At this time, I would like to welcome everyone to the first quarter 2008 conference call. (Operator Instructions) Thank you. Mr. Trainor, you may begin your conference.

Thank you, Tia. Good morning, everyone, and welcome to CoStar Group's first quarter 2008 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar's first quarter 2008 press release and CoStar's filings with the SEC, including CoStar's form 10-K for the period ended December 31, 2007, under the heading "Risk Factors." All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements. You can find a webcast of this conference call at www.costar.com/corporate/investor. Thank you for joining us. I will now turn the call over to Andy.

Thank you, Tim. I want to apologize for us getting going with a late start there on the phone call. We like to start more promptly than that. We had a minor technical difficulty. But, again, I apologize and welcome everyone to the first quarter 2008 conference call. I'm very pleased to report that CoStar Group continued the earnings momentum we began to generate last year, and we posted another strong performance in the first quarter, one in which we added a large number of new subscribers and achieved better than expected earnings growth. By executing our strategy of adding and retaining subscribers and managing our cost structure while taking advantage of the opportunities, through our U.S. national expansion and our expanded U.K. operations, we generated solid earnings growth for the past three consecutive quarters, and we anticipate that we will continue to do so. First quarter net income increased 178% over the same period one year ago to $5 million or $0.26 per diluted shared compared to $1.8 million or $0.09 per diluted share for the first quarter 2007. EBITDA for the first quarter 2008 was $11.5 million, an increase of 128% compared to EBITDA of $5 million in the first quarter of 2007. Revenues for the first quarter 2008 were $52.3 million, a 16.6% increase over the first quarter 2007 revenues of $44.8 million and a 2.8% increase from fourth quarter 2007 revenues of $50.8 million. As of March 31, 2008, we had $193.1 million in cash, cash equivalents, short-term and long-term investments. CoStar Group has no long-term debt. Brian will address the first quarter results in more detail and provide some color on our outlook for the rest of the year and our decision to increase our guidance. Before he does, I'd like to talk about some…

Thank you, Andy. As stated in the press release last night, net income accelerated in the first quarter of 2008, increasing 178% over the same period one year ago to $5 million or $0.26 per diluted share compared to $1.8 million or $0.09 per diluted share for the first quarter of 2007. Now, I am going to focus principally on the sequential results for the first quarter 2008 compared to the fourth quarter 2007 and our outlook for the second quarter and full year 2008. Total revenues grew sequentially by 2.8% from Q4 2007 to Q1 of 2008, increasing from $50.8 million to $52.3 million. Core U.S. subscription revenue increased by 3% from Q4 of 2007 to Q1 of 2008, consistent with last quarter. And our renewal rate remained solid at 90.3 for the quarter. International operations contributed 11.2% of total revenues, and total subscription revenues for the company continued to account for 95% of revenues during Q1 of 2008. International revenues decreased slightly from $6.1 million in Q4 of 2007 to $5.9 million in Q1 of 2008, mainly due to lower foreign currency exchange rates and a slightly lower ad hoc revenue during the quarter. Quarterly international subscription revenue sequential growth remained relatively consistent with the business. Again, let me remind everybody the company has reported sequential revenue increases at every quarter since its IPO in 1998 and through several commercial real estate cycles since 1987 when Andy founded the business. We have and continue to expect that we will add and renew subscribers, increase usage and grow our revenue each quarter through the current economic and real estate environment. Gross margin increased by $1.7 million from $30.8 million in Q4 of 2007 to $32.5 million in Q1 of 2008 on a $1.4 million increase in revenues. Overall, gross…

(Operator Instructions) Your first question comes from Jon Maietta with Needham & Company. Jon Maietta - Needham & Company: Hey, thanks very much. Hi, Andy. Hi, Brian.

Hi. Jon Maietta - Needham & Company: The first question I had, Andy, I was wondering if you could talk qualitatively about any differences in behavior with regard to your larger customers today in this environment versus the smaller customers on purchase decisions.

