UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A


Amendment No.
1





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
the fiscal year ended December 31, 2009





Commission
file number 0-24531





CoStar
      Group, Inc.(Exact
      name of registrant as specified in its
charter)





Delaware
            
            52-2091509(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





2
      Bethesda Metro Center, 10th Floor, Bethesda,
      Maryland 20814(Address
      of principal executive offices) (zip code)(301)
      215-8300Registrant’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
      RegisteredCommon
      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   No
x





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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
registrant was required to submit and post such files.) Yes o   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
              Accelerated
      filer  xNon-accelerated
      filer  o
              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, 2009 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 $641
million.
 
 As of
February 19, 2010, there were 20,581,462 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 120 days after the end of the
registrant’s fiscal year ended December 31, 2009, are incorporated by reference
into Part III of this Report.







Explanatory
Note
 
 This
Amendment No. 1 to the registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, which was filed with the U.S. Securities and
Exchange Commission on February 26, 2010 (the “Original Filing”), is filed
solely to correct a typographical error that resulted in the independent
registered public accounting firm’s report included in Part II, Item 8
truncating the following words from the final paragraph of the financial
statement opinion: “an unqualified opinion thereon.” This Amendment No. 1
corrects the audit report to properly include the words “an unqualified opinion
thereon” at the end of the final paragraph of the financial statement opinion.
Except as described above, no other amendments are being made to the Original
Filing. This Amendment No. 1 does not reflect events occurring after the
Original Filing or modify or update the disclosure contained therein in any way
other than as required to reflect the amendment discussed above. Pursuant to
Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended,
the complete text of Item 8, as amended, is repeated in this Amendment No.
1.
 
 PART
II
 
 Item
      8.
                    Financial
      Statements and Supplementary Data
 
 COSTAR
GROUP, INC.
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULE
 AND
SUPPLEMENTARY FINANCIAL INFORMATION
 
 Reports
      of Independent Registered Public Accounting
      Firm
                      3Consolidated
      Statements of Operations for the years ended December 31,  2007,
      2008 and 2009
                      5Consolidated
      Balance Sheets as of December 31, 2008 and
      2009
                      6Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007,
      2008 and 2009
                      7Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2008 and
      2009
                      8Notes
      to Consolidated Financial
      Statements
                      9Schedule
      II - Valuation and Qualifying Accounts
                      35Consolidated
      Quarterly Results of Operations
                      35
 
 
 2
 
 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, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009.  Our audits also included the
financial statement schedule  listed in the Index at Item
15(a).  These financial statements and schedule are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements and schedule 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, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.  Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
 
 As also
discussed in Note 9 to the consolidated financial statements, under the heading
Income Taxes, the Company adopted FASB authoritative guidance regarding
Accounting for Uncertainty in Income Taxes effective January 1,
2007.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), CoStar Group Inc.’s internal control over
financial reporting as of December 31, 2009, 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 25, 2010
expressed an unqualified opinion thereon.
 
 /s/  Ernst
& Young LLP
 
 
 McLean,
Virginia
 
 February 25, 2010
 
  3
 
  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, 2009, 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, 2009, based onthe 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, 2009 and 2008 and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2009 of CoStar Group, Inc. and our report dated February 25,
2010 expressed an unqualified opinion thereon.
 
 /s/  Ernst
& Young LLP
 
 
 McLean,
Virginia
 
 February 25, 2010
 
  4
  COSTAR
GROUP, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except per share data)
 
 Year
      Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Revenues
                        
                        $
                        192,805
                        
                        
                        $
                        212,428
                        
                        
                        $
                        209,659Cost
      of revenues
                        
                        
                        76,704
                        
                        
                        
                        73,408
                        
                        
                        
                        73,714Gross
      margin
                        
                        
                        116,101
                        
                        
                        
                        139,020
                        
                        
                        
                        135,945Operating
      expenses:Selling
      and marketing
                        
                        
                        51,777
                        
                        
                        
                        41,705
                        
                        
                        
                        42,508Software
      development
                        
                        
                        12,453
                        
                        
                        
                        12,759
                        
                        
                        
                        13,942General
      and administrative
                        
                        
                        36,569
                        
                        
                        
                        39,888
                        
                        
                        
