Ladies and gentlemen, welcome to CoStar Group's third quarter 2008 conference call. Today, we have CoStar Group's Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, your conference is being recorded. I would now like to turn the conference over to Mr. Tim Trainor. Please go ahead.

Thank you, Louise [ph]. Good morning, everyone. Welcome to CoStar Group's third quarter 2008 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state for the record 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 third quarter 2008 press release and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31, 2007 and CoStar's Form 10-Q for the quarter ended June 30, 2008 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 on our Web site at www.costar.com/corporate/investor. Thank you for joining us. I will now turn the call over to Andy.

Thank you, Tim. Welcome everyone, to CoStar Group's Third Quarter 2008 Conference Call. If there is a theme to our earnings call today, it's earnings. We have managed our business quite conservatively over the past year or so, trimming costs where we could, diversifying our product mix with the launch of CoStar Showcase, and above all, focusing on earnings growth. Our earnings results in the third quarter clearly demonstrate the strength of CoStar Group's business model. In an ailing economy, many companies are unfortunately reporting weak earnings. In sharp contrast, CoStar Group is today reporting triple digit year-over-year quarterly net income growth. In fact, for the fourth consecutive earnings call, we are pleased to again announce that we have doubled our earnings year-over-year. Net income for the third quarter of 2008 increased 104% to $6.6 million from $3.3 million in the third quarter of 2007. At $6.6 million, net income for the third quarter increased 22% from the second quarter net income of $5.4 million. Earnings per diluted share for the third quarter were $0.34, up from $0.17 in the same period a year ago. CoStar's EBITDA growth has been equally impressive. Our EBITDA for the third quarter was $15.5 million, a 95% increase compared to EBITDA of $8 million in the third quarter of 2007 and a 21% increase compared to EBITDA of $12.8 million in the second quarter of 2008. For the nine months period ending September 30, 2008, over the nine months period ending September 30, 2007, our net income has nearly tripled. We believe that these results clearly demonstrate the absolute resilience of CoStar's business model in a very difficult recessionary environment. This strong earnings performance is consistent with the aggressive target we set in the second quarter 2007 to raise our then company wide 9%…

Thanks, Andy. Don't worry, everybody. I'm going to work with Andy more next quarter to get his script under 100 pages. But we'll give Andy a little bit of a break here. During Q3, CoStar posted another strong quarter of earnings growth, margin expansion, and cash generation. As Andy mentioned earlier and stated in our press release, net income increased 104% in the third quarter of 2008 over the same period one year ago to $6.6 million or $0.34 per diluted share compared to $3.3 million or $0.17 per diluted share for the third quarter of 2007. EBITDA for the third quarter of 2008 was $15.5 million, an increase of 95% compared to EBITDA of $8 million for the third quarter of 2007. The third quarter 2008 annualized EBITDA is now $62 million as it continues to climb each quarter. Now I'm going to mostly focus on sequential results for the third quarter of 2008 compared to the second quarter and our outlook for the fourth quarter and full year 2008. Total revenues grew sequentially from $53.5 million in Q2 to $53.8 million in Q3 of 2008. Our revenue growth in the third quarter was clearly moderated by global economic turbulence. In particular, the impact of unfavorable foreign currency exchange rates, a decline in non-subscription based revenue and slower revenue growth from subscription based services all contributed to the slower third quarter revenue growth. We do not expect non-subscription based revenue, which is ad hoc revenue, which is mostly related to products facilitating the buying and selling of commercial buildings, to improve for several quarters given the market conditions. But, as you probably know, unlike other competitors in the space, non-subscription based revenue for CoStar accounts for less than 5% of the total revenues for the company. More exact, subscription…

(Operator instructions) And our first question will come from John Neff from William Blair. Please go ahead. John Neff – William Blair: Hi, guys. Thank you. Congratulations on the quarter.

Thank you. John Neff – William Blair: Couple questions for you. How do we think of the decline in cost structure? Do we think of that as cuts that are necessary to deliver on the margin targets? Or do we think of it as a natural decline following a period of significant investment? Or do we think of it as both?