Yes. There is no question that the general anxiety in the economy is causing people to take a little bit longer in the sales cycle. So, people are putting off some decisions here and there. I would have to say, though, our middle to upper clients are very stable with us in this environment. These are situations where they absolutely need this information that we provide, and they're not going to try to save money by replicating our information processes in-house and our research processes in-house. It is dramatically cheaper to outsource to us. Where we see friction right now in the cycle is with the very small firms. So, the 1%, 2%, 3%, 5% sort of marginal customers. Those are the folks who may have been new to the industry in the last several years and are losing confidence. So, it's really strong in the middle-upper, a little weaker at the small client. Jon Maietta - Needham & Company: Okay. And then could you talk about how you're actually going to rollout the Showcase product?

Sure. We've been test marketing it over the last three to four weeks. We're first selling it really to our existing customers. And we've met with maybe 60 customer sites, and we've gotten a very positive response, signed a significant number of deals. And we will go live with the product in about two weeks, and we'll be pushing out to the entire sales force and going very aggressively on it. It will be a centerpiece of our ICSC presence, the International Council of Shopping Centers' big spring convention. And we have a number of marketing campaigns around it, and it will be probably the primary priority in sales over the second, third and fourth quarters of this year. Jon Maietta - Needham & Company: Okay. And then how are you actually pricing the product?

We are pricing it with an algorithm that I couldn't begin to explain on the phone call. What we are doing is we are looking at each client's inventory of listings, both sale and lease. Roughly speaking, we're looking at the value of those listings, and then we're getting discounts for their bulk purchasing of these advertisements on our website. So what we're trying to do there is incentivize our customers to buy ads for all their listings, not to cherry-pick some listings over others. And we're trying to make sure that we aren't charging more to advertise a little less than they're going to earn in commissions. And so we're sort of setting the value relative to the value of the ads on the properties they're trying to move. And so far, the response of this pricing model, which is fairly new and unique, has been very positive. So we've been out there. We've tried it on 60 customers. And they look at it, and they say overall they feel like it's right. And we haven't had a lot of pushback on the price. So, it seems to be working pretty well. Jon Maietta - Needham & Company: Got it. Okay. And then just last question, Brian, what was cash from operations in the quarter?

Cash from operations, I think it was around $6 million, something like that. EBITDA was $11.5 million. Jon Maietta - Needham & Company: Got it. Okay. Thanks very much.

Thanks, Jon.

Your next question comes from Jim Wilson with JMP Securities.

Thanks. Good morning, guys.

Hi, Jim.

Let's see. I guess two things. It's a great color on the sales efforts this quarter and the size of firms. Anything you can give color on the geography of success of sales or are those markets you have now fully completed with the most information or have those been your target points or have those been your most successful sales locations or anything else you can give that that would color?

And you're referring to Showcase?

No, not Showcase, but back to sales piece of new subscribers, the core products during the first quarter.

Okay. So, one of the things we were doing in the first quarter was we were again going back to this effort we made to put all of our sales group focusing on the smaller high listing count firms. They really probably concentrated in our weaker market areas. They would not be in Washington, D.C., New York City or Los Angeles. They would be in newer territories. So, a lot of the sales from the quarter came from weaker or mid-level market areas. And you didn't really ask, but I'm going to tell you anyhow, on the Showcase side, one of the unusual aspects of the Showcase sales are some big sales are coming from some of our smallest markets. So, we're seeing some unusually positive selling activity in markets like Omaha and that kind of market.

I guess maybe then another Showcase question. You gave us the average contract size so far and what you've worked on, but what about average number of listings? How big are these guys in terms of listings that you're signing up?

We don't know. Initially, what we're doing is we're focusing only on firms with five or more listings. So, we're not even talking to firms that have less than five listings. I don't have precise numbers, but it appears to vary. It seems to vary from as little as, I've seen some contracts come in at 10 listings, 15 listings on up to a contract that probably came in for 1,000 listings. So, it's a range.

Okay. And it's probably too early to have a terribly meaningful average anyway, I guess?

Yes, and you tend to focus on the ones that come in at the bigger number.