                        44,248Gain on lease settlement, net
                        
                        
                        (7,613
                        )
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4Purchase
      amortization
                        
                        
                        5,063
                        
                        
                        
                        4,880
                        
                        
                        
                        3,41298,249
                        
                        
                        
                        99,232
                        
                        
                        
                        104,110Income
      from operations
                        
                        
                        17,852
                        
                        
                        
                        39,788
                        
                        
                        
                        31,835Interest
      income, net
                        
                        
                        8,045
                        
                        
                        
                        4,914
                        
                        
                        
                        1,253Income
      before income taxes
                        
                        
                        25,897
                        
                        
                        
                        44,702
                        
                        
                        
                        33,088Income
      tax expense, net
                        
                        
                        9,946
                        
                        
                        
                        20,079
                        
                        
                        
                        14,395Net
      income
                        
                        $
                        15,951
                        
                        
                        $
                        24,623
                        
                        
                        $
                        18,693Net
      income per share 3⁄4 basic
                        
                        $
                        0.84
                        
                        
                        $
                        1.27
                        
                        
                        $
                        0.95Net
      income per share 3⁄4 diluted
                        
                        $
                        0.82
                        
                        
                        $
                        1.26
                        
                        
                        $
                        0.94Weighted
      average outstanding shares 3⁄4 basic
                        
                        
                        19,044
                        
                        
                        
                        19,372
                        
                        
                        
                        19,780Weighted
      average outstanding shares 3⁄4 diluted
                        
                        
                        19,404
                        
                        
                        
                        19,550
                        
                        
                        
                        19,925
 
 See
accompanying notes.
   5
  COSTAR
GROUP, INC.
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands except per share data)
 
 December
      31,2008
                        
                        
                        2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        159,982
                        
                        
                        $
                        205,786Short-term
      investments
                        
                        
                        35,268
                        
                        
                        
                        20,188Accounts
      receivable, less allowance for doubtful accounts of approximately $3,213
      and $2,863 as of December 31, 2008 and 2009, respectively
                        
                        
                        12,294
                        
                        
                        
                        12,855Deferred
      income taxes, net
                        
                        
                        2,036
                        
                        
                        
                        3,450Prepaid
      expenses and other current assets
                        
                        
                        2,903
                        
                        
                        
                        5,128Total
      current assets
                        
                        
                        212,483
                        
                        
                        
                        247,407Long-term
      investments
                        
                        
                        29,340
                        
                        
                        
                        29,724Deferred
      income taxes, net
                        
                        
                        3,392
                        
                        
                        
                        1,978Property
      and equipment, net
                        
                        
                        16,876
                        
                        
                        
                        19,162Goodwill
                        
                        
                        54,328
                        
                        
                        
                        80,321Intangibles
      and other assets, net
                        
                        
                        16,421
                        
                        
                        
                        23,390Deposits
      and other assets
                        
                        
                        1,544
                        
                        
                        
                        2,597Total
      assets
                        
                        $
                        334,384
                        
                        
                        $
                        404,579LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,636
                        
                        
                        $
                        3,667Accrued
      wages and commissions
                        
                        
                        7,217
                        
                        
                        
                        9,696Accrued
      expenses
                        
                        
                        7,754
                        
                        
                        
                        14,167Income
      taxes payable
                        
                        
                        1,907
                        
                        
                        
                        3⁄4Deferred
      revenue
                        
                        
                        9,442
                        
                        
                        
                        14,840Deferred
      rent
                        
                        
                        1,180
                        
                        
                        
                        1,377Total
      current liabilities
                        
                        
                        29,136
                        
                        
                        
                        43,747Deferred
      income taxes, net
                        
                        
                        132
                        
                        
                        
                        3⁄4Income
      taxes payable
                        
                        
                        1,695
                        
                        
                        
                        1,826Commitments
      and contingencies
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4Stockholders’
      equity:Preferred
      stock, $0.01 par value; 2,000 shares authorized; none
      outstanding
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4Common
      stock, $0.01 par value; 30,000 shares authorized; 19,733 and 20,617 issued
      and outstanding as of December 31, 2008 and 2009,
    respectively
                        
                        
                        197
                        
                        
                        
