Costar Group Inc 10-k (annual Reports) 2009-02-24

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 Commission file number 0-24531

CoStar Group, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization)

52-2091509 (I.R.S. Employer Identification No.)

2 Bethesda Metro Center, 10th Floor Bethesda, Maryland 20814 (Address of principal executive offices) (zip code) (301) 215-8300 Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.01 par value NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o x

No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements of the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. Large accelerated filer o Non-accelerated filer o

Accelerated filer x Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x Based on the closing price of the common stock on June 30, 2008 on the Nasdaq Stock Market®, Nasdaq Global Select Market®, the aggregate market value of registrant’s common stock held by non-affiliates of the registrant was approximately $460 million. As of February 17, 2009, there were 19,729,419 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within

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120 days after the end of the registrant’s fiscal year ended December 31, 2008, are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15.

Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders

3 13 20 20 20 20

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial and Operating Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information

21 23 24 36 37 37 37 38

Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services

39 39 39 39 39

Exhibits and Financial Statement Schedules Signatures Index to Exhibits Index to Consolidated Financial Statements

39 40 41 F-1

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PART I Item 1.

Business

(In this report, the words “we,” “our,” “us,” “CoStar” or the “Company” refer to CoStar Group, Inc. and its direct and indirect subsidiaries. This report also refers to our websites, but information contained on those sites is not part of this report.) CoStar Group, Inc., a Delaware corporation, is the number one provider of information/marketing services to the commercial real estate industry in the United States (“U.S.”) and United Kingdom (“U.K.”) based on the fact that we offer the most comprehensive commercial real estate database available, have the largest research department in the industry, provide more information/marketing services than any of our competitors and believe we generate more revenues than any of our competitors. CoStar’s integrated suite of services offers customers online access to the most comprehensive database of commercial real estate information, which has been researched and verified by our team of researchers, currently covering the U.S., as well as London and other parts of the U.K. and parts of France. Prior to 2007, CoStar operated within one segment. Due to the increased size, complexity and funding requirements associated with our international expansion, in 2007 we began to manage our business geographically in two operating segments, with our primary areas of measurement and decision-making being the U.S. and International, which includes the U.K. and France. Since our founding in 1987, CoStar’s strategy has been to provide commercial real estate professionals with critical knowledge to explore and complete transactions, by offering the most comprehensive, timely and standardized information on U.S. commercial real estate. As a result of our January 2003 acquisition of Focus Information Limited (now, CoStar U.K. Limited), June 2004 acquisition of Scottish Property Network, December 2006 acquisition of Grecam S.A.S., and February 2007 acquisition of Property Investment Exchange Limited, we have extended our offering of comprehensive commercial real estate information to include London and other parts of the U.K. and parts of France. Information about CoStar’s revenues from, and long-lived assets located in, foreign countries is included in Notes 2 and 12 to our consolidated financial statements. CoStar’s revenues, net income, assets and liabilities, broken out by segment are set forth in Note 12 to our consolidated financial statements. Information about risks attendant to our foreign operations is included in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” We deliver our content to our U.S. customers via an integrated suite of online service offerings that includes information about space available for lease, comparable sales information, tenant information, information about properties for sale, internet marketing services, property information for clients’ websites, information about industry professionals and their business relationships, analytic information, data integration, and industry news. We have created and are continually improving a standardized information platform where the commercial real estate industry and related businesses can continuously interact and easily facilitate transactions due to the efficient exchange of accurate information we have supplied. We have a number of assets that provide a unique foundation for our standardized platform, including the most comprehensive proprietary database in the industry; the largest research department in the industry; proprietary data collection, information management and quality control systems; a large in-house product development team; a broad suite of web-based information/marketing services; and a large base of clients. Our database has been developed and enhanced for more than 21 years by a research department that makes thousands of daily database updates. In addition to our internal efforts to grow the database, we have obtained and assimilated over 51 proprietary databases. CoStar intends to continue to grow its standardized platform of commercial real estate information/marketing services. In 2004, CoStar began research for a 21-market U.S. expansion effort. By the end of the first quarter of 2006, CoStar had successfully launched service in each of those 21 markets. In addition, following our acquisition of National Research Bureau in January 2005, we launched various research initiatives as part of our expansion into real estate information for retail properties. We launched the new retail component of our flagship product, CoStar Property Professional, in May 2006. In July 2006, we announced our intention to commence actively researching commercial properties in approximately 81 new Core Based Statistical Areas (“CBSAs”) across the U.S. in an effort to expand the geographical coverage of our service offerings, including our new retail service. In the fourth quarter of 2007, we released our CoStar Property Professional service in the 81 new CBSAs across the U.S. In 2008, we released CoStar Showcase, an internet marketing service that provides commercial real estate professionals the opportunity to make their listings accessible to all visitors to our public website, www.CoStar.com. 3

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CoStar also intends to continue to grow and expand the coverage of its service offerings within the U.K. In December 2006, CoStar’s U.K. Subsidiary, CoStar Limited, acquired Grecam S.A.S., a provider of commercial property information and market-level surveys, studies and consulting services, located in Paris, France. In February 2007, CoStar Limited also acquired Property Investment Exchange Limited, a provider of commercial property information and operator of an online investment property exchange located in London, England. CoStar intends to integrate its U.K. and French operations more fully with its U.S. operations and eventually to introduce a consistent international platform of service offerings. Further information about CoStar’s acquisitions is included in Note 3 to our consolidated financial statements. Our subscription-based information/marketing services, consisting primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional and FOCUS services, currently generate more then 90% of our total revenues. Our contracts for our subscription-based information/marketing services typically have a minimum term of one year and renew automatically. Upon renewal, subscription contract rates may increase in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than fees based on actual system usage. Contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography and the number of services to which a client subscribes. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. Industry Overview The market for commercial real estate information is vast based on the variety, volume and value of transactions related to commercial real estate. Each transaction has multiple participants and multiple information requirements, and in order to facilitate transactions, industry participants must have extensive, accurate and current information. Members of the commercial real estate and related business community require daily access to current data such as space availability, properties for sale, rental rates, vacancy rates, tenant movements, sales comparables, supply, new construction, absorption rates and other important market developments to carry out their businesses effectively. There is a strong need for an efficient marketplace, where commercial real estate professionals can exchange information, evaluate opportunities using standardized data and interact with each other on a continuous basis. A large number of parties involved in the commercial real estate and related business community make use of the services we provide in order to obtain information they need to conduct their businesses, including: • • • • • • • • • • •

Sales and leasing brokers Property owners Property managers Design and construction professionals Real estate developers Real estate investment trust managers Investment bankers Commercial bankers Mortgage bankers Mortgage brokers Retailers

• • • •

Government agencies Mortgage-backed security issuers Appraisers Pension fund managers

• •

Reporters Tenant vendors

• • • • •

Building services vendors Communications providers Insurance companies’ managers Institutional advisors Investors and asset managers

The commercial real estate and related business community generally has operated in an inefficient marketplace because of the fragmented approach to gathering and exchanging information within the marketplace. Various organizations, including hundreds of brokerage firms, directory publishers and local research companies, collect data on specific markets and develop software to analyze the information they have independently gathered. This highly fragmented methodology has resulted in duplication of effort in the collection and analysis of information, excessive internal cost and the creation of non-standardized data containing varying degrees of accuracy and comprehensiveness, resulting in a formidable information gap. 4

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The creation of a standardized information platform for commercial real estate requires an infrastructure including a standardized database, accurate and comprehensive research capabilities, easy to use technology and intensive participant interaction. By combining its extensive database, approximately 900 researchers and outside contractors, technological expertise and broad customer base, CoStar believes that it has created such a platform. The U.S. and global economies have changed adversely over the past year or more, and the commercial real estate industry has been negatively impacted. The commercial real estate market has seen a reduction in property sales and leasing activity, lower absorption rates, climbing vacancy rates and decreases in rental rates and sales prices. The full extent of the impact of our current financial crisis is not yet clear. As our customers continue to look for ways to reduce spending, we may continue to see reduced demand for our information/marketing services. However, we believe that even in a weakened economy there is a continuing need for accurate, standardized commercial real estate information/marketing services. We believe that access to continuously researched verified commercial real estate information becomes even more valuable in a down market, as industry players assess where market conditions are heading, how their businesses should adapt, determine what properties are worth, and try to market their properties, among other things. Moreover, outsourcing the labor-intensive task of conducting basic real estate research may result in cost savings for our clients. CoStar’s Comprehensive Database CoStar has spent more than 21 years building and acquiring a database of commercial real estate information, which includes information on leasing, sales, comparable sales, tenants, and demand statistics, as well as digital images. As of January 30, 2009, our database of real estate information covered the U.S., as well as London, England and other parts of the U.K. and parts of France, and contained: • • • • • •

More than 1.1 million sale and lease listings; Over 3.2 million total properties; Over 8.9 billion square feet of sale and lease listings; Over 5.7 million tenants; More than 1.3 million sales transactions valued in the aggregate at over $3.1 trillion; and Approximately 7.6 million digital attachments, including building photographs, aerial photographs, plat maps and floor plans.

This highly complex database is comprised of hundreds of data fields, tracking such categories as: • • • • • • • • •

Location Site and zoning information Building characteristics Space availability Tax assessments Ownership Sales and lease comparables Space requirements Number of retail stores

• • • • • • • • •

Mortgage and deed information For-sale information Income and expense histories Tenant names Lease expirations Contact information Historical trends Demographic information Retail sales per square foot

CoStar Research We have developed a sophisticated data collection organization utilizing a multi-faceted research process. In 2008, our full time researchers and contractors drove millions of miles, conducted hundreds of thousands of on-site building inspections, and conducted millions of interviews of brokers, owners and tenants. Research Department. As of January 30, 2009, we have approximately 900 commercial real estate research professionals and outside contractors performing research. Our research professionals undergo an extensive training program so that we can maintain consistent research methods and processes throughout our research department. Our researchers collect and analyze commercial real estate information through millions of phone calls, e-mails, internet updates and faxes each year, in addition to field inspections, public records review, news monitoring and direct mail. Each researcher is responsible for maintaining the accuracy and reliability of database information. As part of their update process, researchers develop cooperative relationships with industry professionals that allow them to gather useful information. Because of the importance commercial real estate professionals place on our data and our prominent position in the industry, many of these professionals routinely take the initiative and proactively report available space and transactions to our researchers. 5

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CoStar has an extensive field research effort that includes physical inspection of properties in order to research new markets, find additional inventory, photograph properties and verify existing information. CoStar utilizes 147 high-tech field research vehicles in 41 states and the U.K. Of these vehicles, 100 are custom-designed energy efficient hybrid cars that are equipped with computers, proprietary Global Positioning System tracking software, high resolution digital cameras and handheld laser instruments to help precisely measure buildings, geo-code them and position them on digital maps. Some of our researchers also use custom-designed trucks with the same equipment as well as pneumatic masts that extend up to an elevation of twenty-five feet to allow for unobstructed building photographs from “birds-eye” views. Each CoStar vehicle uses wireless technology to track and transmit field data. A typical site inspection consists of photographing the building, measuring the building, geo-coding the building, capturing “For Sale” or “For Lease” sign information, counting parking spaces, assessing property condition and construction, and gathering tenant information. Certain researchers canvass properties, interviewing tenants suite by suite. In addition, many of our field researchers are photographers who take photographs of commercial real estate properties to add to CoStar’s database of digital images. Data and Image Providers. We license a small portion of our data and images from public record providers and third party data sources. Licensing agreements with these entities provide for our use of a variety of commercial real estate information, including property ownership, tenant information, demographic information, maps and aerial photographs, all of which enhance various CoStar services. These license agreements generally grant us a non-exclusive license to use the data and images in the creation and supplementation of our information/marketing services and include what we believe are standard terms, such as a contract term ranging from one to five years, automatic renewal of the contract and fixed periodic license fees or a combination of fixed periodic license fees plus additional fees based upon our usage. Management and Quality Control Systems. Our research processes include automated and non-automated controls to ensure the integrity of the data collection process. A large number of automated data quality tests check for potential errors, including occupancy date conflicts, available square footage greater than building area, typical floor space greater than land area and expired leases. We also monitor changes to critical fields of information to ensure all information is kept in compliance with our standard definitions and methodology. Our non-automated quality control procedures include: •calling our information sources on recently updated properties to re-verify information; •reviewing calls our researchers made to their industry contacts to ensure data reported to the researcher is entered correctly into the database; •performing periodic research audits and field checks to determine if we correctly canvassed buildings; •providing training and retraining to our research professionals to ensure accurate data compilation; and •compiling measurable performance metrics for research teams and managers for feedback on data quality. Finally, one of the most important and effective quality control measures we rely on is feedback provided by the commercial real estate professionals using our data every day. Proprietary Technology As of January 30, 2009, CoStar had a staff of 90 product development, database and network professionals. CoStar’s information technology professionals focus on developing new services for our customers and delivering research automation tools that improve the quality of our data and increase the efficiency of our research analysts. 6

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Our information technology team is responsible for developing and maintaining CoStar products, including CoStar Property Professional, CoStar Property Express, CoStar COMPS, CoStar Tenant, CoStar Showcase, CoStar Commercial MLS and CoStar Connect, as well as our international products. In 2006, CoStar released a major upgrade to its CoStar COMPS service that provides customers with over 100 improvements, including access to for sale information, aerials and enhanced mapping. In 2007, to better support our retail customers, we added significant features to CoStar Property Professional including tenant proximity and demographic search capability, mapping layers, detailed retail tenant information and demographics. In 2008, CoStar released CoStar Showcase, an internet marketing service that provides commercial real estate professionals the opportunity to make their listings accessible to all visitors to our public website, www.CoStar.com. CoStar has also begun development of an international platform, which will allow CoStar to offer CoStar Property Professional in international countries. Our information technology team is responsible for developing the infrastructure necessary to support CoStar’s business processes, our comprehensive database of commercial real estate information/marketing services and our extensive image library. The team implements technologies and systems that introduce efficient workflows and controls that increase the production capacity of our research teams and improve the quality of our data. Over the years, the team has developed data collection and quality control mechanisms that we believe are unique to the commercial real estate industry. The team continues to develop and modify our enterprise information management system that integrates CoStar sales, research, field research, customer support and accounting information. We use this system to maintain our commercial real estate research information, manage contacts with the commercial real estate community, provide research workflow automation and conduct daily automated quality assurance checks. In addition, our information technology team has also developed frauddetection technology to detect and prevent unauthorized access to our services. Our information technology professionals also maintain the servers and network components necessary to support CoStar services and research systems. Our encrypted virtual private network provides remote researchers and salespeople secure access to CoStar applications and network resources. CoStar maintains a comprehensive data protection policy that provides for use of encrypted data fields and off-site storage of all system backups, among other protective measures. CoStar’s services are continually monitored in an effort to ensure our customers fast and reliable access. Services Our suite of information/marketing services is branded and marketed to our customers. Our services are derived from a database of building-specific information and offer customers specialized tools for accessing, analyzing and using our information. Over time, we expect to enhance our existing information/marketing services and develop additional services that make use of our comprehensive database to meet the needs of our existing customers as well as potential new categories of customers. Our various information/marketing services are described in detail in the following paragraphs as of January 30, 2009: CoStar Property Professional® CoStar Property Professional, or “CoStar Property,” is the Company’s flagship service. It provides subscribers a comprehensive inventory of office, industrial, retail and multifamily properties and land in markets throughout the U.S., including for-lease and for-sale listings, historical data, building photographs, maps and floor plans. Commercial real estate professionals use CoStar Property to identify available space for lease, evaluate leasing and sale opportunities, value assets and position properties in the marketplace. Our clients also use CoStar Property to analyze market conditions by calculating current vacancy rates, absorption rates or average rental rates, and forecasting future trends based on user selected variables. CoStar Property provides subscribers with powerful map-based search capabilities as well as a user controlled, password protected extranet (or electronic “file cabinet”) where brokers may share space surveys and transaction-related documents online, in real time, with team members. When used together with CoStar Connect, CoStar Property enables subscribers to share space surveys and transaction-related documents with their clients, accessed through their corporate website. CoStar Property, along with all of CoStar’s other core information/marketing services, are delivered solely via the internet. CoStar COMPS Professional ® CoStar COMPS Professional, or “COMPS Professional,” provides comprehensive coverage of comparable sales information in the U.S. commercial real estate industry. It is the industry’s most comprehensive database of comparable sales transactions and is designed for professionals who need to research property comparables, identify market trends, expedite the appraisal process and support property valuations. COMPS Professional service offers subscribers numerous fields of property information, access to support documents (e.g., deeds of trust) for new comparables, demographics and the ability to view for-sale properties alongside sold properties in three formats – plotted on a map, aerial image or in a table.

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CoStar Tenant® CoStar Tenant is a detailed online business-to-business prospecting and analytical tool providing commercial real estate professionals with the most comprehensive commercial real estate-related U.S. tenant information available. CoStar Tenant profiles tenants occupying space in commercial buildings across the U.S. and provides updates on lease expirations - one of the service’s key features - as well as occupancy levels, growth rates and numerous other facts. Delivering this information via the internet allows users to target prospective clients quickly through a searchable database that identifies only those tenants meeting certain criteria. CoStar Showcase® CoStar Showcase offers commercial real estate professionals a simple way to get their for sale and for lease listings in front of a broad internet audience who search on Google TM, Yahoo ® and Costar.com to find commercial properties. When customers sign up for CoStar Showcase, their listings become accessible to visitors to Costar.com, who can search those listings for free. To drive traffic to CoStar Showcase subscriber listings, CoStar invests in Google TM and Yahoo ® keyword based pay-per-click advertising to capture the high volume traffic of users actively searching for commercial properties on those search engines. As part of their CoStar Showcase subscription, subscribers also receive customized websites for each of their brokers that displays their bio, photo, contact information and updated listings that they can use to promote their services. CoStar Property Express ® CoStar Property Express provides access, via an annual subscription, to a “light” or scaled down version of CoStar Property. Commercial real estate professionals use CoStar Property Express to look up and search for lease and for sale listings in CoStar’s comprehensive national database. CoStar Property Express provides base building information, photos, floor plans, maps and a limited number of reports. CoStar Listings Express® CoStar Listings Express provides access via an annual subscription to a listings only version of CoStar Property Express. Commercial real estate professionals use CoStar Listings Express to look up and search for lease and for sale listings in CoStar’s comprehensive national database. CoStar Listings Express provides base building information, photos, floor plans, maps and a limited number of reports on only properties that are either for lease or for sale. CoStar Listings Express does not provide information on fully leased properties, as found in CoStar Property Professional and CoStar Property Express. CoStar COMPS Express ® CoStar COMPS Express provides users with immediate, subscription free access with payment by credit card to the CoStar COMPS Professional system on a report-by-report basis. Subscribers also use this on-demand service to research comparable sales information outside of their subscription markets. CoStar Connect® CoStar Connect allows commercial real estate firms to license CoStar’s technology and information to market their U.S. property listings on their corporate websites. Customers enhance the quality and depth of their listing information through access to CoStar’s database of content and digital images. The service automatically updates via the CoStar Property database and manages customers’ online property information, providing comprehensive listings coverage and significantly reducing the expense of building and maintaining their websites’ content and functionality. CoStar Commercial MLS ® CoStar Commercial MLS is the industry’s most comprehensive collection of researched for sale listings. CoStar Commercial MLS draws upon CoStar’s large database of digital images and includes office, industrial, multifamily and retail properties, as well as shopping centers and raw land. CoStar Commercial MLS represents an efficient means for sellers to market their properties to a large audience and for buyers to easily identify target properties. CoStar Advertising® CoStar Advertising offers property owners a highly targeted and cost effective way to market a space for lease or a property for sale directly to the individuals looking for that type of space through interactive advertising. Our advertising model is based on varying levels of exposure, enabling the advertiser to target as narrowly or broadly as its budget permits. With the CoStar Advertising program, when the advertiser’s listings appear in a results set, they receive priority positioning and are enhanced to stand out. The advertiser can also purchase exposure in additional submarkets, or the entire market area so that this ad will appear even when this listing would not be returned in a results set. 8

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CoStar Professional Directory® CoStar Professional Directory, a service available exclusively to CoStar Property Professional subscribers, provides detailed contact information for approximately 1.1 million commercial real estate professionals, including specific information about an individual’s current and prior activities such as completed transactions, current landlord representation assignments, sublet listings, major tenants and owners represented and local and national affiliations. Commercial real estate brokers can input their biographical information and credentials and upload their photo to create personal profiles. Subscribers use CoStar Professional Directory to network with their peers, identify and evaluate potential business partners, and maintain accurate mailing lists of other industry professionals for their direct mail marketing efforts. CoStar Market Report™ The CoStar Market Report provides in-depth current and historical analytical information covering office, industrial and retail properties across the U.S. Published quarterly, each market report includes details such as absorption rates, vacancy rates, rental rates, average sales prices, capitalization rates, existing inventory and current construction activity. This data is presented using standard definitions and calculations developed by CoStar, and offers real estate professionals critical and unbiased information necessary to make intelligent commercial real estate decisions. CoStar Market Reports are available to CoStar Property Professional subscribers at no additional charge, and are available for purchase by non-subscribers. Metropolis™ The Metropolis service is a single interface that combines commercial real estate data from multiple information providers into a comprehensive resource. The Metropolis service allows a user to input a property address and then view detailed information on that property from multiple information providers, including CoStar services. This technology offers commercial real estate professionals a simple and convenient solution for integrating a wealth of third party information and proprietary data, and is currently available for the Southern California markets. FOCUS™ CoStar’s U.K. subsidiary, CoStar UK Limited, offers several services, the primary of which is FOCUS. FOCUS is a digital online service offering information on the U.K. commercial real estate market. This service seamlessly links data on individual properties and companies across the U.K., including comparable sales, available space, requirements, tenants, lease deals, planning information, socioeconomics and demographics, credit ratings, photos and maps. SPN™ SPN provides users online access to a comprehensive database of information for properties located in Scotland, including available space, comparable sales and lease deals. Propex™ Propex gives users access to the commercial property investment market. It is used by U.K. investment agencies and professional investors and is a secure online exchange through which investment deals may be introduced. It is a primary channel for the distribution of live transaction data and property research data in the U.K. investment market. Propex also provides private investors with a gateway into the commercial property investment market. It is a free-access listing website, which provides details of commercial property investments. It is used by U.K. agencies to sell investments suitable for the private investor. Shopproperty.co.uk™ Shopproperty is a listing database of available retail units across the U.K. on a free-access website. Shopproperty.co.uk is the only specialist listing website with fully licensed Goad street-trader plans. Grecam™ Our French subsidiary, Grecam S.A.S., provides commercial real estate information throughout the Paris region through its Observatoire Immobilier D’ Entreprise (“OIE”) service offering. The OIE service provides commercial property availability and transaction information to its subscribers through both an online service and market reports. Clients We draw clients from across the commercial real estate and related business community. Commercial real estate brokers have traditionally formed the largest portion of CoStar clients, however, we also provide services to owners, landlords, financial institutions, retailers, vendors, appraisers, investment banks, governmental agencies, and other parties involved in commercial real estate. The following chart lists U.S. and U.K. clients that are well known or have the highest annual subscription fees in each of the various categories, each as of January 30, 2009. 9

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Brokers CB Richard Ellis CB Richard Ellis — U.K. Colliers Colliers Conrad Ritblat Erdman — U.K. Cushman & Wakefield Cushman & Wakefield — U.K. Weichert Commercial Brokerage Jones Lang LaSalle Jones Lang LaSalle — U.K. Grubb & Ellis Gerald Eve — U.K. Drivers Jonas — U.K. Lambert Smith Hampton — U.K. Charles Dunn Company, Inc. Marcus & Millichap Mohr Partners Newmark & Company Real Estate CRESA Partners Studley Coldwell Banker Commercial NRT UGL Equis FirstService Williams GVA Advantis Binswanger Re/Max Carter USI Real Estate Brokerage Services DAUM Commercial Real Estate Services HFF U.S. Equities Realty Sperry Van Ness DTZ — U.K. Savillis Commercial — U.K. Atis Real — U.K. GVA Grimley — U.K. King Sturge — U.K.

REITs Brandywine Realty Trust Brookfield Properties Boston Properties Liberty Property Trust Kimco Realty Corporation Vornado Realty Trust Simon Property Group, Inc.

Lenders, Investment Bankers Capmark — U.K. Deutsche Bank Wells Fargo JP Morgan Chase Bank Key Bank TD Bank Citibank AEGON USA Realty Advisors, Inc. Capmark Financial Group, Inc. East West Bank Q10 Bonneville Mortgage Company

Institutional Advisors, Asset Managers BlackRock Prudential Prudential — U.K. Metropolitan Life ING Clarion Partners Duke Realty Corporation USAA Real Estate Company NorthMarq Capital AEW Capital Management LP Progressive Casualty Insurance Co.

Owners, Developers Hines LNR Property Corp Shorenstein Company, LLC Mack-Cali Manulife Financial Industrial Developments International (IDI) Land Securities — U.K.

Appraisers, Accountants Integra Deloitte Deloitte — U.K. Marvin F. Poer KPMG GE Capital PGP Valuation Thomson Reuters

Retailers Nationwide Insurance Café Rio Mexican Grill, Inc. Merle Norman Cosmetics, Inc. Massage Envy 7-Eleven Dollar General Corporation Walgreens Town Fair Tire Rent-A-Center Spencer Gifts LLC

Government Agencies U.S. General Services Administration County of Los Angeles Internal Revenue Service City of Chicago Cook County Assessor’s Office U.S. Department of Housing and Urban Development Corporation of London — U.K. Scottish Enterprise — U.K. Federal Reserve Bank of New York

Property Managers Transwestern Commercial Services Lincoln Property Company PM Realty Group Navisys Group Osprey Management Company Leggat McCall Properties Asset Plus Corporation Morlin Asset Management LP

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Vendors Turner Construction Company Kastle Systems Comcast Corporation ADT Security MWB — U.K. Cox Communications, Inc. Clear Channel Outdoor Verizon Communications, Inc.

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For the years ended December 31, 2006, 2007 and 2008, no single client accounted for more than 5% of our revenues. Sales and Marketing

As of January 30, 2009, we had 220 sales, marketing and customer support employees, with the majority of our direct sales force located in field the U.S. and in London, England; Manchester, England; Glasgow, Scotland and Paris, France. Our inside sales team is located in our Marylan exclusively by telephone and over the internet to support the direct sales force.

Our local offices typically serve as the platform for our in-market sales, customer support and field research operations for their respective r existing clients, providing ongoing customer support, renewing existing client contracts and identifying cross-selling opportunities. In addition, the

Our sales strategy is to aggressively attract new clients, while providing ongoing incentives for existing clients to subscribe to additional frequent service demonstrations as well as company-client contact and communication. We place a premium on training new and existing client satisfaction with our services. Our strategy also involves entering into multi-year, multi-market license agreements with our larger clients.

We seek to make our services essential to our clients’ businesses. To encourage clients to use our services regularly, we generally charge a actual system usage. Contract rates are generally based on the number of sites, number of users, organization size, the client’s business focus, clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. In addition, through CoStar C without a subscription on a pay per use basis. Our customer service and support staff is charged with ensuring high client satisfaction by providing ongoing customer support.

Our primary marketing methods include: service demonstrations; face to face networking; web-based marketing; direct marketing; communi industry events; print advertising in trade magazines and local business journals; client referrals; and CoStar Advisor™, the Company’s newslett marketing are the most cost-effective means for us to find prospective clients. Our web-based marketing efforts include paid advertising with majo include direct mail, email and telemarketing, and make extensive use of our unique, proprietary database. Once we have identified a prospective clie of advertising to build brand identity and reinforce the value and benefits of our services. We also sponsor and attend local association activit reinforce our relationships with our core user groups, including industry-leading events for commercial brokers and retail and financial services ins

In May 2008, we released CoStar Showcase®, an internet marketing service that provides commercial real estate professionals the opportunity and allows each visitor to search those property listings for free. CoStar Showcase draws additional traffic to our website through searches on Go are researched and verified by CoStar researchers. CoStar Showcase subscribers need only designate their listings for inclusion in the free proper our other services, serve as leads for additional cross-selling opportunities. 11

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Competition

The market for information/marketing services generally is competitive and rapidly changing. In the commercial real estate industry, the princ providers are: • • • • • • • • • • • •

quality and depth of the underlying databases; ease of use, flexibility, and functionality of the software; timeliness of the data; breadth of geographic coverage and services offered; client service and support; perception that the service offered is the industry standard; price; effectiveness of marketing and sales efforts; proprietary nature of methodologies, databases and technical resources; vendor reputation; brand loyalty among customers; and capital resources.

We compete directly and indirectly for customers with the following categories of companies: •

online services or websites targeted to commercial real estate brokers, buyers and sellers of commercial real estate properties, insuran Information Limited, officespace.com, MrOfficeSpace.com, and TenantWise, Inc;

•

publishers and distributors of information/marketing services, including regional providers and national print publications, such as Black’ Yale Robbins, Inc., Reis, Inc., Real Capital Analytics, Inc. and The Smith Guide, Inc.;

•

locally controlled real estate boards, exchanges or associations sponsoring property listing services and the companies with whom t Commercial Association of Realtors Data Services and the Association of Industrial Realtors;

•

in-house research departments operated by commercial real estate brokers; and

•

public record providers.

As the commercial real estate information/marketing services marketplace develops, additional competitors (including companies which coul resources than we do) may enter the market and competition may intensify. While we believe that we have successfully differentiated ourselves fro Proprietary Rights

To protect our proprietary rights in our methodologies, database, software, trademarks and other intellectual property, we depend upon a comb • • • • •

trade secret, copyright, trademark, database protection and other laws; nondisclosure, noncompetition and other contractual provisions with employees and consultants; license agreements with customers; patent protection; and technical measures. 12

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We seek to protect our software’s source code, our database and our photography as trade secrets and under copyright law. Although c copyright registration for many of our databases, photographs, software and other materials. Under current U.S. copyright law, the arrangement an with respect to our U.K. databases, certain database protection laws provide additional protections of these databases. We license our services un These agreements restrict the disclosure and use of our information and prohibit the unauthorized reproduction or transfer of the information/mark

We also attempt to protect the secrecy of our proprietary database, our trade secrets and our proprietary information through confidentiality a include technical measures designed to discourage and detect unauthorized copying of our intellectual property. We have established an inter services to detect and prevent unauthorized access, and we actively prosecute individuals and firms that engage in this unlawful activity.

We have filed trademark applications to register trademarks for a variety of names for CoStar services and other marks, and have obtained reg Property”, “CoStar Tenant”, “CoStar Showcase” and “CoStar Group”. Depending upon the jurisdiction, trademarks are generally valid as long a been found to become generic. We consider our trademarks in the aggregate to constitute a valuable asset. In addition, we have filed several p have one patent in the U.K. which expires in 2021 covering, among other things, certain of our field research methodologies, and three patents i elements of CoStar’s proprietary field research technology and mapping tools. We regard the rights under our patents as valuable to our business Employees As of January 30, 2009, we employed 1,178 employees. None of our employees is represented by a labor union. We have experienced no work Available Information

Our investor relations internet website is http://www.costar.com/investors.aspx. The reports we file with or furnish to the Securities and Exch are available free of charge on our internet website as soon as reasonably practicable after we electronically file such material with, or furnish i information we file with the Securities and Exchange Commission at the Commission's Public Reference Room at 100 F Street, NE, Washington, D Room by calling the SEC at 1-800-SEC-0330. The Securities and Exchange Commission maintains an internet site that contains reports, proxy and with the Commission at http://www.sec.gov. Item 1A.

Risk Factors

Cautionary Statement Concerning Forward-Looking Statements

We have made forward-looking statements in this Report and make forward-looking statements in our press releases and conference calls that that is not purely historic fact and include, without limitation, statements concerning our financial outlook for 2009 and beyond, our possible or regarding assumptions about our revenues, EBITDA, fully diluted net income, taxable income, cash flow from operating activities, available cash, diluted net income per share, weighted-average outstanding shares, capital and other expenditures, effective tax rate, equity compensation charges acquisitions, contract renewal rate, capital structure, contractual obligations, legal proceedings and claims, our database, database growth, ser liquidate or realize our long-term investments, management’s plans, goals and objectives for future operations, and growth and markets for o “Business,” “Risk Factors,” “Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of O and Procedures” and the Financial Statements and related Notes. 13

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Our forward-looking statements are also identified by words such as “believes,” “expects,” “thinks,” “anticipates,” “intends,” “estimates” or estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the he future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statemen consolidations within the commercial real estate industry; customer retention; our ability to attract new clients; our ability to sell additional service acquire and integrate acquisition candidates; our ability to obtain any required financing on favorable terms; global credit market conditions affec our ability to continue to expand successfully; our ability to effectively penetrate the market for retail real estate information and gain acceptance i practices; release of new and upgraded services by us or our competitors; data quality; development of our sales force; employee retention; tech real estate brokers and other strategic partners; legal and regulatory issues; and successful adoption of and training on our services.

Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information avail statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained o statements or release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or t Risk Factors

A downturn or consolidation in the commercial real estate industry may decrease customer demand for our services. The continuing declin rates and the on-going downturn in the commercial real estate market’s for sale activity may affect our ability to generate revenues and may lead to revenues or our revenue growth rate to decline and reduce our profitability. A depressed commercial real estate market has a negative impact on services. Also, companies in this industry are consolidating, often in order to reduce expenses. Consolidation, or other cost-cutting measures by o our customers, reduce the number of our existing clients, reduce the size of our target market or increase our clients’ bargaining power, all of profitability.