Right. Sure. Okay. All right. Good. That's helpful. Thanks.

Thank you, Jim.

Your next question comes from John Neff with William Blair.

Hi, John.

Congratulations on the quarter.

Thank you very much.

Thanks, John.

A few questions for you. The 17% decline in selling and marketing, from my numbers, it looks like sales headcount was relatively flat year-over-year. So, why that sharp decline? Is there something negative about that? Is it an indictment of sales productivity or commission payouts or are you cutting back somewhere we should be aware of?

Yes, I think I mentioned in my script that we had some yearend marketing campaigns that were going out, multiple direct mail pieces that were going out all through the quarter before the end of the year. So, those kind of dropped off from Q4 to Q1. And then again, we expect an increase there, not just from ICSC, but also the release of Showcase in the second quarter. So, it's more timing and when the marketing and direct mail pieces went out. A lot went out in Q4. Not as much went out in Q1. And we'll expect to see an increase in Q2.

I meant more year-over-year. So, were there proportionately more of those kinds of marketing --?

Yes.

In the year-ago quarter, first quarter?

You also had higher sales training and recruiting costs in the first quarter of '07.

Correct. Higher sales training costs in the first quarter of '07 as we were ramping that up. And again, we definitely had a difference in the marketing campaigns between the two years.

Now, I think as your seeing, both on the research side and on the sales side, again, first quarter last year we were still full on stepping up the cost structure. So, now you're seeing a lot of efficiencies coming in, and we've talked about a relatively fixed cost structure. But obviously, excluding the one-time gain, you actually saw costs come down quarter-over-quarter. And again, that's because you're not in hiring phase. Those groups are maturing. So, there is actually a lot less in training costs and those types of things.

Customer usage, how do you measure that?

We're looking at how many searches people are doing, whether or not they log on consistently. We look for at least 100 page views before we call you active, 100 requests from a logged-in state. And we look for that in the course of a one-month time period, I believe, or else we don't call you active. And we watch it pretty closely, because it's one of the key metrics we use in compensating our sales people for growing the number of people using the product within their book of business. And we think it's an important predictor of renewal rates. So, people that use our product heavily renew the service. Some people that don't use the product heavily, renew the service too, but generally like them using the service. So, it's a measure of number of searches, number of pages viewed. And right now, the numbers look very good, which is counter to probably general sentiment of a downcycle.

You gave some numbers. I was wondering if you could repeat what that total user count was at the end of the quarter? But also, could you also describe from a standpoint of pricing scheme with contracts your revenue sensitivity to number of users? In other words, if we were to see more widespread industry layoffs in commercial real estate, more brokers being let go, et cetera, what kind of an impact or sensitivity does that present to your contract value?

Yes, so the total subscriber accounts, which the number we gave, is 90,822 currently. So, it's up 2,071 over the preceding quarter. Now, so, we're seeing very strong growth in the number of subscribers with authorized IDs. As people, if a 10-person shop cuts two brokers or three brokers or loses two or three brokers, it really has no impact on the contract values. It has no impact on the revenue side. Where it becomes more material is when somebody with five goes down to one. Those people are going to be looking for a discount. And that's why I sort of mentioned earlier in the call and I have mentioned in previous calls is that's where you see a little bit more a friction on the renewal rate are those folks getting much smaller. The folks who are mid-sized firms or big firms who are moving up and down slightly generally does not impact our revenue base. But right now the usage numbers and the subscriber growth is what you would normally associate with a strong market, not a weak market.

That's helpful. And then I was just a little confused when you said the average contract size for Showcase was $11,400.

Annually.

Annually. Okay. So I'm just confused. My impression was that this was a per group of listing -- at per X number of listings per month kind of an offering.

What it is --

We get something more of a subscription kind of a thing.