                        206Additional
      paid-in capital
                        
                        
                        333,983
                        
                        
                        
                        364,635Accumulated
      other comprehensive loss
                        
                        
                        (13,796
                        )
                        
                        
                        (7,565
                        )Retained
      earnings (accumulated deficit)
                        
                        
                        (16,963
                        )
                        
                        
                        1,730Total
      stockholders’ equity
                        
                        
                        303,421
                        
                        
                        
                        359,006Total
      liabilities and stockholders’ equity
                        
                        $
                        334,384
                        
                        
                        $
                        404,579
  See
accompanying notes.
  6
  COSTAR
GROUP, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 (in
thousands)
  Additional
                                    
                                    
                                    Accumulated
                                      Other
                                    
                                    
                                    Retained
                                      Earnings
                                    
                                    
                                    TotalComprehensive
                                      Income
                                    
                                    
                                    Common
      Stock
                                    
                                    
                                    Paid-In
                                      Capital
                                    
                                    
                                    Comprehensive
                                      Income
      (Loss)
                                    
                                    
                                    (Accumulated
                                      Deficit)
                                    
                                    
                                    Stockholders’
                                      EquityShares
                                    
                                    
                                    AmountBalance
      at December 31, 2006
                                    
                                    
                                    
                                    
                                    
                                    19,081
                                    
                                    
                                    $
                                    191
                                    
                                    
                                    $
                                    302,936
                                    
                                    
                                    $
                                    4,520
                                    
                                    
                                    $
                                    (57,537
                                    )
                                    
                                    $
                                    250,110Tax
      benefit adjustment
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    26
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    26Balance
      at January 1, 2007
                                    
                                    
                                    
                                    
                                    
                                    19,081
                                    
                                    
                                    
                                    191
                                    
                                    
                                    
                                    302,962
                                    
                                    
                                    
                                    4,520
                                    
                                    
                                    
                                    (57,537
                                    )
                                    
                                    
                                    250,136Net
      income
                                    
                                    
                                    15,951
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    15,951
                                    
                                    
                                    
                                    15,951Foreign
      currency translation adjustment
                                    
                                    
                                    873
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    873
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    873Net
      unrealized gain on  investments
                                    
                                    
                                    233
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    233
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    233Comprehensive
      income
                                    
                                    $
                                    17,057Exercise
      of stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    289
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    8,127
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    8,130Restricted
      stock grants
                                    
                                    
                                    
                                    
                                    
                                    
                                    131
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4Restricted
      stock grants surrendered
                                    
                                    
                                    
                                    
                                    
                                    
                                    (58
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (635
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (635
                                    )Consideration
      for Propex
                                    
                                    
                                    
                                    
                                    
                                    
                                    22
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    1,010
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    1,010Stock
      compensation expense, net of forfeitures
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    5,399
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    5,399ESPP
                                    
                                    
                                    
                                    
                                    
                                    
                                    9
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    448
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    448Excess
      tax benefit for exercised stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    260
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    260Balance
      at December 31, 2007
                                    
                                    
                                    
                                    
                                    
                                    
                                    19,474
                                    
                                    
                                    
                                    195
                                    
                                    
                                    
                                    317,570
                                    
                                    
                                    
                                    5,626
                                    
                                    
                                    
                                    (41,586
                                    )
                                    
                                    
                                    281,805Net
      income
                                    
                                    
                                    24,623
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    24,623
                                    
                                    
                                    
                                    24,623Foreign
      currency translation adjustment
                                    
                                    
                                    (14,061
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (14,061
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (14,061
                                    )Net
      unrealized loss on investments
                                    
                                    
                                    (5,361
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (5,361
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (5,361
                                    )Comprehensive
      income
                                    
                                    $
                                    5,201Exercise
      of stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    198
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    6,555
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    6,557Restricted
      stock grants
                                    
                                    
                                    
                                    
                                    
                                    
                                    102
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    1Restricted
      stock grants surrendered
                                    
                                    
                                    
                                    
                                    
                                    
                                    (49
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (695
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (696
                                    )Stock
      compensation expense, net of forfeitures
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    4,907
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    4,907ESPP
                                    
                                    
                                    
                                    
                                    