Negative general economic conditions could increase our expenses and reduce our revenues. Our business and the commercial real esta success of our business depends on a number of factors relating to general global, national, regional and local economic conditions, including perc interest rates, taxation policies, availability of credit, employment levels, and wage and salary levels. Negative general economic conditions coul continuing bank failures and freezing of the credit markets generally, other adverse national and global economic events, as well as any signifi general, which could negatively affect our financial performance and our stock price. Market disruptions may also contribute to extreme price and v 14

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unrelated to our operating performance. In addition, a significant increase in inflation could increase our expenses more rapidly than expected, the e deflation resulting in a decline of prices could reduce our revenues. In the current economic environment, it is difficult to predict whether we will ex either could have an adverse effect on our results of operations. As a result of current economic conditions, we have recently seen an increase in c us. If we experience greater cancellations and more reductions of services and failures to timely pay and we do not acquire new clients or sell new would be adversely affected.

Our revenues and financial position will be adversely affected if we are not able to attract and retain clients. Our success and revenues dep subscription-based information/marketing services generate the largest portion of our revenues. However, we may be unable to attract new clients, services. In addition, in order to increase our revenue, we must continue to attract new customers, continue to keep our cancellation rate low continue to grow our customer base, keep the cancellation rate for customers and services low or sell new services to existing customers as a resu customers have no need for our services; a decision to use alternative services; customers’ and potential customers’ pricing and budgetary constr technical problems; or competitive pressures. If clients decide to cancel services or not to renew their subscription agreements, and we do not revenues and our revenue growth rate may decline.

If we are unable to hire qualified persons for, or retain and continue to develop, our sales force, or if our sales force is unproductive, our r continue to develop, train and retain our sales force. Our ability to build and develop a strong sales force may be affected by a number of factors effectively train our sales force; the ability of our sales force to sell an increased number of services; our ability to manage effectively an outbound the competition we face from other companies in hiring and retaining sales personnel; and our ability to effectively manage a multi-location sales the members of our sales force, including sales force management, or if our sales force is unproductive, our revenues or growth rate could decline a

Fluctuating foreign currencies may negatively impact our business, results of operations and financial position. Due to our acquisitions o Propex, a portion of our business is denominated in the British Pound and Euro and as a result, fluctuations in foreign currencies may have an im currency exchange rates have fluctuated greatly and may continue to fluctuate. Significant foreign currency exchange rate fluctuatio consolidated revenue. Currencies may be affected by internal factors, general economic conditions and external developments in other countries, a party to any hedging transactions intended to reduce our exposure to exchange rate fluctuations. We may seek to enter into hedging transactions acceptable terms or at all. We cannot predict whether we will incur foreign exchange losses in the future. Further, significant foreign exchange fluc our foreign assets, as well as decrease our revenues and earnings from our foreign subsidiaries, which would reduce our profitability and adversely 15

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If we are unable to sustain our revenue growth or our operating costs are higher than expected, our profitability may be reduced and o forecast our revenue growth rate. Many of our expenses, particularly personnel costs and occupancy costs, are relatively fixed. As a result, we ma expenses or revenue shortfall. We may experience higher than expected operating costs, including increased personnel costs, occupancy costs, communications costs, travel costs, software development costs, professional fees and other costs. If operating costs exceed our expectations an operations and financial position will be adversely affected. Additionally, we may not be able to sustain our historic revenue growth rates and growth depend on continued increased demand for our services. Our sales are affected by, among other things, general economic and comme preference, a further weakening of the U.S. or global economies or other reasons, may result in decreased revenue and growth, adversely affecting

Competition could render our services uncompetitive. The market for information systems and services in general is highly competitive and ra recessionary economic conditions, as customer bases and customer spending decrease and service providers are competing for fewer customer res recognition, larger customer bases, better technology or data, lower prices, easier access to data, greater user traffic or greater financial, technical o effective marketing campaigns, obtain more data, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscr quickly to new or emerging technologies or changes in user requirements. If we are unable to retain customers or obtain new customers, our revenu revenues and higher expenses, which would reduce our profitability.

Litigation or government investigations in which we become involved may significantly increase our expenses and adversely affect our s lawsuits, threatened lawsuits or government investigations in which we are involved could cost us a significant amount of time and money to def addition, if any claims are determined against us or if a settlement requires us to pay a large monetary amount, our profitability could be significa assurances that we will have any or sufficient insurance to cover any litigation claims.

We may be subject to legal liability for collecting displaying or distributing information. Because the content in our database is collected f of contract, defamation, negligence, unfair competition or copyright or trademark infringement or claims based on other theories. We could also be links to other websites or information on our website supplied by third parties. Even if these claims do not result in liability to us, we could inc liability for information distributed by us to others could require us to implement measures to reduce our exposure to such liability, which information/marketing services to users.

An impairment in carrying value of goodwill could negatively impact our consolidated results of operations and net worth. Goodwill and reporting unit on October 1st of each year for impairment and are tested for impairment more frequently based upon the existence of one or more ind units under Statement of Financial Accounting Standards (“SFAS”) No. 142 for consideration of potential impairment of goodwill. We assess the i or changes in circumstances indicate that the carrying value may not be recoverable. The existence of one or more of the following indicators could • • • •

Significant underperformance relative to historical or projected future operating results; Significant changes in the manner of our use of acquired assets or the strategy for our overall business; Significant negative industry or economic trends; or Significant decline in our market capitalization relative to net book value for a sustained period.

These types of events or indicators and the resulting impairment analysis could result in goodwill impairment charges in the future, which wo results in the periods of such charges, which may reduce our profitability. As of December 31, 2008, we had $54.3 million of goodwill, $31.5 million i 16

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Our stock price may be negatively affected by fluctuations in our financial results. Our operating results, revenues and expenses may fluc reasons, many of which are outside of our control, such as: cancellations or non-renewals of our services; competition; our ability to control exp consolidation in the real estate industry; our investments in geographic expansion and to increase coverage in existing markets; interest rate fl successful execution of our expansion plans; data quality; the development of our sales force; managerial execution; employee retention; foreign c on our services; litigation; acquisitions of other companies or assets; sales, brand enhancement and marketing promotional activities; client s resources. In addition, changes in accounting policies or practices may affect our level of net income. Fluctuations in our financial results, revenue

Market volatility may have an adverse effect on our stock price. The trading price of our common stock has fluctuated widely in the past, a widely based on numerous factors, including: economic factors; quarter-to-quarter variations in our operating results; changes in analysts’ es innovations or new services; general conditions in the commercial real estate industry; developments or disputes concerning copyrights or propr recent years, the stock market in general, and the shares of internet-related and other technology companies in particular, have experienced extrem securities issued by many companies for reasons unrelated to the operating performance of the specific companies and may have the same effect o

International operations expose us to additional business risks, which may reduce our profitability. Our international operations and e fluctuations; adapting to the differing business practices and laws in foreign countries; difficulties in managing foreign operations; limited protect receivable and longer collection periods; costs of enforcing contractual obligations; impact of recessions in economies outside the U.S.; and additional burdens on our executive and administrative personnel, systems development, research and sales departments, and general managerial may incur higher expenses and our profitability may be reduced. Finally, the investment required for additional international expansion could exce adversely affect our financial position.

Negative conditions in the global credit markets may affect the liquidity of a portion of our long-term investments. Currently our long-ter primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Ed investors from liquidating their holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of value of ARS all of which failed to settle at auctions. When an auction fails for ARS in which we have invested, we may be unable to liquidate som these funds, we will not be able to do so until a future auction on these investments is successful, a buyer is found outside the auction process or a investments at par, we may incur a loss, which would reduce our profitability and adversely affect our financial position. 17

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Our ARS investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estim discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, 2008. The assumptions used in prep spreads, timing and amount of cash flows, liquidity risk premiums, expected holding periods and default risk of the ARS. Based on this assessment value of our ARS investments of approximately $3.7 million. The decline was deemed to be a temporary impairment and recorded as an unrealized l ARS are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to record additional unrealized losses earnings on these investments, which would reduce our profitability and adversely affect our financial position.

If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive position and operating intellectual property involved in our methodologies, database, services and software. We rely on a combination of trade secret, patent, copyright a other contractual provisions and technical measures to protect our intellectual property rights. However, current law may not provide for adequat to the validity, enforceability and scope of protection of proprietary rights in internet related businesses are uncertain and evolving, and we ca business could be significantly harmed if we are not able to protect our content and our other intellectual property. The same would be true if a c intellectual property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost us a significant business. In addition, if we do not prevail on any intellectual property claims, this could result in a change to our methodology or information/mark

Our current or future geographic expansion plans may not result in increased revenues, which may negatively impact our business, resu resources towards increasing the depth of our coverage within existing markets imposes additional burdens on our research, systems development to increase the depth of our coverage in the U.S. and U.K. If we are unable to manage our expansion efforts effectively, if our expansion efforts t financial position could be adversely affected. In addition, if we incur significant costs to improve data quality within existing markets, or are not s expansion may have a material adverse effect on our financial position by increasing our expenses without increasing our revenues, adversely affec

Our continuing expansion into the retail real estate sector may not be completed successfully or may not result in increased revenues, whi Expanding into the retail real estate sector imposed and continues to impose additional burdens on our research, systems development, sales, mark expand the number of retail properties contained within our database. If we are unable to manage this expansion effectively, if this expansion effo financial position could be adversely affected. In addition, if we incur significant costs to expand our retail sector services and we are not success new services, our expansion may have a material adverse effect on our financial position by increasing our expenses without increasing our revenue

We may not be able to successfully introduce new or upgraded information/marketing services, which could decrease our revenues and ou continue to introduce new and upgraded services into the marketplace. To be successful, we must adapt to rapid technological changes by cont upgrades to services imposes heavy burdens on our systems department, management and researchers. This process is costly, and we cannot a addition, successfully launching and selling a new service puts pressure on our sales and marketing resources. If we are unable to develop new o and our revenues may decline and our profitability may be reduced. In addition, if we incur significant costs in developing new or upgraded servic customers fail to accept these new services, it could have a material adverse effect on our results of operations by decreasing our revenues or our r 18

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Technical problems that affect either our customers’ ability to access our services, or the software, internal applications and systems und services, lower revenues and increased costs. Our business increasingly depends upon the satisfactory performance, reliability and availability internet or the services provided by our local exchange carriers or internet service providers could result in slower connections for our customer experience technical problems in distributing our services, we could experience reduced demand for our information/marketing services. In additio and may not be efficient or error-free. Our careful development and testing may not be sufficient to ensure that we will not encounter technical pr Any inefficiencies, errors or technical problems with our software, internal applications and systems could reduce the quality of our services or in reduce the demand for our services, lower our revenues and increase our costs.

If we are not able to obtain and maintain accurate, comprehensive or reliable data, we could experience reduced demand for our infor comprehensiveness, accuracy and reliability of the data we provide. The task of establishing and maintaining accurate and reliable data is challeng comprehensive or reliable, we could experience reduced demand for our services or legal claims by our customers, which could result in lower processes to update our database. Any inefficiencies, errors, or technical problems with this application could reduce the quality of our data, whic

If we are not able to successfully identify, finance and/or integrate acquisitions, our business operations and financial position could acquisitions of complementary businesses, services, databases and technologies, and expect to continue to do so in the future. Our strategy to ac availability of, suitable acquisition candidates. In addition, acquisitions involve numerous risks, including managing the integration of personnel Grecam S.A.S. in France, CoStar U.K. Limited and Propex in the U.K.; the diversion of management’s attention from other business concerns; the direct experience; and the potential loss of key employees or clients of the acquired companies. We may not successfully integrate any acquire Acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, one-time write-offs of goodwill and substantial amort environment may be difficult and cost prohibitive. We may be unable to obtain financing on favorable terms, or at all, if necessary to financ businesses. If we are able to obtain financing, the terms may be onerous and more restrictive than we are willing to accept.

Temporary or permanent outages of our computers, software or telecommunications equipment could lead to reduced demand for our in depend on our ability to protect our database, computers and software, telecommunications equipment and facilities against damage from po telecommunications failures. Any temporary or permanent loss of one or more of these systems or facilities from an accident, equipment malfu prevents us from delivering our information/marketing services to clients, we could experience reduced demand for our information/marketing servi 19

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Changes in accounting and reporting policies or practices may affect our financial results or presentation of results, which may affect our our net income, which reductions may be independent of changes in our operations. These reductions in reported net income could cause our stoc of SFAS 123R, which required us to expense the value of granted stock options. We recorded $2.9 million in compensation charges for stock option

Our business depends on retaining and attracting highly capable management and operating personnel. Our success depends in large pa our President and Chief Executive Officer, Andrew Florance, and our other officers and key employees. Our business requires highly skilled techni in high demand and are often subject to competing offers. To retain and attract key personnel, we use various measures, including employment agr officers. These measures may not be enough to retain and attract the personnel we need or to offset the impact on our business of the loss of the se Item 1B.

Unresolved Staff Comments

None. Item 2.

Properties

Our corporate headquarters is located in Bethesda, Maryland, where we occupy approximately 60,000 square feet of office space. Our main lea used primarily by our U.S. segment.

In addition to our Bethesda, Maryland facility, our research operations are principally run out of leased spaces in San Diego, California; Colu Paris, France. Additionally, we lease office space in a variety of other metropolitan areas, which generally house our field sales offices. These loca Francisco; Boston; Manchester, England; Orange County, California; Philadelphia; Houston; Atlanta; Phoenix; Detroit; Pittsburgh; Iselin, New California; Indianapolis; and St. Louis. We believe these facilities are suitable and appropriately support our business needs. Item 3.

Legal Proceedings

Currently, and from time to time, we are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or counsel, is likely to have a material adverse effect on our financial position or results of operations. Item 4.

Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of our security holders during the quarter ended December 31, 2008. 20

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PART II Item 5.

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock. Our common stock is traded on the Nasdaq Global Select Market® under the symbol “CSGP.” The followin share of our common stock, as reported by the Nasdaq Global Select Market®. High

Low

Year Ended December 31, 2007 First Quarter Second Quarter Third Quarter Fourth Quarter

$ $ $ $

52.15 55.71 58.49 61.65

$ $ $ $

43.44 44.95 50.70 44.48

Year Ended December 31, 2008 First Quarter Second Quarter Third Quarter Fourth Quarter

$ $ $ $

45.31 51.36 56.70 45.20

$ $ $ $

36.55 44.39 43.57 27.00

As of February 1, 2009, there were approximately 260 holders of record of our common stock. Dividend Policy. We have never declared or paid any dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon our results of operations, financial position and other factors deemed relevant by our Board of Directors. We do not anticipate paying any dividends on our common stock during the foreseeable future, but intend to retain any earnings for future growth of our business. Recent Issues of Unregistered Securities. We did not issue any unregistered securities during the quarter ended December 31, 2008. Issuer Purchases of Equity Securities. The following table is a summary of our repurchases of common stock during each of the three months in the quarter ended December 31, 2008:

ISSUER PURCHASES OF EQUITY SECURITIES

Month, 2008 October 1 through 31 November 1 through 30 December 1 through 31 Total

Total Number of Shares Purchased   4,220 (1) 4,220

Total Number of Shares Purchased as Part of Maximum Number of Shares Average Price Paid per Publicly Announced Plans that May Yet Be Purchased Share or Programs Under the Plans or Programs       $29.37   $29.37  

(1)

The number of shares purchased consists of shares of common stock tendered by employees to the Company to satisfy the employees’ tax withholding obligations arising as a result of vesting of restricted stock grants under the Company’s 1998 Stock Incentive Plan, as amended, and the Company’s 2007 Stock Incentive Plan, as amended, which shares were purchased by the Company based on their fair market value on the vesting date. None of these share purchases were part of a publicly announced program to purchase common stock of the Company. 21

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Stock Price Performance Graph The stock performance graph below shows how an initial investment of $100 in our common stock would have compared to: •An equal investment in the Standards & Poor's Stock 500 (“S&P 500”) Index. •An equal investment in the S&P 500 Application Software Index. The comparison covers the period beginning December 31, 2003, and ending on December 31, 2008, and assumes the reinvestment of any dividends. You should note that this performance is historical and is not necessarily indicative of future price performance.

compchart

Company / Index CoStar Group, Inc. S&P 500 Index S&P 500 Application Software Index

12/31/03 100 100 100

22

12/31/04 110.74 110.88 111.63

12/31/05 103.53 116.33 123.57

12/31/06 128.44 134.70 130.15

12/31/07 113.31 142.10 144.57

12/31/08 78.99 89.53 79.03

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Item 6.

Selected Consolidated Financial and Operating Data Selected Consolidated Financial and Operating Data (in thousands, except per share data and other operating data)

The following table provides selected consolidated financial and other operating data for the five years ended December 31, 2008. The consolidated statement of operations data shown below for each of the three years ended December 31, 2006, 2007, and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 are derived from audited consolidated financial statements that are included in this report. The consolidated statement of operations data for each of the years ended December 31, 2004 and 2005 and the consolidated balance sheet data as of December 31, 2004, 2005, and 2006 shown below are derived from audited consolidated financial statements for those years that are not included in this report.

Consolidated Statement of Operations Data: Revenues Cost of revenues Gross margin Operating expenses Income from operations Interest and other income, net Income before income taxes Income tax (benefit) expense , net Net income Net income per share − basic Net income per share − diluted Weighted average shares outstanding − basic Weighted average shares outstanding − diluted

Consolidated Balance Sheet Data: Cash, cash equivalents, short-term and long-term investments Working capital Total assets Total liabilities Stockholders’ equity

Other Operating Data: Number of subscription client sites Millions of properties in database

$

$ $ $

2004 112,085 35,384 76,701 69,955 6,746 1,314 8,060 (16,925) 24,985 1.38 1.33 18,165 18,827

$

$ $ $

2004 $

Year Ended December 31, 2005 2006 2007 134,338 $ 158,889 $ 192,805 44,286 56,136 76,704 90,052 102,753 116,101 82,710 88,672 98,249 7,342 14,081 17,852 3,455 6,845 8,045 10,797 20,926 25,897 4,340 8,516 9,946 6,457 $ 12,410 $ 15,951 0.35 $ 0.66 $ 0.84 0.34 $ 0.65 $ 0.82 18,453 18,751 19,044 19,007 19,165 19,404

2005

117,069 107,875 232,691 21,747 210,944

2004 9,489 1.6

23

$

134,185 124,501 248,059 23,263 224,796

2005 11,464 1.8

As of December 31, 2006 $

158,148 154,606 275,437 25,327 250,110

As of December 31, 2006 13,257 2.1

$

$ $ $

2007 $

187,426 167,441 321,843 40,038 281,805

2007 14,467 2.7

2008 212,428 73,408 139,020 99,232 39,788 4,914 44,702 20,079 24,623 1.27 1.26 19,372 19,550

2008 $

224,590 183,347 334,384 30,963 303,421

2008 15,920 3.2

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated above in Item 1A. under the headings “Risk Factors  Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors,” as well as those described from time to time in our filings with the Securities and Exchange Commission. All forward-looking statements are based on information available to us on the date of this filing and we assume no obligation to update such statements. The following discussion should be read in conjunction with our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission and the consolidated financial statements and related notes in this Annual Report on Form 10-K. Overview CoStar Group, Inc. (“CoStar”) is the number one provider of information/marketing services to the commercial real estate industry in the U.S. and the U.K. based on the fact that we offer the most comprehensive commercial real estate database available, have the largest research department in the industry, provide more information/marketing services than any of our competitors and believe we generate more revenues than any of our competitors. We have created a standardized information/marketing platform where the members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information. Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, tenant information, information about properties for sale, internet marketing services, information for clients' websites, information about industry professionals and their business relationships, analytic information, data integration, and industry news. Our service offerings span all commercial property types – office, industrial, retail, land, mixed-use, hospitality and multifamily. Since 1994, we have expanded the geographical coverage of our existing information/marketing services and developed new information/marketing services. In addition to internal growth, this expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in 1996 and New Market Systems, Inc. in San Francisco in 1997. In August 1998, we expanded into the Houston region through the acquisition of Houston-based real estate information provider C Data Services, Inc. In January 1999, we expanded further into the Midwest and Florida by acquiring LeaseTrend, Inc. and into Atlanta and Dallas/Fort Worth by acquiring Jamison Research, Inc. In February 2000, we acquired COMPS.COM, Inc., a San Diego-based provider of commercial real estate information. In November 2000, we acquired First Image Technologies, Inc., a California-based provider of commercial real estate software. In September 2002, we expanded further into Portland, Oregon through the acquisition of certain assets of Napier Realty Advisors (doing business as REAL-NET). In January 2003, we established a base in the U.K. with our acquisition of London-based FOCUS Information Limited. In May 2004, we expanded into Tennessee through the acquisition of Peer Market Research, Inc., and in September 2004, we extended our coverage of the U.K. through the acquisition of Scottish Property Network (“SPN”). In September 2004, we strengthened our position in Denver, Colorado through the acquisition of substantially all of the assets of RealComp, Inc., a local comparable sales information provider. In January 2005, we acquired National Research Bureau, a Connecticut-based leading provider of U.S. shopping center information. In December 2006, our U.K. subsidiary, CoStar Limited, acquired Grecam S.A.S. (“Grecam”), a provider of commercial property information and market-level surveys, studies and consulting services located in Paris, France. In February 2007, CoStar Limited also acquired Property Investment Exchange Limited (“Propex”), a provider of commercial property information and operator of an electronic platform that facilitates the exchange of investment property located in London, England. In April 2008, we acquired the assets of First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information. The more recent acquisitions are discussed later in this section under the heading “Recent Acquisitions.” 24

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In 2004, we began our expansion into 21 new metropolitan markets throughout the U.S., as well as expanding the geographical coverage of many of our existing U.S. and U.K. markets. We completed our expansion into the 21 new markets in the first quarter of 2006. In early 2005, in conjunction with the acquisition of National Research Bureau, we launched a major effort to expand our coverage of retail real estate information. The new retail component of our flagship product, CoStar Property Professional, was unveiled in May 2006 at the International Council of Shopping Centers’ convention in Las Vegas. During the second half of 2006, to expand the geographical coverage of our service offerings we began actively researching commercial properties in 81 new Core Based Statistical Areas (“CBSAs”) in the U.S., increased our U.S. field research fleet by adding 89 vehicles and hired researchers to staff these vehicles. In March 2007, we signed a long-term lease for a new research facility in White Marsh, Maryland, in support of our expanded research efforts and hired and trained additional researchers and other personnel. We released our CoStar Property Professional service in the 81 new CBSAs across the U.S. in the fourth quarter of 2007. In connection with our acquisitions of Propex and Grecam, we intend to expand the coverage of our service offerings within the U.K. and integrate our international operations more fully with those of the U.S. We have gained operational efficiencies as a result of consolidating a majority of our U.K. research operations in one location in Glasgow and combining the majority of our remaining U.K. operations in one central location in London. We intend to eventually introduce a consistent international platform of service offerings. In 2007, we introduced the “CoStar Group” as the brand encompassing our international operations. We believe that our recent U.S. and international expansion and integration efforts have created a platform for earnings. In fact, our results for 2008 reflect growth in earnings as a result of these investments in our business. Our financial reporting currency is the U.S. Dollar. Changes in exchange rates can significantly affect our reported results and consolidated trends. We believe that our increasing diversification beyond the U.S. economy through our international businesses benefits our shareholders over the long term. We also believe it is important to evaluate our operating results before and after the effect of currency changes, as it may provide a more accurate comparison of our results of operations over historical periods. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported financial results and consolidated trends and comparisons. We expect to continue to develop and distribute new services, expand existing services within our current platform, consider strategic acquisitions and expand and develop our sales and marketing organization. For instance, in May 2008, we released CoStar Showcase ® , an internet marketing service that provides commercial real estate professionals the opportunity to make their listings accessible to all visitors to our public website, www.CoStar.com. In addition, in April 2008, as described above we acquired the online commercial real estate information assets of First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO). Any future expansion could reduce our profitability and increase our capital expenditures. Therefore, while we expect current service offerings to remain profitable, driving overall earnings throughout 2009 and providing substantial cash flow for our business, it is possible that any new investments could cause us to generate losses and negative cash flow from operations in the future. Current general economic conditions in the U.S. and the world are negatively affecting business operations for our clients and are resulting in more business consolidations and, in certain circumstances, failures. As a result of the economic conditions, we have recently seen an uptick in customer cancellations, reductions of services and failures to pay amounts due us. If cancellations, reductions of services and failures to pay continue to rise, and we are unable to offset the resulting decrease in revenue by increasing sales to new or existing customers, our revenues will be adversely affected and our revenue may decline. Additionally, current conditions may cause customers to reduce expenses, when reducing expenses, customers may be forced to purchase fewer services or cancel all services. We compete against many other commercial real estate information/marketing service providers for business. If customers choose to cancel our services for costcutting or other reasons, our revenue could decline. The extent and duration of any future continued weakening of the economy is unknown and there can be no assurance that any of the governmental or private sector initiatives designed to strengthen the economy will be successful. Because of the current uncertainties in the economic environment, we may not be able to accurately forecast our revenue. However, we continue to believe that the company is positioned to generate continued, sustained earnings through the end of 2009. 25

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We currently issue restricted stock and stock options to our officers, directors and employees, and as a result we record additional compensation expense in our consolidated statements of operations. We plan to continue the use of alternative stock-based compensation for our officers, directors and employees, which may include, among other things, restricted stock or stock option grants that typically will require us to record additional compensation expense in our consolidated statements of operations and reduce our net income. We incurred approximately $4.9 million in total equity compensation expense in 2008. Our subscription-based information/marketing services, consisting primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional, and FOCUS services currently generate more than 90% of our total revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a suite of similar services and comprise our primary service offering in our U.S. operating segment. FOCUS is our primary service offering in our International operating segment. Our contracts for our subscription-based information/marketing services typically have a minimum term of one year and renew automatically. Upon renewal, many of the subscription contract rates may increase in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than fees based on actual system usage. Contract rates are generally based on the number of sites, number of users, organization size, the client’s business focus, geography and the number of services to which a client subscribes. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. We recognize this revenue on a straight-line basis over the life of the contract. Annual and quarterly advance payments result in deferred revenue, substantially reducing the working capital requirements generated by accounts receivable. For the year ended December 31, 2007, our contract renewal rate was over 90%. For the year ended December 31, 2008, our contract renewal rate was approximately 89%. As discussed above, our contract renewal rate may continue to decline if continuing negative economic conditions lead to business failures and/or consolidations and further reductions in customer spending and decreases in the customer base. Application of Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. The following accounting policies involve a “critical accounting estimate” because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period. Changes in the accounting estimates we use are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. Valuation of Long-Lived and Intangible Assets and Goodwill We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows of the carrying amounts of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below: • • • •

Significant underperformance relative to historical or projected future operating results; Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; Significant negative industry or economic trends; or Significant decline in our market capitalization relative to net book value for a sustained period. 26

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When we determine that the carrying value of long-lived and identifiable intangible assets may not be recovered based upon the existence of one or more of the above indicators, we test for impairment. Goodwill and identifiable intangible assets not subject to amortization are tested annually by each reporting unit on October 1st of each year for impairment and are tested for impairment more frequently based upon the existence of one or more of the above indicators. We consider our operating segments, U.S. and International, as our reporting units under Statement of Financial Accounting Standards (“SFAS”) No. 142 for consideration of potential impairment of goodwill. The goodwill impairment test is a two-step process. The first step is to determine the fair value of each reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model that includes significant assumptions and estimates including our future financial performance and a weighted average cost of capital. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss. We measure impairment loss based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk in our current business model. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and assess the temporary differences resulting from differing treatment of items, such as deferred revenue or deductibility of certain intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that it is more-likely-than not that some portion or all of our deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a period, we must reflect the corresponding increase or decrease within the tax provision in the statements of operations. Non-GAAP Financial Measures We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. We also disclose and discuss certain non-GAAP financial measures in our public releases. Currently, the non-GAAP financial measure that we disclose is EBITDA, which is our net income (loss) before interest, income taxes, depreciation and amortization. We disclose EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The nonGAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations. We view EBITDA as an operating performance measure and as such we believe that the GAAP financial measure most directly comparable to it is net income (loss). In calculating EBITDA, we exclude from net income (loss) the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. EBITDA is not a measurement of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss) or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA as a substitute for any GAAP financial measure, including net income (loss). In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of EBITDA to net income (loss) set forth below, in our earnings releases and in other filings with the Securities and Exchange Commission and to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the Securities and Exchange Commission, as well as our quarterly earnings releases, and compare the GAAP financial information with our EBITDA. 27

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EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 21 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to the expansion of our information/marketing services, which included acquisitions, our net income (loss) has included significant charges for purchase amortization, depreciation and other amortization. EBITDA excludes these charges and provides meaningful information about the operating performance of our business, apart from charges for purchase amortization, depreciation and other amortization. We believe the disclosure of EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe EBITDA is a measure of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and non-operating items, such as interest and income taxes, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry. Set forth below are descriptions of the financial items that have been excluded from our net income (loss) to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income (loss): •

Purchase amortization in cost of revenues may be useful for investors to consider because it represents the use of our acquired database technology, which is one of the sources of information for our database of commercial real estate information. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•

Purchase amortization in operating expenses may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of any acquired trade names. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•

Depreciation and other amortization may be useful for investors to consider because they generally represent the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•

The amount of net interest income we generate may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of net interest income to be a representative component of the day-to-day operating performance of our business.

•

Income tax expense (benefit) may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense (benefit) to be a representative component of the day-to-day operating performance of our business.

Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business. 28

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The following table shows our EBITDA reconciled to our net income and our cash flows from operating, investing and financing activities for the indicated periods (in thousands):

Net income Purchase amortization in cost of revenues Purchase amortization in operating expenses Depreciation and other amortization Interest income, net Income tax expense, net EBITDA

$

$

Cash flows provided by (used in) Operating activities Investing activities Financing activities

$ $ $

Year Ended December 31, 2006 2007 2008 12,410 $ 15,951 $ 24,623 1,205 2,170 2,284 4,183 5,063 4,880 6,421 8,914 9,637 (6,845) (8,045) (4,914) 8,516 9,946 20,079 25,890 $ 33,999 $ 56,589

32,587 $ (28,329) $ 5,582 $

51,732 $ (40,331) $ 8,161 $

40,908 52,430 11,475

Consolidated Results of Operations The following table provides our selected consolidated results of operations for the indicated periods (in thousands of dollars and as a percentage of total revenue):

Revenues Cost of revenues Gross margin Operating expenses: Selling and marketing Software development General and administrative Gain on lease settlement, net Purchase amortization Total operating expenses Income from operations Interest and other income, net Income before income taxes Income tax expense, net Net income

$

$

2006 158,889

Year Ended December 31, 2007 100.0% $ 192,805 100.0% $

2008 212,428

100.0%

56,136 102,753

35.3 64.7

76,704 116,101

39.8 60.2

73,408 139,020

34.6 65.4

41,774

26.3

51,777

26.9

41,705

19.6

12,008

7.6

12,453

6.5

12,759

6.0

30,707 

19.3 0.0

36,569 (7,613)

19.0 (3.9)

39,888 

18.8 0.0

4,183

2.6

5,063

2.6

4,880

2.3

88,672

55.8

98,249

51.0

99,232

46.7

14,081 6,845

8.9 4.3

17,852 8,045

9.3 4.2

39,788 4,914

18.7 2.3

20,926

13.2

25,897

13.4

44,702

21.0

20,079 24,623

9.5 11.6%

8,516 12,410

5.4 7.8% $

9,946 15,951

5.2 8.3% $

Comparison of Year Ended December 31, 2008 and Year Ended December 31, 2007 Revenues. Revenues grew to $212.4 million in 2008, from $192.8 million in 2007. This increase in revenue was due to further penetration of our subscription-based information/marketing services, and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. Our subscription-based information services consist primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional, FOCUS services and Propex services. As of December 31, 2008, our subscription-based information/marketing services represented more than 90% of our total revenues. 29

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Gross Margin. Gross margin increased to $139.0 million in 2008, from $116.1 million in 2007. The gross margin percentage increased to 65.4% in 2008, from 60.2% in 2007. The increase in the gross margin resulted principally from revenue growth from our subscription-based information/marketing services and a decrease in cost of revenues. Cost of revenues decreased to $73.4 million for the year ended December 31, 2008, from $76.7 million for the year ended December 31, 2007 principally due to expansion costs that were incurred in 2007 that were not incurred in 2008. Selling and Marketing Expenses. Selling and marketing expenses decreased to $41.7 million in 2008, from $51.8 million in 2007, and decreased as a percentage of revenues to 19.6% in 2008, from 26.9% in 2007. The decrease was principally due to a reduction in personnel costs of approximately $5.4 million primarily due to the fact that the sales force sold services with a smaller average price point in 2008, which resulted in lower average contract values compared to 2007. Additionally, there was a decrease in marketing initiatives of approximately $2.3 million in 2008. Software Development Expenses. Software development expenses slightly increased to $12.8 million in 2008, from $12.5 million in 2007, and slightly decreased as a percentage of revenues to 6.0% in 2008, from 6.5% in 2007. The decrease in the percentage was primarily due to increased revenues in 2008. General and Administrative Expenses. General and administrative expenses increased to $39.9 million in 2008, from $36.6 million in 2007, and decreased slightly as a percentage of revenues to 18.8% in 2008, from 19.0% in 2007. The increase in the amount of general and administrative expenses was principally a result of an increase of approximately $2.5 million in legal fees and an increase of $1.6 million in bad debt expense. Gain on Lease Settlement, Net. On September 14, 2007, CoStar U.K Limited, a wholly owned U.K. subsidiary of CoStar, entered into an agreement with Trafigura Limited to assign to Trafigura our leasehold interest in our office space located in London. The lease assignment was effective on December 19, 2007. As a result, CoStar U.K. Limited was paid $7.6 million, net of expenses, for the assignment of the lease. There were no gains on lease settlements in 2008. Purchase Amortization. Purchase amortization slightly decreased to $4.9 million in 2008, from $5.1 million in 2007, and slightly decreased as a percentage of revenues to 2.3% in 2008, from 2.6% in 2007. Interest and Other Income, Net. Interest and other income, net decreased to $4.9 million in 2008, from $8.0 million in 2007. Although, cash and cash equivalents, short-term and long-term investments were higher in 2008 than in 2007, our interest and other income decreased due to lower average interest rates in 2008 compared to 2007. Income Tax Expense, Net. Income tax expense, net increased to $20.1 million in 2008, from $9.9 million in 2007. This increase was primarily due to higher income before income taxes for 2008 due to our growth and profitability, in addition to a higher effective tax rate in 2008. The effective tax rate was lower in 2007 due to the gain on lease settlement in the U.K. that was completed in December 2007. The lease settlement resulted in income in the U.K., which reduced the overall effective tax rate. Comparison of Business Segment Results for Year Ended December 31, 2008 and Year Ended December 31, 2007 Due to the increased size, complexity and funding requirements associated with our international expansion, in 2007 we began to manage our business geographically in two operating segments, with our primary areas of measurement and decision-making being the U.S. and International, which includes the U.K. and France. Management relies on an internal management reporting process that provides segment revenue and EBITDA, which is our net income before interest, income taxes, depreciation and amortization. Management believes that segment EBITDA is an appropriate measure for evaluating the operational performance of our segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. 30

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Segment Revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a suite of similar services and comprise our primary service offering in our U.S. operating segment. U.S. revenues increased to $190.1 million from $170.3 million for the years ended December 31, 2008 and 2007, respectively. This increase in U.S. revenue is due to further penetration of our U.S. subscription-based information/marketing services and the successful cross-selling of our service to our customers, combined with a continued high renewal rate. FOCUS is our primary service offering in our International operating segment. International revenues slightly decreased to $22.4 million from $22.5 million for the years ended December 31, 2008 and 2007, respectively. This decrease is due to foreign currency fluctuations. In their functional currency, International revenues increased 7.2% for the year ended December 31, 2008 compared to the year ended December 31, 2007. Segment EBITDA. U.S. EBITDA increased to $58.8 million from $32.9 million for the years ended December 31, 2008 and 2007, respectively. The increase in U.S. EBITDA was due to increased revenues, and lower sales and marketing personnel costs, partially offset by an increase in legal fees and bad debt expense. International EBITDA decreased to a loss of $2.2 million from $1.1 million earnings for the years ended December 31, 2008 and 2007, respectively. This decrease is primarily due to gain on lease settlement of $7.6 million in 2007 that did not occur in 2008. International EBITDA also includes a corporate allocation of approximately $1.1 million and $2.6 million for the years ended December 31, 2008 and 2007, respectively. The corporate allocation represents costs incurred for U.S. employees involved in international management and expansion activities. Comparison of Year Ended December 31, 2007 and Year Ended December 31, 2006 Revenues. Revenues grew 21.3% to $192.8 million in 2007, from $158.9 million in 2006. This increase in revenue has resulted from continued penetration of our subscription-based information services, the successful cross-selling of additional products and services to our existing customer base combined with a continued high renewal rate, and additional revenues from acquired companies, including Grecam, acquired in December 2006, and Propex, acquired in February 2007. Our subscription-based information services consist primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional, FOCUS services and Propex services. As of December 31, 2007, our subscriptionbased information services represented approximately 95% of our total revenues. Gross Margin. Gross margin increased to $116.1 million in 2007, from $102.8 million in 2006. The gross margin percentage decreased to 60.2% in 2007, from 64.7% in 2006. The increase in the gross margin amount resulted principally from revenue growth from our subscriptionbased information services, partially offset by an increase in cost of revenues. The decrease in gross margin percentage was principally due to an increase in the cost of revenues to $76.7 million for 2007, from $56.1 million for 2006. The increase in cost of revenues resulted from increased research department hiring, training, compensation and other operating costs, principally in connection with our retail and 81 new CBSA expansions, and our international expansion, as well as increased cost structures associated with the acquisitions of Grecam and Propex. Selling and Marketing Expenses. Selling and marketing expenses increased to $51.8 million in 2007, from $41.8 million in 2006, and increased as a percentage of revenues to 26.9% in 2007, from 26.3% in 2006. The increase in the amount of selling and marketing expenses is primarily due to increased growth in the sales force, increased marketing efforts, as well as increased cost structures associated with the acquisition of Propex. Software Development Expenses. Software development expenses increased to $12.5 million in 2007, from $12.0 million in 2006, and decreased as a percentage of revenues to 6.5% in 2007, from 7.6% in 2006. The increase in the amount of software development expenses was primarily due to increased costs associated with the continued development of an international platform. The decrease in the percentage was primarily due to our continued efforts to control and leverage our costs. General and Administrative Expenses. General and administrative expenses increased to $36.6 million in 2007, from $30.7 million in 2006, and decreased slightly as a percentage of revenues to 19.0% in 2007, from 19.3% in 2006. The increase primarily includes increases in personnel expenses, cost structures associated with the acquisition of Propex and equity compensation. 31

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Gain on Lease Settlement, Net. On September 14, 2007, CoStar U.K. Limited, a wholly owned U.K. subsidiary of CoStar, entered into an agreement with Trafigura Limited to assign to Trafigura our leasehold interest in our office space located in London. The lease assignment was effective on December 19, 2007. As a result, CoStar U.K. Limited was paid $7.6 million, net of expenses, for the assignment of the lease. There were no gains on lease settlements in 2006. Purchase Amortization. Purchase amortization increased to $5.1 million in 2007, from $4.2 million in 2006, and remained consistent as a percentage of revenues at 2.6% in 2007 and 2006. This increase in the amount was due to the acquisitions of Grecam and Propex. Interest and Other Income, Net. Interest and other income, net increased to $8.0 million in 2007, from $6.8 million in 2006. This increase was primarily due to higher interest income as a result of higher total short-term investment balances for 2007 and increased interest rates for 2007 as compared to 2006. Income Tax Expense, Net. Income tax expense, net increased to $9.9 million in 2007, from $8.5 million in 2006. This increase was due to higher income before income taxes for 2007, partially offset by a lower effective tax rate. The effective tax rate was lower in 2007 due to the gain on lease settlement in the U.K. that was completed in December 2007. The lease settlement resulted in income in the U.K., which reduced the overall effective tax rate. Comparison of Business Segment Results for Year Ended December 31, 2007 and Year Ended December 31, 2006 Due to the increased size, complexity and funding requirements associated with our international expansion, in 2007 we began to manage our business geographically in two operating segments, with our primary areas of measurement and decision-making being the U.S. and International, which includes the U.K. and France. Management relies on an internal management reporting process that provides revenue and segment EBITDA, which is our net income before interest, income taxes, depreciation and amortization. Management believes that segment EBITDA is an appropriate measure for evaluating the operational performance of our segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. Segment Revenues. U.S. revenues increased to $170.3 million from $146.1 million for the years ended December 31, 2007 and 2006, respectively. This increase in U.S. revenue is due to further penetration of our U.S. subscription-based information services and the successful cross-selling into our customer base across our service platform in existing markets, combined with a continued high renewal rate. International revenues increased to $22.5 million from $12.8 million for the years ended December 31, 2007 and 2006, respectively. This increase in international revenue is principally a result of a combination of further penetration of our subscription-based information services in the U.K. and the acquisitions of Grecam and Propex. Segment EBITDA. U.S. EBITDA increased to $32.9 million from $26.2 million for the years ended December 31, 2007 and 2006, respectively. The increase in U.S. EBITDA was due to increased revenues, partially offset by increased research costs and growth in our sales force as a result of our expansion. International EBITDA increased to $1.1 million from a loss of $315,000 for the years ended December 31, 2007 and 2006, respectively. This increase is primarily due to the assignment of our lease to Trafigura, offset by our increased investment in international expansion. International EBITDA also includes a corporate allocation of approximately $2.6 million and $1.0 million for the years ended December 31, 2007 and 2006, respectively. The corporate allocation represents costs incurred for U.S. employees involved in international management and expansion activities. 32

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Consolidated Quarterly Results of Operations The following tables summarize our consolidated results of operations on a quarterly basis for the indicated periods (in thousands, except per share amounts, and as a percentage of total revenues):

Mar. 31 $ 44,831 17,826 27,005 25,569 1,436

Revenues Cost of revenues Gross margin Operating expenses Income from operations Interest and other income, net Income before income taxes Income tax expense, net Net income $ Net income per share − basic $ Net income per share − diluted $

Revenues Cost of revenues Gross margin Operating expenses Income from operations Interest and other income, net Income before income taxes Income tax expense, net Net income

1,862 3,298 1,484 1,814

2007 Jun. 30 Sep. 30 $ 47,794 $ 49,340 19,318 19,551 28,476 29,789 28,230 25,952 246 3,837

$

1,891 2,137 962 1,175

0.10

$

0.09

$

Mar. 31 100.0% 39.8 60.2 57.0 3.2

Dec. 31 $ 50,840 20,009 30,831 18,498 12,333

Mar. 31 $ 52,264 19,721 32,543 25,313 7,230

$

1,938 9,168 4,126 5,042

$

2,072 5,909 2,659 3,250

$

2,220 14,553 4,841 9,712

0.06

$

0.17

$

0.51

$

0.06

$

0.17

$

0.50

$

2007 Jun. 30 Sep. 30 100.0% 100.0% 40.4 39.6 59.6 60.4 59.1 52.6 0.5 7.8

4.1

4.0

7.3 3.3 4.0%

4.5 2.0 2.5%

Dec. 31 100.0% 39.4 60.6 36.4 24.2

2008 Jun. 30 Sep. 30 $ 53,478 $ 53,757 18,341 17,613 35,137 36,144 26,627 24,864 8,510 11,280

$

1,243 9,753 4,318 5,435

0.26

$

0.26

$

Mar. 31 100.0% 37.7 62.3 48.5 13.8

Dec. 31 $ 52,929 17,733 35,196 22,428 12,768

$

951 12,231 5,586 6,645

$

782 13,550 6,049 7,501

0.28

$

0.34

$

0.39

0.28

$

0.34

$

0.38

2008 Jun. 30 Sep. 30 100.0% 100.0% 34.3 32.8 65.7 67.2 49.8 46.2 15.9 21.0

Dec. 31 100.0% 33.5 66.5 42.4 24.1

4.2

4.4

3.7

2.3

1.8

1.5

12.0 5.4 6.6%

28.6 9.5 19.1%

17.5 7.9 9.6%

18.2 8.0 10.2%

22.8 10.4 12.4%

25.6 11.4 14.2%

Recent Acquisitions Propex. On February 16, 2007, CoStar Limited acquired Property Investment Exchange Limited (“Propex”), a provider of web-based commercial property information and operator of an electronic platform that facilitates the exchange of investment property in the U.K. Propex’s suite of electronic platforms and listing websites give users access to the U.K. commercial property investment and leasing markets. CoStar Limited acquired all outstanding capital stock of Propex for approximately $22.0 million, consisting of cash, deferred consideration and 21,526 shares of CoStar common stock. First CLS, Inc. On April 1, 2008, we acquired certain assets of First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information for $3.0 million in initial cash consideration and deferred consideration payable within approximately six months of the one-year anniversary of closing. Accounting Treatment. These acquisitions were accounted for using purchase accounting. The purchase price for the Propex acquisition was primarily allocated to acquired customer base, trade names, and goodwill. The purchase price for the First CLS, Inc. acquisition was primarily allocated to acquired customer base. The acquired customer base for the acquisitions, which consists of one distinct intangible asset for each acquisition and is composed of acquired customer contracts and the related customer relationships, is being amortized on a 125% declining balance method over ten years. The Propex acquired trade name is being amortized on a straight-line basis over 33

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three years. We recorded goodwill of approximately $15.0 million for the Propex acquisition and $1.1 million for the First CLS, Inc. acquisition. Goodwill is not amortized, but is subject to annual impairment tests. The results of operations of Propex and First CLS, Inc. have been consolidated with those of the Company since the respective dates of the acquisitions and are not considered material to our consolidated financial statements. Accordingly, pro forma financial information has not been presented for either acquisition. Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents and short-term investments. Total cash, cash equivalents and short-term investments were $195.3 million at December 31, 2008 compared to $187.4 million at December 31, 2007. The increase in cash, cash equivalents and short-term investments for the year ended December 31, 2008 was primarily due to net cash from operating activities of approximately $40.9 million partially offset by the reclassification of approximately $33.1 million par value auction rate securities (“ARS”) from short-term investments to long-term investments in the first quarter of 2008. Net cash provided by operating activities for the year ended December 31, 2008 was $40.9 million compared to $51.7 million for the year ended December 31, 2007. The $10.8 million decrease in net cash provided by operating activities is primarily due to approximately $3.3 million decreased cash receipts on accounts receivable due to increased balances and declining economic conditions and increased payments for accounts payable and accrued expenses of approximately $9.8 million which included the $2.9 million payment of deferred consideration for the Propex acquisition, approximately $400,000 in payments for a Propex data agreement, and payment of approximately $1.4 million in value added taxes related to the lease settlement. Net cash provided by investing activities was $52.4 million for the year ended December 31, 2008, compared to net cash used in investing activities of $40.3 million for the year ended December 31, 2007. This $92.7 million increase in net cash provided by investing activities was primarily due to the decision to invest in money market funds and U.S. treasuries instead of short-term investment instruments, which resulted in a net sale of investments of approximately $59.1 million in the year ended December 31, 2008 compared to a net purchase of investments of approximately $9.3 million in the year ended December 31, 2007. In addition, we used $3.0 million in cash as initial consideration for the purchase of First CLS, Inc. in the year ended December 31, 2008, as compared to $16.7 million in cash consideration used for the acquisition of Propex in the year ended December 31, 2007. We also purchased approximately $10.6 million less in property, equipment and other assets during the year ended December 31, 2008 compared to the year ended December 30, 2007. Net cash provided by financing activities was $11.5 million for the year ended December 31, 2008 compared to $8.2 million for the year ended December 31, 2007. The higher net cash provided by financing activities in 2008 compared to 2007 is due to an increase in excess tax benefits from stock options partially offset by a decrease in proceeds from the exercise of stock options. Contractual Obligations. The following table summarizes our principal contractual obligations at December 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Operating leases Purchase obligations(1) Total contractual principal cash obligations

$

Total 23,596

$

2,971 26,567

$

2009 8,264

2010-2011 $ 10,041

2012-2013 $ 4,276

2014 and thereafter $ 1,015

$

2,242 10,506

294 10,335

290 4,566

145 1,160

$

$

$

(1)Amounts

do not include (i) contracts with initial terms of twelve months or less, or (ii) multi-year contracts that may be terminated by a third party or us. During 2008, we incurred capital expenditures of approximately $3.7 million. We expect to make capital expenditures in 2009 of approximately $4.0 million to $7.0 million. 34

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To date, we have grown in part by acquiring other companies and we may continue to make acquisitions. Our acquisitions may vary in size a other means of funding to make these acquisitions. In April 2008, we paid $3.0 million in initial cash consideration and made a commitment anniversary of closing for the online commercial real estate information assets of First CLS, Inc., an Atlanta-based provider of local commercial real

Based on current plans, we believe that our available cash combined with positive cash flow provided by operating activities should be suffici

As of December 31, 2008, we had $33.1 million of long-term investments in student loan ARS, which failed to settle at auctions. The majo primarily securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education. Wh the short term. In the event we need to immediately access these funds, we may have to sell these securities at an amount below par value. Based and our expected operating cash flows, we do not anticipate having to sell these investments below par value in order to operate our business in th

As of December 31, 2008, we had utilized all of our U.S. net operating loss carryforwards for federal income tax purposes. As a result, we expec

Inflation may affect the way we operate in the U.S. and abroad. In general, we believe that over time we are able to increase the prices of our se not believe the impact of inflation has significantly affected our operations, and we do not anticipate that inflation will have a material impact on ou Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Incom effective for our company as of January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax r the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being r with FIN 48 did not have a material impact on our results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framew fair value measurements. SFAS 157 does not require any new fair value measurements under GAAP and is effective for fiscal years beginning afte 157-2, “Partial Deferral of the Effective Date of Statement 157”, (“FSP 157-2”), which delays the effective date of SFAS 157 to January 1, 2009 for disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Effective January 1, 2008, we adopted the po did not have a material impact on our results of operations and financial position. In October 2008, the FASB issued FSP 157-3, “Determining the clarifies the application of SFAS 157 to markets that are not active and provides an example illustrating key considerations for determining the fa upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard did not have an impact on 35

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In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an amend measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is eff on January 1, 2008 and have not elected to apply the fair value option to any of our financial instruments. The adoption of SFAS 159 did not have

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”), which will change the accounti 31, 2008. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction a accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R will have an impact on accounting for busi business combination with an acquisition date subsequent to December 31, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of AR for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or impact on our results of operations or financial position.

In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which is effec adoption of FSP 142-3 is not permitted. FSP 142-3 requires additional footnote disclosures about the impact of our ability or intent to renew or exte intangibles, how we account for costs incurred to renew or extend such agreements, the time until the next renewal or extension period by as intangibles acquired after December 31, 2008, FSP 142-3 requires that we consider our experience regarding renewal and extensions of similar a arrangements, FSP 142-3 requires that we use the assumptions of a market participant putting the intangible to its highest and best use in determ December 31, 2008, and its effect will depend on the specifics of the intangible acquired.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which identifies be used in the preparation of financial statements. SFAS 162 is effective as of November 17, 2008. The adoption of SFAS 162 did not have a materia Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

We provide information/marketing services to the commercial real estate and related business community in the U.S., U.K. and France. Our f such, fluctuations in the British Pound and Euro may have an impact on our business, results of operations and financial position. For the year en 11% of total revenue. For the year ended December 31, 2008, our revenue would have decreased by approximately $2.2 million if the U.S. dollar denominated in foreign currencies. A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure at D carrying amount of net assets. For the year ended December 31, 2008, our revenue would have increased by approximately $2.2 million if the U.S. d denominated in foreign currencies. A 10% weakening of the U.S. dollar exchange rate against all currencies with which we have exposure at D carrying amount of net assets. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to reduce our exposure to exchange rate fluctuations, but we may be unable to enter into hedging transactions successfully, on acceptable terms included a loss from foreign currency translation adjustments of approximately $8.5 million. 36

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We do not have material exposure to market risks associated with changes in interest rates related to cash equivalent securities held as of equivalents and short-term investments. If there is an increase or decrease in interest rates, there will be a corresponding increase or decre investments. Based on our ability to access our cash, cash equivalents and short-term investments, and our expected operating cash flows, we operate our business in the foreseeable future.

Included within our long-term investments are investments in mostly AAA rated student loan ARS. These securities are primarily securities December 31, 2008, auctions for $33.1 million of our investments in auction rate securities failed. As a result, we may not be able to sell these inv event we need to immediately liquidate these investments, we may have to locate a buyer outside the auction process, who may be unwilling to value of these investments in ARS as of December 31, 2008, we determined that there was a decline in the fair value of our ARS investments of app as an unrealized loss in other comprehensive income in stockholders’ equity. If the issuers are unable to successfully close future auctions and th investments as a temporary impairment and recognize a greater unrealized loss in other comprehensive income or as an other-than-temporary imp and short-term investments, and our expected operating cash flows, we do not anticipate having to sell these securities below par value in orde financial statements for further discussion.

We have approximately $70.7 million in intangible assets as of December 31, 2008. As of December 31, 2008, we believe our intangible asse operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. In the event that we dete to the amount by which the carrying amount of the assets exceeds the fair value of the asset. We continue to monitor these assumptions and their Item 8.

Financial Statements and Supplementary Data

Financial Statements meeting the requirements of Regulation S-X are set forth beginning at page F-1. Supplementary data is set forth in “Mana under the caption “Consolidated Results of Operations.” Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None. Item 9A.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required and procedures. 37

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As of December 31, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our Ch and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer conclude reasonable assurance level. Management’s Report on Internal Control over Financial Reporting

Management of CoStar is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessm Securities and Exchange Commission, internal control over financial reporting is a process designed by, or supervised by, the Company’s principa the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of finan receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and director unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any ev become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment December 31, 2008 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of the C

Based on this assessment, management did not identify any material weakness in the Company's internal control, and management has concl December 31, 2008. Ernst & Young, LLP, the independent registered public accounting firm that audited the Company's financial statements included in this financial reporting, a copy of which is included in this Annual Report on Form 10-K.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affe reporting. Item 9B.

Other Information.

None. 38

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PART III Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual meeting of stockholders. Item 11.

Executive Compensation

The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual meeting of stockholders. Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual meeting of stockholders. Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual meeting of stockholders. Item 14.

Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual meeting of stockholders. PART IV Item 15.

Exhibits and Financial Statement Schedules

(a)(1) The following financial statements are filed as a part of this report: CoStar Group, Inc. Consolidated Financial Statements.

(a)(2) All schedules are omitted because they are not applicable or not required or because the required information is incorporated herein by r this report.

(a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed in the Exhibit Index included else

39

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SIGNATURES Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland, on the 23rd day of February 2009. COSTAR GROUP, INC. By:

/S/ Andrew C. Florance Andrew C. Florance President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew C. Florance and Brian J. Radecki, and each of them individually, as their true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature

Capacity

Date

/S/ Michael R. Klein Michael R. Klein

Chairman of the Board

February 23, 2009

/S/ Andrew C. Florance Andrew C. Florance

Chief Executive Officer and President and a Director (Principal Executive Officer)

February 23, 2009

/S/ Brian J. Radecki Brian J. Radecki

Chief Financial Officer (Principal Financial and Accounting Officer)

February 23, 2009

/S/ David Bonderman David Bonderman

Director

February 23, 2009

/S/ Warren H. Haber Warren H. Haber

Director

February 23, 2009

/S/ Josiah O. Low, III Josiah O. Low, III

Director

February 23, 2009

/S/ Christopher Nassetta Christopher Nassetta

Director

February 23, 2009

/S/ Michael Glosserman Michael Glosserman

Director

February 23, 2009

40

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INDEX TO EXHIBITS Exhibit No. 2.1

3.1 3.2 3.3 4.1 *10.1 *10.2 *10.3 *10.4 *10.5 *10.6 *10.7 *10.8 *10.9 *10.10 *10.11 *10.12 *10.13 *10.14 *10.15

Description Offer Document by CoStar Limited for the share capital of Focus Information Limited (Incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Registration Statement on Form S-3 of the Registrant (Reg. No. 333-106769) filed with the Commission on August 14, 2003). Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission on March 13, 1998 (the “1998 Form S-1”)). Certificate of Amendment of Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 10-Q for the quarter ended June 30, 1999). Amended and Restated By-Laws (filed herewith). Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant’s Report on Form 10-K for the year ended December 31, 1999). CoStar Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005). CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (filed herewith). CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). Form of Stock Option Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of Stock Option Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.8.1 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of Restricted Stock Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed June 22, 2007). Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (filed herewith). Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (filed herewith). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers and employees (filed herewith). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its directors (filed herewith). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (filed herewith). Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). CoStar Group, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission on April 27, 1998). 41

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INDEX TO EXHIBITS  (Continued) Exhibit No. Description *10.16 First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (filed herewith). *10.17 Executive Service Contract dated February 16, 2007, between Property Investment Exchange Limited and Paul Marples (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). *10.18 Form of Indemnification Agreement between the Registrant and each of its officers and directors (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2004). 10.19 Office Lease, dated August 12, 1999, between CoStar Realty Information, Inc. and Newlands Building Ventures, LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 1999). 10.20 Office Sublease, dated June 14, 2002, between CoStar Realty Information, Inc., CoStar Group, Inc. and Gateway, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the quarter ended June 30, 2002). 10.21 Exercise of option to extend lease term and sublease amendment, dated February 22, 2007 between Gateway, Inc. and CoStar Realty Information, Inc. and CoStar Group, Inc. (Incorporated by reference to Exhibit 10.11 to the Registrant’s Report on Form 10K for the year ended December 31, 2006). 10.22 Addendum No. 3 to Office Lease, dated as of May 12, 2004, between Newlands Building Venture, LLC, and CoStar Realty Information, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended June 30, 2004). 10.23 Office Lease, dated as of February 23, 2005, between CoStar Realty Information, Inc. and Crestpointe III, LLC. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). 10.24 Office Lease Agreement, dated March 16, 2007, between Corporate Place I Business Trust and CoStar Group, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007). 10.25 Agreement for Lease among Nokia UK Limited, Focus Information Limited and CoStar Group, Inc., dated November 23, 2007 (Incorporated by reference to Exhibit 10.22 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). 10.26 Contract for Sale and Purchase between Focus Information Limited and Trafigura Limited, dated September 14, 2007 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2007). 21.1 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith). 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002 (filed herewith). 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002 (filed herewith).

* Management Contract or Compensatory Plan or Arrangement. 42

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COSTAR GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended December 31, 2006, 2007 and 2008 Consolidated Balance Sheets as of December 31, 2007 and 2008 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2007 and 2008 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008 Notes to Consolidated Financial Statements

F-1

F-2 F-4 F-5 F-6 F-7 F-8

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of CoStar Group, Inc. We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoStar Group, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. As also discussed in Note 9 to the consolidated financial statements, under the heading Income Taxes, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” effective January 1, 2007. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CoStar's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2009 expressed an unqualified opinion thereon. /S/ Ernst & Young LLP

McLean, Virginia February 19, 2009

F-2

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of CoStar Group, Inc. We have audited CoStar Group, Inc.’s (“CoStar”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CoStar’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, CoStar maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008 of CoStar Group, Inc. and our report dated February 19, 2009 expressed an unqualified opinion thereon.

/S/ Ernst & Young LLP

McLean, Virginia February 19, 2009 F-3

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COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)

2006 Revenues Cost of revenues Gross margin

$

Operating expenses: Selling and marketing Software development General and administrative Gain on lease settlement, net Purchase amortization

Year Ended December 31, 2007 2008

158,889 56,136 102,753

Income from operations Interest and other income, net Income before income taxes Income tax expense, net Net income

$

41,774 12,008 30,707  4,183 88,672 14,081 6,845 20,926 8,516 12,410

Net income per share  basic Net income per share  diluted

$ $

0.66 0.65

Weighted average outstanding shares  basic Weighted average outstanding shares  diluted

18,751 19,165 See accompanying notes. F-4

$

$ $ $

192,805 76,704 116,101

$

212,428 73,408 139,020

51,777 12,453 36,569 (7,613) 5,063 98,249 17,852 8,045 25,897 9,946 15,951 $

41,705 12,759 39,888  4,880 99,232 39,788 4,914 44,702 20,079 24,623

0.84 0.82 19,044 19,404

$ $

1.27 1.26 19,372 19,550

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COSTAR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands except per share data) December 31, 2007 2008 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of approximately $2,959 and $3,213 as of December 31, 2007 and 2008, respectively Deferred income taxes, net Prepaid expenses and other current assets Total current assets Long-term investments Deferred income taxes, net Property and equipment, net Goodwill Intangibles and other assets, net Deposits and other assets Total assets

$

$

57,785 129,641

$

159,982 35,268

10,875 2,716 4,661 205,678

12,294 2,036 2,903 212,483

 2,233 24,045 61,854 25,711 2,322 321,843

29,340 3,392 16,876 54,328 16,421 1,544 334,384

$

LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued wages and commissions Accrued expenses Income taxes payable Deferred revenue Deferred rent Total current liabilities

$

Deferred income taxes, net Income taxes payable Commitments and Contingencies Stockholders’ equity: Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding Common stock, $0.01 par value; 30,000 shares authorized; 19,474 and 19,733 issued and outstanding as of December 31, 2007 and 2008, respectively Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity $ See accompanying notes

F-5

3,299 7,489 15,505 191 10,374 1,379 38,237

$

1,636 7,217 7,754 1,907 9,442 1,180 29,136

1,801 

132 1,695









195 317,570 5,626 (41,586) 281,805 321,843 $

197 333,983 (13,796) (16,963) 303,421 334,384

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COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands)

Comprehensive Income Balance at December 31, 2005 Net income Foreign currency translation adjustment Net unrealized gain on short-term investments Comprehensive income $ Exercise of stock options Swaps of shares for exercise Restricted stock grants Restricted stock grants surrendered Stock compensation expense, net of forfeitures Employee Stock Purchase Plan (ESPP) Impact upon adoption of SFAS 123R Balance at December 31, 2006 FIN 48 Adjustment Balance at January 1, 2007 Net income Foreign currency translation adjustment Net unrealized gain on short-term investments Comprehensive income $ Exercise of stock options Restricted stock grants Restricted stock grants surrendered Consideration for Propex Stock compensation expense, net of forfeitures

Common Stock Shares Amount

Accumulated Additional Other Total Paid-In Unearned Comprehensive Accumulated Stockholders’ Capital Compensation Income (Loss) Deficit Equity

12,410

18,674 $ 

187 $ 295,920 $  

(2,712) $ 

1,348 $ 

(69,947) $ 12,410

224,796 12,410

2,950









2,950



2,950

222









222



222

270

3

6,566







6,569

(20)

(1)

(938)







(939)

165

2

34







36

(12)



(234)







(234)





4,094







4,094

4



206







206





(2,712)

2,712







19,081 

191 

302,936 26

 

4,520 

(57,537) 

250,110 26

15,951

19,081 

191 

302,962 

 

4,520 

(57,537) 15,951

250,136 15,951

873









873



873

233









233



233

289

3

8,127







8,130

131

1

(1)









(58)



(635)







(635)

22



1,010







1,010





5,440







5,440

15,582

17,057

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ESPP Excess tax benefit for exercised stock options Balance at December 31, 2007 Net income Foreign currency translation adjustment Net unrealized loss on short-term investments Comprehensive income $ Exercise of stock options Restricted stock grants Restricted stock grants surrendered Stock compensation expense, net of forfeitures ESPP Excess tax benefit for exercised stock options Balance at December 31, 2008

9



407







407





260







260

24,623

19,474 

195 

317,570 

 

5,626 

(14,061)









(14,061)



(14,061)

(5,361)









(5,361)



(5,361)

198

2

6,555







6,557

102

1









1

(49)

(1)

(695)







(696)

 8

 

4,907 329

 

 

 

4,907 329





5,317







5,317

(13,796) $

(16,963) $

(41,586) 24,623

281,805 24,623

5,201

19,733 $

197 $ 333,983 $ See accompanying notes.

F-6

 $

303,421

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COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

2006 Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Deferred income tax expense, net Provision for losses on accounts receivable Excess tax benefit from stock options Stock-based compensation expense Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Interest receivable Prepaid expenses and other current assets Deposits Accounts payable and accrued expenses Deferred revenue Net cash provided by operating activities

$

Investing activities: Purchases of short-term investments Sales of short-term investments Purchases of property and equipment and other assets Acquisitions, net of cash acquired Net cash (used in) provided by investing activities Financing activities: Excess tax benefit from stock options Proceeds from transactions in stock based plans Net cash provided by financing activities Effect of foreign currency exchange rates on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes

F-7

$

Year Ended December 31, 2007 2008

12,410

$

15,951

$

24,623

5,734 6,076 7,658 1,813  4,155

7,778 8,369 9,946 2,464  5,440

8,360 8,441 2,148 4,042 (5,317) 4,940

(5,080) (164) (1,205) (246) 688 748 32,587

(2,944) (67) (755) (670) 6,721 (501) 51,732

(6,196) 533 1,464 652 (3,044) 262 40,908

(108,876) 95,393 (12,959) (1,887) (28,329)

(116,609) 107,286 (14,271) (16,737) (40,331)

(4,839) 63,949 (3,656) (3,024) 52,430

 5,582 5,582

 8,161 8,161

5,317 6,158 11,475

254 10,094 28,065 38,159

64 19,626 38,159 57,785

(2,616) 102,197 57,785 159,982

$

$

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 1. ORGANIZATION CoStar Group, Inc. (the “Company”) has created a comprehensive, proprietary database of commercial real estate information covering the United States, as well as parts of the United Kingdom and France. Based on its unique database, the Company provides information/marketing services to the commercial real estate and related business community and operates within two segments, U.S. and International. The Company’s information/marketing services are typically distributed to its clients under subscription-based license agreements, which typically have a minimum term of one year and renew automatically. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain previously reported amounts have been reclassified to conform to the Company’s current presentation. Revenue Recognition The Company primarily derives revenues from providing access to its proprietary database of commercial real estate information. The Company generally charges a fixed monthly amount for its subscription-based services. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus and the number of services to which a client subscribes. Subscriptionbased license agreements typically have a minimum term of one year and renew automatically. Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sales of subscription licenses and is recognized over the term of the license agreement. Cost of Revenues Cost of revenues principally consists of salaries and related expenses for the Company’s researchers who collect and analyze the commercial real estate data that is the basis for the Company’s information/marketing services. Additionally, cost of revenues includes the cost of data from third party data sources, which is expensed as incurred, and the amortization of database technology. Significant Customers No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2006, 2007 and 2008.