It's much more of a subscription service, and many people are looking at this as a multi-year subscription. So what we're doing is we're going to a brokerage firm, and we have good intelligence and information as to what their volume and content of listings typically looks like. We apparently have developed a formula that seems to resonate with them as a fair way to price marketing their entire basket of listings, based upon their historical activity we lock in a fixed rate, which will stay in place for the term of the contract regardless whether or not their listing count goes up or down. So if their listing count goes down, they're probably generating lot of commissions, and if the listing count goes up, they're going to be generating commissions in the future, hopefully. But it's a fixed number based upon their historical activity. And, again, we seem to have hit on something here because we have a short sale cycle on this product, it appears, and we have a high close rate --

John, it's much more similar to our subscription-based business in total. So it's very similar to kind of how we've been selling things in the past.

And if that --

We know you don't like the sort of annuity subscription revenue streams.

Yes. We hate that, but it's an interesting point because I guess there was some concern previously to what extent -- how do you avoid cannibalization with other products? Is it even an issue if this is the average contract size?

I think that was a concern that we had 12 months ago or 18 months ago as we first began looking at the product. And given the average contract size we're looking at right now, it becomes less of a concern because the contract values almost have a comparative relationship to the information contracts. The marketing contracts are looking like information contracts. But also if you look in our Scottish property network company, they actually do something where they have a Showcase like product and they have an information service, and I think something like 80% of their listing content is out for the public to see, yet they still have very strong subscriptions for information for kind of (inaudible) looking to get the extra 20% of the listings that aren't publicly disclosed. And then when I look at the relative size of Glasgow and Edinburgh compared to the various US markets and I look at the revenue stream we're deriving from that Scottish property network, it's actually favorable. So I think that's a little empirical experience that we can look at on a potential cannibalization, it doesn't look like a concern.

All right. I can get back in the queue. Thank you.

(Operator Instructions) The next question comes from Vance Edelson with Morgan Stanley.

Hey, thanks for taking the questions. You mentioned some of the smaller customers who are undergoing a loss of confidence over the state of the industry, and if I heard you right, that may have contributed to the slight drop in the retention rate. Just wondering if you could elaborate a little on the increase in bad debt and the cause of that which might suggest more than just concern on the part of customers?

Sure. So let's segment that appropriately. I would say that, you look at CB Richard Ellis's reported revenue growth and earnings growth and Richard Elli's sales reported revenue growth, earnings growth, and there's no sign of any issues that I see as I look at that. And so if you have a delay in a buying cycle from our mid-size to larger firms, it is more related to them spending too much time reading the FT or The Wall Street Journal and the bad news, not the actual reality in their business. When I talk about loss of confidence, that would not apply to the one, two, three-person brokerage firm in California, Phoenix, or Southern Florida. Some of them are in bad straits. It's actually real there. Leasing volume in some markets in California not San Francisco, but say Orange County, leasing volume is down sharply. And so some of the small firms are going bankrupt, which would be a loss of confidence. So we're seeing bad debt in some of those guys. And that's what you're looking at in that cancellation rate being a little higher in this quarter. And when you look at those guys anecdotally, what you see is some people who entered the marketplace. Generally I'm seeing people that entered the marketplace in the last one to three years, like went out on their own from some bigger firm and now they're going back into a bigger firm or going into something different.

Okay. That's very helpful. And you would explain the slight international sequential drop in revenues, but the international EBITDA was down quite a bit more. Was that primarily due to the heavy investment upfront, or were there any other factors at work there?

We had a one-time transaction in the fourth quarter that probably should be written up in the real estate textbooks for the all-time most lucrative lease termination deal in the history of real estate globally. So we were paid $800 per square foot to terminate a 10,000 square foot lease in London early in the fourth quarter and took a large one-time gain, so what you're seeing is just the elimination of that one-time gain. And the UK is probably six months behind the US in sort of filling out the geographic coverage, and so they are a little bit behind the US in the margin expansion phase of the business.

I think we discussed that the international is running a few quarters behind, and that's why, obviously, we're targeting the 30% in the US and then breakeven by the end of the year internationally.

All right. And then, lastly, could you provide some color on the legal expense related to the competitors, what effect that had on the quarterly numbers and then whether that should trend down significantly from here and thanks?