If you were to – I would characterize the cuts that have occurred so far as being – they would not be characterized as layoffs in response to any environment or a target margin. It's more just basic business management given a bunch of factors like integrating together all these different companies we acquired in the UK into one much more efficient, streamlined company. It is things like backing all the friction out of the process that occurs after we expanded into so many U.S. markets. As soon as you take the foot off the accelerator in adding new markets as we've done here in the last five quarters, historically, every time we do that, our expenses drop off and it's frustrating because I can't get, Brian, when we're actually opening those new markets up and I know that we're ending a period of opening bunch of new markets. Brian will never in advance admit that costs will decline when we stop opening new markets. They always do. But now he has to admit that actually costs do decline after we stop opening up new geography. The company – if the company needed to, we have the ability to additionally reduce our cost structure. But we're running – right now we're making the margin targets we're looking for ahead of schedule and we will have room to continue to make those margin targets and enhance them. So we're taking advantage of the fact that we've got a strong balance sheet. The marketplace is very volatile. It's a little more challenging. But we feel we're comfortable where we are.

John, just to add a little color to that. As we completed the step up in cost structure in Q2, right around when I was made CFO, we reduced total costs 10% – 11% somewhere in that range or so. And I think as Andy said, we haven't had to make any major adjustments to that or sudden cost cuts or anything that wouldn't allow us to continue to run the business for long-term growth. We're still releasing new products like Showcase, delivering higher quality information. You see some of the efficiencies that we've gotten were from software releases, were from consolidating office space, getting paid $7.6 million for new space in the UK, reducing, consolidating space here in Bethesda and saving $1.2 million. So we're able to continue to go through that and while those types of cost savings and efficiencies, you can't really budget and forecast because you have to go out and find them. I would expect that we could continue over the next few years to see something in that same range, similar spread out as we just continue to go through and look for more efficiencies, better ways to do things. As you know, if you gain just a few percentage points of efficiency gains on approximately 900 researchers, there is some significant cost savings. When you're not hiring and training people in bulk the way we were for a few years, there is a lot of cost savings on training, travel costs of bringing people here to Bethesda and those types of things so.

And our turnover rate in research say in our San Diego operations is now probably half of the level it was just a couple years ago. Sales force turnover is actually fairly low. So that all basically saves you a lot of money.

Does that answer your question, John? John Neff – William Blair: Yes. That's helpful.

I'll be disappointed if you don't have a follow-up question. John Neff – William Blair: Yes. I got a few for you. Just thinking about what sort of minimum sort of sequential growth is required to kind of continue to unlock the operating leverage, is there a minimal growth rate below which you can't make progress towards – positive progress towards that $100 million annualized EBITDA goal?

I think that the last four months, five months or so have been very unusual. I never would have predicted that Wachovia, AIG, Countrywide, Bear Stearns, Merrill Lynch, WaMu, Lehman Brothers, et cetera, et cetera would occur. I think that the bail out package has probably stabilized that area. And hopefully, the VIC settles down a little bit here and creates a more favorable operating environment. But I think that in this pretty bad environment, we've been able to keep things positive. The exchange rate, obviously, is a problem as it goes the wrong way. It's great for when you're traveling on business to London. It's not good for reporting earnings in US dollars. But as long as we're flat, we'll continue to show earnings leverage.

And John, to follow-up on that, couple points. We talked about the subscription based business in the U.S. being at 1.2% or something like that. I would expect to continue to see that to be some place in that range now. I think, again, I can't predict what's going to happen to exchange rates in Q4. I look at the exchange rates. I got back from a once in a life time trip, taking my entire family to Italy. I know I talked about this with some investors, which I saved up for and spent a lot of money on. Literally, within a day or so after I got back at the end of July, the exchange rate dropped from about two x to about 1.75 on September 11th in one month. But then it popped back up within a week to 1.86 and now, over the past month, it dropped to where the same place it was when we acquired our focus operations nearly six years ago. So just in less than a couple months, we've had some severe volatility up and down with exchange rates wiping out what we've seen as a pretty steady increasing gain of six years going up and down. So, pretty hard to forecast. But I would think that over the next few quarters, those things will settle down, you'll be back into some more normalized ranges. John Neff – William Blair: Okay. Another revenue question for you. Just trying to get a sense of how the slow down is sort of manifesting across different sort of vintages in markets. In other words, is there a – are you seeing converging growth rates between old and new markets or are old markets slowing more rapidly than the new. Just trying to get a sense of how homogenous or unhomogeneous?

I think the thing, it's not so much about the market. It's more about the age of the customer – I mean the age of the customer relationship. So, again, it goes back to this thing where if I just subscribe to CoStar Group for the – some of the customers who – there's a higher likelihood that if someone just subscribed to CoStar Group in January of this year and yet deeply integrated their operations, they're more likely to cancel than someone who's been a customer for more than three years. So it's more about the customer, not about the markets. The markets are acting fairly similar and this is a good problem because this is addressable and we've put four or five things in place that we think will actually have a big impact and should, outside of thing, unusual things like Bear Stearns and Lehman Brothers, should enable us to get the renewal rates back up as those changes take effect. So the markets are acting fairly similarly. It's more about new customers versus middle aged or older customers. John Neff – William Blair: Helpful. And last question and I can get back in queue. Reaction to Xceligent's announcement today of recapturing the Magnificent Seven in Milwaukee and they're taking, as they say in the press release, responsibility for updating their market research databases? Is there sort of a renewed threat out of Xceligent?