F-8

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Foreign Currency Translation The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars as of the balance sheet date. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period. Gains and losses resulting from translation are included in accumulated other comprehensive income. Net gains or losses resulting from foreign currency exchange transactions are included in the consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2008 and 2007. Comprehensive Income The components of accumulated other comprehensive income were as follows (in thousands): Year Ended December 31, 2007 2008 $ 5,540 $ (8,521) 86 (5,275) $ 5,626 $ (13,796)

Foreign currency translation adjustment Accumulated net unrealized gain (loss) on investments, net of tax Total accumulated other comprehensive income (loss) Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense were approximately $4.0 million, $2.3 million and $2.8 million for the years ended December 31, 2006, 2007 and 2008, respectively. Income Taxes The Company provides for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”). Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that some or all of the asset may not be realized through future taxable earnings or implementation of tax planning strategies. Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s potentially dilutive securities include stock options and restricted stock. Diluted net income per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potential common shares would have an anti-dilutive effect. Stock-Based Compensation On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R “Share Based Payment” (“SFAS 123R”), which addresses the accounting for share-based payment transactions in which the Company receives employee services in exchange for equity instruments., The statement generally requires that equity instruments issued in such transactions be accounted for using a fairvalue based method and the fair value of such equity instruments be recognized as expense in the consolidated statements of operations. F-9

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Stock-Based Compensation  (Continued) Under the fair-value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. The Company recognizes compensation costs for awards with graded vesting on a straight-line basis. The Company adopted SFAS 123R using the modified prospective method, which requires the application of the accounting standard as of January 1, 2006. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Upon adoption of SFAS 123R, the Company recorded a charge of approximately $35,000 representing the cumulative effect of a change in accounting principle. This amount was recorded in general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2006. The impact of the adoption of SFAS 123R on the Company's results of operations for the year ended December 31, 2006, was as follows (in thousands, except per share data): Income from operations Income before taxes Net income Basic earnings per share Diluted earnings per share

$ $ $ $ $

(2,860) (2,860) (1,784) (0.10) (0.09)

SFAS 123R requires cash flows resulting from excess tax benefits to be classified as part of cash flows from financing activities. Excess tax benefits represent tax benefits related to exercised options in excess of the associated deferred tax asset for such options. There were no excess tax benefits as a result of adopting SFAS 123R for the year ended December 31, 2006, and no amounts were classified as an operating cash outflow or a financing cash inflow in the accompanying consolidated statement of cash flows. Net cash proceeds from the exercise of stock options were approximately $6.6 million; $8.1 million and $6.6 million for the years ended December 31, 2006, 2007 and 2008, respectively. There were approximately $5.3 million of excess tax benefits realized from stock option exercises for the year ended December 31, 2008. Stock-based compensation expense for stock options, restricted stock and the employee stock purchase plan included in the Company's results of operations for the years ended December 31, was as follows (in thousands): Year Ended December 31, 2007 2008 317 $ 926 $ 547 1,263 1,118 400 202 340 423 2,373 3,056 3,570 4,155 $ 5,440 $ 4,940

2006 Cost of revenues Selling and marketing Software development General and administrative Total

$

$

F-10

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market fund investments and U.S. Government Securities. As of December 31, 2007 and 2008, cash of $754,000 and $518,000, respectively, was held to support letters of credit for security deposits. Investments The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), The Company determines the appropriate classification of investments at the time of purchase and reevaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term investments consist of commercial paper, government/federal notes and bonds and corporate obligations with maturities greater than 90 days at the time of purchase. Available-for-sale short-term investments with contractual maturities beyond one year are classified as current in the Company’s consolidated balance sheets because they represent the investment of cash that is available for current operations. Long-term investments consist of auction rate securities. Investments are carried at fair market value. Concentration of Credit Risk and Financial Instruments The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and lack of dependence on individual customers mitigate the risk of nonpayment of the Company’s accounts receivable. The carrying amount of the accounts receivable approximates the net realizable value. The carrying value of the Company’s financial instruments including cash and cash equivalents, short-term investments, long-term investments, accounts receivable, accounts payable, and accrued expenses approximates fair value. Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the aging of the balances, and current economic conditions that may affect a customer’s ability to pay. Property and Equipment Property and equipment are stated at cost. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets: Leasehold improvements Furniture and office equipment Research vehicles Computer hardware and software

Shorter of lease term or useful life Five to seven years Five years Two to five years

Internal use software costs are capitalized in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Qualifying costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred. F-11

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Goodwill, Intangibles and Other Assets Goodwill represents the excess of costs over the fair value of assets of businesses acquired. Goodwill and intangible assets subject to amortization that arose from acquisitions prior to July 1, 2001, have been amortized on a straight-line basis over their estimated useful lives in accordance with Accounting Principles Board Opinion No. 17, “Intangible Assets” (“APB 17”). The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually by reporting unit in accordance with the provisions of SFAS No. 142. The goodwill impairment test is a two-step process. The first step is to determine the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including our future financial performance and a weighted average cost of capital. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss. The impairment loss is measured based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk in our current business model. SFAS No. 142 also requires that intangible assets with estimable useful lives that arose from acquisitions on or after July 1, 2001, be amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for Impairment or Disposal of Long-Lived Assets”. Acquired database technology, customer base and trade names and other are related to the Company’s acquisitions (See Notes 3 and 6). Acquired database technology and trade names and other are amortized on a straight-line basis over periods ranging from two to ten years. The acquired intangible asset characterized as customer base consists of one distinct intangible asset composed of acquired customer contracts and the related customer relationships. Acquired customer bases that arose from acquisitions prior to July 1, 2001 are amortized on a straight-line basis principally over a period of ten years. Acquired customer bases that arose from acquisitions on or after July 1, 2001 are amortized on a 125% declining balance method over ten years. The cost of capitalized building photography is amortized on a straight-line basis over five years. Long-Lived Assets In accordance with SFAS 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount for which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Goodwill and intangible assets not subject to amortization are tested annually for impairment by reporting unit, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Company’s operating segments, U.S. and International, are the reporting units tested for potential impairment under SFAS No. 142. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. F-12

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which became effective for the Company as of January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material impact on its results of operations and financial position. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements under GAAP and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”), which delays the effective date of SFAS 157 to January 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Effective January 1, 2008, the Company adopted the portion of SFAS 157 that was not deferred under FSP 157-2. The adoption of SFAS 157 did not have a material impact on the Company’s results of operations or financial position. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”), which clarifies the application of SFAS 157 to markets that are not active and provides an example illustrating key considerations for determining the fair value of financial assets when their markets are not active. FSP 1573 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard did not have an impact on the Company’s results of operations or financial position. In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning on or after December 31, 2007. The Company adopted SFAS 159 on January 1, 2008 and has elected not to apply the fair value option to any of its financial instruments. The adoption of SFAS 159 did not have a material impact on the Company’s results of operations or financial position. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”), which will change the accounting for any business combination the Company enters into with an acquisition date after December 31, 2008. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R will have an impact on accounting for business combinations once adopted, but its effect will depend upon the specifics of any business combination with an acquisition date subsequent to December 31, 2008. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS 160”), which establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on the Company’s results of operations or financial position. F-13

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED) Recent Accounting Pronouncements  (Continued) In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which is effective for all fiscal years and interim periods beginning after December 15, 2008. Early adoption of FSP 142-3 is not permitted. FSP 142-3 requires additional footnote disclosures about the impact of the Company’s ability or intent to renew or extend agreements related to existing intangibles or expected future cash flows from those intangibles, how the Company accounts for costs incurred to renew or extend such agreements, the time until the next renewal or extension period by asset class, and the amount of renewal or extension costs capitalized, if any. For any intangibles acquired after December 31, 2008, FSP 142-3 requires that the Company consider its experience regarding renewal and extensions of similar arrangements in determining the useful life of such intangibles. If the Company does not have experience with similar arrangements, FSP 142-3 requires that the Company use the assumptions of a market participant putting the intangible to its highest and best use in determining the useful life. The adoption of FSP 142-3 will impact intangibles acquired after December 31, 2008, and its effect will depend on the specifics of the intangible acquired. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. SFAS 162 is effective as of November 17, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s results of operations or financial position. 3. ACQUISITIONS On February 16, 2007, CoStar Limited, a wholly owned U.K. subsidiary of CoStar, acquired all of the outstanding capital stock of Property Investment Exchange Limited (“PropexTM”) for approximately $22.0 million, consisting of cash, deferred consideration and 21,526 shares of CoStar common stock. Propex provides web-based commercial property information and operates an electronic platform that facilitates the exchange of investment property in the U.K. Propex’s suite of electronic platforms and listing websites give users access to the U.K. commercial property investment and leasing markets. On April 1, 2008, the Company acquired certain assets of First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information for $3.0 million in initial cash consideration and deferred consideration payable within approximately six months of the one-year anniversary of closing. These acquisitions were accounted for using the purchase method of accounting. The purchase price of the Propex acquisition was primarily allocated to customer base, trade name, and goodwill. The purchase price of the First CLS, Inc. acquisition was primarily allocated to acquired customer base. The acquired customer base for the acquisitions, which consists of one distinct intangible asset for each acquisition and is composed of acquired customer contracts and the related customer relationships, is being amortized on a 125% declining balance method over ten years. The Propex acquired trade name is amortized on a straight-line basis over three years. We recorded goodwill of approximately $15.0 million for the Propex acquisition and $1.1 million for the First CLS, Inc. acquisition. Goodwill is not amortized, but is subject to annual impairment tests. The results of operations of Propex and First CLS, Inc. have been consolidated with those of the Company since the date of the acquisition and are not considered material to our consolidated financial statements. Accordingly, pro forma financial information has not been presented for either acquisition. F-14

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 4. INVESTMENTS The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). The Company determines the appropriate classification of investments at the time of purchase and reevaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term investments consist of commercial paper, government/federal notes and bonds and corporate obligations with maturities greater than 90 days at the time of purchase. Available-for-sale short-term investments with contractual maturities beyond one year are classified as current in the Company’s consolidated balance sheets because they represent the investment of cash that is available for current operations. Long-term investments consist of auction rate securities. Investments are carried at fair market value. Scheduled maturities of investments classified as available-for-sale as of December 31, 2008 are as follows (in thousands): Maturity Due in: 2009 2010-2013 2014-2018 2019 and thereafter

Fair Value $

Securities with multiple maturities Investments

$

5,226 26,881 917 31,131 64,155 453 64,608

The realized gains on the Company’s investments for the years ended December 31, 2007 and 2008 was approximately $24,000 and $329,000, respectively. The realized losses on the Company’s investments for the years ended December 31, 2007 and 2008 was approximately $232,000 and $489,000, respectively. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. A decline in market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned. The unrealized losses on the Company’s investments as of December 31, 2007 and 2008 were generated primarily from increases in interest rates. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company has the ability to hold these investments until a recovery of fair value, which may be maturity, it does not consider these investments to be other-than-temporarily impaired as of December 31, 2007 and 2008. F-15

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 4. INVESTMENTS  (CONTINUED) The components of the investments in a loss position for more than twelve months consists of the following (in thousands): December 31, 2007 Aggregate Fair Value $ 1,592 13,886 $ 15,478

Federal debt securities Corporate debt securities

2008

Gross Aggregate Unrealized Fair Losses Value $ (15) $  (49) 22,136 $ (64) $ 22,136

Gross Unrealized Losses $  (1,494) $ (1,494)

The components of the investments in a loss position for less than twelve months consists of the following (in thousands): December 31, 2007 2008 Aggregate Gross Aggregate Gross Fair Unrealized Fair Unrealized Value Losses Value Losses $  $  $ 29,340 $ (3,710) 531 (1) 19 (1) 21,234 (148) 6,976 (366) $ 21,765 $ (149) $ 36,335 $ (4,077)

Auction rate securities Federal debt securities Corporate debt securities

The gross unrealized gains as of December 31, 2007 and 2008 were approximately $330,000 and $128,000, respectively. 5. FAIR VALUE In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. The Company adopted the provisions of SFAS 157 as of January 1, 2008 for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial position, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.

F-16

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 5. FAIR VALUE  (CONTINUED) SFAS 157 establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. In accordance with SFAS 157, the following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2008 (in thousands): Level 1 29,297 130,685    $ 159,982

Cash Money market funds Corporate debt securities Government-sponsored enterprise obligations Auction rate securities Total

$

Level 2 $

$

  35,132 136  35,268

Level 3 $

$

    29,340 29,340

$

$

Total 29,297 130,685 35,132 136 29,340 224,590

The Company’s Level 2 assets consist of corporate debt securities and government-sponsored enterprise obligations, which do not have directly observable quoted prices in active markets. The Company’s corporate debt securities are valued using matrix pricing, which is an acceptable practical expedient under SFAS 157 for inputs. The Company’s Level 3 assets consist of variable rate debt instruments with an auction-reset feature, Auction Rate Securities (“ARS”), whose underlying assets are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The following table presents the Company’s Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs as defined in SFAS 157, as of December 31, 2008 (in thousands): Auction Rate Securities $ 53,975 (3,710) (20,925) $ 29,340

Balance at December 31, 2007 Unrealized loss included in other comprehensive income Settlements Balance at December 31, 2008

ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value. Typically, the carrying value of ARS approximates fair value due to frequent resetting of the interest rates. As of December 31, 2008, the Company held ARS with $33.1 million par value, all of which failed to settle at auctions. The majority of these investments are of high credit quality with AAA credit ratings and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s consolidated balance sheet as of December 31, 2008. F-17

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 5. FAIR VALUE  (CONTINUED) While the Company continues to earn interest on its ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of cash flows, liquidity risk premiums, expected holding periods, and default risk. Based on this assessment of fair value, as of December 31, 2008, the Company determined there was a decline in the fair value of its ARS investments of approximately $3.7 million. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in other comprehensive income in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, the Company may be required to record additional unrealized losses in other comprehensive income or an other-than-temporary impairment charge to earnings on these investments. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): December 31, 2007 2008 Leasehold improvements Furniture, office equipment and research vehicles Computer hardware and software

$

Accumulated depreciation and amortization Property and equipment, net

8,357 $ 19,874 27,735 55,966 (31,921) 24,045 $

7,808 19,305 27,938 55,051 (38,175) 16,876

International $ 16,069 $ 14,806 551 31,426  (8,645) $ 22,781 $

Total 46,497 14,806 551 61,854 1,119 (8,645) 54,328

$

7. GOODWILL The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands): United States $ 30,428   30,428 1,119  $ 31,547

Goodwill, December 31, 2006 Acquisitions Effect of foreign currency translation Goodwill, December 31, 2007 Acquisitions Effect of foreign currency translation Goodwill, December 31, 2008

The Company recorded goodwill of approximately $15.0 million for the Propex acquisition in February 2007. The Company recorded goodwill of approximately $1.1 million in connection with the First CLS, Inc. acquisition in April 2008. The decrease in goodwill in 2008 is related to foreign currency fluctuations. During the fourth quarters of 2007 and 2008, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.

F-18

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 8. INTANGIBLES AND OTHER ASSETS Intangibles and other assets consist of the following (in thousands, except amortization period data):

December 31, 2007 Building photography Accumulated amortization Building photography, net

$

10,799 (6,708) 4,091

2008 $

WeightedAverage Amortization Period (in years)

11,011 (7,711) 3,300

5

Acquired database technology Accumulated amortization Acquired database technology, net

21,390 (20,573) 817

20,711 (20,361) 350

4

Acquired customer base Accumulated amortization Acquired customer base, net

50,891 (34,374) 16,517

48,198 (37,192) 11,006

10

9,089 (4,803) 4,286

7,744 (5,979) 1,765

6

Acquired trade names and other Accumulated amortization Acquired trade names and other, net Intangibles and other assets, net

$

25,711

$

16,421

Amortization expense for intangibles and other assets was approximately $6.1 million for the year ended December 31, 2006 and $8.4 million for the years ended December 31, 2007 and 2008, respectively. In the aggregate, amortization for intangibles and other assets existing as of December 31, 2008 for future periods is expected to be approximately $5.4 million, $2.4 million, $1.9 million, $1.1 million and $1.0 million for the years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively. F-19

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 9. INCOME TAXES The components of the provision (benefit) for income taxes attributable to operations consist of the following (in thousands):

2006 Current: Federal State Total current Deferred: Federal State Foreign Total deferred Total provision for income taxes

$

$

Year Ended December 31, 2007 2008

414 220 634

$

7,497 1,077 (692) 7,882 8,516 $

574 821 1,395

$

18,289 3,842 22,131

9,716 72 (1,237) 8,551 9,946 $

(408) (52) (1,592) (2,052) 20,079

The components of deferred tax assets and liabilities consists of the following (in thousands): December 31, 2007 2008 Deferred tax assets: Reserve for bad debts Accrued compensation Stock compensation Net operating losses Restructuring reserve Alternative minimum tax credits Capital loss carryovers Unrealized loss on securities Other liabilities Total deferred tax assets

$

799 1,286 1,603 3,177 45 1,393   1,001 9,304

$

928 2,144 2,115 3,077   345 2,088 1,401 12,098

Deferred tax liabilities: Prepaids Depreciation Identified intangibles associated with purchase accounting Total deferred tax liabilities

(739) (427)

(522) (626)

(4,927) (6,093)

(2,607) (3,755)

Net deferred tax asset Valuation allowance Net deferred taxes

3,211 (63) 3,148 $

8,343 (3,047) 5,296

$

The net long-term deferred tax liability shown on the balance sheet includes deferred tax liabilities and assets related to the international operations of the Company. F-20

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 9. INCOME TAXES  (CONTINUED) For the years ended December 31, 2007 and 2008, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The Company’s change in valuation allowance was a decrease of approximately $274,000 for the year ended December 31, 2007 and an increase of approximately $3.0 million for the year ended December 31, 2008. The increase for the year ended December 31, 2008 is due to an increase in the valuation allowance required for the deferred tax assets for international loss carryforwards, capital loss carryforwards, and unrealized losses on securities. The increase in the valuation allowance for the deferred tax asset for unrealized losses has been recorded as an adjustment to other comprehensive income. The valuation allowance for the year ended December 31, 2007 was primarily attributable to deferred tax assets for state net operating loss carryforwards. For the year ended December 31, 2008, the Company had income of approximately $52.7 million subject to applicable U.S. federal and state income tax laws and a loss of approximately $8.0 million subject to applicable international tax laws. The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands):

2006 Expected federal income tax provision at statutory rate State income taxes, net of federal benefit Foreign income taxes, net effect Stock compensation (Decrease) increase in valuation allowance Other adjustments Income tax expense, net

$

$

Year Ended December 31, 2007 2008

7,115 $ 1,014 119 528 (267) 7 8,516 $

8,805 $ 841 156 146 (274) 272 9,946 $

15,646 2,505 497 87 1,023 321 20,079

The Company paid approximately $858,000, $1.1 million, and $13.4 million in income taxes for the years ended December 31, 2006, 2007 and 2008, respectively. The Company has net operating loss carryforwards for international income tax purposes of approximately $10.1 million, which do not expire. The Company adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $217,000 of unrecognized tax benefits, all of which would favorably affect the effective tax rate if recognized in future periods, and $52,000 of accrued penalties and $47,000 of accrued interest. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The following tables summarize the activity related to the Company’s unrecognized tax benefits (in thousands): Unrecognized tax benefit as of January 1, 2007 Increase for current year tax positions Increase for prior year tax positions Expiration of the statute of limitation for assessment of taxes Unrecognized tax benefit as of December 31, 2007

$

$ F-21

217 44 (6) (22) 233

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 9. INCOME TAXES  (CONTINUED) Unrecognized tax benefit as of December 31, 2007 Increase for current year tax positions Increase for prior year tax positions Expiration of the statute of limitation for assessment of taxes Unrecognized tax benefit as of December 31, 2008

$

$

233 1,451 (9) (117) 1,558

Approximately $142,000 and $233,000 of the unrecognized tax benefit as of December 31, 2008, and 2007, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. During 2008, the Company recognized approximately $145,000 of interest and $9,000 of penalties, and had total accruals of approximately $173,000 for interest and $34,000 for penalties as of December 31, 2008. During 2007, the Company recognized approximately $36,000 of interest and $11,000 of penalties, and had total accruals of approximately $74,000 for interest and $57,000 for penalties as of December 31, 2007. The Company does not anticipate the amount of the unrecognized tax benefits to change significantly over the next twelve months. The Company’s federal and state income tax returns for tax years 2005 through 2007 remain open to examination. The Company’s U.K. income tax returns for tax years 2002 through 2007 remain open to examination. 10. GAIN ON LEASE SETTLEMENT, NET On September 14, 2007, CoStar Limited, a wholly owned U.K. subsidiary of CoStar, entered into an agreement with Trafigura Limited to assign to Trafigura the leasehold interest in the office space located in London. The lease assignment was completed on December 19, 2007. As a result, CoStar U.K. was paid approximately $7.6 million, net of expenses, for the assignment of the lease. The expenses associated with the lease settlement included legal, moving and the disposal of assets. 11. COMMITMENTS AND CONTINGENCIES The Company leases office facilities and office equipment under various noncancelable-operating leases. The leases contain various renewal options. Rent expense for the years ended December 31, 2006, 2007 and 2008 was approximately $7.0 million, $8.1 million and $8.0 million, respectively. Future minimum lease payments as of December 31, 2008 are as follows (in thousands):

2009 2010 2011 2012 2013 2014 and thereafter

$

$

8,264 5,652 4,389 3,221 1,055 1,015 23,596

Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the opinion of management, is likely to have a material adverse effect on its financial position or results of operations. F-22

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 12. SEGMENT REPORTING Due to the increased size, complexity, and funding requirements associated with the Company’s international expansion, in 2007 the Company began to manage the business geographically in two operating segments, with the primary areas of measurement and decisionmaking being the U.S. and International, which includes the U.K. and France. The Company’s subscription-based information/marketing services, consisting primarily of CoStar Property Professional® , CoStar Tenant ® , CoStar COMPS Professional® , and FOCUSTM services, currently generate more than 90% of the Company’s total revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a suite of similar services and comprise the Company’s primary service offering in the U.S. operating segment. FOCUS is the Company’s primary service offering in the International operating segment. Management relies on an internal management reporting process that provides revenue and segment EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization. Management believes that segment EBITDA is an appropriate measure for evaluating the operational performance of our segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. Summarized information by segment was as follows (in thousands):

2006 Revenues United States International Total revenues

$ $

EBITDA United States International Total EBITDA

$ $

Reconciliation of EBITDA to net income EBITDA Purchase amortization in cost of revenues Purchase amortization in operating expenses Depreciation and other amortization Interest income, net Income tax expense, net Net income

$

$

Year Ended December 31, 2007 2008

146,073 12,816 158,889

$

$

$

170,298 22,507 192,805

26,205 $ (315) 25,890 $

32,872 1,127 33,999

$ $

58,813 (2,224) 56,589

25,890 $ (1,205) (4,183) (6,421) 6,845 (8,516) 12,410 $

33,999 $ (2,170) (5,063) (8,914) 8,045 (9,946) 15,951 $

56,589 (2,284) (4,880) (9,637) 4,914 (20,079) 24,623

$

190,075 22,353 212,428

International EBITDA includes a corporate allocation of approximately $1.0 million, $2.6 million and $1.1 million for the years ended December 31, 2006, 2007 and 2008, respectively. F-23

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 12. SEGMENT REPORTING — (CONTINUED) Summarized information by segment consists of the following (in thousands): December 31, 2007 2008 Property and equipment, net United States International Total property and equipment, net

$ $

Goodwill United States International Total goodwill

$ $

Assets United States International Total segment assets

$ $

Reconciliation of segment assets to total assets Total segment assets Investment in subsidiaries Intercompany receivables Total assets

$

$

Liabilities United States International Total segment liabilities

$ $

Reconciliation of segment liabilities to total liabilities Total segment liabilities Intercompany payables Total liabilities

$ $

F-24

18,162 5,883 24,045

$

30,428 31,426 61,854

$

308,373 72,659 381,032

$

$

$

13,927 2,949 16,876

31,547 22,781 54,328

$

353,084 43,474 396,558

381,032 $ (18,343) (40,846) 321,843 $

396,558 (18,343) (43,831) 334,384

21,581 61,025 82,606

$ $

24,180 40,053 64,233

82,606 $ (42,568) 40,038 $

64,233 (33,270) 30,963

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 13. STOCKHOLDERS’ EQUITY Preferred Stock The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series. Common Stock The Company has 30,000,000 shares of common stock, $0.01 par value, authorized for issuance. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock. 14. NET INCOME PER SHARE The following table sets forth the calculation of basic and diluted net income per share (in thousands except per share data):

2006 Numerator: Net income Denominator: Denominator for basic net income per share  weighted-average outstanding shares Effect of dilutive securities: Stock options and restricted stock Denominator for diluted net income per share  weighted-average outstanding shares Net income per share  basic Net income per share  diluted

$

$ $

Year Ended December 31, 2007 2008

12,410

$

15,951

$

24,623

18,751

19,044

19,372

414

360

178

19,165

19,404

19,550

0.66 0.65

$ $

0.84 0.82

$ $

1.27 1.26

Stock options to purchase approximately 86,900, 80,400 and 250,200 shares were outstanding as of December 31, 2006, 2007 and 2008, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and, therefore, the effect would have been anti-dilutive. F-25

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 15. EMPLOYEE BENEFIT PLANS Stock Incentive Plans In June 1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”) prior to consummation of the Company’s initial public offering. In April 2007, the Company’s Board of Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. All shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (excluding shares subject to outstanding awards) were rolled into the 2007 Plan and, as of that date, no shares of common stock were available under the 1998 Plan. The 1998 Plan continues to govern unexercised and unexpired awards issued under the 1998 Plan prior to June 7, 2007. The 1998 Plan provides for the grant of stock and stock options to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 1998 Plan might be incentive or non-qualified. The exercise price for an incentive stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options and restricted stock grants is determined by the Board of Directors and is generally three to four years. Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all outstanding unexercisable options and restricted stock grants under the 1998 Plan immediately become exercisable. The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, employees, directors and consultants of the Company and its subsidiaries. Stock options granted under the 2007 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2007 Plan is determined by the Board of Directors and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. The Company has reserved the following shares of common stock for issuance under the 2007 Plan: (a) 1,000,000 shares of common stock, plus (b) 121,875 shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan), and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007 that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards issued under the 2007 Plan prior to that date. Approximately 1.1 million and 880,000 shares were available for future grant under the 2007 Plan as of December 31, 2007 and 2008, respectively. F-26

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 15. EMPLOYEE BENEFIT PLANS  (CONTINUED) Stock Incentive Plans  (Continued) Option activity was as follows:

Outstanding at December 31, 2008

815,586

Range of Exercise Price 9.00 $ $52.13 $ 51.92 9.00 $ $45.18 18.28 $45.18 $ 9.00 $ $52.13 48.25 $ $54.12 9.00 $ $45.18 21.28 $51.92 $ 16.20 $ $54.12 43.99 $ $55.07 17.77 $ $45.18 39.00 $52.13 $ 16.20 $ $55.07

Exercisable at December 31, 2006

929,324

$

Exercisable at December 31, 2007

826,782

$

Exercisable at December 31, 2008

701,975

$

Number of Shares Outstanding at December 31, 2005 Granted

1,473,897 96,900

Exercised

(269,755)

Canceled or expired

(26,565)

Outstanding at December 31, 2006

1,274,477

Granted

7,000

Exercised

(288,757)

Canceled or expired

(24,875)

Outstanding at December 31, 2007

967,845

Granted

93,900

Exercised

(198,434)

Canceled or expired

(47,725)

9.00 $52.13 16.20 $52.13 16.20 $54.12

WeightedAverage Exercise Price $ $

29.76 51.92

$

24.35

$

37.85

$

32.23

$

50.77

$

28.16

$

44.82

$

33.25

$

45.76

$

33.05

$

46.36

$

33.98

$

28.93

$

31.07

$

31.84

WeightedAverage Remaining Contract Life (in years)

Aggregate Intrinsic Value (in thousands)

4.77

$

3,692

4.10

$

3,692

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at December 31, 2006, 2007 and 2008 and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of December 31, 2006, 2007 and 2008, that had an exercise price less than the closing price on that date. Options to purchase 269,755, 288,757, and 198,434 shares were exercised for the years ended December 31, 2006, 2007, and 2008, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was $7.4 million, $7.5 million and $3.4 million, respectively. At December 31, 2008, there was $10.5 million of unrecognized compensation cost related to stock-based payments, net of forfeitures, which is expected to be recognized over a weighted-average-period of 1.9 years. The weighted-average grant date fair value of each option granted during the years ended December 2006, 2007 and 2008 was $33.45, $32.70 and $27.81, respectively. F-27

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 15. EMPLOYEE BENEFIT PLANS  (CONTINUED) Stock Incentive Plans  (Continued) The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions noted in the following table:

2006 Dividend yield Expected volatility Risk-free interest rate Expected life (in years)

Year Ended December 31, 2007 2008 0% 61% 4.7% 5

0% 61% 4.7% 5

0% 59% 3.0% 5

The assumptions above and the estimation of expected forfeitures are based on multiple facts, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of the Company’s stock price. The following table summarizes information regarding options outstanding at December 31, 2008:

$ $ $ $ $ $ $ $ $ $ $

Range of Exercise Price 16.20 - $18.06 18.12 - $22.87 23.06 - $28.15 29.00 - $30.75 32.00 - $39.00 39.53 - $43.99 44.06 - $45.18 46.81 - $51.92 54.12 - $54.12 55.07 - $55.07 16.20 - $55.07

Number of Shares 99,617 102,828 118,171 95,275 89,932 135,938 85,625 70,200 3,000 15,000 815,586

Options Outstanding Weighted-Average Remaining Contractual Life (in years) 2.76 3.44 3.45 3.19 4.59 6.91 5.76 7.64 8.42 9.67 4.77

Options Exercisable

Weighted-Average Exercise Price $ 17.94 $ 20.78 $ 27.04 $ 30.33 $ 38.75 $ 42.49 $ 44.83 $ 51.49 $ 54.12 $ 55.07 33.98 $

Number of Shares 99,617 102,828 118,171 95,275 89,932 63,063 85,625 46,464 1,000 0 701,975

Weighted-Average Exercise Price $ 17.94 $ 20.78 $ 27.04 $ 30.33 $ 38.75 $ 40.79 $ 44.83 $ 51.48 $ 54.12 $ 0.00 31.84 $

The following table presents unvested restricted stock awards activity for the year ended December 31, 2008: WeightedAverage Grant Date Number of Fair Value Shares per Share 258,588 $ 48.55 102,177 $ 48.76 (54,009) $ 46.49 (33,403) $ 47.86 273,353 $ 49.12

Unvested restricted stock at December 31, 2007 Granted Vested Canceled Unvested restricted stock at December 31, 2008 F-28

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COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED) 15. EMPLOYEE BENEFIT PLANS  (CONTINUED) Employee 401(k) Plan The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the Internal Revenue Service. In 2006, 2007 and 2008, the Company matched 100% of employee contributions up to a maximum of 6% of total compensation. Amounts contributed to the 401(k) by the Company to match employee contributions for the years ended December 31, 2006, 2007 and 2008 were approximately $2.0 million, $2.3 million and $2.6 million, respectively. The Company paid administrative expenses in connection with the 401(k) plan of approximately $25,000, $22,000 and $28,000 for the years ended December 31, 2006, 2007 and 2008, respectively. Employee Pension Plan The Company maintains a company personal pension plan for all eligible employees in the Company’s London, England office. The plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by the Inland Revenue. The Company contributes a match subject to the percentage of the employees’ contribution. Amounts contributed to the plan by the Company to match employee contributions for the years ended December 31, 2006, 2007 and 2008 were approximately $193,000, $281,000 and $265,000, respectively. Employee Stock Purchase Plan As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees participating in the plan authorize the Company to withhold from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during the offering period. The offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. There were 86,308 and 78,840 shares available for purchase under the plan as of December 31, 2007 and 2008, respectively and approximately 9,000 and 7,400 shares of the Company’s common stock were purchased during 2007 and 2008, respectively.

F-29

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Exhibit 3.3 AMENDED AND RESTATED BY-LAWS OF COSTAR GROUP, INC.

ARTICLE I Offices The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation may also have offices at other places, within or without the State of Delaware, as the Board of Directors or the Chairman of the Board may from time to time determine or the business of the Corporation may require.