                                    
                                    8
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    329
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    329Excess
      tax benefit for exercised stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    5,317
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    5,317Balance
      at December 31, 2008
                                    
                                    
                                    
                                    
                                    
                                    
                                    19,733
                                    
                                    
                                    
                                    197
                                    
                                    
                                    
                                    333,983
                                    
                                    
                                    
                                    (13,796
                                    )
                                    
                                    
                                    (16,963
                                    )
                                    
                                    
                                    303,421Net
      income
                                    
                                    
                                    18,693
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    18,693
                                    
                                    
                                    
                                    18,693Foreign
      currency translation adjustment
                                    
                                    
                                    3,671
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3,671
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3,671Net
      unrealized gain on  investments
                                    
                                    
                                    2,560
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    2,560
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    2,560Comprehensive
      income
                                    
                                    $
                                    24,924Exercise
      of stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    85
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    2,232
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    2,232Restricted
      stock grants
                                    
                                    
                                    
                                    
                                    
                                    
                                    237
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    2Restricted
      stock grants surrendered
                                    
                                    
                                    
                                    
                                    
                                    
                                    (44
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (672
                                    )
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    (672
                                    )Stock
      compensation expense, net of forfeitures
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    6,438
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    6,438ESPP
                                    
                                    
                                    
                                    
                                    
                                    
                                    7
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    230
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    230Consideration
      for PPR
                                    
                                    
                                    
                                    
                                    
                                    
                                    573
                                    
                                    
                                    
                                    6
                                    
                                    
                                    
                                    20,897
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    20,903Consideration
      for Resolve Technology
                                    
                                    
                                    
                                    
                                    
                                    
                                    26
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1,124
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    1,125Excess
      tax benefit for exercised stock options
                                    
                                    
                                    
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    403
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    3⁄4
                                    
                                    
                                    
                                    403Balance
      at December 31, 2009
                                    
                                    
                                    
                                    
                                    
                                    
                                    20,617
                                    
                                    
                                    $
                                    206
                                    
                                    
                                    $
                                    364,635
                                    
                                    
                                    $
                                    (7,565
                                    )
                                    
                                    $
                                    1,730
                                    
                                    
                                    
                                    359,006
  See
accompanying notes.
  7
  COSTAR
GROUP, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
  Year
      Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Operating
      activities:Net
      income
                        
                        $
                        15,951
                        
                        
                        $
                        24,623
                        
                        
                        $
                        18,693Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                        
                        
                        7,778
                        
                        
                        
                        8,360
                        
                        
                        
                        7,583Amortization
                        
                        
                        8,369
                        
                        
                        
                        8,441
                        
                        
                        
                        7,093Deferred
      income tax expense, net
                        
                        
                        9,946
                        
                        
                        
                        2,148
                        
                        
                        
                        (2,428
                        )Provision
      for losses on accounts receivable
                        
                        
                        2,464
                        
                        
                        
                        4,042
                        
                        
                        
                        4,172Excess
      tax benefit from stock options
                        
                        
                        (260
                        )
                        
                        
                        (5,317
                        )
                        
                        
                        (403
                        )Stock-based
      compensation expense
                        
                        
                        5,440
                        
                        
                        
                        4,940
                        
                        
                        
                        6,460Leasehold
      write-off
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4
                        
                        
                        
                        603Changes
      in operating assets and liabilities, net of acquisitions:Accounts
      receivable
                        
                        
                        (2,944
                        )
                        
                        
                        (6,196
                        )
                        
                        
                        (1,610
                        )Interest
      receivable
                        
                        
                        (67
                        )
                        
                        
                        533
                        
                        
                        
                        97Prepaid
      expenses and other current assets
                        
                        
                        (755
                        )
                        
                        
                        1,464
                        
                        
                        
                        (1,521
                        )Deposits
      and other assets
                        
                        
                        (670
                        )
                        
                        
                        652
                        
                        
                        
                        (1,013
                        )Accounts
      payable and other liabilities
                        
                        
                        6,981
                        
                        
                        
                        (3,044
                        )
                        
                        
                        2,655Deferred
      revenue
                        
                        
                        (501
                        )
                        
                        
                        262
                        
                        
                        
                        (812
                        )Net
      cash provided by operating activities
                        
                        
                        51,732
                        
                        
                        