We haven't disclosed that amount. Obviously, if you take a look at the G&A line, it's not up significantly quarter-over-quarter. So I believe it was $9.743 in Q4 and $9.805 in Q1. So it's not a significant change. I don't think it's anything that we're going to discuss.

And our legal and anti-piracy team is actually having significant success with out-of-court settlements with smaller password stealers so that they're probably actually almost operating as a profit center, which is highly unusual in a general counsel's office.

Got it. Okay. Thanks a lot, guys.

Thank you.

Your next question comes from Christopher Mammone with Deutsche Bank.

Sitting in for Chris. Just a housekeeping question first. The $300,000 lease termination charge that you mentioned, is that included in the guidance for second quarter?

Yes, it is. It is included in the second quarter guidance.

Okay. Thank you. And the other question, with respect to the strong subscriber growth that you saw this quarter, would you characterize that as purely ramp up on the sales force productivity, or do you think that you are seeing some early success in the 80 new markets that you have in the US now?

I'll sort of go between those two options, and I'll say that it's probably the maturation of the sales force. We had a lot of newer sales people now they are with us for six months, nine months, and they're beginning to become productive. And this has probably been a somewhat challenging exercise for our sales force because they are pursuing strategic initiatives, as opposed to the maximum revenue initiative. So they're getting a lot of high subscriber growth that will pay off over the next several quarters to come. And I think it's a mix, these subscribers are coming from both older and new markets, probably more of the mid-aged markets is the biggest driver.

Okay. And one last question. Did I hear you correct that you said you might be starting to see revenues from Showcase in the third quarter?

I would expect minor revenues from Showcase in the third quarter. I would believe that most of the revenues will show up in the fourth quarter. As Andy mentioned, there will be some free trial periods for a few months so we would expect to start to see Q4 seeing revenue come in from that. We'll obviously discuss that more on calls to come.

Okay, but is that included in your annual revenue growth guidance?

Yes, it is.

Okay. Thank you.

Great. Thank you.

Your next question comes from Brett Huff with Stephens Incorporated.

Hey, Brett.

Good morning. How are you?

Doing fine and a couple of technical difficulties this morning.

Okay, I had two quick questions. Number one, I wanted to make sure I understood how the pricing on your product works generally. I know you described it a little bit, but I want to make sure that I understand it. Is it that, if a substantial decline in the number of people at a brokerage has to occur in order for repricing to occur. But isn't that also limited by the length of contract? Like that issue wouldn't even come up if it were an annual contract until renewal; is that right?

You've got that correct.

That's correct, Brett.

Okay. So that's one thing. And then the second thing is can you talk just a little bit about the exposure of your business generally to weakness in sales versus weakness in leasing in the commercial market?

Sure. Our property professional business, which is the largest component of our business, is not very exposed to the sales marketplace. I mean, I think it's got very light exposure. Our commercial multiple listing service, which generates probably around $1 million a year, or half a percentage point of our revenue, would be exposed to a sales downturn. So if volumes came down, sales came down, our sales in that product, which again was half a percentage point of our revenue, would have a lot of exposure. And I see some softness in that product. So that product was growing steadily up until the fourth quarter, and then it began to level and that's a low-end product that we set up to be more competitive with like LoopNet. Our comps product is -- from the people that have worked with the product for 25 years is generally not very cyclical, because as volumes in the sales side go down or problems occur or bankruptcies occur, the banks themselves need the product more in order to try to understand their asset exposure and what's going on in their loan-to-asset ratios. So we don't, the more cowboy brokers who are riding the upward trend are not the guys who are doing that, not the men and women who are doing a lot of careful analysis with our comps product. It's the appraisers and valuation folks that do more work with our comps product, and they remain employed when things get dicey.

Okay. Those are the only two questions I had. Thanks for your time.

At this time there are no further questions. Are there any closing remarks?

Yes. I'd like to thank everybody for joining us on the call. I think we had a great quarter, and I'm sorry that we had to make you wait ten minutes to hear about the good news. Thank you very much.