ARTICLE II Stockholders SECTION 1. Place of Meeting. Meetings of the stockholders shall be held at such place, within or without the State of Delaware, as the Board of Directors designates. SECTION 2. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date and at such time as may be designated by the Board of Directors, for the purpose of electing Directors and for the transaction of such other business as may be properly brought before the meeting. SECTION 3. Special Meetings. Except as otherwise provided in the Certificate of Incorporation or by the General Corporation Law of Delaware (the “DGCL”), special meetings of the stockholders of the Corporation may be called at any time by the Chairman of the Board or the President and shall be called by the President or the Secretary at the request in writing of a majority of the Board of Directors. Such a request shall state the purpose or purposes of the proposed meeting. Any special meeting of the stockholders shall be held on such date, and at such time as the Board of Directors or the officer calling the meeting may designate. At a special meeting of the stockholders, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting unless all of the stockholders are present in person or by proxy, in which case any and all business may be transacted at the meeting.

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SECTION 4. Notice of Meetings. Written notice of each meeting of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of the Corporation entitled to vote at such meeting. The notice shall state the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Notice may be given personally, by mail or by electronic transmission in accordance with Section 232 of the DGCL. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to each stockholder at such stockholder's address appearing on the books of the Corporation or given by the stockholder for such purpose. Notice by electronic transmission shall be deemed given as provided in Section 232 of the DGCL. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the Secretary, Assistant Secretary or any transfer agent of the Corporation giving the notice, shall be prima facie evidence of the giving of such notice or report. Notice shall be deemed to have been given to all stockholders of record who share an address if notice is given in accordance with the "householding" rules set forth in Rule 14a-3(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 233 of the DGCL. SECTION 5. Quorum. At any meeting of the stockholders, the holders of a majority in number of the total issued and outstanding shares of stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum of the stockholders for all purposes, unless the representation of a larger number of shares shall be required by law, by the Certificate of Incorporation or by these By-Laws, in which case the representation of the number of shares so required shall constitute a quorum. SECTION 6. Adjourned Meetings. Whether or not a quorum shall be present in person or represented at any annual or special meeting of the stockholders, the Board of Directors (by majority vote), Chairman of the Board or the President may adjourn the meeting from time to time for any reason. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the stockholders may transact any business which might have been transacted by them at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. SECTION 7. Voting. Except as otherwise provided in the Certificate of Incorporation or by law, each stockholder shall be entitled to one vote for each share of the capital stock of the Corporation registered in the name of such stockholder upon the books of the Corporation. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. When a quorum is present at a meeting of the stockholders, except as otherwise provided by law or by the Certificate of Incorporation, Directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the stockholders entitled to vote in the election and, whenever any corporate action, other than the election of Directors is to be taken, it shall be authorized by a majority of the votes cast at a meeting of stockholders by the stockholders entitled to vote thereon. 2

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Shares of the capital stock of the Corporation belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. SECTION 8. Stockholder Proposals. (a)

Annual Meeting.

(i) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business other than nominations to be considered by the stockholders may be made at an annual meeting of stockholders only (A) pursuant to the Corporation's notice of meeting (or any supplement thereto), (B) by or at the direction of the Board of Directors, or (C) by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 8(a) is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 8(a). (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of the foregoing paragraph, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must be a proper subject for stockholder action. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the seventy-fifth (75th) day nor earlier than the close of business on the one hundred fifth (105th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred fifth (105th) day prior to such annual meeting and not later than the close of business on the later of the seventy-fifth (75th) day prior to such annual meeting or the tenth (10th) day following the date on which public announcement (as defined below) of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposes to nominate for election or re-election as a director (1) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Exchange Act, and (2) such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any substantial interest (within the meaning of Item 5 of Schedule 14A under the Exchange Act) in such business of such stockholder and the beneficial owner (within the meaning of Section 13(d) of the Exchange Act), if any, on whose behalf the proposal is made; 3

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(C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made or the business is proposed: (1) the name and address of such stockholder, as they appear on the Corporation's books, and the name and address of such beneficial owner, (2) the class and number of shares of capital stock of the Corporation which are owned of record by such stockholder and such beneficial owner as of the date of the notice, and the stockholder's agreement to notify the Corporation in writing within five business days after the record date for such meeting of the class and number of shares of capital stock of the Corporation owned of record by the stockholder and such beneficial owner as of the record date for the meeting, and (3) a representation that the stockholder intends to appear in person or by proxy at the meeting to propose such nomination or business; (D) as to the stockholder giving the notice or, if the notice is given on behalf of a beneficial owner on whose behalf the nomination is made or the business is proposed, as to such beneficial owner: (1) the class and number of shares of capital stock of the Corporation which are beneficially owned (as defined below) by such stockholder or beneficial owner as of the date of the notice, and the stockholder's agreement to notify the Corporation in writing within five business days after the record date for such meeting of the class and number of shares of capital stock of the Corporation beneficially owned by such stockholder or beneficial owner as of the record date for the meeting, (2) a description of any agreement, arrangement or understanding with respect to the nomination or other business between or among such stockholder or beneficial owner and any other person, including without limitation any agreements that would be required to be disclosed pursuant to Item 5 or Item 6 of Exchange Act Schedule 13D (regardless of whether the requirement to file a Schedule 13D is applicable to the stockholder or beneficial owner) and the stockholder's agreement to notify the Corporation in writing within five business days after the record date for such meeting of any such agreement, arrangement or understanding in effect as of the record date for the meeting, (3) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder's notice by, or on behalf of, such stockholder or beneficial owner, the effect or intent of which is to mitigate loss, manage risk or benefit from changes in the share price of any class of the Corporation’s capital stock, or increase or decrease the voting power of the stockholder or beneficial owner with respect to shares of stock of the Corporation, and the stockholder's agreement to notify the Corporation in writing within five business days after the record date for such meeting of any such agreement, arrangement or understanding in effect as of the record date for the meeting, 4

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(4) a representation whether the stockholder or the beneficial owner, if any, will engage in a solicitation with respect to the nomination or business and, if so, the name of each participant (as defined in Item 4 of Schedule 14A under the Exchange Act) in such solicitation and whether such person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve or adopt the business to be proposed (in person or by proxy) by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation including information relevant to a determination whether such proposed nominee can be considered an independent director. The foregoing notice requirements of this Section 8(a)(ii) shall not apply to a stockholder if the stockholder has notified the Corporation of his or her intention to present a stockholder proposal at an annual meeting only pursuant to and in compliance with Rule 14a-8 under the Exchange Act and such proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. (iii) Notwithstanding anything in Section 8(a)(ii) above to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased by more than fifty percent of its previous size and there is no public announcement naming all of the nominees for directors or specifying the size of the increased Board of Directors made by the Corporation at least one hundred and five (105) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 8(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. (b) Special Meeting. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (A) by or at the direction of the Board of Directors or (B) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 8(b) is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 8, including delivery of information set forth in Section 8(a)(ii). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the notice required by paragraph (a)(ii) of this Section 8 shall be delivered to the Secretary at the principal 5

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executive offices of the Corporation not earlier than the close of business on the one hundred fifth (105th) day prior to such special meeting and not later than the close of business on the later of the seventy-fifth (75th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (c)

General.

(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 8 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 8. Except as otherwise provided by law, the Board of Directors shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 8 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in compliance with such stockholder's representation as required by clause (a)(ii)(D)(4) of this Section 8). If any proposed nomination or business was not made or proposed in compliance with this Section 8, the Chairman of the meeting shall have the power and duty to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 8, unless otherwise required by law, if the stockholder does not provide the information required under clauses (a)(ii)(C) and (a)(ii)(D) of this Section 8 to the Corporation within five business days following the record date for an annual or special meeting or if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 8, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or authorized by a writing executed by such stockholder (or a reliable reproduction or electronic transmission of the writing) delivered to the Corporation’s Secretary prior to the making of such nomination or proposal at such meeting by such stockholder stating that such person is authorized to act for such stockholder as proxy at the meeting of stockholders. (ii) For purposes of this Section 8, a "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. For purposes of clause (a)(ii)(D)(1) of this Section 8, shares shall be treated as "beneficially owned" by a person if the person beneficially owns such shares, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Regulations 13D and 13G thereunder or has or shares pursuant to any agreement, arrangement or understanding (whether or not in writing): (A) the right to acquire such shares (whether such right is exercisable immediately or only after the passage of time or the fulfillment of a condition or both), (B) the right to vote such shares, alone or in concert with others and/or (C) investment power with respect to such shares, including the power to dispose of, or to direct the disposition of, such shares. 6

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(iii) Nothing in this Section 8 shall be deemed to affect any rights of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation. SECTION 9. Organization. (a) The Chairman of the Board of Directors or, in the absence of the Chairman of the Board, the President or other officer designated by the Board of Directors shall call all meetings of the stockholders to order, and shall preside at all meetings of the stockholders. In the absence of the Chairman of the Board and the President or other officer designated by the Board of Directors, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a presiding officer for purposes of such meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the stockholders; but in the absence of the Secretary, the presiding officer may appoint any person to act as secretary of the meeting. (b) The Board of Directors shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the Chairman or presiding officer of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such Chairman or presiding officer, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies and such other persons as the Chairman or presiding officer shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting and matters which are to be voted on by ballot. SECTION 10. Proxies. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy, which may be in the form of a telegram, cablegram or other means of electronic transmission, signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the stockholder's signature is placed on the proxy by the stockholder or the stockholder's attorney-in-fact. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary of the Corporation. A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the Corporation. 7

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SECTION 11. Meetings by Remote Communications. The Board of Directors may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication in accordance with Section 211(a)(2) of the DGCL. If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication (a) participate in a meeting of stockholders and (b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder; (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation. ARTICLE III Directors SECTION 1. Powers. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 2. Number and Term of Office; Election; Qualification. The Board of Directors shall consist of not less than two and not more than seven Directors, the exact number to be fixed from time to time by resolution passed by a majority of the Board of Directors. The Directors shall, except as hereinafter otherwise provided for filling vacancies, be elected at the annual meeting of stockholders, and shall hold office until their respective successors are elected and qualified or until their earlier resignation or removal. SECTION 3. Removal, Vacancies and Additional Directors. The stockholders may, at any special meeting the notice of which shall state that it is called for that purpose, remove, with or without cause, any Director. Vacancies caused by any such removal, or any vacancy caused by the death or resignation of any Director or for any other reason, and any newly created directorship resulting from any increase in the authorized number of Directors, may be filled by the affirmative vote of a majority of the Directors then in office, even if less than a quorum, and any Director so elected to fill any such vacancy or newly created directorship shall hold office until his successor is elected and qualified or until his earlier resignation or removal. 8

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When one or more Directors shall resign effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office as herein provided in connection with the filling of other vacancies. SECTION 4. Place of Meeting. Any meeting of the Board of Directors shall be held at such place, within or without the State of Delaware, as the Board of Directors designates. SECTION 5. Regular Meetings. Regular meetings of the Board of Directors shall be held on such dates and at such times as the Board from time to time by resolution shall determine. No notice shall be required for any regular meeting of the Board of Directors; but a copy of every resolution fixing or changing the time or place of regular meetings shall be mailed to every Director at least five days before the first meeting held in pursuance thereof, or shall be sent to such director at such place by telecopy, telegraph, electronic transmission or other form of recorded communication, or be delivered personally or by telephone, in each case at least three days before the first meeting held in pursuance thereof. SECTION 6. Special Meetings. Special meetings of the Board of Directors may be called by direction of the Chairman of the Board, the President or by any two of the Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of such meetings. Notice of each such meeting shall be given to each director, if by mail, addressed to such director at his or her residence or usual place of business, at least two (2) days before the day on which such meeting is to be held, or shall be sent to such director at such place by telecopy, telegraph, electronic transmission or other form of recorded communication, or be delivered personally or by telephone, in each case at least twenty-four (24) hours prior to the time set for such meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any special meeting. SECTION 7. Quorum; Vote. Subject to the provisions of Section 3 of this Article III, fifty percent or more of the members of the Board of Directors in office shall constitute a quorum for the transaction of business and the vote of the majority of the Directors present at any meeting of the Board of Directors at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board there is less than a quorum present, a majority of those present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present, whereupon the meeting may be held, as adjourned, without further notice. SECTION 8. Organization. The Chairman of the Board shall preside at all meetings of the Board of Directors. In the absence of the Chairman of the Board, an acting Chairman shall be elected from the Directors present to preside at such meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the Directors; but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. 9

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SECTION 9. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided by resolution passed by a majority of the whole Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and the affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending these By-Laws; and unless such resolution, these By-laws, or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall determine its rules with respect to notice, quorum, voting and the taking of action, provided that such rules shall be consistent with law, the rules in these By-Laws applicable to the Board of Directors and the resolution of the Board of Directors establishing the committee. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. SECTION 10. Conference Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, the members of the Board of Directors or any committee designated by the Board, may participate in a meeting of the Board or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 11. Consent of Directors or Committee in Lieu of Meeting. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or committee, as the case may be. SECTION 12. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. 10

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ARTICLE IV Officers SECTION 1. General. The Board of Directors shall elect, at its first meeting after each annual meeting of the stockholders, the officers of the Corporation, which shall include a Chairman of the Board, a Chief Executive Officer, a Chief Financial Officer, a President, one or more Vice Presidents, a Secretary and a Treasurer. The failure to hold such election shall not of itself terminate the term of office of any officer. The Board of Directors may elect such additional officers it deems desirable for the conduct of the business of the Corporation pursuant to the provisions of Section 10 of this Article IV. All officers shall hold office at the pleasure of the Board of Directors. Any officer may resign at any time upon written notice to the Corporation. Officers may, but need not, be Directors. Any number of offices may be held by the same person. SECTION 2. Term of Office; Removal; Vacancies. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal and all officers, agents and employees shall be subject to removal, with or without cause, at any time by the Board of Directors. The removal of an officer without cause shall be without prejudice to his contract rights, if any but the election or appointment of an officer shall not of itself create contract rights. All agents and employees other than officers elected by the Board of Directors shall also be subject to removal, with or without cause, at any time by the officers appointing them. Any vacancy caused by the death, resignation or removal of any officer, or otherwise, may be filled by the Board of Directors. SECTION 3. Powers and Duties. In addition to the powers and duties of the officers of the Corporation as set forth in these ByLaws, the officers shall have such powers and duties as generally pertain to their respective offices as well as such authority and such duties as from time to time may be determined by the Board of Directors. SECTION 4. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors; shall, subject to the control of the Board of Directors, oversee the formulation of the strategic plans and direction of the business of the Corporation, in conjunction with the Chief Executive Officer; and shall have such powers and shall perform such duties as may be assigned to him or her from time to time by these By-Laws or by the Board of Directors. All actions heretofore taken by the Chairman of the Board in the name or on behalf of the Corporation, including the execution and delivery in the name and on behalf of the Corporation of agreements, bonds, contracts, deeds, mortgages, certificates for shares of stock of the Corporation and other instruments, documents and certificates are in all respects ratified, approved, confirmed and adopted as of the date of such action, execution or delivery, with the same effect as if expressly authorized by the By-laws of the Corporation on the date thereof. 11

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SECTION 5. President and Chief Executive Officer. Unless otherwise specified by the Board of Directors, the President shall be the Chief Executive Officer of the Corporation and, subject to the control of the Board of Directors, shall have general charge and control of all the Corporation's business and affairs, and shall have all powers and perform all duties incident to the office of President. In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and shall have such other powers and perform such other duties as may from time to time be assigned to the President by these By-Laws or by the Board of Directors. SECTION 6. Chief Financial Officer. The Chief Financial Officer of the Corporation shall have overall responsibility and authority for the financial affairs of the Corporation including, without limitation, oversight of the Corporation's accounting, inventory, management information systems, internal audit and billing functions, subject to the authority of the Board of Directors, and shall have such other powers and perform such other duties as may from time to time be assigned to the Chief Financial Officer by these By-Laws or by the Board of Directors. SECTION 7. Vice Presidents. Each Vice President shall have all powers and shall perform all duties incident to the office of Vice President and shall have such other powers and perform such other duties as may from time to time be assigned to such officer by these ByLaws or by the Board of Directors or the President. SECTION 8. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors and the minutes of all meetings of the stockholders in books provided for that purpose; shall attend to the giving or serving of all notices of the Corporation; shall have custody of the corporate seal of the Corporation and shall affix the same to such documents and other papers as the Board of Directors or the President shall authorize and direct; shall have charge of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors or the President shall direct, all of which shall at all reasonable times be open to the examination of any Director, upon application, at the office of the Corporation during business hours; and shall have all powers and shall perform all duties incident to the office of Secretary and shall also have such other powers and shall perform such other duties as may from time to time be assigned to the Secretary by these By-Laws or by the Board of Directors or the President. SECTION 9. Treasurer. The Treasurer shall have custody of, and when proper shall pay out, disburse or otherwise dispose of, all funds and securities of the Corporation which may have come into his or her hands; may endorse on behalf of the Corporation for collection checks, notes and other obligations and shall deposit the same to the credit of the Corporation in such bank or banks or depositary or depositaries as the Board of Directors may designate; shall sign all receipts and vouchers for payments made to the Corporation; shall enter or cause to be entered regularly in the books of the Corporation kept for the purpose full and accurate accounts of all moneys received or paid or otherwise disposed of by such officer and whenever required by the Board of Directors or the President shall render statements of such accounts; shall, at all reasonable times, exhibit such Treasurer's books and accounts to any Director of the Corporation upon application at the office of the Corporation during business hours; and shall have all powers and shall perform all duties incident to the office of Treasurer and shall also have such other powers and shall perform such other duties as may from time to time be assigned to the Treasurer by these By-Laws or by the Board of Directors or the President. 12

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SECTION 10. Additional Officers. The Board of Directors may from time to time elect such other officers (who may but need not be Directors), including a Controller, Assistant Treasurers, Assistant Secretaries and Assistant Controllers, as the Board may deem advisable and such officers shall have the usual powers and duties pertaining to their offices, together with such other powers and duties as may from time to time be assigned to them by the Board of Directors or the President. The Board of Directors may from time to time by resolution delegate to any Assistant Treasurer or Assistant Treasurers any of the powers or duties herein assigned to the Treasurer; and may similarly delegate to any Assistant Secretary or Assistant Secretaries any of the powers or duties herein assigned to the Secretary. SECTION 11. Giving of Bond by Officers. All officers of the Corporation, if required to do so by the Board of Directors, shall furnish bonds to the Corporation for the faithful performance of their duties, in such penalties and with such conditions and security as the Board shall require. SECTION 12. Voting Upon Stocks. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may from time to time, by resolution, confer like powers upon any other person or persons. SECTION 13. Compensation of Officers. The officers of the Corporation shall be entitled to receive such compensation for their services as shall from time to time be determined by the Board of Directors, subject to the rights, if any, of such officers under any contract of employment. ARTICLE V Indemnification of Directors and Officers SECTION 1. Rights to Indemnification; Advancement of Expenses. To the fullest extent required or permitted by applicable law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, arbitration, alternative dispute mechanism, hearing or proceeding (collectively, a “Proceeding”), whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to become a Director or officer of the Corporation, or, while a Director or officer of the Corporation, is or was serving or has agreed to serve at the request of the Corporation as a Director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to an employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to a Proceeding by reason of the fact that he is or was or has agreed to become an employee or agent of the 13

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Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to an employee benefit plan), against all expenses (including attorneys' fees), liabilities, losses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by such person or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe his or her conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a Judgment in its favor (l) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such Proceeding, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, except with respect to a proceeding to enforce rights to indemnification or advance payment of expenses under this Article V, the Corporation shall be required to indemnify a Director or officer under this Article V in connection with any Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors. SECTION 2. Successful Defense. To the extent that a Director or officer of the Corporation has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 1 of this Article V or in defense of any claim, issue or matter therein, or in any Proceeding brought by a Director or officer to enforce rights to indemnification or advance payment of expenses granted pursuant to this Article V, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. SECTION 3. Determination that Indemnification is Proper. Any indemnification of a Director or officer of the Corporation under Section 1 of this Article V (unless ordered by a court or required under Section 2 of this Article V) shall be made by the Corporation unless a determination is made that indemnification of the Director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 1. Any such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such Proceeding, or (2) by a committee of such Directors designated by majority vote of such Directors, even though less than a quorum, or (3) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (4) by the vote of a majority of the stockholders present or voting by proxy at an annual or special meeting of the stockholders. 14

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SECTION 4. Advance Payment of Expenses. Unless the Board of Directors otherwise determines in a specific case, expenses incurred by a Director or officer in defending a Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article V. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's legal counsel to represent such Director, officer, employee or agent in any Proceeding, whether or not the Corporation is a party to such Proceeding. SECTION 5. Survival: Preservation of Other Rights. All rights granted to Directors or officers pursuant to this Article V shall vest at the time a person becomes a Director or officer of the Corporation. All rights granted pursuant to this Article V shall be deemed to be contract rights and any repeal or modification thereof shall be prospective only and shall not adversely affect any right or obligation then existing with respect to any state of facts then or previously existing or any Proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such contract rights to indemnification and advance payment of expenses may not be modified retroactively without the consent of such Director or officer. The indemnification and rights to advance payment of expenses provided by this Article V shall not be deemed exclusive of any other rights to which those indemnified may be entitled under statute, any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may enter into an agreement with any of its Directors, officers, employees or agents providing for indemnification and advancement of expenses, including attorneys’ fees, that may change, enhance, qualify or limit any right to indemnification or advancement of expenses created by this Article V. SECTION 6. Severability. If this Article V or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgment, fines and amounts paid in settlement with respect to any Proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article V that shall not have been invalidated and to the fullest extent permitted by applicable law. SECTION 7. Subrogation. In the event of payment of indemnification to a person described in Section 1 of this Article V, the Corporation shall be subrogated to the extent of such payment to any right of recovery such person may have and such person, as a condition of receiving indemnification from the Corporation, shall execute all documents and do all things that the Corporation may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the Corporation effectively to enforce any such recovery. 15

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SECTION 8. No Duplication of Payments. The Corporation shall not be liable under this Article V to make any payment in connection with any claim made against a person described in Section 1 of this Article V to the extent such person has otherwise received payment (under any insurance policy, by-law or otherwise) of the amounts otherwise indemnifiable hereunder. SECTION 9. Procedure for Obtaining Indemnification or Advancement of Expenses. (a) To receive indemnification under this Article V, an indemnitee shall submit to the Corporation a written request, which shall include documentation or information which is necessary to determine whether indemnification is payable under this Article V and which is reasonably available to the indemnitee. Upon receipt by the Corporation of such a written request, if required by the DGCL (but only if required by the DGCL), a determination regarding whether indemnification is payable under this Article V shall be made, based upon the facts known at the time, in accordance with Section 3 of this Article V. (b) To receive an advancement of expenses under this Article V, an indemnitee shall submit to the Corporation a written request, which shall reasonably evidence the costs and expenses incurred by the indemnitee and shall include or be accompanied an undertaking by or on behalf of the indemnitee to repay any expenses advanced if it shall ultimately be determined by a court of competent jurisdiction in a final, nonappeable adjudication that the indemnitee is not entitled to indemnification under this Article V. SECTION 10. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

ARTICLE VI Capital Stock SECTION 1. Certificates For Shares of Stock. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. The certificates for shares of stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be approved by the Board of Directors. All certificates shall be signed by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall not be valid unless so signed. 16

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In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as through the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the corporation. All certificates for shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby with the number of such shares and the date of issue thereof shall be entered on the books of the corporation. Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be canceled, and no new certificates shall be issued until former certificates for the same number of shares have been surrendered and canceled. SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person owning a certificate for shares of stock of the Corporation alleges that it has been lost, stolen or destroyed, such person shall file in the office of the Corporation an affidavit setting forth, to the best of such person's knowledge and belief, the time, place and circumstances of the loss, theft or destruction, and, if required by the Board of Directors, a bond of indemnity or other indemnification sufficient in the opinion of the Board of Directors to indemnify the Corporation and its agents against any claim that may be made against it or them on account of the alleged loss, theft or destruction of any such certificate or the issuance of a new certificate or uncertificated shares in replacement therefore. Thereupon the Corporation may cause to be issued to such person a new certificate or uncertificataed shares in replacement for the certificate alleged to have been lost, stolen or destroyed. Upon the stub of every new certificate so issued shall be noted the fact of such issue and the number, date and the name of the registered owner of the lost, stolen or destroyed certificate in lieu of which the new certificate is issued. SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall be transferred on the books of the Corporation by the registered holder thereof, in person or by his attorney duly authorized in writing, and if such shares are represented by a certificate, upon surrender of such certificate properly endorsed or accompanied by a duly executed stock power and the payment of any taxes thereon and cancellation of such certificate(s) for the number of shares of stock to be transferred, except as provided in Section 2 of this Article; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. SECTION 4. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors shall have power to declare and pay dividends upon shares of stock of the Corporation, but only out of funds available for the payment of dividends as provided by law. Subject to the provisions of the Certificate of Incorporation, any dividends declared upon the stock of the Corporation shall be payable on such date or dates as the Board of Directors shall determine. If the date fixed for the payment of any dividend shall in any year fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday. 17

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SECTION 5. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. SECTION 6. Regulations. The Board of Directors may make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of shares of stock of the Corporation.

ARTICLE VII Notices SECTION 1. General. Subject to Article II, Section 4 and Article III, Sections 5 and 6 hereof, whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any Director or stockholder, such notice may be given in writing, by mail, addressed to such Director or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram, telephone, telecopy, electronic transmission or other form of recorded communication, or be delivered personally. SECTION 2. Waiver. Whenever any notice whatever is required to be given by law, by the Certificate of Incorporation or by these By-Laws to any person or persons, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE VIII Miscellaneous Provisions SECTION 1. Checks, Notes, etc. All checks, drafts, bills of exchange, acceptances, notes or other obligations or orders for the payment of money shall be signed and, if so required by the Board of Directors, countersigned by such officers of the Corporation and/or other persons as the Board of Directors from time to time shall designate. Checks, drafts, bills of exchange, acceptances, notes, obligations and orders for the payment of money made payable to the Corporation may be endorsed for deposit to the credit of the Corporation with a duly authorized depository by the Treasurer and/or such other officers or persons as the Board of Directors from time to time may designate. 18

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SECTION 2. Loans. No loans and no renewals of any loans shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized to do so, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. When authorized so to do, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances. SECTION 3. Contracts. Except as otherwise provided in these By-Laws or by law or as otherwise directed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or any other officer elected by the Board pursuant to Article IV hereof shall be authorized to execute and deliver, in the name and on behalf of the corporation, all agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and the seal of the corporation, if appropriate, shall be affixed thereto by any of such officers or the Secretary or an Assistant Secretary. The Board of Directors, the Chairman of the Board, the President or any other officer elected by the Board pursuant to Article IV hereof so designated by the Board of Directors may authorize any other officer, employee or agent to execute and deliver, in the name and on behalf of the Corporation, agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and, if appropriate, to affix the seal of the Corporation thereto. The grant of such authority by the Board or any such officer may be general or confined to specific instances. SECTION 4. Offices Outside of Delaware. Except as otherwise required by the laws of the State of Delaware, the Corporation may have an office or offices and keep its books, documents and papers outside of the State of Delaware at such place or places as from time to time may be determined by the Board of Directors or the Chairman of the Board. SECTION 5. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be kept in the custody of the Secretary. A duplicate of the seal may be kept and be used by any officer of the Corporation designated by the Board of Directors, the Chairman of the Board or the President. SECTION 6. Fiscal Year. The fiscal year of the Corporation shall be such fiscal year as the Board of Directors from time to time by resolution shall determine. SECTION 7. Reliance Upon Books, Reports and Records. Each Director and each member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 19

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SECTION 8. Subject to Law and Certificate of Incorporation. All powers, duties and responsibilities provided for in these Bylaws, whether or not explicitly so qualified, are qualified by the Certificate of Incorporation and applicable law.

ARTICLE IX Amendments In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to adopt, amend or repeal these By-laws. In addition to any requirements of law and any other provision of these By-laws or the Certificate of Incorporation, and notwithstanding any other provision of these By-laws, the Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, the affirmative vote of the holders of at least a majority in voting power of the issued and outstanding stock entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to amend or repeal, or adopt any provision inconsistent with, any provision of these By-laws; provided, that the affirmative vote of the holders of at least 66-2/3% in voting power of the issued and outstanding stock entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to amend or repeal, or adopt any provision inconsistent with, any provision of Article II, Sections 3 and 8; Article V and this Article IX. Effecttive January 22, 2009 20

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Exhibit 10.2 CoStar Logo

COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN (Amended effective December 11, 2008) 1.

Purpose

The purpose of the CoStar Group, Inc. 2007 Stock Incentive Plan (the “Plan”) is to advance the interests of CoStar Group, Inc. (the “Company”) by enabling the Company and its subsidiaries to attract, retain and motivate employees of the Company by providing for or increasing the proprietary interests of such individuals in the Company, and by enabling the Company to attract, retain and motivate its nonemployee directors and further align their interests with those of the shareholders of the Company by providing for or increasing the proprietary interests of such directors in the Company. The Plan provides for the grant of Incentive and Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units, any of which may be performance-based, as determined by the Committee. 2.

Definitions As used in the Plan, the following terms shall have the meanings set forth below:

(a) “Award” means an Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right, Restricted Stock, or Restricted Stock Unit granted to a Participant pursuant to the provisions of the Plan, any of which the Committee may structure to qualify in whole or in part as a Performance Award. (b) “Award Agreement” means a written agreement or other instrument as may be approved from time to time by the Committee implementing the grant of each Award. An Agreement may be in the form of an agreement to be executed by both the Participant and the Company (or an authorized representative of the Company) or certificates, notices or similar instruments as approved by the Committee. (c) (d) thereunder.

“Board” means the board of directors of the Company. “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rulings and regulations issues

(e)

“Committee” means the Committee delegated the authority to administer the Plan in accordance with Section 16.

(f)

“Common Share” means a share of the Company’s common stock, subject to adjustment as provided in Section 11.

(g)

“Company” means CoStar Group, Inc., a Delaware corporation.

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(h) “Fair Market Value” means, as of any given date, the closing sales price on such date during normal trading hours (or, if there are no reported sales on such date, on the last date prior to such date on which there were sales) of the Common Shares on NASDAQ, the New York Stock Exchange Composite Tape or, if not listed on such exchanges, on any other national securities exchange on which the Common Shares are listed, in any case, as reporting in such source as the Committee shall select. If there is no regular public trading market for such Common Shares, the Fair Market Value of the Common Shares shall be determined by the Committee in good faith and in compliance with Section 409A of the Code. (i) “Incentive Stock Option” means a stock option that is intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code. (j) “Nonemployee Director” means each person who is, or is elected to be, a member of the Board or the board of directors of any Subsidiary and who is not an employee of the Company or any Subsidiary. (k) “Nonqualified Stock Option” means a stock option that is not intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code. (l)

“Option” means an Incentive Stock Option and/or a Nonqualified Stock Option granted pursuant to Section 6 of the Plan.

(m) “Participant” means any individual described in Section 3 to whom Awards have been granted from time to time by the Committee and any authorized transferee of such individual. (n) “Performance Award” means an Award, the grant, issuance, retention, vesting or settlement of which is subject to satisfaction of one or more performance criteria pursuant to Section 12. (o)

“Plan” means the CoStar Group, Inc. 2007 Stock Incentive Plan as set forth herein and as amended from time to time.

(p)

“Prior Plan” means the CoStar Group, Inc. 1998 Stock Incentive Plan.

(q)

“Qualifying Performance Criteria” has the meaning set forth in Section 12(b).

(r)

“Restricted Stock” means Common Shares granted pursuant to Section 8 of the Plan.

(s) “Restricted Stock Unit” means an Award granted to a Participant pursuant to Section 8 pursuant to which Common Shares or cash in lieu thereof may be issued in the future. (t) “Stock Appreciation Right” means a right granted pursuant to Section 7 of the Plan that entitles the Participant to receive, in cash or Common Shares or a combination thereof, as determined by the Committee, value equal to or otherwise based on the excess of (i) the market price of a specified number of Common Shares at the time of exercise over (ii) the exercise price of the right, as established by the Committee on the date of grant. 2

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(u) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company where each of the corporations in the unbroken chain other than the last corporation owns stock possessing at least 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, and if specifically determined by the Committee in the context other than with respect to Incentive Stock Options, may include an entity in which the Company has a significant ownership interest or that is directly or indirectly controlled by the Company. (v) “Substitute Awards” means Awards granted or Common Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a corporation acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines. 3.

Eligibility

Any person who is an officer or employee of the Company or of any Subsidiary (including any director who is also an employee, in his or her capacity as such) shall be eligible for selection by the Committee for the grant of Awards hereunder. In addition, Nonemployee Directors shall be eligible for the grant of Awards hereunder as determined by the Committee. In addition any service provider who has been retained to provide consulting, advisory or other services to the Company or to any Subsidiary shall be eligible for selection by the Committee for the grant of Awards hereunder. Options intending to qualify as Incentive Stock Options may only be granted to employees of the Company or any Subsidiary within the meaning of the Code, as selected by the Committee. 4.

