to NeuStars
report on Form 8-K, filed April 14, 2006 (File No.
001-32548).
 31




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##### 



Exhibit No.
    
    Description10.52
    
    Form of Directors Restricted Stock Unit Agreement,
incorporated herein by reference to Exhibit 99.2 to NeuStars
report on Form 8-K, filed April 14, 2006 (File No.
001-32548).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.
 
 
    
    Compensatory arrangement.*
    
    Neustar, Inc. hereby agrees to furnish a copy of the omitted schedules and exhibits to the SEC upon request.**
    
    Confidential treatment has been requested or granted
for portions of this document. The omitted portions
of this document have been filed with the Securities
and Exchange Commission. 32




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##### 



NeuStar, Inc.Date: August 11, 2006
    
    By:
    
    /s/ Jeffrey A. Babka

Jeffrey A. Babka
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
 33