                        40,908
                        
                        
                        
                        39,569Investing
      activities:Purchases
      of investments
                        
                        
                        (116,609
                        )
                        
                        
                        (4,839
                        )
                        
                        
                        3⁄4Sales
      of investments
                        
                        
                        107,286
                        
                        
                        
                        63,949
                        
                        
                        
                        17,159Purchases
      of property and equipment and other assets
                        
                        
                        (14,271
                        )
                        
                        
                        (3,656
                        )
                        
                        
                        (10,544
                        )Acquisitions,
      net of cash acquired
                        
                        
                        (16,737
                        )
                        
                        
                        (3,024
                        )
                        
                        
                        (3,207
                        )Net
      cash (used in) provided by investing activities
                        
                        
                        (40,331
                        )
                        
                        
                        52,430
                        
                        
                        
                        3,408Financing
      activities:Excess
      tax benefit from stock options
                        
                        
                        260
                        
                        
                        
                        5,317
                        
                        
                        
                        403Repurchase
      of restricted stock to satisfy tax withholding obligations
                        
                        
                        (635
                        )
                        
                        
                        (695
                        )
                        
                        
                        (672
                        )Proceeds from exercise of stock options
                        
                        
                        8,536
                        
                        
                        
                        6,853
                        
                        
                        
                        2,441Net
      cash provided by financing activities
                        
                        
                        8,161
                        
                        
                        
                        11,475
                        
                        
                        
                        2,172Effect
      of foreign currency exchange rates on cash and cash
      equivalents
                        
                        
                        64
                        
                        
                        
                        (2,616
                        )
                        
                        
                        655Net
      increase in cash and cash equivalents
                        
                        
                        19,626
                        
                        
                        
                        102,197
                        
                        
                        
                        45,804Cash
      and cash equivalents at beginning of year
                        
                        
                        38,159
                        
                        
                        
                        57,785
                        
                        
                        
                        159,982Cash
      and cash equivalents at end of year
                        
                        $
                        57,785
                        
                        
                        $
                        159,982
                        
                        
                        $
                        205,786
  See
accompanying notes.
 8
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009
 
 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 and analytic services to the commercial real
estate and related business community and operates within two segments, U.S. and
International. The Company’s information, marketing and analytic 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 on the consolidated statements of cash flows 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.
Subscription-based license agreements typically have a minimum term of one year
and renew automatically.
 
 Revenue
is recognized when (1) there is persuasive evidence of an arrangement, (2) the
fee is fixed and determinable, (3) services have been rendered and payment has
been contractually earned and (4) collectability is reasonably
assured.
 
 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 and analytic 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.
 
 
 9
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 Significant
Customers
 
 No single
customer accounted for more than 5% of the Company’s revenues for each of the
years ended December 31, 2007, 2008 and 2009.
 
 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 (loss). 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, 2009 and 2008.
  Accumulated
Other Comprehensive Loss
 
 The
components of accumulated other comprehensive loss were as follows (in
thousands):
 
 Year
      Ended December 31,2008
                          
                          2009Foreign
      currency translation adjustment
                          
                          $
                          (8,521
                          )
                          
                          $
                          (4,850
                          )Accumulated
      net unrealized loss on investments, net of tax
                          
                          
                          (5,275
                          )
                          
                          
                          (2,715
                          )Total
      accumulated other comprehensive loss
                          
                          $
                          (13,796
                          )
                          
                          $
                          (7,565
                          )
  Advertising
Costs
 
 The
Company expenses advertising costs as incurred. Advertising expenses were
approximately $2.3 million, $2.8 million and $3.3 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
 
 Income
Taxes
 
 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 an
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
 
 Equity
instruments issued in exchange for employee services are accounted for using a
fair-value based method and the fair value of such equity instruments is
recognized as expense in the consolidated statements of operations.
  10
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 Stock-Based Compensation3⁄4 (Continued)
 
 Stock-based
compensation cost is measured at the grant date of the share-based awards based
on their fair values, and is recognized on a straight line basis as expense over
the vesting periods of the awards, net of an estimated forfeiture
rate.
 