Effective Date and Termination of Plan

This Plan was adopted by the Board and became effective as of April 26, 2007 (the “Effective Date”), subject to the approval by the Company’s stockholders. All Awards granted under this Plan are subject to, and may not be exercised before, the approval of this Plan by the stockholders prior to the first anniversary date of the effective date of the Plan by the affirmative vote of the holders of a majority of the outstanding Common Shares of the Company present, or represented by proxy, and entitled to vote, at a meeting of the Company’s stockholders or by written consent in accordance with the laws of the State of Delaware; provided that if such approval by the stockholders of the Company is not forthcoming, all Awards previously granted under this Plan shall be void. The Plan shall remain available for the grant of Awards until the tenth (10th) anniversary of the Effective Date. Notwithstanding the foregoing, the Plan may be terminated at such earlier time as the Board may determine. Termination of the Plan will not affect the rights and obligations of the Participants and the Company arising under Awards theretofore granted and then in effect. 3

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5.

Common Shares Subject to the Plan and to Awards

(a) Aggregate Limits. The aggregate number of Shares issuable pursuant to all Awards shall not exceed 1,000,000 shares, plus (i) any Shares that were authorized for issuance under the Prior Plan that, as of June 7, 2007, remain available for issuance under the Prior Plan (not including any Shares that are subject to, as of June 7, 2007, outstanding awards under the Prior Plan or any Shares that prior to June 7, 2007 were issued pursuant to awards granted under the Prior Plan) and (ii) any Shares subject to outstanding awards under the Prior Plan as of June 7, 2007 that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). The aggregate number of Common Shares available for grant under this Plan and the number of Common Shares subject to outstanding Awards shall be subject to adjustment as provided in Section 11. The Common Shares issued pursuant to Awards granted under this Plan may be shares that are authorized and unissued or shares that were reacquired by the Company, including shares purchased in the open market. (b) Issuance of Common Shares. For purposes of this Section 5, the aggregate number of Common Shares available for Awards under this Plan at any time shall not be reduced by (i) shares subject to Awards that have been terminated, expired unexercised, forfeited or settled in cash, (ii) shares subject to Awards that have been retained by the Company in payment or satisfaction of the exercise price, purchase price or tax withholding obligation of an Award, or (iii) shares subject to Awards that otherwise do not result in the issuance of Common Shares in connection with payment or settlement of an Award. In addition, Common Shares that have been delivered (either actually or by attestation) to the Company in payment or satisfaction of the exercise price, purchase price or tax withholding obligation of an Award shall be available for Awards under this Plan. (c) Tax Code Limits. The aggregate number of Common Shares subject to Awards granted under this Plan during any calendar year to any one Participant shall not exceed 200,000, which number shall be calculated and adjusted pursuant to Section 11 only to the extent that such calculation or adjustment will not affect the status of any Award intended to qualify as “performance based compensation” under Section 162(m) of the Code but which number shall not count any tandem SARs (as defined in Section 7). Any Common Shares that may be issued under this Plan may be issued pursuant to the exercise of Incentive Stock Options. (d) Substitute Awards. Substitute Awards shall not reduce the Common Shares authorized for issuance under the Plan or authorized for grant to a Participant in any calendar year. Additionally, in the event that a corporation acquired by the Company or any Subsidiary, or with which the Company or any Subsidiary combines, has shares available under a pre-existing plan approved by shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Common Shares authorized for issuance under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not employees, directors or consultants of the Company or its Subsidiaries immediately before such acquisition or combination. 4

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6.

Options

(a) Option Awards. Options may be granted at any time and from time to time prior to the termination of the Plan to Participants as determined by the Committee. No Participant shall have any rights as a stockholder with respect to any Common Shares subject to Option hereunder until said Common Shares have been issued, except that the Committee may authorize dividend equivalent accruals with respect to such Common Shares. Each Option shall be evidenced by an Award Agreement. Options granted pursuant to the Plan need not be identical but each Option must contain and be subject to the terms and conditions set forth below. (b) Price. The Committee will establish the exercise price per Common Share under each Option, which, in no event will be less than the Fair Market Value of the Common Shares on the date of grant; provided, however, that the exercise price per Common Share with respect to an Option that is granted in connection with a merger or other acquisition as a substitute or replacement award for options held by optionees of the acquired entity may be less than 100% of the market price of the Common Shares on the date such Option is granted if such exercise price is based on a formula set forth in the terms of the options held by such optionees or in the terms of the agreement providing for such merger or other acquisition. The exercise price of any Option may be paid in Common Shares, cash, certified check, money order or a combination thereof, as determined by the Committee, including an irrevocable commitment by a broker to pay over such amount from a sale of the Common Shares issuable under an Option, the delivery of previously owned Common Shares and withholding of Common Shares deliverable upon exercise. (c) No Repricing. Other than in connection with a change in the Company’s capitalization (as described in Section 11) the exercise price of an Option may not be reduced without stockholder approval (including canceling previously awarded Options and regranting them with a lower exercise price). (d) Provisions Applicable to Options. The date on which Options become exercisable shall be determined at the sole discretion of the Committee and set forth in an Award Agreement. Unless provided otherwise in the applicable Award Agreement, to the extent that the Committee determines that an approved leave of absence or employment on a less than full-time basis is not a termination of employment, the vesting period and/or exercisability of an Option shall be adjusted by the Committee during or to reflect the effects of any period during which the Participant is on an approved leave of absence or is employed on a less than full-time basis. (e) Term of Options and Termination of Employment: The Committee shall establish the term of each Option, which in no case shall exceed a period of ten (10) years from the date of grant. Unless an Option earlier expires upon the expiration date established pursuant to the foregoing sentence, upon the termination of the Participant’s employment, his or her rights to exercise an Option then held shall be determined by the Committee and set forth in an Award Agreement. 5

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(f) Incentive Stock Options. Notwithstanding anything to the contrary in this Section 6, in the case of the grant of an Option intending to qualify as an Incentive Stock Option: (i) if the Participant owns stock possessing more than 10 percent of the combined voting power of all classes of stock of the Company (a “10% Common Shareholder”), the exercise price of such Option must be at least 110 percent of the Fair Market Value of the Common Shares on the date of grant and the Option must expire within a period of not more than five (5) years from the date of grant, and (ii) termination of employment will occur when the person to whom an Award was granted ceases to be an employee (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company and its Subsidiaries. Notwithstanding anything in this Section 6 to the contrary, options designated as Incentive Stock Options shall not be eligible for treatment under the Code as Incentive Stock Options (and will be deemed to be Nonqualified Stock Options) to the extent that either (a) the aggregate Fair Market Value of Common Shares (determined as of the time of grant) with respect to which such Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Subsidiary) exceeds $100,000, taking Options into account in the order in which they were granted, or (b) such Options otherwise remain exercisable but are not exercised within three (3) months of Termination of employment (or such other period of time provided in Section 422 of the Code). 7.

Stock Appreciation Rights

Stock Appreciation Rights may be granted to Participants from time to time either in tandem with or as a component of other Awards granted under the Plan (“tandem SARs”) or not in conjunction with other Awards (“freestanding SARs”) and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each grant or each recipient. Any Stock Appreciation Right granted in tandem with an Award may be granted at the same time such Award is granted or at any time thereafter before exercise or expiration of such Award. All freestanding SARs shall be granted subject to the same terms and conditions applicable to Options as set forth in Section 6 and all tandem SARs shall have the same exercise price, vesting, exercisability, forfeiture and termination provisions as the Award to which they relate. Subject to the provisions of Section 6 and the immediately preceding sentence, the Committee may impose such other conditions or restrictions on any Stock Appreciation Right as it shall deem appropriate. Stock Appreciation Rights may be settled in Common Shares, cash or a combination thereof, as determined by the Committee and set forth in the applicable Award Agreement. Other than in connection with a change in the Company’s capitalization (as described in Section 11) the exercise price of Stock Appreciation Rights may not be reduced without stockholder approval (including canceling previously awarded Stock Appreciation Rights and regranting them with a lower exercise price). 8.

Restricted Stock and Restricted Stock Units

(a) Restricted Stock and Restricted Stock Unit Awards. Restricted Stock and Restricted Stock Units may be granted at any time and from time to time prior to the termination of the Plan to Participants as determined by the Committee. Restricted Stock is an award or issuance of Common Shares the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to such conditions (including continued employment or performance conditions) and terms as the Committee deems appropriate. Restricted Stock Units are Awards denominated in units of Common Shares under which the issuance of Common Shares is subject to such conditions (including continued employment or performance conditions) and terms as the Committee deems appropriate. Each grant of Restricted Stock and Restricted Stock Units shall be evidenced by an Award Agreement. 6

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Unless determined otherwise by the Committee, each Restricted Stock Unit will be equal to one Common Share and will entitle a Participant to either the issuance of Common Shares or payment of an amount of cash determined with reference to the value of Common Shares. To the extent determined by the Committee, Restricted Stock and Restricted Stock Units may be satisfied or settled in Common Shares, cash or a combination thereof. Restricted Stock and Restricted Stock Units granted pursuant to the Plan need not be identical but each grant of Restricted Stock and Restricted Stock Units must contain and be subject to the terms and conditions set forth below. (b) Contents of Agreement. Each Award Agreement shall contain provisions regarding (i) the number of Common Shares or Restricted Stock Units subject to such Award or a formula for determining such number, (ii) the purchase price of the Common Shares, if any, and the means of payment, (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of Common Shares or Restricted Stock Units granted, issued, retainable and/or vested, (iv) such terms and conditions on the grant, issuance, vesting and/or forfeiture of the Common Shares or Restricted Stock Units as may be determined from time to time by the Committee, (v) the term of the performance period, if any, as to which performance will be measured for determining the number of such Common Shares or Restricted Stock Units, and (vi) restrictions on the transferability of the Common Shares or Restricted Stock Units. Common Shares issued under a Restricted Stock Award may be issued in the name of the Participant and held by the Participant or held by the Company, in each case as the Committee may provide. (c) Vesting and Performance Criteria. The grant, issuance, retention, vesting and/or settlement of shares of Restricted Stock and Restricted Stock Units will occur when and in such installments as the Committee determines or under criteria the Committee establishes, which may include Qualifying Performance Criteria; provided, however, that, except in the case of a change of control of the Company, the death or disability of the Participant or awards granted to employees of the Company or any Subsidiary in appreciation of past service to the Company or a Subsidiary pursuant to a Company program or policy that applies to all such employees on an equal basis, vesting of Restricted Stock and Restricted Stock Units shall be no earlier than three (3) years from the date of grant for Awards not subject to vesting based on performance criteria and one (1) year from the date of grant for Awards that vest based on the achievement of performance criteria. Notwithstanding anything in this Plan to the contrary, the performance criteria for any Restricted Stock or Restricted Stock Unit that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code will be a measure based on one or more Qualifying Performance Criteria selected by the Committee and specified when the Award is granted. (d) Discretionary Adjustments and Limits. Subject to the limits imposed under Section 162(m) of the Code for Awards that are intended to qualify as “performance based compensation,” notwithstanding the satisfaction of any performance goals, the number of Common Shares granted, issued, retainable and/or vested under an Award of Restricted Stock or Restricted Stock Units on account of either financial performance or personal performance evaluations may, to the extent specified in the Award Agreement, be reduced by the Committee on the basis of such further considerations as the Committee shall determine. 7

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(e) Voting Rights. Unless otherwise determined by the Committee, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those shares during the period of restriction. Participants shall have no voting rights with respect to Common Shares underlying Restricted Stock Units unless and until such Common Shares are reflected as issued and outstanding shares on the Company’s stock ledger. (f) Dividends and Distributions. Participants in whose name Restricted Stock is granted shall be entitled to receive all dividends and other distributions paid with respect to those Common Shares, unless determined otherwise by the Committee. The Committee will determine whether any such dividends or distributions will be automatically reinvested in additional shares of Restricted Stock and subject to the same restrictions on transferability as the Restricted Stock with respect to which they were distributed or whether such dividends or distributions will be paid in cash. Common Shares underlying Restricted Stock Units shall be entitled to dividends or dividend equivalents only to the extent provided by the Committee. 9.

Deferral of Gains

The Committee may, in an Award Agreement or otherwise, provide for the deferred delivery of Common Shares upon settlement, vesting or other events with respect to Restricted Stock or Restricted Stock Units. Notwithstanding anything herein to the contrary, in no event will any deferral of the delivery of Common Shares or any other payment with respect to any Award be allowed if the Committee determines, in its sole discretion, that the deferral would result in the imposition of the additional tax under Section 409A(a)(1)(B) of the Code. 10.

Conditions and Restrictions Upon Securities Subject to Awards

The Committee may provide that the Common Shares issued upon exercise of an Option or Stock Appreciation Right or otherwise subject to or issued under an Award shall be subject to such further agreements, restrictions, conditions or limitations as the Committee in its discretion may specify prior to the exercise of such Option or Stock Appreciation Right or the grant, vesting or settlement of such Award, including without limitation, conditions on vesting or transferability, forfeiture or repurchase provisions and method of payment for the Common Shares issued upon exercise, vesting or settlement of such Award (including the actual or constructive surrender of Common Shares already owned by the Participant) or payment of taxes arising in connection with an Award. Without limiting the foregoing, such restrictions may address the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any Common Shares issued under an Award, including without limitation (i) restrictions under an insider trading policy or pursuant to applicable law, (ii) restrictions designed to delay and/or coordinate the timing and manner of sales by Participant and holders of other Company equity compensation arrangements, (iii) restrictions as to the use of a specified brokerage firm for such resales or other transfers, and (iv) provisions requiring Common Shares to be sold on the open market or to the Company in order to satisfy tax withholding or other obligations. 8

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11.

Adjustment of and Changes in the Stock

The number and kind of Common Shares available for issuance under this Plan (including under any Awards then outstanding), and the number and kind of Common Shares subject to the limits set forth in Section 5 of this Plan, shall be equitably adjusted by the Committee to reflect any reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, dividend or distribution of securities, property or cash (other than regular, quarterly cash dividends), or any other equity restructuring transaction, as that term is defined in Statement of Financial Accounting Standards No. 123 (revised). Such adjustment may be designed to comply with Section 425 of the Code or, except as otherwise expressly provided in Section 5(c) of this Plan, may be designed to treat the Common Shares available under the Plan and subject to Awards as if they were all outstanding on the record date for such event or transaction or to increase the number of such Common Shares to reflect a deemed reinvestment in Common Shares of the amount distributed to the Company’s securityholders. The terms of any outstanding Award shall also be equitably adjusted by the Committee as to price, number or kind of Common Shares subject to such Award, vesting, and other terms to reflect the foregoing events, which adjustments need not be uniform as between different Awards or different types of Awards. In the event there shall be any other change in the number or kind of outstanding Common Shares, or any stock or other securities into which such Common Shares shall have been changed, or for which it shall have been exchanged, by reason of a change of control, other merger, consolidation or otherwise in circumstances that do not involve an equity restructuring transaction, as that term is defined in Statement of Financial Accounting Standards No. 123 (revised), then the Committee shall determine the appropriate adjustment, if any, to be effected. In addition, in the event of such change described in this paragraph, the Committee may accelerate the time or times at which any Award may be exercised and may provide for cancellation of such accelerated Awards that are not exercised within a time prescribed by the Committee in its sole discretion. No right to purchase fractional shares shall result from any adjustment in Awards pursuant to this Section 11. In case of any such adjustment, the Common Shares subject to the Award shall be rounded down to the nearest whole share. The Company shall notify Participants holding Awards subject to any adjustments pursuant to this Section 11 of such adjustment, but (whether or not notice is given) such adjustment shall be effective and binding for all purposes of the Plan. 12.

Qualifying Performance-Based Compensation

(a) General. The Committee may establish performance criteria and level of achievement versus such criteria that shall determine the number of Common Shares, units, or cash to be granted, retained, vested, issued or issuable under or in settlement of or the amount payable pursuant to an Award, which criteria may be based on Qualifying Performance Criteria or other standards of financial performance and/or personal performance evaluations. In addition, the Committee may specify that an Award or a portion of an Award is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, provided that the performance criteria for 9

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such Award or portion of an Award that is intended by the Committee to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be a measure based on one or more Qualifying Performance Criteria selected by the Committee and specified at the time the Award is granted. The Committee shall certify the extent to which any Qualifying Performance Criteria has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting of any Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code. Notwithstanding satisfaction of any performance goals, the number of Common Shares issued under or the amount paid under an award may, to the extent specified in the Award Agreement, be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. (b) Qualifying Performance Criteria. For purposes of this Plan, the term “Qualifying Performance Criteria” shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or Subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee: (i) cash flow (before or after dividends), (ii) earnings or earnings per share (including earnings before interest, taxes, depreciation and amortization), (iii) stock price, (iv) return on equity, (v) total stockholder return, (vi) return on capital or investment (including return on total capital, return on invested capital, or return on investment), (vii) return on assets or net assets, (viii) market capitalization, (ix) economic value added, (x) debt leverage (debt to capital), (xi) revenue, (xii) income or net income, (xiii) operating income, (xiv) operating profit or net operating profit, (xv) operating margin or profit margin, (xvi) return on operating revenue, (xvii) cash from operations, (xviii) operating ratio, (xix) operating revenue, or (xx) customer service. To the extent consistent with Section 162(m) of the Code, the Committee (A) shall appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the acquisition or disposal of a segment of a business or related to a change in accounting principle all as determined in accordance with standards established by opinion No. 30 of the Accounting Principles Board (APA Opinion No. 30) or other applicable or successor accounting provisions, as well as the cumulative effect of accounting changes, in each case as determined in accordance with generally accepted accounting principles or identified in the Company’s financial statements or notes to the financial statements, and (B) may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation, claims, judgments or settlements, (iii) the effect of changes in tax law or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs and (v) accruals of any amounts for payment under this Plan or any other compensation arrangement maintained by the Company. 10

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13.

Transferability

Unless the Committee provides otherwise, each Award may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by a Participant other than by will or the laws of descent and distribution, and each Option or Stock Appreciation Right shall be exercisable only by the Participant during his or her lifetime. 14.

Compliance with Laws and Regulations

This Plan, the grant, issuance, vesting, exercise and settlement of Awards thereunder, and the obligation of the Company to sell, issue or deliver Common Shares under such Awards, shall be subject to all applicable foreign, federal, state and local laws, rules and regulations, stock exchange rules and regulations, and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to register in a Participant’s name or deliver any Common Shares prior to the completion of any registration or qualification of such shares under any foreign, federal, state or local law or any ruling or regulation of any government body which the Committee shall determine to be necessary or advisable. To the extent the Company is unable to or the Committee deems it infeasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Common Shares hereunder, the Company and its Subsidiaries shall be relieved of any liability with respect to the failure to issue or sell such Common Shares as to which such requisite authority shall not have been obtained. No Option shall be exercisable and no Common Shares shall be issued and/or transferable under any other Award unless a registration statement with respect to the Common Shares underlying such Option is effective and current or the Company has determined that such registration is unnecessary. 15.

Withholding

To the extent required by applicable federal, state, local or foreign law, a Participant shall be required to satisfy, in a manner satisfactory to the Company, any withholding tax obligations that arise by reason of an Option exercise, disposition of Common Shares issued under an Incentive Stock Option, the vesting of or settlement of an Award, an election pursuant to Section 83(b) of the Code or otherwise with respect to an Award. The Company and its Subsidiaries shall not be required to issue Common Shares, make any payment or to recognize the transfer or disposition of Common Shares until such obligations are satisfied. The Committee may provide for or permit the minimum statutory withholding obligations to be satisfied through the mandatory or elective sale of Common Shares and/or by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her upon exercise of the Option or the vesting or settlement of an Award, or by tendering Common Shares previously acquired. 16.

Administration of the Plan

(a) Committee of the Plan. The Plan shall be administered by the Compensation Committee of the Board or the Board itself. Any power of the Committee may also be exercised by the Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934 or cause an Award designated as a Performance Award not to qualify for treatment as performance-based compensation under Section 162(m) of the Code. To the extent that any permitted action taken by the Board conflicts with action taken by 11

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the Committee, the Board action shall control. The Compensation Committee may by resolution authorize one or more officers of the Company to perform any or all things that the Committee is authorized and empowered to do or perform under the Plan, and for all purposes under this Plan, such officer or officers shall be treated as the Committee; provided, however, that the resolution so authorizing such officer or officers shall specify the total number of Awards (if any) such officer or officers may award pursuant to such delegated authority, and any such Award shall be subject to the form of Award Agreement theretofore approved by the Compensation Committee. No such officer shall designate himself or herself as a recipient of any Awards granted under authority delegated to such officer. In addition, the Compensation Committee may delegate any or all aspects of the day-to-day administration of the Plan to one or more officers or employees of the Company or any Subsidiary, and/or to one or more agents. (b) Powers of Committee. Subject to the express provisions of this Plan, the Committee shall be authorized and empowered to do all things that it determines to be necessary or appropriate in connection with the administration of this Plan, including, without limitation: (i) to prescribe, amend and rescind rules and regulations relating to this Plan and to define terms not otherwise defined herein; (ii) to determine which persons are Participants, to which of such Participants, if any, Awards shall be granted hereunder and the timing of any such Awards; (iii) to grant Awards to Participants and determine the terms and conditions thereof, including the number of Common Shares subject to Awards and the exercise or purchase price of such Common Shares and the circumstances under which Awards become exercisable or vested or are forfeited or expire, which terms may but need not be conditioned upon the passage of time, continued employment, the satisfaction of performance criteria, the occurrence of certain events (including events which constitute a change of control), or other factors; (iv) to establish and verify the extent of satisfaction of any performance goals or other conditions applicable to the grant, issuance, exercisability, vesting and/or ability to retain any Award; (v) to prescribe and amend the terms of the agreements or other documents evidencing Awards made under this Plan (which need not be identical) and the terms of or form of any document or notice required to be delivered to the Company by Participants under this Plan; (vi) to determine the extent to which adjustments are required pursuant to Section 11; (vii) to interpret and construe this Plan, any rules and regulations under this Plan and the terms and conditions of any Award granted hereunder, and to make exceptions to any such provisions in good faith and for the benefit of the Company; and (viii) to make all other determinations deemed necessary or advisable for the administration of this Plan. (c) Determinations by the Committee. All decisions, determinations and interpretations by the Committee regarding the Plan, any rules and regulations under the Plan and the terms and conditions of or operation of any Award granted hereunder, shall be final and binding on all Participants, beneficiaries, heirs, assigns or other persons holding or claiming rights under the Plan or any Award. The Committee shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select. 12

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17.

Amendment of the Plan or Awards

The Board may amend, alter or discontinue this Plan and the Committee may amend, or alter any agreement or other document evidencing an Award made under this Plan but, except as specifically provided for hereunder, no such amendment shall, without the approval of the stockholders of the Company (a) reduce the exercise price of outstanding Options or Stock Appreciation Rights, (b) reduce the price at which Options may be granted below the price provided for in Section 6 or (c) otherwise amend the Plan in any manner requiring stockholder approval by law or under the NASDAQ’s listing requirements. No amendment or alteration to the Plan or an Award or Award Agreement shall be made which would impair the rights of the holder of an Award, without such holder’s consent, provided that no such consent shall be required if the Committee determines in its sole discretion and prior to the date of any change of control that such amendment or alteration either is required or advisable in order for the Company, the Plan or the Award to satisfy any law or regulation or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard. 18.

Miscellaneous

(a) No Liability of Company. The Company and any Subsidiary or affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant or any other person as to: (i) the non-issuance or sale of Common Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Common Shares hereunder; and (ii) any tax consequence expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Award granted hereunder. (b) Non-Exclusivity of Plan. Neither the adoption of this Plan by the Board nor the submission of this Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as either may deem desirable, including without limitation, the granting of restricted stock or stock options otherwise than under this Plan or an arrangement not intended to qualify under Code Section 162(m), and such arrangements may be either generally applicable or applicable only in specific cases. (c) Governing Law. This Plan and any agreements or other documents hereunder shall be interpreted and construed in accordance with the laws of the Delaware and applicable federal law. (d) No Right to Employment, Reelection or Continued Service. Nothing in this Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Subsidiaries and/or its affiliates to terminate any Participant’s employment, service on the Board or service for the Company at any time or for any reason not prohibited by law, nor shall this Plan or an Award itself confer upon any Participant any right to continue his or her employment or service for any specified period of time. Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company, any Subsidiary and/or its affiliates. (e) Unfunded Plan. The Plan is intended to be an unfunded plan. Participants are and shall at all times be general creditors of the Company with respect to their Awards. If the Committee or the Company chooses to set aside funds in a trust or otherwise for the payment of Awards under the Plan, such funds shall at all times be subject to the claims of the creditors of the Company in the event of its bankruptcy or insolvency. 13

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Exhibit 10.8

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Grantee’s Copy Company's Copy

COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT

To «Name»: CoStar Group, Inc. (the "Company") has granted you an option (the "Option") under the CoStar Group, Inc. 2007 Stock Incentive Plan, as amended from time to time (the "Plan"), to purchase «NoShares» shares (the "Shares") of common stock of the Company (the "Common Stock"), at «Price» per share (the "Exercise Price"). The date of grant is «DateofGrant». This Option is subject in all respects to the applicable provisions of the Plan, a copy of which is attached, except as otherwise noted. By signing this agreement (the "Agreement"), you acknowledge that you have received and read the Plan. This Agreement incorporates the Plan by reference and specifies other applicable terms and conditions. All capitalized terms not defined by this Agreement have the meanings given in the Plan. The Compensation Committee of the Company's Board of Directors (or other administrator of the Plan, the "Administrator") may adjust the number of Shares and the Exercise Price with respect to your Option from time to time in accordance with the Plan. Subject to the terms of the Plan, the Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and will be interpreted accordingly; provided, however that the Option will be an incentive stock option only to the extent that the aggregate Fair Market Value (determined at the date of grant) of the stock with respect to which incentive stock options are exercisable for the first time by you during any calendar year (under the Plan and all other plans of the Company and its subsidiary corporations, within the meaning of Code Section 422(d)), does not exceed $100,000. This limitation will be applied by taking Options into account in the order in which such Options were granted. If, by design or operation, the Option exceeds this limit, the excess will be treated as a nonqualified stock option. In addition to the terms, conditions, and restrictions set forth in the Plan, the following terms, conditions, and restrictions apply to the Option: (1)

Vesting. The schedule for exercising the Option is as follows, subject to the expiration provisions set forth in Section 3 below:

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a. You may exercise the Option on the following schedule: [Set forth vesting schedule.] No portion of the Option that is unexercisable at your termination of employment will thereafter become exercisable, unless the Administrator determines otherwise. b. The Option will become immediately exercisable in full upon the occurrence of a Change in Control. “Change in Control” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then outstanding securities eligible to vote to elect members of the Board (the “Company Voting Securities”); ii. consummation of a merger, consolidation or reorganization of the Company with or into any other entity, unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or iii. the stockholders of the Company approve (A) a plan of complete liquidation or dissolution of the Company or (B) an agreement for the Company’s sale or disposition of all or substantially all of the Company’s assets, and such liquidation, dissolution, sale or disposition is consummated. 2

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Even if other tests are met, a Change in Control has not occurred under any circumstances in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing. The provisions of Section 4 will also apply if the Change in Control is a Substantial Corporate Change (as defined in those provisions). c. The Administrator may, in its sole discretion, accelerate the time at which you may exercise part or all of the Option. d. The vesting period and/or exercisability of the Option may be adjusted by the Administrator to reflect the decreased level of employment during any period in which you are on an approved leave of absence or employed on a less than full time basis, provided, that the Administrator may take into consideration any accounting consequences to the Company. (2) Exercise. Subject to this Agreement and the Plan, unless the Administrator determines otherwise, you may exercise the Option only by a written “Notice of Exercise” to the Company or its designee on a form specified by the Company on or before the date the Option expires. Unless the Administrator determines otherwise, each such Notice must: a. state your election to exercise the Option and the number of Shares with respect to which you are exercising the Option; b. be signed by you or, if you have died or become disabled, by the party entitled to exercise the Option; c. contain such representations as the Company reasonably requires; and d. be accompanied by payment of the Exercise Price in full through one, or a combination, of the following payment methods, which method(s) shall be indicated in the Notice of Exercise: i. cashier's or certified check in the amount of the Exercise Price payable to the order of the Company; ii. direction to the Company through your Notice of Exercise to send the share certificates to be issued under this Option to a licensed broker acceptable to the Company as your agent in exchange for the broker's tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price, for the Shares with respect to which the Option is being exercised, as part of a cashless exercise; 3

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iii. unless the Administrator determines otherwise, by surrender to the Company of shares of Common Stock with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you), for the Shares with respect to which the Option is being exercised; provided, however, that you may not surrender (turn in) previously held or owned Common Stock of the Company as payment unless you have held such stock for more than six months before the surrender. For purposes hereof, the date of exercise shall be the date of delivery of (A) the duly executed Notice of Exercise and (B) the shares tendered for payment of the Exercise Price; iv. unless the Administrator determines otherwise, attestation of ownership of Common Stock and issuance of a net number of shares upon Option exercise; or v. unless the Administrator determines otherwise, by the Company withholding from the shares of Common Stock otherwise issuable to you upon the exercise of the Option (or portion thereof) the whole number of shares with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (rounded down, with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you on such date of exercise). For purposes hereof, the date of exercise shall be the date of delivery of the duly executed Notice of Exercise. The Company shall not be obligated to issue any shares of Common Stock until you have paid the total Exercise Price for that number of shares of Common Stock you have elected to purchase. Shares of Common Stock will be issued as soon as is practical after exercise. (3) Expiration. The Option will expire no later than the close of business on «ExpirationDate» (ten years from the date of grant or five years for an ISO granted to a more-than 10% stockholder on the date of grant). Unless the Administrator determines otherwise at any time, you will forfeit any unexercised portions of the Option (whether or not then exercisable) upon the first to occur of: a. the Option's expiration under the preceding sentence, 4

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b. the 90th day after your resignation, including retirement (for any reason other than disability), c. the 90th day after the Company terminates your employment (for any reason other than disability), d. in the event of the termination of your employment for disability (as determined by the Administrator), the earlier of (i) the first anniversary of the termination of your employment and (ii) 30 days after you cease to have a disability, where, for purposes of this Agreement, “disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months, e. the first anniversary of your date of death, and f. the date you violate any covenant not to compete, nonsolicitation covenant or similar covenant in effect between you and the Company. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment for purposes of this Agreement. If you exercise an Option more than 90 days after termination of employment with the Company, you will only receive incentive stock option treatment to the extent provided under the Code, and becoming or remaining an employee of another related company (that is not a Subsidiary) or an independent contractor to the Company will not prevent loss of incentive stock option status as a result of the formal termination of employment unless otherwise provided under the Code. (4) Substantial Corporate Change. Upon a Substantial Corporate Change, any portion of this Option that is unexercised will terminate unless provision is made in writing in connection with such transaction for: a. assumption or continuation of outstanding Options; or b. the substitution for such Options, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Option will continue in the manner and under the terms so provided. Unless the Board determines otherwise, if an Option would otherwise terminate pursuant to the preceding sentence, you will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Option, whether or not previously exercisable. 5

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A “Substantial Corporate Change” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of 100% of the combined voting power of all classes of stock of the Company; ii. merger, consolidation or reorganization of the Company with or into one or more entities in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings); iii. merger, consolidation or reorganization of the Company in which the Company is the surviving corporation, but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; iv. the liquidation or dissolution of the Company; or v. the sale or disposition of all or substantially all of the Company’s assets. (5) Taxes. a. You understand and agree that the Company has not advised you regarding your income tax liability in connection with the Option. To the extent required by applicable federal, state, local or foreign law, you shall make arrangements satisfactory to the Company in its sole discretion for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied. 6

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b. By accepting the Option, you agree that, unless and to the extent you have otherwise satisfied any U.S. federal income and other taxes, including state, local or non-U.S. income or employment tax obligations, related to the exercise of the Option that are required to be withheld and paid over to the applicable tax authorities (the “Tax Withholding Obligations”) in a manner permitted or required by the Administrator pursuant to the Plan, the Company is authorized (but not required) to deduct and retain without notice from the shares of Common Stock issuable to you in respect of the exercised portion of the Option the whole number of shares (rounding down) having a Fair Market Value on the exercise date or, if not a trading day, the first trading day before the exercise date (as determined by the Company consistent with any applicable tax requirements) sufficient to satisfy the applicable Tax Withholding Obligation. If the withheld shares are not sufficient to satisfy your Tax Withholding Obligation, you agree to pay to the Company as soon as practicable, by cash or check or, unless otherwise determined by the Administrator, deducted from salary or other amounts payable to you, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of shares of Common Stock described above. c. You are ultimately liable and responsible for all taxes owed by you in connection with the Option, regardless of any action the Company takes or any transaction pursuant to this Section 5 with respect to any tax withholding obligations that arise in connection with the Option. The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or exercise of the Option or the subsequent sale of any of the shares of Common Stock acquired upon exercise of the Option. The Company does not commit and is under no obligation to structure the Option to reduce or eliminate your tax liability. (6) Company Postponement of Delivery. The Company may postpone issuing and delivering any Shares for so long as the Company determines to be necessary or advisable to satisfy the following: a. completing or amending any registration or qualification of the Shares or satisfying any exemption from registration under any federal or state law, rule, or regulation; b. complying with any requests for representations under the Plan; c. receiving proof satisfactory to the Company that a person seeking to exercise the Option after your death or disability is authorized and entitled to exercise the Option; and 7

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d. satisfying any federal, state, or local tax withholding obligations. (7) Compliance with Securities Laws. a. If, at the time the Company should issue you Shares because of your exercise of the Option, no current registration statement under the Securities Act of 1933 (the "Act") covers such issuance, you must, before the Company will issue such Shares to you: i. represent to the Company, in form satisfactory to the Company's counsel, that you are acquiring the Shares for your own account and not with a view to reselling or distributing the Shares; and ii. agree that you may not sell, transfer, or otherwise dispose of the Shares issued to you under the Option unless: A. a registration statement under the Act is effective at the time of disposition with respect to the Shares sold, transferred, or otherwise disposed of; or B. the Company has received an opinion of counsel or other information and representations satisfactory to it to the effect that registration under the Act is not required by reason of Rule 144 under the Act or otherwise. b. Notwithstanding anything herein to the contrary, you may not exercise the Option, and the Company shall not be obligated to deliver any shares of Common Stock, during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any applicable federal or state securities laws or other laws or regulations. (8) Restrictions on Resales. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by you or other subsequent transfers by you of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by you and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers. 8

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(9) Not an Employment Contract. Nothing in this Agreement restricts the right of the Company or any of its affiliates to terminate your employment at any time, with or without cause. The termination of employment, whether by the Company or any of its affiliates or otherwise, and regardless of the reason therefore, has the consequences provided for hereunder, under the Plan and under any applicable employment or severance agreement. (10) Non-Transferability of Option. You may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by you during your lifetime. The Company may cancel the Option if you attempt to assign or transfer it in a manner inconsistent with this Section 10. (11) Limitation of Interest. You understand and agree that you will not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares unless and until they have been issued to you after your exercise of this Option and payment for the Shares. Neither you (individually or as a member of a group) nor any beneficiary or other person claiming under or through you shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. (12) No Fractional Shares. At the time of exercise, the Company will round down any fractional Shares but will not make any cash or other payments in settlement of fractional shares eliminated by rounding. If you have not then exercised the Option in full, the Company will carry forward the fractional Shares rather than eliminating them. (13) No Limitation on Company Actions. You understand and agree that the existence of this Option will not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (14) General. a. This Agreement and the Plan constitute the entire understanding between you and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. b. The laws of the State of Delaware will govern all matters relating to this Agreement, without regard to the principles of conflict of laws. 9

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c. Any notice you give to the Company (including notice of exercise of all or part of the Option) must be in writing and either hand-delivered or mailed to the Corporate Secretary of the Company (or to the Chief Financial Officer if either you would receive the notice or the position is vacant). If mailed, it should be sent by certified mail and be addressed to the foregoing executive at the Company's then corporate headquarters. Any notice given to you will be addressed to you at your address as reflected on the personnel records of the Company. You may change the address for notice by like notice to the Company. Notice will be deemed to have been duly delivered when hand-delivered, or, if mailed, two business days after such notice is postmarked. d. As a condition of this Option, you, on behalf of yourself, your heirs, successors and personal representatives ("you and your successors"), agree that any dispute or disagreement which may arise hereunder shall be decided by the Administrator. You and your successors agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option, and you and your successors hereby explicitly waive any right to judicial review. e. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms hereunder shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. f. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns. g. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. h. All questions arising under the Plan or under this Agreement shall be decided by the Administrator in its total and absolute discretion. 10

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i. Wherever a conflict may arise between the terms of this Agreement and the terms of the Plan, the terms of the Plan will control.