We've gotten to the place where we're digging for news and we're talking about someone winning a $10,000 contract. So over the course of a number of years, Xceligent and CoStar competed in a number of secondary markets. Things ebb and flow. I don't think anyone would say that Xceligent has a product that's equal to or even close to as high quality as a product as CoStar Group. I know that I've heard that Xceligent has dropped their prices dramatically, which given the fact that my impression has been that their revenue growth has been flat or declining for quite some time and that there, my impression is that they don't make money. I would not want to be – I would much rather be in CoStar's seat going into this particular market environment where CoStar Group's got a strong balance sheet, is profitable, strong, and a top-notch product. Because ultimately, cutting your costs when you're not making money to try to win business is probably not a survival tactic in an environment like this. So, I think this actually is probably good news because in a down market like this, sometimes you get some consolidation or you get market share gain. And it would not be the right thing to do to slash your price dramatically to try to win business right now. Does that answer your question? John Neff – William Blair: Yes, it does. Thank you so much.

Thanks, John.

Thank you. Our next question is from Jon Maietta from Needham and Company. Please go ahead. Jon Maietta – Needham and Company: Thank you.

Hi, Jon. Jon Maietta – Needham and Company: Hi, Andy. How are you? Hi, Brian.

I'm suffering from having two toddlers at home, bring them home from preschool. Jon Maietta – Needham and Company: Andy, there are certain products within the portfolio that may lend themselves particularly well for this environment. I know you have an analytics product. I'm just wondering if you could speak to that?

Sure. So obviously, we had a shock to the system with all the activity from the summer with the big financials, but we're gearing up both in the United Kingdom and the United States. We're making it top priority to gear up our analytic products, because we think there's going to be a lot of demand in that area. So, for years, folks have used our products to originate mortgages or to produce the prerequisite half an inch of market data at the back of any sort of loan commitment documents for an asset. I think very few people have actually read what was in those market reports that CoStar produces at the back of those loan commitment, investment commitment documents. So these market conditions, based on what we saw back in the '90s when things turned south on the asset side, people become a lot more interested in what's actually happening in the market conditions comparable sales cap rates, supply-demand, how new construction might impact leasing, what competitors are doing with rental rates. So we're going to release a whole series of upgrades to our analytic products that will not cost a lot of money because basically using the development and resources we currently have, the data resources we currently have, but should appeal to a market that's becoming dramatically more risk adverse. And we're basically a unique service that eliminates what's happening in that risk. So we're bullish about it, working hard in that whole analytic zone right now. Jon Maietta – Needham and Company: Got it. Okay. And then I'm just wondering if you could talk a little bit about the deal with the Federal Reserve? How are they using the products? Maybe what group within the Fed is using the solution?

Under advice of counsel I cannot comment. Jon Maietta – Needham and Company: Okay. Brian, just a couple of items on the balance sheet statement of cash flow. I may have missed it. Cash from operations in the quarter?

I think for the nine months ended it's about – cash from operations is about $30 million. Jon Maietta – Needham and Company: Okay. And stock comp in the quarter, if you have that?

Stock comp in the quarter was about – I think it was like $1.2 million, $1.3 million. Something like that. Jon Maietta – Needham and Company: Okay. Got it. And then just last question. On the OpEx line, are there certain operating expenses where you have more leverage than others? Or is it just kind of – should we think about it more as the fixed – as you said, kind of all lines being fixed with maybe a slight bend to reducing over time?

Yes. I think obviously we talk a little bit about – there was a big decrease in selling and marketing, but I think that was clearly stated. Everybody knew about ICSC and the release of Showcase. I think kind of where you're at right now is a pretty good cost base and obviously we'll give guidance as to if something's happening in one of those lines. But I think right now, you're on a pretty good point trajectory for each of those. Jon Maietta – Needham and Company: Okay. Thanks a lot.

Great. Thanks, Jon.

Thanks, Jon.

Thank you. Our next question is from Brett Huff from Stephens Inc. Please go ahead.

Good morning, Brett. Brett Huff – Stephens Inc.: Good morning. Congrats on a nice quarter.