 Cash
flows resulting from excess tax benefits are classified as part of cash flows
from operating and financing activities. Excess tax benefits represent tax
benefits related to stock based compensation in excess of the associated
deferred tax asset for such equity compensation.  Net cash proceeds
from the exercise of stock options were approximately $8.5 million; $6.9 million
and $2.4 million for the years ended December 31, 2007, 2008 and 2009,
respectively.  There were approximately $260,000, $5.3 million and
$403,000 of excess tax benefits realized from stock option exercises for the
years ended December 31, 2007, 2008 and 2009.
 
 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
                      
                      
                      2009Cost
      of
      revenues
                      
                      $
                      926
                      
                      
                      $
                      547
                      
                      
                      $
                      888Selling
      and
      marketing
                      
                      
                      1,118
                      
                      
                      
                      400
                      
                      
                      
                      1,125Software
      development
                      
                      
                      340
                      
                      
                      
                      423
                      
                      
                      
                      588General
      and
      administrative
                      
                      
                      3,056
                      
                      
                      
                      3,570
                      
                      
                      
                      3,859Total
                      
                      $
                      5,440
                      
                      
                      $
                      4,940
                      
                      
                      $
                      6,460
  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, 2008 and 2009, cash of approximately $518,000 and $519,000,
respectively, was held to support letters of credit for security
deposits.
 
 Investments
 
 The
Company determines the appropriate classification of debt and equity 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.
 
 
 11
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 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
                        
                        Shorter
      of lease term or useful lifeFurniture
      and office equipment
                        
                        Five
      to seven yearsResearch
      vehicles
                        
                        Five
      yearsComputer
      hardware and software
                        
                        Two
      to five years
 
 Qualifying
internal-use software 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.
 
 Goodwill,
Intangibles and Other Assets
 
 Goodwill
represents the excess of costs over the fair value of assets of businesses
acquired. 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. The
Company’s operating segments, U.S. and International, are the reporting units
tested for potential impairment.  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 the Company’s 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 the Company’s management to be commensurate
with the risk in its current business model.
 
 Intangible
assets with estimable useful lives that arose from acquisitions on or after July
1, 2001, are 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.
 
 Acquired
database technology, customer base and trade names and other are related to the
Company’s acquisitions (See Notes 3, 7 and 8). 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.
 
 
 12
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 Long-Lived
Assets
 
 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.
 
 Recent
Accounting Pronouncements
 
 In
February 2007, the FASB issued authoritative guidance on the fair value option
for financial assets and financial liabilities, 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. This guidance is
effective for fiscal years beginning on or after December 31, 2007. The Company
adopted this guidance on January 1, 2008 and has not elected to apply the fair
value option to any of its financial instruments.  The adoption of
this guidance did not have a material impact on the Company’s results of
operations or financial position.
 
 In
December 2007, the FASB issued authoritative guidance on business
combinations, which changes the accounting for any business combination the
Company enters into with an acquisition date after December 31, 2008. Under this
guidance, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. This guidance changes the accounting treatment and
disclosure for certain specific items in a business combination.  The
Company adopted this guidance on January 1, 2009 and has recorded assets
acquired and liabilities assumed at fair value.
 
 In
December 2007, the FASB issued authoritative guidance on non-controlling
interest, which establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance is effective for fiscal years beginning on or after
December 15, 2008. The Company adopted this guidance on January 1, 2009.
The adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position.
 
 In April
2008, the FASB issued authoritative guidance on existing intangibles or expected
future cash flows from those intangibles, which is effective for all fiscal
years and interim periods beginning after December 15, 2008. Early adoption of
this guidance is not permitted. This guidance 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, this guidance 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, this guidance
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
Company adopted this guidance on January 1, 2009. The adoption of this guidance
did not have a material impact on the Company’s results of operations or
financial position.
 
 13
 
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 Recent
Accounting Pronouncements3⁄4
(Continued)
 
 In June
2008, the FASB issued authoritative guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities.  This guidance clarifies that unvested share-based payment
awards with a right to receive non-forfeitable dividends are participating
securities. This guidance is effective for all annual and interim periods
beginning after December 15, 2008. Adoption of this standard will require the
two-class method of calculating basic earnings per share to the extent that
unvested share-based payments have the right to receive non-forfeitable
dividends. The Company adopted this guidance on January 1, 2009.  The
adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position.
 