COSTAR GROUP, INC. By: ________________________ Name: ______________________ Title: ______________________ 11

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ACKNOWLEDGMENT I acknowledge receipt of a copy of the attached Plan. I represent that I have read and am familiar with the Plan's terms. I accept the Option subject to all of the terms and provisions of this Agreement and of the Plan under which it is granted, as the Plan may be amended in accordance with its terms. I agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option.

Date:

___________________________________ Signature of Grantee/Participant

NO ONE MAY SELL, TRANSFER, OR DISTRIBUTE THIS OPTION OR THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THIS OPTION WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY OR OTHER INFORMATION AND REPRESENTATIONS SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

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Exhbit 10.9 ® ®

Grantee’s Copy Company's Copy COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT

To Andrew C. Florance: CoStar Group, Inc. (the "Company") has granted you an option (the "Option") under the CoStar Group, Inc. 2007 Stock Incentive Plan, as amended from time to time (the "Plan"), to purchase «NoShares» shares (the "Shares") of common stock of the Company (the "Common Stock"), at «Price» per share (the "Exercise Price"). The date of grant is «DateofGrant». This Option is subject in all respects to the applicable provisions of the Plan, a copy of which is attached, except as otherwise noted. By signing this agreement (the "Agreement"), you acknowledge that you have received and read the Plan. This Agreement incorporates the Plan by reference and specifies other applicable terms and conditions. All capitalized terms not defined by this Agreement have the meanings given in the Plan. The Compensation Committee of the Company's Board of Directors (or other administrator of the Plan, the "Administrator") may adjust the number of Shares and the Exercise Price with respect to your Option from time to time in accordance with the Plan. Subject to the terms of the Plan, the Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and will be interpreted accordingly; provided, however that the Option will be an incentive stock option only to the extent that the aggregate Fair Market Value (determined at the date of grant) of the stock with respect to which incentive stock options are exercisable for the first time by you during any calendar year (under the Plan and all other plans of the Company and its subsidiary corporations, within the meaning of Code Section 422(d)), does not exceed $100,000. This limitation will be applied by taking Options into account in the order in which such Options were granted. If, by design or operation, the Option exceeds this limit, the excess will be treated as a nonqualified stock option. In addition to the terms, conditions, and restrictions set forth in the Plan, the following terms, conditions, and restrictions apply to the Option:

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(1)

Vesting. The schedule for exercising the Option is as follows, subject to the expiration provisions set forth in Section 3 below: a. You may exercise the Option on the following schedule: [Set forth vesting schedule.] Except as specifically provided otherwise herein, no portion of the Option that is unexercisable at your termination of employment will thereafter become exercisable, unless the Administrator determines otherwise. b. The Option will become immediately exercisable in full upon the occurrence of a Change in Control. “Change in Control” means the occurrence of any one or more of the following events: A. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then outstanding securities eligible to vote to elect members of the Board (the “Company Voting Securities”); B. consummation of a merger, consolidation or reorganization of the Company with or into any other entity, unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or C. the stockholders of the Company approve (A) a plan of complete liquidation or dissolution of the Company or (B) an agreement for the Company’s sale or disposition of all or substantially all of the Company’s assets, and such liquidation, dissolution, sale or disposition is consummated. 2

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Even if other tests are met, a Change in Control has not occurred under any circumstances in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing. The provisions of Section 4 will also apply if the Change in Control is a Substantial Corporate Change (as defined in those provisions). c. Subject to, and as permitted by, the Plan, that portion of the Option that is not otherwise exercisable will become immediately exercisable in full upon: i. the termination of your employment by the Company without Cause (as defined in the Employment Agreement between Andrew C. Florance and the Company effective as of January 1, 1998, as amended (the “Employment Agreement”)) pursuant to Section 7(a) of the Employment Agreement; or ii. the termination of your employment by you for Good Reason (as defined in the Employment Agreement) pursuant to Section 7(c) of the Employment Agreement. d. Upon the termination of your employment on account of your Disability (as defined in the Employment Agreement) pursuant to Section 9 of the Employment Agreement or in the event of your death, a pro rata portion of your unvested Options that would have become otherwise exercisable during the calendar year of your termination will become exercisable immediately. Such pro rata amount shall be determined by multiplying the number of unvested options that would have vested in the calendar year of termination by a fraction, the numerator of which is the number of complete weeks you were employed during the year of termination and the denominator of which is fifty-two. e. The Administrator may, in its sole discretion (subject to, and as permitted by, the Plan), accelerate the time at which you may exercise part or all of the Option. f. The vesting period and/or exercisability of the Option may be adjusted by the Administrator to reflect the decreased level of employment during any period in which you are on an approved leave of absence or employed on a less than full time basis, provided, that the Administrator may take into consideration any accounting consequences to the Company. 3

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(2) Exercise. Subject to this Agreement and the Plan, unless the Administrator determines otherwise, you may exercise the Option only by a written “Notice of Exercise” to the Company or its designee on a form specified by the Company on or before the date the Option expires. Unless the Administrator determines otherwise, each such Notice must: a. state your election to exercise the Option and the number of Shares with respect to which you are exercising the Option; b. be signed by you or, if you have died or become disabled, by the party entitled to exercise the Option; c. contain such representations as the Company reasonably requires; and d. be accompanied by payment of the Exercise Price in full through one, or a combination, of the following payment methods, which method(s) shall be indicated in the Notice of Exercise: i. cashier's or certified check in the amount of the Exercise Price payable to the order of the Company; ii. direction to the Company through your Notice of Exercise to send the share certificates to be issued under this Option to a licensed broker acceptable to the Company as your agent in exchange for the broker's tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price, for the Shares with respect to which the Option is being exercised, as part of a cashless exercise; iii. unless the Administrator determines otherwise, by surrender to the Company of shares of Common Stock with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you), for the Shares with respect to which the Option is being exercised; provided, however, that you may not surrender (turn in) previously held or owned Common Stock of the Company as payment unless you have held such stock for more than six months before the surrender. For purposes hereof, the date of exercise shall be the date of delivery of (A) the duly executed Notice of Exercise and (B) the shares tendered for payment of the Exercise Price; 4

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iv. unless the Administrator determines otherwise, attestation of ownership of Common Stock and issuance of a net number of shares upon Option exercise; or v. unless the Administrator determines otherwise, by the Company withholding from the shares of Common Stock otherwise issuable to you upon the exercise of the Option (or portion thereof) the whole number of shares with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (rounded down, with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you on such date of exercise). For purposes hereof, the date of exercise shall be the date of delivery of the duly executed Notice of Exercise. The Company shall not be obligated to issue any shares of Common Stock until you have paid the total Exercise Price for that number of shares of Common Stock you have elected to purchase. Shares of Common Stock will be issued as soon as is practical after exercise. (3) Expiration. The Option will expire no later than the close of business on «ExpirationDate» (ten years from the date of grant or five years for an ISO granted to a more-than 10% stockholder on the date of grant). The exercise period for the Options shall be until the first to occur of: a. the Option's expiration under the preceding sentence, b. the 60th day after the cessation of your employment as a result of the termination of your employment by you without Good Reason pursuant to Section 7(d) of the Employment Agreement; c. the 60th day after the cessation of your employment as a result of the termination of your employment by the Company for Cause pursuant to Section 7(b) of the Employment Agreement; d. the 180th day after the cessation of your employment as a result of the termination of your employment (a) by the Company without Cause pursuant to Section 7(a) of the Employment Agreement or (b) by you for Good Reason pursuant to Section 7(c) of the Employment Agreement; provided, however, that to the extent you exercise the Option on or after the 90th day following such termination, the Option may not qualify as an Incentive Stock Option; 5

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e. one year after the cessation of your employment as a result of the termination of your employment for Disability; f. the first anniversary of your date of death; and g. after the termination of your employment, the date you violate any covenant not to compete, nonsolicitation covenant or similar covenant in effect between you and the Company. Pursuant to Section 4(c) of the Employment Agreement, if you do not exercise the Option on or prior to the date the Option expires or is no longer exercisable, you shall be deemed to have made a “cashless exercise” of the unexercised, exercisable portion of the Option on the last day that the Option may be exercised (the “Deemed Exercise Date”), and the Company shall pay to you within thirty days of the Deemed Exercise Date a cash payment equal to the amount that results from multiplying the total number of shares underlying the unexercised, exercisable portion of the Option multiplied by a number equal to the difference between the closing price of the Company’s common stock on the Deemed Exercise Date (or if the Deemed Exercise Date is not a trading day, then on the trading day immediately preceding the Deemed Exercise Date) and the exercise price of the Option; provided, however, that the cashless exercise alternative shall not be available if your employment has been terminated by the Company for Cause or by you without Good Reason. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment for purposes of this Agreement. If you exercise an Option more than 90 days after termination of employment with the Company, you will only receive incentive stock option treatment to the extent provided under the Code, and becoming or remaining an employee of another related company (that is not a Subsidiary) or an independent contractor to the Company will not prevent loss of incentive stock option status as a result of the formal termination of employment unless otherwise provided under the Code. (4) Substantial Corporate Change. Upon a Substantial Corporate Change, any portion of this Option that is unexercised will terminate unless provision is made in writing in connection with such transaction for: a. assumption or continuation of outstanding Options; or 6

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b. the substitution for such Options, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Option will continue in the manner and under the terms so provided. Unless the Board determines otherwise, if an Option would otherwise terminate pursuant to the preceding sentence, you will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Option, whether or not previously exercisable. A “Substantial Corporate Change” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of 100% of the combined voting power of all classes of stock of the Company; ii. merger, consolidation or reorganization of the Company with or into one or more entities in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings); iii. merger, consolidation or reorganization of the Company in which the Company is the surviving corporation, but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; iv. the liquidation or dissolution of the Company; or v. the sale or disposition of all or substantially all of the Company’s assets. 7

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(5) Taxes. a. You understand and agree that the Company has not advised you regarding your income tax liability in connection with the Option. To the extent required by applicable federal, state, local or foreign law, you shall make arrangements satisfactory to the Company in its sole discretion for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied. b. By accepting the Option, you agree that, unless and to the extent you have otherwise satisfied any U.S. federal income and other taxes, including state, local or non-U.S. income or employment tax obligations, related to the exercise of the Option that are required to be withheld and paid over to the applicable tax authorities (the “Tax Withholding Obligations”) in a manner permitted or required by the Administrator pursuant to the Plan, the Company is authorized (but not required) to deduct and retain without notice from the shares of Common Stock issuable to you in respect of the exercised portion of the Option the whole number of shares (rounding down) having a Fair Market Value on the exercise date or, if not a trading day, the first trading day before the exercise date (as determined by the Company consistent with any applicable tax requirements) sufficient to satisfy the applicable Tax Withholding Obligation. If the withheld shares are not sufficient to satisfy your Tax Withholding Obligation, you agree to pay to the Company as soon as practicable, by cash or check or, unless otherwise determined by the Administrator, deducted from salary or other amounts payable to you, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of shares of Common Stock described above. c. You are ultimately liable and responsible for all taxes owed by you in connection with the Option, regardless of any action the Company takes or any transaction pursuant to this Section 5 with respect to any tax withholding obligations that arise in connection with the Option. The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or exercise of the Option or the subsequent sale of any of the shares of Common Stock acquired upon exercise of the Option. The Company does not commit and is under no obligation to structure the Option to reduce or eliminate your tax liability. 8

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(6) Company Postponement of Delivery. The Company may postpone issuing and delivering any Shares for so long as the Company determines to be necessary or advisable to satisfy the following: a. completing or amending any registration or qualification of the Shares or satisfying any exemption from registration under any federal or state law, rule, or regulation; b. complying with any requests for representations under the Plan; c. receiving proof satisfactory to the Company that a person seeking to exercise the Option after your death or disability is authorized and entitled to exercise the Option; and d. satisfying any federal, state, or local tax withholding obligations. (7) Compliance with Securities Laws. a. If, at the time the Company should issue you Shares because of your exercise of the Option, no current registration statement under the Securities Act of 1933 (the "Act") covers such issuance, you must, before the Company will issue such Shares to you: i. represent to the Company, in form satisfactory to the Company's counsel, that you are acquiring the Shares for your own account and not with a view to reselling or distributing the Shares; and ii. agree that you may not sell, transfer, or otherwise dispose of the Shares issued to you under the Option unless: A. a registration statement under the Act is effective at the time of disposition with respect to the Shares sold, transferred, or otherwise disposed of; or B. the Company has received an opinion of counsel or other information and representations satisfactory to it to the effect that registration under the Act is not required by reason of Rule 144 under the Act or otherwise. b. Notwithstanding anything herein to the contrary, you may not exercise the Option, and the Company shall not be obligated to deliver any shares of Common Stock, during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any applicable federal or state securities laws or other laws or regulations. 9

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(8) Restrictions on Resales. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by you or other subsequent transfers by you of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by you and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers. (9) Not an Employment Contract. Nothing in this Agreement restricts the right of the Company or any of its affiliates to terminate your employment at any time, with or without cause. The termination of employment, whether by the Company or any of its affiliates or otherwise, and regardless of the reason therefore, has the consequences provided for hereunder, under the Plan and under any applicable employment or severance agreement. (10) Non-Transferability of Option. You may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by you during your lifetime. The Company may cancel the Option if you attempt to assign or transfer it in a manner inconsistent with this Section 10. (11) Limitation of Interest. You understand and agree that you will not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares unless and until they have been issued to you after your exercise of this Option and payment for the Shares. Neither you (individually or as a member of a group) nor any beneficiary or other person claiming under or through you shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. (12) No Fractional Shares. At the time of exercise, the Company will round down any fractional Shares but will not make any cash or other payments in settlement of fractional shares eliminated by rounding. If you have not then exercised the Option in full, the Company will carry forward the fractional Shares rather than eliminating them. (13) No Limitation on Company Actions. You understand and agree that the existence of this Option will not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 10

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(14) General. a. This Agreement and the Plan constitute the entire understanding between you and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. b. The laws of the State of Delaware will govern all matters relating to this Agreement, without regard to the principles of conflict of laws. c. Any notice you give to the Company (including notice of exercise of all or part of the Option) must be in writing and either hand-delivered or mailed to the Corporate Secretary of the Company (or to the Chief Financial Officer if either you would receive the notice or the position is vacant). If mailed, it should be sent by certified mail and be addressed to the foregoing executive at the Company's then corporate headquarters. Any notice given to you will be addressed to you at your address as reflected on the personnel records of the Company. You may change the address for notice by like notice to the Company. Notice will be deemed to have been duly delivered when hand-delivered, or, if mailed, two business days after such notice is postmarked. d. As a condition of this Option, you, on behalf of yourself, your heirs, successors and personal representatives ("you and your successors"), agree that any dispute or disagreement which may arise hereunder shall be decided by the Administrator. You and your successors agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option, and you and your successors hereby explicitly waive any right to judicial review. e. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms hereunder shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. f. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns. 11

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g. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. h. All questions arising under the Plan or under this Agreement shall be decided by the Administrator in its total and absolute discretion. i. Wherever a conflict may arise between the terms of this Agreement and the terms of the Plan, the terms of the Plan will control.

COSTAR GROUP, INC. By:

______________________________

Name:

______________________________

Title:

______________________________ 12

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ACKNOWLEDGMENT I acknowledge receipt of a copy of the attached Plan. I represent that I have read and am familiar with the Plan's terms. I accept the Option subject to all of the terms and provisions of this Agreement and of the Plan under which it is granted, as the Plan may be amended in accordance with its terms. I agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option.

Date:

____________________________________ Signature of Grantee/Participant

NO ONE MAY SELL, TRANSFER, OR DISTRIBUTE THIS OPTION OR THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THIS OPTION WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY OR OTHER INFORMATION AND REPRESENTATIONS SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

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Exhibit 10.10

® ®

Grantee’s Copy Company's Copy COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT

To «Name»: CoStar Group, Inc. (the "Company") has granted you a nonqualified stock option (the "Option") under the CoStar Group, Inc. 2007 Stock Incentive Plan, as amended from time to time (the "Plan"), to purchase «NoShares» shares (the "Shares") of common stock of the Company (the "Common Stock"), at «Price» per share (the "Exercise Price"). The date of grant is «DateofGrant». This Option is subject in all respects to the applicable provisions of the Plan, a copy of which is attached, except as otherwise noted. By signing this agreement (the "Agreement"), you acknowledge that you have received and read the Plan. This Agreement incorporates the Plan by reference and specifies other applicable terms and conditions. All capitalized terms not defined by this Agreement have the meanings given in the Plan. The Compensation Committee of the Company's Board of Directors (or other administrator of the Plan, the "Administrator") may adjust the number of Shares and the Exercise Price with respect to your Option from time to time in accordance with the Plan. This Option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and will be interpreted accordingly. In addition to the terms, conditions, and restrictions set forth in the Plan, the following terms, conditions, and restrictions apply to the Option: (1)

Vesting. The schedule for exercising the Option is as follows, subject to the expiration provisions set forth in Section 3 below: a. You may exercise the Option on the following schedule: [Set forth vesting schedule.]

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No portion of the Option that is unexercisable at your termination of employment, consultancy, directorship or other position making you an eligible participant under the Plan will thereafter become exercisable, unless the Administrator determines otherwise. b. The Option will become immediately exercisable in full upon the occurrence of a Change in Control. “Change in Control” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then outstanding securities eligible to vote to elect members of the Board (the “Company Voting Securities”); ii. consummation of a merger, consolidation or reorganization of the Company with or into any other entity, unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or iii. the stockholders of the Company approve (A) a plan of complete liquidation or dissolution of the Company or (B) an agreement for the Company’s sale or disposition of all or substantially all of the Company’s assets, and such liquidation, dissolution, sale or disposition is consummated. Even if other tests are met, a Change of Control has not occurred under any circumstances in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing. The provisions of Section 4 will also apply if the Change in Control is a Substantial Corporate Change (as defined in those provisions). 2

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c. The Administrator may, in its sole discretion, accelerate the time at which you may exercise part or all of the Option. d. The vesting period and/or exercisability of the Option may be adjusted by the Administrator to reflect the decreased level of employment or other applicable service during any period in which you are on an approved leave of absence or employed or providing applicable services on a less than full time basis, provided, that the Administrator may take into consideration any accounting consequences to the Company. (2) Exercise. Subject to this Agreement and the Plan, unless the Administrator determines otherwise, you may exercise the Option only by a written “Notice of Exercise” to the Company or its designee on a form specified by the Company on or before the date the Option expires. Unless the Administrator determines otherwise, each such Notice must: a. state your election to exercise the Option and the number of Shares with respect to which you are exercising the Option; b. be signed by you or, if you have died or become disabled, by the party entitled to exercise the Option; c. contain such representations as the Company reasonably requires; and d. be accompanied by payment of the Exercise Price in full through one, or a combination, of the following payment methods, which method(s) shall be indicated in the Notice of Exercise: i. cashier's or certified check in the amount of the Exercise Price payable to the order of the Company; ii. direction to the Company through your Notice of Exercise to send the share certificates to be issued under this Option to a licensed broker acceptable to the Company as your agent in exchange for the broker's tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price, for the Shares with respect to which the Option is being exercised, as part of a cashless exercise; 3

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iii. unless the Administrator determines otherwise, by surrender to the Company of shares of Common Stock with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you), for the Shares with respect to which the Option is being exercised; provided, however, that you may not surrender (turn in) previously held or owned Common Stock of the Company as payment unless you have held such stock for more than six months before the surrender. For purposes hereof, the date of exercise shall be the date of delivery of (A) the duly executed Notice of Exercise and (B) the shares tendered for payment of the Exercise Price; iv. unless the Administrator determines otherwise, attestation of ownership of Common Stock and issuance of a net number of shares upon Option exercise; or v. unless the Administrator determines otherwise, by the Company withholding from the shares of Common Stock otherwise issuable to you upon the exercise of the Option (or portion thereof) the whole number of shares with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (rounded down, with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you on such date of exercise). For purposes hereof, the date of exercise shall be the date of delivery of the duly executed Notice of Exercise. The Company shall not be obligated to issue any shares of Common Stock until you have paid the total Exercise Price for that number of shares of Common Stock you have elected to purchase. Shares of Common Stock will be issued as soon as is practical after exercise. (3) Expiration. The Option will expire no later than the close of business on «ExpirationDate» (ten years from the date of grant). Unless the Administrator determines otherwise at any time, you will forfeit any unexercised portions of the Option (whether or not then exercisable) upon the first to occur of: a. the Option's expiration under the preceding sentence, 4

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b. the 90th day after your resignation, including retirement (for any reason other than disability), c. the 90th day after the Company terminates your employment or other applicable service (for any reason other than disability), d. in the event of the termination of your employment or other applicable service to the Company for disability (as determined by the Administrator), the earlier of (i) the first anniversary of the termination of your service and (ii) 30 days after you cease to have a disability, where, for purposes of this Agreement, “disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months, e. the first anniversary of your date of death, and f. the date you violate any covenant not to compete, nonsolicitation covenant or similar covenant in effect between you and the Company. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment or other applicable service for purposes of this Agreement. (4) Substantial Corporate Change. Upon a Substantial Corporate Change, any portion of this Option that is unexercised will terminate unless provision is made in writing in connection with such transaction for: a. assumption or continuation of outstanding Options; or b. the substitution for such Options, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Option will continue in the manner and under the terms so provided. Unless the Board determines otherwise, if an Option would otherwise terminate pursuant to the preceding sentence, you will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Option, whether or not previously exercisable. A “Substantial Corporate Change” means the occurrence of any one or more of the following events: 5

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i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of 100% of the combined voting power of all classes of stock of the Company; ii. merger, consolidation or reorganization of the Company with or into one or more entities in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings); iii. merger, consolidation or reorganization of the Company in which the Company is the surviving corporation, but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; iv. the liquidation or dissolution of the Company; or v. the sale or disposition of all or substantially all of the Company’s assets. (5) Taxes. a. You understand and agree that the Company has not advised you regarding your income tax liability in connection with the Option. To the extent required by applicable federal, state, local or foreign law, you shall make arrangements satisfactory to the Company in its sole discretion for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied. 6

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b. By accepting the Option, you agree that, unless and to the extent you have otherwise satisfied any U.S. federal income and other taxes, including state, local or non-U.S. income or employment tax obligations, related to the exercise of the Option that are required to be withheld and paid over to the applicable tax authorities (the “Tax Withholding Obligations”) in a manner permitted or required by the Administrator pursuant to the Plan, the Company is authorized (but not required) to deduct and retain without notice from the shares of Common Stock issuable to you in respect of the exercised portion of the Option the whole number of shares (rounding down) having a Fair Market Value on the exercise date or, if not a trading day, the first trading day before the exercise date (as determined by the Company consistent with any applicable tax requirements) sufficient to satisfy the applicable Tax Withholding Obligation. If the withheld shares are not sufficient to satisfy your Tax Withholding Obligation, you agree to pay to the Company as soon as practicable, by cash or check or, unless otherwise determined by the Administrator, deducted from salary or other amounts payable to you, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of shares of Common Stock described above. c. You are ultimately liable and responsible for all taxes owed by you in connection with the Option, regardless of any action the Company takes or any transaction pursuant to this Section 5 with respect to any tax withholding obligations that arise in connection with the Option. The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or exercise of the Option or the subsequent sale of any of the shares of Common Stock acquired upon exercise of the Option. The Company does not commit and is under no obligation to structure the Option to reduce or eliminate your tax liability. (6) Company Postponement of Delivery. The Company may postpone issuing and delivering any Shares for so long as the Company determines to be necessary or advisable to satisfy the following: a. completing or amending any registration or qualification of the Shares or satisfying any exemption from registration under any federal or state law, rule, or regulation; b. complying with any requests for representations under the Plan; c. receiving proof satisfactory to the Company that a person seeking to exercise the Option after your death or disability is authorized and entitled to exercise the Option; and d. satisfying any federal, state, or local tax withholding obligations. 7

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(7) Compliance with Securities Laws. a. If, at the time the Company should issue you Shares because of your exercise of the Option, no current registration statement under the Securities Act of 1933 (the "Act") covers such issuance, you must, before the Company will issue such Shares to you: i. represent to the Company, in form satisfactory to the Company's counsel, that you are acquiring the Shares for your own account and not with a view to reselling or distributing the Shares; and ii. agree that you may not sell, transfer, or otherwise dispose of the Shares issued to you under the Option unless: A. a registration statement under the Act is effective at the time of disposition with respect to the Shares sold, transferred, or otherwise disposed of; or B. the Company has received an opinion of counsel or other information and representations satisfactory to it to the effect that registration under the Act is not required by reason of Rule 144 under the Act or otherwise. b. Notwithstanding anything herein to the contrary, you may not exercise the Option, and the Company shall not be obligated to deliver any shares of Common Stock, during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any applicable federal or state securities laws or other laws or regulations. (8) Restrictions on Resales. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by you or other subsequent transfers by you of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by you and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers. (9) Not an Employment Contract. Nothing in this Agreement restricts the right of the Company or any of its affiliates to terminate your employment or other service at any time, with or without cause. The termination of employment or service, whether by the Company or any of its affiliates or otherwise, and regardless of the reason therefore, has the consequences provided for hereunder, under the Plan and under any applicable employment, severance or other agreement. 8

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(10) Non-Transferability of Option. You may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by you during your lifetime. The Company may cancel the Option if you attempt to assign or transfer it in a manner inconsistent with this Section 10. (11) Limitation of Interest. You understand and agree that you will not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares unless and until they have been issued to you after your exercise of this Option and payment for the Shares. Neither you (individually or as a member of a group) nor any beneficiary or other person claiming under or through you shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. (12) No Fractional Shares. At the time of exercise, the Company will round down any fractional Shares but will not make any cash or other payments in settlement of fractional shares eliminated by rounding. If you have not then exercised the Option in full, the Company will carry forward the fractional Shares rather than eliminating them. (13) No Limitation on Company Actions. You understand and agree that the existence of this Option will not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (14) General. a. This Agreement and the Plan constitute the entire understanding between you and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. b. The laws of the State of Delaware will govern all matters relating to this Agreement, without regard to the principles of conflict of laws. 9

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c. Any notice you give to the Company (including notice of exercise of all or part of the Option) must be in writing and either hand-delivered or mailed to the Corporate Secretary of the Company (or to the Chief Financial Officer if either you would receive the notice or the position is vacant). If mailed, it should be sent by certified mail and be addressed to the foregoing executive at the Company's then corporate headquarters. Any notice given to you will be addressed to you at your address as reflected on the personnel records of the Company. You may change the address for notice by like notice to the Company. Notice will be deemed to have been duly delivered when hand-delivered, or, if mailed, two business days after such notice is postmarked. d. As a condition of this Option, you, on behalf of yourself, your heirs, successors and personal representatives ("you and your successors"), agree that any dispute or disagreement which may arise hereunder shall be decided by the Administrator. You and your successors agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option, and you and your successors hereby explicitly waive any right to judicial review. e. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms hereunder shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. f. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns. g. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. h. All questions arising under the Plan or under this Agreement shall be decided by the Administrator in its total and absolute discretion. 10

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i. Wherever a conflict may arise between the terms of this Agreement and the terms of the Plan, the terms of the Plan will control.

COSTAR GROUP, INC. By: _____________________________ Name:

___________________________

Title: _____________________________ 11

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ACKNOWLEDGMENT I acknowledge receipt of a copy of the attached Plan. I represent that I have read and am familiar with the Plan's terms. I accept the Option subject to all of the terms and provisions of this Agreement and of the Plan under which it is granted, as the Plan may be amended in accordance with its terms. I agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option.

Date:

____________________________________ Signature of Grantee/Participant

NO ONE MAY SELL, TRANSFER, OR DISTRIBUTE THIS OPTION OR THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THIS OPTION WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY OR OTHER INFORMATION AND REPRESENTATIONS SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

12

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Exhibit 10.11 ® Grantee’s Copy ® Company's Copy COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT

To «Name»: CoStar Group, Inc. (the "Company") has granted you a nonqualified stock option (the "Option") under the CoStar Group, Inc. 2007 Stock Incentive Plan, as amended from time to time (the "Plan"), to purchase «NoShares» shares (the "Shares") of common stock of the Company (the "Common Stock"), at «Price» per share (the "Exercise Price"). The date of grant is «DateofGrant». This Option is subject in all respects to the applicable provisions of the Plan, a copy of which is attached, except as otherwise noted. By signing this agreement (the "Agreement"), you acknowledge that you have received and read the Plan. This Agreement incorporates the Plan by reference and specifies other applicable terms and conditions. All capitalized terms not defined by this Agreement have the meanings given in the Plan. The Compensation Committee of the Company's Board of Directors (or other administrator of the Plan, the "Administrator") may adjust the number of Shares and the Exercise Price with respect to your Option from time to time in accordance with the Plan. This Option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and will be interpreted accordingly. In addition to the terms, conditions, and restrictions set forth in the Plan, the following terms, conditions, and restrictions apply to the Option: (1)

Vesting. The schedule for exercising the Option is as follows, subject to the expiration provisions set forth in Section 3 below: a. You may exercise the Option on the following schedule: [Set forth vesting schedule.]