Thank you, sir. Brett Huff – Stephens Inc.: Just a couple quick questions. I wanted to make sure that – you talked a little bit about behavior of existing clients.

Yes. Brett Huff – Stephens Inc.: I wondered how are those conversations going? You guys are a big cost for those guys that obviously you're still, as you say, at some level you're a cost reduction or a way to save for them. But at the same time, as you say, they're obviously looking for ways to sort of clamp down. When you have those discussions, how do those usually go? I know at that level you're as much a partnership as anything. So I'm just curious.

There is – it's probably can be described, you have to segment it out to multiple, different discussions. Unfortunately, for the one man shop that just set out last year to go into business and their timing was pretty poor, the conversation is sort of one way. They basically default. For the company that is a midsize firm that's had dramatically bad impact (inaudible) fortune like say, they're based in Southern California or Southern Florida. They may have cut their staff in half. And we'll work with those folks and try to be reasonable to help them through the market knowing that we'd like to have a long-term relationship with them as they recovered. That is probably not the predominant kind of conversation that's occurring. At the mid and upper level client, things are actually very solid. We hear little to no dialogue where people are questioning us to reduce our prices. No one's talking about that with us in the mid to upper level customer. Just because they may engage in conversation, but we're like one-tenth of 1% of their cost structure. And in fact, without disclosing names, there's a really good side to this whole situation which is some of the bigger companies, the bigger, stronger companies who have been either maintaining internal research operations that are duplicative with CoStar Group or maintaining expensive internal research operations instead of CoStar Group. Some of those companies are now actually eliminating those internal research operations and buying more from CoStar Group. So one of our biggest customers who is taking significant steps to reduce their internal cost structure is at the same time increasing the amount of products and services they're buying from us. So we are a cost saving product at the end of the day for most firms and market conditions like this create an environment where people seek those cost saving products like CoStar Group. So this whole bifurcation we've seen recently in our renewal rate, I'm amazed. When you look at customers in this environment who have been customers for more than three years, the fact their renewal rate is 95% is really amazing to me. That's in a context of folks like AIG disappearing for us or Bear Stearns disappearing for us. So the conversations sort of range the spectrum. I hope that answers your question. Brett Huff – Stephens Inc.: Yes. That's really helpful.

Big guys aren't saying to cut our costs because they know that we have people that we've got to pay and we've got to do the job for them. They don't want us to cut our costs too far. Brett Huff – Stephens Inc.: Right. And sort of another question looking into '09. I know you guys aren't giving guidance, but I'm just trying to think about the different components of revenue growth and I know it'll probably be tougher in '09 than in the past. But I think about things like your CPI price increases that usually happen. I think about what Showcase could contribute. I think about cross sales and things like that. Can you just talk a little bit about how you think about the components of growth in '09 on the top line?

We think that we can move the ball forward with Showcase and continue to pick up some market shares. We effectively communicate to the customer base the relative advantages of our product through every means. We think that there's continued cross selling activity. We think there will be market share gains from firms who are getting rid of internal research. We think that there will be institutional lending and government agencies who will buy more of our product because they're trying to understand what's going on with these mortgages. We are not going to rely heavily on price increases right now. We think that in the interest of good long-term relationships with our customers, we don't want to hit them with price increases right now. So we're laying low on the price increase side. Basically, CPI increases that sort of stuff. So, assuming things stabilize somewhat over the last several months, it should be a pretty solid year. Do you want to add anything to that, Brian?

No. I think you got it. Brett Huff – Stephens Inc.: That's helpful. And then just sort of one more as we think about this, the analytic stuff that you guys were talking about, is this kind of expense or incremental expense going to be similar to Showcase in the sense that you're just going to re-task developers? Or is it the kind of thing that would be complex enough that you'll need to hire some specific expertise to get the real value that you think will sell to customers?

We believe we already have most of that expertise in-house. And we believe it will be less expensive than Showcase. So I think it will probably cost a fraction of what Showcase cost, and Showcase cost a fraction of what opening new markets cost. So we think it'll be downright dirt cheap. And the great thing about it is it's not like that kind of product is something that someone else could replicate. We're the only folks around with the largest research operations in the world. Brett Huff – Stephens Inc.: And one last one on expenses. Brian, you mentioned, I think what you said was, you all have lowered costs by something like 10% over the last year or so and you think you can do that again sort of over time over the next, it sounded like three-ish type years. It sounds like it's not so much staff as it is just efficiencies, sort of here and there, taken bit by bit that add up to a larger whole. Can you just give us an example? You talked a little bit about that. I just want to make sure I understand the kinds of things that you're talking about.