 In April
2009, the FASB issued authoritative guidance related to the initial recognition,
measurement and subsequent accounting for assets and liabilities arising from
pre-acquisition contingencies in a business combination. It requires that such
assets acquired or liabilities assumed be initially recognized at fair value at
the acquisition date if fair value can be determined during the measurement
period. When fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. This guidance requires
that companies expense acquisition and deal-related costs that were previously
allowed to be capitalized.  This guidance also requires that a
systematic and rational basis for subsequently measuring and accounting for the
assets or liabilities be developed depending on their nature. This guidance was
effective for contingent assets or liabilities arising from business
combinations with an acquisition date on or after January 1,
2009.   The adoption of this guidance changes the accounting
treatment and disclosure for certain specific items in a business combination
with an acquisition date subsequent to December 31, 2008.  The Company
adopted this guidance on January 1, 2009, and expensed acquisition and
deal-related costs of approximately $700,000 associated primarily with the
acquisitions of Property and Portfolio Research, Inc. (“PPR”) and Resolve
Technology, Inc. (“Resolve Technology”).
 
 In April
2009, the FASB issued authoritative guidance for determining whether a market is
active or inactive, and whether a transaction is distressed. This guidance is
applicable to all assets and liabilities (financial and non-financial) and will
require enhanced disclosures. The Company adopted this guidance for its interim
period ending June 30, 2009. The adoption of this guidance did not have a
material impact on the Company’s results of operations or financial position,
but did require additional disclosures in the Company’s financial
statements.
 
 In April
2009, the FASB issued authoritative guidance requiring disclosures in interim
reporting periods concerning the fair value of financial instruments that were
previously only required in the annual financial statements. The Company adopted
the provisions of this guidance for the interim period ending June 30, 2009. The
adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position, but did require additional
disclosures in the Company’s financial statements.
 
 In April
2009, the FASB issued authoritative guidance that redefines what constitutes an
other-than-temporary impairment, defines credit and non-credit components of an
other-than-temporary impairment, prescribes their financial statement treatment,
and requires enhanced disclosures relating to such impairments. The Company
adopted this guidance for the interim period ending June 30, 2009. The adoption
of this guidance did not have a material impact on the Company’s results of
operations or financial position, but did require additional disclosures in the
Company’s financial statements.
 
 In May
2009, the FASB issued authoritative guidance which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued. This guidance was effective for
all interim and annual reporting periods ending after June 15, 2009. This
guidance has not and is not expected to result in significant changes in the
subsequent events that the Company reports, either through recognition or
disclosure, in its financial statements.
 
 14
 
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3⁄4
(CONTINUED)
 
 Recent
Accounting Pronouncements3⁄4
(Continued)
 
 In June
2009, the FASB issued authoritative guidance to amend the manner in which
entities evaluate whether consolidation is required for variable interest
entities (VIE).  Previously, variable interest holders were required
to determine whether they had a controlling financial interest in a VIE based on
a quantitative analysis of the expected gains and/or losses of the
entity.  The new guidance requires an enterprise with a variable
interest in a VIE to qualitatively assess whether it has a controlling financial
interest in the entity, and if so, whether it is the primary
beneficiary.  This guidance also requires that companies continually
evaluate VIEs for consolidation, rather than assessing whether consolidation is
required based upon the occurrence of triggering events.  This
guidance enhances disclosures to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This guidance will be effective
for the first annual reporting period beginning after November 15, 2009. This
guidance is not expected to materially impact the Company’s results of
operations, financial position or related disclosures.
 
 In June
2009, the FASB issued authoritative guidance which replaced the previous
hierarchy of U.S. GAAP and establishes the FASB Codification as the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. This guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. This
guidance did not materially impact the Company’s results of operations or
financial position, but did require changes to the disclosures in the Company’s
financial statements.
 
 In July
2009, the FASB issued authoritative guidance to improve the consistency with
which companies apply fair value measurements guidance to
liabilities.  This guidance is effective for interim and annual
periods beginning after September 30, 2009.  This guidance is not
expected to materially impact the Company’s results of operations, financial
position or related disclosures.
 