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No portion of the Option that is unexercisable at your termination of employment, consultancy, directorship or other position making you an eligible participant under the Plan will thereafter become exercisable, unless the Administrator determines otherwise. b. The Option will become immediately exercisable in full upon the occurrence of a Change in Control. “Change in Control” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then outstanding securities eligible to vote to elect members of the Board (the “Company Voting Securities”); ii. consummation of a merger, consolidation or reorganization of the Company with or into any other entity, unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or iii. the stockholders of the Company approve (A) a plan of complete liquidation or dissolution of the Company or (B) an agreement for the Company’s sale or disposition of all or substantially all of the Company’s assets, and such liquidation, dissolution, sale or disposition is consummated. Even if other tests are met, a Change of Control has not occurred under any circumstances in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing. 2

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The provisions of Section 4 will also apply if the Change in Control is a Substantial Corporate Change (as defined in those provisions). c. The Administrator may, in its sole discretion, accelerate the time at which you may exercise part or all of the Option. d. The vesting period and/or exercisability of the Option may be adjusted by the Administrator to reflect the decreased level of employment or other applicable service during any period in which you are on an approved leave of absence or employed or providing applicable services on a less than full time basis, provided, that the Administrator may take into consideration any accounting consequences to the Company. (2) Exercise. Subject to this Agreement and the Plan, unless the Administrator determines otherwise, you may exercise the Option only by a written “Notice of Exercise” to the Company or its designee on a form specified by the Company on or before the date the Option expires. Unless the Administrator determines otherwise, each such Notice must: a. state your election to exercise the Option and the number of Shares with respect to which you are exercising the Option; b. be signed by you or, if you have died or become disabled, by the party entitled to exercise the Option; c. contain such representations as the Company reasonably requires; and d. be accompanied by payment of the Exercise Price in full through one, or a combination, of the following payment methods, which method(s) shall be indicated in the Notice of Exercise: i. cashier's or certified check in the amount of the Exercise Price payable to the order of the Company; ii. direction to the Company through your Notice of Exercise to send the share certificates to be issued under this Option to a licensed broker acceptable to the Company as your agent in exchange for the broker's tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price, for the Shares with respect to which the Option is being exercised, as part of a cashless exercise; 3

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iii. unless the Administrator determines otherwise, by surrender to the Company of shares of Common Stock with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you), for the Shares with respect to which the Option is being exercised; provided, however, that you may not surrender (turn in) previously held or owned Common Stock of the Company as payment unless you have held such stock for more than six months before the surrender. For purposes hereof, the date of exercise shall be the date of delivery of (A) the duly executed Notice of Exercise and (B) the shares tendered for payment of the Exercise Price; iv. unless the Administrator determines otherwise, attestation of ownership of Common Stock and issuance of a net number of shares upon Option exercise; or v. unless the Administrator determines otherwise, by the Company withholding from the shares of Common Stock otherwise issuable to you upon the exercise of the Option (or portion thereof) the whole number of shares with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (rounded down, with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you on such date of exercise). For purposes hereof, the date of exercise shall be the date of delivery of the duly executed Notice of Exercise. The Company shall not be obligated to issue any shares of Common Stock until you have paid the total Exercise Price for that number of shares of Common Stock you have elected to purchase. Shares of Common Stock will be issued as soon as is practical after exercise. (3) Expiration. The Option will expire no later than the close of business on «ExpirationDate» (ten years from the date of grant). Unless the Administrator determines otherwise at any time, you will forfeit any unexercised portions of the Option (whether or not then exercisable) upon the first to occur of: a. the Option's expiration under the preceding sentence, 4

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b. the 90th day after your resignation, including retirement (for any reason other than disability), c. the 90th day after the Company terminates your employment or other applicable service (for any reason other than disability), d. in the event of the termination of your employment or other applicable service to the Company for disability (as determined by the Administrator), the earlier of (i) the first anniversary of the termination of your service and (ii) 30 days after you cease to have a disability, where, for purposes of this Agreement, “disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months, e. the first anniversary of your date of death, and f. the date you violate any covenant not to compete, nonsolicitation covenant or similar covenant in effect between you and the Company. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment or other applicable service for purposes of this Agreement. (4) Substantial Corporate Change. Upon a Substantial Corporate Change, any portion of this Option that is unexercised will terminate unless provision is made in writing in connection with such transaction for: a. assumption or continuation of outstanding Options; or b. the substitution for such Options, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Option will continue in the manner and under the terms so provided. Unless the Board determines otherwise, if an Option would otherwise terminate pursuant to the preceding sentence, you will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Option, whether or not previously exercisable. A “Substantial Corporate Change” means the occurrence of any one or more of the following events: 5

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i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of 100% of the combined voting power of all classes of stock of the Company; ii. merger, consolidation or reorganization of the Company with or into one or more entities in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings); iii. merger, consolidation or reorganization of the Company in which the Company is the surviving corporation, but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; iv. the liquidation or dissolution of the Company; or v. the sale or disposition of all or substantially all of the Company’s assets. (5) Taxes. All taxes, if any, in respect of the Option or any payments to you hereunder shall be solely your responsibility and shall be paid by you. (6) Company Postponement of Delivery. The Company may postpone issuing and delivering any Shares for so long as the Company determines to be necessary or advisable to satisfy the following: a. completing or amending any registration or qualification of the Shares or satisfying any exemption from registration under any federal or state law, rule, or regulation; b. complying with any requests for representations under the Plan; 6

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c. receiving proof satisfactory to the Company that a person seeking to exercise the Option after your death or disability is authorized and entitled to exercise the Option; and d. satisfying any federal, state, or local tax withholding obligations. (7) Compliance with Securities Laws. a. If, at the time the Company should issue you Shares because of your exercise of the Option, no current registration statement under the Securities Act of 1933 (the "Act") covers such issuance, you must, before the Company will issue such Shares to you: i. represent to the Company, in form satisfactory to the Company's counsel, that you are acquiring the Shares for your own account and not with a view to reselling or distributing the Shares; and ii. agree that you may not sell, transfer, or otherwise dispose of the Shares issued to you under the Option unless: A. a registration statement under the Act is effective at the time of disposition with respect to the Shares sold, transferred, or otherwise disposed of; or B. the Company has received an opinion of counsel or other information and representations satisfactory to it to the effect that registration under the Act is not required by reason of Rule 144 under the Act or otherwise. b. Notwithstanding anything herein to the contrary, you may not exercise the Option, and the Company shall not be obligated to deliver any shares of Common Stock, during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any applicable federal or state securities laws or other laws or regulations. (8) Restrictions on Resales. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by you or other subsequent transfers by you of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by you and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers. 7

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(9) Not an Employment Contract. Nothing in this Agreement restricts the right of the Company or any of its affiliates to terminate your employment or other service at any time, with or without cause. The termination of employment or service, whether by the Company or any of its affiliates or otherwise, and regardless of the reason therefore, has the consequences provided for hereunder, under the Plan and under any applicable employment, severance or other agreement. (10) Non-Transferability of Option. You may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by you during your lifetime. The Company may cancel the Option if you attempt to assign or transfer it in a manner inconsistent with this Section 10. (11) Limitation of Interest. You understand and agree that you will not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares unless and until they have been issued to you after your exercise of this Option and payment for the Shares. Neither you (individually or as a member of a group) nor any beneficiary or other person claiming under or through you shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. (12) No Fractional Shares. At the time of exercise, the Company will round down any fractional Shares but will not make any cash or other payments in settlement of fractional shares eliminated by rounding. If you have not then exercised the Option in full, the Company will carry forward the fractional Shares rather than eliminating them. (13) No Limitation on Company Actions. You understand and agree that the existence of this Option will not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 8

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(14) General. a. This Agreement and the Plan constitute the entire understanding between you and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. b. The laws of the State of Delaware will govern all matters relating to this Agreement, without regard to the principles of conflict of laws. c. Any notice you give to the Company (including notice of exercise of all or part of the Option) must be in writing and either hand-delivered or mailed to the Corporate Secretary of the Company (or to the Chief Financial Officer if either you would receive the notice or the position is vacant). If mailed, it should be sent by certified mail and be addressed to the foregoing executive at the Company's then corporate headquarters. Any notice given to you will be addressed to you at your address as reflected on the personnel records of the Company. You may change the address for notice by like notice to the Company. Notice will be deemed to have been duly delivered when hand-delivered, or, if mailed, two business days after such notice is postmarked. d. As a condition of this Option, you, on behalf of yourself, your heirs, successors and personal representatives ("you and your successors"), agree that any dispute or disagreement which may arise hereunder shall be decided by the Administrator. You and your successors agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option, and you and your successors hereby explicitly waive any right to judicial review. e. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms hereunder shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. f. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns. g. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. 9

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h. All questions arising under the Plan or under this Agreement shall be decided by the Administrator in its total and absolute discretion. i. Wherever a conflict may arise between the terms of this Agreement and the terms of the Plan, the terms of the Plan will control.

COSTAR GROUP, INC. By: ________________________________ Name: _____________________________ Title: ______________________________ 10

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ACKNOWLEDGMENT I acknowledge receipt of a copy of the attached Plan. I represent that I have read and am familiar with the Plan's terms. I accept the Option subject to all of the terms and provisions of this Agreement and of the Plan under which it is granted, as the Plan may be amended in accordance with its terms. I agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option.

Date:

____________________________________ Signature of Grantee/Participant

NO ONE MAY SELL, TRANSFER, OR DISTRIBUTE THIS OPTION OR THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THIS OPTION WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY OR OTHER INFORMATION AND REPRESENTATIONS SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

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Exhibit 10.12

® ®

Grantee’s Copy Company's Copy COSTAR GROUP, INC. 2007 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT

To Andrew C. Florance: CoStar Group, Inc. (the "Company") has granted you a nonqualified stock option (the "Option") under the CoStar Group, Inc. 2007 Stock Incentive Plan, as amended from time to time (the "Plan"), to purchase «NoShares» shares (the "Shares") of common stock of the Company (the "Common Stock"), at «Price» per share (the "Exercise Price"). The date of grant is «DateofGrant». This Option is subject in all respects to the applicable provisions of the Plan, a copy of which is attached, except as otherwise noted. By signing this agreement (the "Agreement"), you acknowledge that you have received and read the Plan. This Agreement incorporates the Plan by reference and specifies other applicable terms and conditions. All capitalized terms not defined by this Agreement have the meanings given in the Plan. The Compensation Committee of the Company's Board of Directors (or other administrator of the Plan, the "Administrator") may adjust the number of Shares and the Exercise Price with respect to your Option from time to time in accordance with the Plan. This Option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and will be interpreted accordingly. In addition to the terms, conditions, and restrictions set forth in the Plan, the following terms, conditions, and restrictions apply to the Option: (1)

Vesting. The schedule for exercising the Option is as follows, subject to the expiration provisions set forth in Section 3 below: a. You may exercise the Option on the following schedule: [Set forth vesting schedule.]

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Except as specifically provided otherwise herein, no portion of the Option that is unexercisable at your termination of employment will thereafter become exercisable, unless the Administrator determines otherwise. b. The Option will become immediately exercisable in full upon the occurrence of a Change in Control. “Change in Control” means the occurrence of any one or more of the following events: A. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then outstanding securities eligible to vote to elect members of the Board (the “Company Voting Securities”); B. consummation of a merger, consolidation or reorganization of the Company with or into any other entity, unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or C. the stockholders of the Company approve (A) a plan of complete liquidation or dissolution of the Company or (B) an agreement for the Company’s sale or disposition of all or substantially all of the Company’s assets, and such liquidation, dissolution, sale or disposition is consummated. Even if other tests are met, a Change in Control has not occurred under any circumstances in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing. 2

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The provisions of Section 4 will also apply if the Change in Control is a Substantial Corporate Change (as defined in those provisions). c. Subject to, and as permitted by, the Plan that portion of the Option that is not otherwise exercisable will become immediately exercisable in full upon: i. the termination of your employment by the Company without Cause (as defined in the Employment Agreement between Andrew C. Florance and the Company effective as of January 1, 1998, as amended (the “Employment Agreement”)) pursuant to Section 7(a) of the Employment Agreement; or ii. the termination of your employment by you for Good Reason (as defined in the Employment Agreement) pursuant to Section 7(c) of the Employment Agreement. d. Upon the termination of your employment on account of your Disability (as defined in the Employment Agreement) pursuant to Section 9 of the Employment Agreement or in the event of your death, a pro rata portion of your unvested Options that would have become otherwise exercisable during the calendar year of your termination will become exercisable immediately. Such pro rata amount shall be determined by multiplying the number of unvested options that would have vested in the calendar year of termination by a fraction, the numerator of which is the number of complete weeks you were employed during the year of termination and the denominator of which is fifty-two. e. The Administrator may, in its sole discretion (subject to, and as permitted by, the Plan), accelerate the time at which you may exercise part or all of the Option. f. The vesting period and/or exercisability of the Option may be adjusted by the Administrator to reflect the decreased level of employment during any period in which you are on an approved leave of absence or employed on a less than full time basis, provided, that the Administrator may take into consideration any accounting consequences to the Company. (2) Exercise. Subject to this Agreement and the Plan, unless the Administrator determines otherwise, you may exercise the Option only by a written “Notice of Exercise” to the Company or its designee on a form specified by the Company on or before the date the Option expires. Unless the Administrator determines otherwise, each such Notice must: 3

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a. state your election to exercise the Option and the number of Shares with respect to which you are exercising the Option; b. be signed by you or, if you have died or become disabled, by the party entitled to exercise the Option; c. contain such representations as the Company reasonably requires; and d. be accompanied by payment of the Exercise Price in full through one, or a combination, of the following payment methods, which method(s) shall be indicated in the Notice of Exercise: i. cashier's or certified check in the amount of the Exercise Price payable to the order of the Company; ii. direction to the Company through your Notice of Exercise to send the share certificates to be issued under this Option to a licensed broker acceptable to the Company as your agent in exchange for the broker's tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price, for the Shares with respect to which the Option is being exercised, as part of a cashless exercise; iii. unless the Administrator determines otherwise, by surrender to the Company of shares of Common Stock with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you), for the Shares with respect to which the Option is being exercised; provided, however, that you may not surrender (turn in) previously held or owned Common Stock of the Company as payment unless you have held such stock for more than six months before the surrender. For purposes hereof, the date of exercise shall be the date of delivery of (A) the duly executed Notice of Exercise and (B) the shares tendered for payment of the Exercise Price; iv. unless the Administrator determines otherwise, attestation of ownership of Common Stock and issuance of a net number of shares upon Option exercise; or 4

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v. unless the Administrator determines otherwise, by the Company withholding from the shares of Common Stock otherwise issuable to you upon the exercise of the Option (or portion thereof) the whole number of shares with a Fair Market Value on the date of exercise equal to all or part of the Exercise Price (rounded down, with any balance paid by cash or check or, unless the Administrator determines otherwise, deducted from salary or other amounts payable to you on such date of exercise). For purposes hereof, the date of exercise shall be the date of delivery of the duly executed Notice of Exercise. The Company shall not be obligated to issue any shares of Common Stock until you have paid the total Exercise Price for that number of shares of Common Stock you have elected to purchase. Shares of Common Stock will be issued as soon as is practical after exercise. (3) Expiration. The Option will expire no later than the close of business on «ExpirationDate» (ten years from the date of grant). The exercise period for the Options shall be until the first to occur of: a. the Option's expiration under the preceding sentence, b. the 60th day after the cessation of your employment as a result of the termination of your employment by you without Good Reason pursuant to Section 7(d) of the Employment Agreement; c. the 60th day after the cessation of your employment as a result of the termination of your employment by the Company for Cause pursuant to Section 7(b) of the Employment Agreement; d. the 180th day after the cessation of your employment as a result of the termination of your employment (a) by the Company without Cause pursuant to Section 7(a) of the Employment Agreement or (b) by you for Good Reason pursuant to Section 7(c) of the Employment Agreement; e. one year after the cessation of your employment as a result of the termination of your employment for Disability; f. the first anniversary of your date of death; and g. after the termination of your employment, the date you violate any covenant not to compete, nonsolicitation covenant or similar covenant in effect between you and the Company. 5

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Pursuant to Section 4(c) of the Employment Agreement, if you do not exercise the Option on or prior to the date the Option expires or is no longer exercisable, you shall be deemed to have made a “cashless exercise” of the unexercised, exercisable portion of the Option on the last day that the Option may be exercised (the “Deemed Exercise Date”), and the Company shall pay to you within thirty days of the Deemed Exercise Date a cash payment equal to the amount that results from multiplying the total number of shares underlying the unexercised, exercisable portion of the Option multiplied by a number equal to the difference between the closing price of the Company’s common stock on the Deemed Exercise Date (or if the Deemed Exercise Date is not a trading day, then on the trading day immediately preceding the Deemed Exercise Date) and the exercise price of the Option; provided, however, that the cashless exercise alternative shall not be available if your employment has been terminated by the Company for Cause or by you without Good Reason. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment for purposes of this Agreement. (4) Substantial Corporate Change. Upon a Substantial Corporate Change, any portion of this Option that is unexercised will terminate unless provision is made in writing in connection with such transaction for: a. assumption or continuation of outstanding Options; or b. the substitution for such Options, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Option will continue in the manner and under the terms so provided. Unless the Board determines otherwise, if an Option would otherwise terminate pursuant to the preceding sentence, you will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Option, whether or not previously exercisable. A “Substantial Corporate Change” means the occurrence of any one or more of the following events: i. a Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of 100% of the combined voting power of all classes of stock of the Company; 6

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ii. merger, consolidation or reorganization of the Company with or into one or more entities in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings); iii. merger, consolidation or reorganization of the Company in which the Company is the surviving corporation, but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company; iv. the liquidation or dissolution of the Company; or v. the sale or disposition of all or substantially all of the Company’s assets. (5) Taxes. a. You understand and agree that the Company has not advised you regarding your income tax liability in connection with the Option. To the extent required by applicable federal, state, local or foreign law, you shall make arrangements satisfactory to the Company in its sole discretion for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied. b. By accepting the Option, you agree that, unless and to the extent you have otherwise satisfied any U.S. federal income and other taxes, including state, local or non-U.S. income or employment tax obligations, related to the exercise of the Option that are required to be withheld and paid over to the applicable tax authorities (the “Tax Withholding Obligations”) in a manner permitted or required by the Administrator pursuant to the Plan, the Company is authorized (but not required) to deduct and retain without notice from the shares of Common Stock issuable to you in respect of the exercised portion of the Option the whole number of shares (rounding down) having a Fair Market Value on the exercise date or, if not a trading day, the first trading day before the exercise date (as determined by the Company consistent with any applicable tax requirements) sufficient to satisfy the applicable Tax Withholding Obligation. If the withheld shares are not sufficient to satisfy your Tax Withholding Obligation, you agree to pay to the Company as soon as practicable, by cash or check or, unless otherwise determined by the Administrator, deducted from salary or other amounts payable to you, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of shares of Common Stock described above. 7

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c. You are ultimately liable and responsible for all taxes owed by you in connection with the Option, regardless of any action the Company takes or any transaction pursuant to this Section 5 with respect to any tax withholding obligations that arise in connection with the Option. The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or exercise of the Option or the subsequent sale of any of the shares of Common Stock acquired upon exercise of the Option. The Company does not commit and is under no obligation to structure the Option to reduce or eliminate your tax liability. (6) Company Postponement of Delivery. The Company may postpone issuing and delivering any Shares for so long as the Company determines to be necessary or advisable to satisfy the following: a. completing or amending any registration or qualification of the Shares or satisfying any exemption from registration under any federal or state law, rule, or regulation; b. complying with any requests for representations under the Plan; c. receiving proof satisfactory to the Company that a person seeking to exercise the Option after your death or disability is authorized and entitled to exercise the Option; and d. satisfying any federal, state, or local tax withholding obligations. (7) Compliance with Securities Laws. a. If, at the time the Company should issue you Shares because of your exercise of the Option, no current registration statement under the Securities Act of 1933 (the "Act") covers such issuance, you must, before the Company will issue such Shares to you: 8

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i. represent to the Company, in form satisfactory to the Company's counsel, that you are acquiring the Shares for your own account and not with a view to reselling or distributing the Shares; and ii. agree that you may not sell, transfer, or otherwise dispose of the Shares issued to you under the Option unless: A. a registration statement under the Act is effective at the time of disposition with respect to the Shares sold, transferred, or otherwise disposed of; or B. the Company has received an opinion of counsel or other information and representations satisfactory to it to the effect that registration under the Act is not required by reason of Rule 144 under the Act or otherwise. b. Notwithstanding anything herein to the contrary, you may not exercise the Option, and the Company shall not be obligated to deliver any shares of Common Stock, during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any applicable federal or state securities laws or other laws or regulations. (8) Restrictions on Resales. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by you or other subsequent transfers by you of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by you and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers. (9) Not an Employment Contract. Nothing in this Agreement restricts the right of the Company or any of its affiliates to terminate your employment at any time, with or without cause. The termination of employment, whether by the Company or any of its affiliates or otherwise, and regardless of the reason therefore, has the consequences provided for hereunder, under the Plan and under any applicable employment or severance agreement. 9

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(10) Non-Transferability of Option. You may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by you during your lifetime. The Company may cancel the Option if you attempt to assign or transfer it in a manner inconsistent with this Section 10. (11) Limitation of Interest. You understand and agree that you will not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares unless and until they have been issued to you after your exercise of this Option and payment for the Shares. Neither you (individually or as a member of a group) nor any beneficiary or other person claiming under or through you shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. (12) No Fractional Shares. At the time of exercise, the Company will round down any fractional Shares but will not make any cash or other payments in settlement of fractional shares eliminated by rounding. If you have not then exercised the Option in full, the Company will carry forward the fractional Shares rather than eliminating them. (13) No Limitation on Company Actions. You understand and agree that the existence of this Option will not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (14) General. a. This Agreement and the Plan constitute the entire understanding between you and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. b. The laws of the State of Delaware will govern all matters relating to this Agreement, without regard to the principles of conflict of laws. 10

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c. Any notice you give to the Company (including notice of exercise of all or part of the Option) must be in writing and either hand-delivered or mailed to the Corporate Secretary of the Company (or to the Chief Financial Officer if either you would receive the notice or the position is vacant). If mailed, it should be sent by certified mail and be addressed to the foregoing executive at the Company's then corporate headquarters. Any notice given to you will be addressed to you at your address as reflected on the personnel records of the Company. You may change the address for notice by like notice to the Company. Notice will be deemed to have been duly delivered when hand-delivered, or, if mailed, two business days after such notice is postmarked. d. As a condition of this Option, you, on behalf of yourself, your heirs, successors and personal representatives ("you and your successors"), agree that any dispute or disagreement which may arise hereunder shall be decided by the Administrator. You and your successors agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option, and you and your successors hereby explicitly waive any right to judicial review. e. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms hereunder shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. f. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns. g. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. h. All questions arising under the Plan or under this Agreement shall be decided by the Administrator in its total and absolute discretion. 11

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i. Wherever a conflict may arise between the terms of this Agreement and the terms of the Plan, the terms of the Plan will control.

COSTAR GROUP, INC. By: ____________________________ Name: ___________________________ Title: ____________________________ 12

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ACKNOWLEDGMENT I acknowledge receipt of a copy of the attached Plan. I represent that I have read and am familiar with the Plan's terms. I accept the Option subject to all of the terms and provisions of this Agreement and of the Plan under which it is granted, as the Plan may be amended in accordance with its terms. I agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator concerning any questions arising under the Plan with respect to the Option.

Date:

____________________________________ Signature of Grantee/Participant

NO ONE MAY SELL, TRANSFER, OR DISTRIBUTE THIS OPTION OR THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THIS OPTION WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY OR OTHER INFORMATION AND REPRESENTATIONS SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

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Exhibit 10.16 FIRST AMENDMENT TO ANDREW C. FLORANCE EMPLOYMENT AGREEMENT

THIS FIRST AMENDMENT to the Employment Agreement is made and entered into December __, 2008, effective as of January 1, 2009 by and between CoStar Realty Information, Inc. (“Company”) and Andrew C. Florance (“Executive”).

W I T N E S S E T H; WHEREAS, Company and Executive are parties to that certain Employment Agreement dated as of April 24, 1998, effective as of January 1, 1998 (the “Employment Agreement”) pursuant to which Executive is employed as Company’s President and Chief Executive Officer; and WHEREAS, Company and Executive desire to amend the terms of the Employment Agreement as set forth herein effective as of January 1, 2009 (the Employment Agreement, as amended, is hereinafter referred to as the “Agreement”), in order to comply with the provisions of Section 409A of the Internal Revenue Code and the rules and regulations promulgated thereunder and to make certain other clarifying revisions. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Section 4(a) is deleted and replaced in its entirety to read as follows: “The annual base salary (the “Base Salary”) of Executive under this Agreement shall be at the rate set by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) or the Board of Directors of the Company (the “Board”) annually. Base Salary shall be payable in biweekly or such other installments as shall be consistent with the Company’s payroll procedures for its senior executives.” 2. Section 4(b) is deleted and replaced in its entirety to read as follows: “The Company shall maintain for the benefit of Executive during the term of Executive’s employment under this Agreement (and, where applicable, for such period thereafter as Executive is entitled to payments thereunder pursuant to this Agreement) an executive cash bonus program (the “Bonus Program”) on the terms set by the Compensation Committee or the Board, which will provide Executive with an opportunity to receive an annual cash bonus based on attainment of performance objectives set annually by the Compensation Committee or the Board. The annual bonus shall be paid as soon as reasonably practicable after the end of the calendar year for which it is earned and, in any case, no later than March 15 of the following calendar year.”

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3. Section 7(a) is deleted and replaced in its entirety to read as follows: “(a) By the Company Without Cause. The Company may terminate Executive’s employment at any time, without Cause (as defined herein), upon sixty (60) days written notice to Executive. If the Company terminates Executive’s employment without Cause, Executive: (x) shall receive through the later of (i) the expiration of the Current Term or (ii) one year from the date of termination, the compensation provided for under paragraph 4(a) of this Agreement, provided that any payments that would otherwise be made under this subsection (x) after March 15 of the year following the calendar year of termination shall be paid to Executive no later than March 15 of the year following the calendar year of termination of employment; (y) shall be entitled to receive the bonus he would have received under the Bonus Program (as in effect on the date of termination) as if he continued in the position he held immediately prior to termination for the balance of the calendar year in which such termination occurs, provided that such bonus shall be paid no later than March 15 of the year following the calendar year of termination of employment; and (z) shall be, if not otherwise, fully vested in all stock options granted to Executive under the Company’s stock incentive plans (as in effect on the date of termination). Upon termination of Executive’s employment without Cause, the exercise period for all vested options shall be one-hundred eighty (180) days after cessation of employment. 4. The last paragraph of Section 7(c) is deleted and replaced in its entirety to read as follows: “If Executive terminates his employment for Good Reason, Executive: (x) shall receive through the later of (i) the expiration of the Current Term or (ii) one year from the date of termination, the compensation provided for under paragraph 4(a) of this Agreement, provided that any payments that would otherwise be made under this subsection (x) after March 15 of the year following the calendar year of termination shall be paid to Executive no later than March 15 of the year following the calendar year of termination of employment; (y) shall be entitled to receive the bonus he would have received under the Bonus Program (as in effect on the date of termination) as if he continued in the position he held immediately prior to termination for the balance of the calendar year in which such termination occurs, provided that such bonus shall be paid no later than March 15 of the year following the calendar year of termination of employment; and (z) shall be, if not otherwise, fully vested in all stock options granted to Executive under the Company’s stock incentive plans (as in effect on the date of termination). Upon termination of Executive’s employment with Good Reason, the exercise period for all vested options shall be onehundred eighty (180) days after cessation of employment. 2

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5. A new Section 7(e) shall be added and read as follows: “In the event that under the terms of the applicable stock incentive plan(s), all or any portion of Executive’s stock options that are not otherwise fully vested upon termination of employment and are scheduled to vest pursuant to Section 7 in connection with such termination cannot be accelerated in accordance with the terms of this Agreement, then Executive shall be entitled to receive cash consideration for each share underlying that portion of Executive’s stock options that cannot be so accelerated equal to the excess (if any) of the highest closing price of the Company’s common stock during the 180 days following Executive's date of termination (or, if the Company is no longer publicly traded as of the date of termination, the per-share price in connection with the transaction(s) that resulted in the Company no longer being publicly traded) over the exercise price of such option. Any such cash consideration shall be paid within 10 days following the date the amount of the payment pursuant to this Section 7(e) is determined.” 6. Section 9 is amended to add the following to the end of subsection (ii) of the first sentence of Section 9: “, payable no later than March 15 of the year following the calendar year of termination.” 7. Section 10 is amended to add the following to the end of subsection (ii) of the first sentence of Section 10: “, payable no later than March 15 of the year following the calendar year of termination.” 8. Section 22 is amended by adding the following sentence to the end thereof: “In all events, any amount payable under this Section 22 shall be paid no later than the end of the calendar year after the applicable tax is remitted to the applicable taxing authority.” 3

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9. A new Section 23 is added as follows: Compliance with Section 409A. It is the intention of the parties hereto that this Agreement comply with the provisions of Section 409A of the Internal Revenue Code (the “Code”) and the rules and regulations promulgated thereunder (collectively, “Section 409A”). Notwithstanding anything in this Agreement to the contrary, to the extent that the Company determines, in its sole discretion, that any payment or benefit to be provided under the Agreement to or for the benefit of Executive would be subject to the additional tax imposed under Section 409A(a)(1)(B) of the Code, the commencement of such payments and/or benefits shall be delayed (but only to the extent necessary under Section 409A) until the earlier of (i) the date that is six months after Executive’s “separation from service” (as such term is defined under Section 409A) or (ii) the date of Executive’s death. Any payments delayed pursuant to section (i) of the preceding sentence shall be paid on the first day of the seventh month after Executive’s separation from service, or as soon as reasonably practicable thereafter and any remaining payments shall be made as originally scheduled (e.g. if payments under Section 7(a)(x) of the Agreement would be subject to the additional tax, Executive would not receive payments for six months after termination, then would receive six months of base salary on the first day of the seventh month after termination, and the remaining installments of base salary provided by Section 7(a)(x) (approximately six months’ base salary) would be paid to Executive as provided by Section 4(a)). In the event of Executive’s death, any payments shall be made pursuant to section (ii) of the sentence above no later than the later of (a) 75 days following the Executive’s death, or (b) the last day of Executive’s taxable year in which such death occurs. 10. Counterparts. This First Amendment, for the convenience of the parties, may be executed in any number of counterparts, all of which when taken together shall constitute one and the same agreement. 11. Except as modified hereby, the Employment Agreement continues in full force and effect.

IN WITNESS WHEREOF, the parties have executed this First Amendment on the day and year first above written.

COSTAR REALTY INFORMATION, INC.

By: /s/ Michael Klein Michael Klein Chairman of the Board

/s/ Andrew C. Florance Andrew C. Florance

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Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT

a) CoStar Realty Information, Inc., a Delaware corporation b) CoStar Limited, a U.K. company c) CoStar U.K. Limited, a U.K. company d) Property Investment Exchange Limited, a U.K. company e) Grecam S.A.S., a Societée par Actions Simplifiée

Exhbit 23.1

Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements of CoStar Group, Inc. on Form S-8 Nos. 333-82599, 33392165, 333-45770, 333-69548, 333-135709 and 333-143968 of our reports dated February 19, 2009 with respect to the consolidated financial statements of CoStar Group, Inc. and the effectiveness of internal control over financial reporting of CoStar Group, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008.

/S/ Ernst & Young LLP McLean, Virginia February 19, 2009

Exhibit 31.1 CERTIFICATION I, Andrew C. Florance, certify that: 1.

I have reviewed this annual report on Form 10-K of CoStar Group, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact nec statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all m registrant as of, and for, the periods presented in this annual report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defi reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and we have: a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our sup consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report i

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under o reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions a period covered by this report based on such evaluation; and

d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registra annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporti 5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial rep directors (or persons performing the equivalent functions): a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reas and report financial information; and

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b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal co Date: February 23, 2009

By:

Exhibit 31.2 CERTIFICATION I, Brian J. Radecki, certify that: 1.

I have reviewed this annual report on Form 10-K of CoStar Group, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact nec statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all m registrant as of, and for, the periods presented in this annual report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defi reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and we have: a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our sup consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report i

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under o reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions a period covered by this report based on such evaluation; and

d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registra annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporti 5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial rep directors (or persons performing the equivalent functions): a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reas and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal co Date: February 23, 2009

By:

Exhibit 32.1 CoStar Group, Inc. 2 Bethesda Metro Center, 10th floor Bethesda, MD 20814 February 23, 2009 Securities and Exchange Commission 450 5th Street, NW Washington, DC 20549 Re: Certification Of Principal Executive Officer Pursuant To 18 U.S.C. Sec. 1350 Dear Ladies and Gentlemen: In connection with the accompanying Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, I,

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Andrew C. Florance, Chief Executive Officer of CoStar Group, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o (d)); and 2) the information contained in such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of CoStar Group, Inc. By:

/S/ Andrew C. Florance Andrew C. Florance Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to CoStar Group, Inc. and will be retained by CoStar Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. In accordance with Item 601 of Regulation S-K, this certification is being “furnished” as Exhibit 32.1 to CoStar Group, Inc.’s annual report and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Exhibit 32.2

CoStar Group, Inc. 2 Bethesda Metro Center, 10th floor Bethesda, MD 20814 February 23, 2009 Securities and Exchange Commission 450 5th Street, NW Washington, DC 20549 Re: Certification Of Principal Financial Officer Pursuant To 18 U.S.C. Sec. 1350 Dear Ladies and Gentlemen: In connection with the accompanying Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, I, Brian J. Radecki, Chief Financial Officer of CoStar Group, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and 2) the information contained in such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of CoStar Group, Inc. By:

/S/ Brian J. Radecki Brian J. Radecki Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to CoStar Group, Inc. and will be retained by CoStar Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. In accordance with Item 601 of Regulation S-K, this certification is being “furnished” as Exhibit 32.2 to CoStar Group, Inc.’s annual report and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.