Sure. I think it's a combination of the two. So, as I said, we had more trainers, when you had hundreds of people going through training sessions and you're ramping up headcount, you had more trainers, more recruiters, you were placing more ads in newspapers. For the sales group, you were flying them here for a month of onsite training and then bringing them back for retraining and those types of things. So I think it's a whole combination of maybe there is some less headcount if you don't need as many trainers or recruiters and those types of things. You have savings from lower turnover. I think when you hire in bulk you typically have higher turnover. We've seen lower turnover this year than last year. And I would expect that trend to continue going forward into next year. And then it does have things that have nothing to do with headcount which is like we talked about, the London lease where we had multiple leases out there and when you close something like that, you also gain efficiencies on communication costs and insurance and those types of things. So I think it's a combination of the two and I think it's a thing that we can continue to look for and you'll continue to see efficiencies over the next few years without having any impact at all on the quality of the data or the projects that we're able to put out with new software like Showcase or focusing on analytics.

Brett, Brian's volunteering to take a pay cut for '09.

Right, after Andy. Brett Huff – Stephens Inc.: Thanks. I appreciate your time. That's all I had.

Thanks, Brett.

Thank you. Our next question is from Jim Wilson from JMP Securities. Please go ahead. Jim Wilson – JMP Securities: Thanks. Good morning, guys.

Good morning, Jim. How are you doing? Jim Wilson – JMP Securities: Doing fine. Could you – I missed a little bit of the call because I have a few calls going on here at once. But could you give a little color? You talked a lot about your biggest clients and the stability and obviously pricing issues, but how many or what percentage of your contracts or some form of color on how much is fixed in dollar pricing structure versus how much actually primarily (inaudible) per seat kind of revenue model for you?

I would say that 99% – I would say 96%, 97% of our subscription revenue is fixed. It's like – it's initially priced at per seat, but during the term of these contracts, it's fixed. On contract renewal, there is some negotiation if they've downsized dramatically. But generally, our price list over the last ten years has been increasing at a pace much greater than the price that the average customer sees in escalations. So the price schedule's climbing much faster than the existing customers' price is climbing each year. As a result, if someone has reduced their staff by 20% at the time the contract rolls, they're still at that 20% reduction receiving a 30% discount off of our list price typically. So it's not a big variable for us. The bigger variable is like Lehman Brothers, Bear Stearns kind of situation. Not so much headcount reductions. Jim Wilson – JMP Securities: Okay. And have you had any big – these are financial services customers, really the AIG, Bear, or Lehman that might've left. Anything material what thing of any in the actual real estate industry itself or the brokerage industry?

It's more of the real small guys. The big guys, obviously some very big names in the industry that you and I both know we're talking about. They've had some weak earnings or a sharp drop in their stock price. But people forget that over the decades, these businesses don't go anywhere. They go public. They go private. They go public again. They go private again. They still have thousands of brokers that spend hours each day inside of our terminals. So whether or not those brokers are at Company A or Company B, they still use our products. And if their income goes down 30%, they still use our products. And when they're making no money, they still use our products. When they're in bankruptcy, they still use our products. It's been pretty stable inside the brokerages. Folks have been commercial brokers for 25 years of their life and they're in the top 10% of the industry don't stop being brokers because of a downturn. And remember, the brokers often make good money in downturns because they move all the tenants out of the B buildings into the A buildings that are sitting vacant and they move all the tenants out of C buildings into the B buildings that are then standing vacant and they play musical chairs with the industry until the next recovery comes. So we're not seeing anything that makes us nervous inside the brokerage side of things. Jim Wilson – JMP Securities: Okay. And then just finally, I see growth being modest in the quarter, but was it predominantly – I'm assuming that's the answer, predominantly existing customers adding new services? Or was there much in the way of new customer acquisition?

There was a lot of new customer acquisition. 590 some I think. 570 some new firms came on board. So the total sales volume has not changed dramatically over, it's pretty much in line with what we've seen last five years. The only change is a big change in exchange rates, new customer, brand new customers cutting costs, or the meltdown of Wall Street. Jim Wilson – JMP Securities: Okay. All right. That makes sense. Thanks.

Thanks, Jim.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 1:15 today through November 13th at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 964778. Again, the number is 1-800-475-6701 and the access code is 964778. Mr. Florance, please go ahead with any closing remarks.

I want to thank you, guys, all again for joining us. You can see we've switched vendors on the conference call service, another cost cutting move. But we look forward to updating you on our results next quarter. Thank you for joining us and I apologize for having a bad voice here today. Good-bye.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.