 In
October 2009, the FASB issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a revenue-generating
transaction where multiple deliverables exist, and provides guidance for
measuring and allocating revenue to one or more units of
accounting.  In addition, the FASB issued authoritative guidance on
arrangements that include software elements.  Under this guidance,
tangible products containing software components and non-software components
that are essential to the functionality of the tangible product will no longer
be within the scope of the software revenue recognition guidance. This guidance
is effective using the prospective application or the retrospective application
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 with earlier application permitted. The
Company is currently assessing the impacts adoption of this guidance may have on
its financial statements.
 
 In
January 2010, the FASB issued authoritative guidance that amends the disclosure
requirements related to recurring and nonrecurring fair value measurements. This
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (assets and liabilities measured using observable inputs such as
quoted prices in active markets) and Level 2 (assets and liabilities measured
using inputs other than quoted prices in active markets that are either directly
or indirectly observable) of the fair value measurement hierarchy, including the
amount and reason of the transfers. Additionally, this guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). This guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, with the exception of the
additional disclosure for Level 3 assets and liabilities, which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. This guidance is not expected to materially impact the
Company’s results of operations or financial position, but will require changes
to the disclosures in its interim and annual financial statements.
  15
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
  3.
ACQUISITIONS
 
 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 of $1.7 million paid during the third
quarter of 2009.
 
 On July
17, 2009, the Company acquired all of the issued and outstanding equity
securities of PPR, and its wholly owned subsidiary Property and Portfolio
Research Ltd., providers of real estate analysis, market forecasts and credit
risk analytics to the commercial real estate industry. The Company acquired PPR
from DMG Information, Inc. (“DMGI”) in exchange for 572,999 shares of CoStar
common stock, which had an aggregate value of approximately $20.9 million as of
the closing date. On July 17, 2009, 433,667 shares of the Company’s common stock
were issued to DMGI, and the remaining 139,332 shares were issued to DMGI on
September 28, 2009 after taking into account post-closing purchase price
adjustments.  The purchase accounting is preliminary and is subject to
change upon completion of the purchase accounting.
 The
purchase price for the PPR acquisition was allocated as follows (in
thousands):
 
 Working
      capital
                        
                        $
                        (5,479
                        )Acquired
      trade names and
      other
                        
                        
                        810Acquired
      customer
      base
                        
                        
                        5,300Acquired
      database
      technology
                        
                        
                        3,700Goodwill
                        
                        
                        16,572Total
      purchase
      consideration
                        
                        $
                        20,903
  On
October 19, 2009, the Company acquired all of the outstanding capital stock of
Resolve Technology, a Delaware corporation, for approximately $4.5 million,
consisting of approximately $3.4 million in cash and 25,886 shares, or
approximately $1.1 million, of CoStar common stock, which shares are subject to
a three-year lockup.   Additionally, the seller may be entitled
to receive (i) a potential deferred cash payout two years after closing based on
the incremental growth of Resolve Technology’s revenue, and (ii) other potential
deferred cash payouts for successful completion of operational and sales
milestones during the period from closing through June 30, 2013, which period
may be subject to extension to a date no later than December 31,
2014.   The purchase accounting is preliminary and is subject to
change upon completion of the purchase accounting.
 
 The
purchase price for the Resolve acquisition was allocated as follows (in
thousands):
 
 Purchase
      price in cash and
      stock
                        
                        $
                        4,499Deferred
      consideration
                        
                        
                        3,052Total
      purchase consideration
                        
                        $
                        7,551Working
      capital
                        
                        $
                        (550
                        )Acquired
      trade names and
      other
                        
                        
                        430Acquired
      customer
      base
                        
                        
                        890Acquired
      database
      technology
                        
                        
                        1,200Goodwill
                        
                        
                        5,581Total
      purchase
      consideration
                        
                        $
                        7,551
  16
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 3.
ACQUISITIONS 3⁄4
(CONTINUED)
 
 These
acquisitions were accounted for using purchase accounting. The purchase price
for the First CLS, Inc. acquisition was primarily allocated to acquired customer
base and goodwill. For each of the PPR and Resolve Technology acquisitions, the
purchase price was allocated to various working capital accounts, developed
technology, customer base, trademarks, non-competition agreements and
goodwill.  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 identified
intangibles will be amortized over their estimated useful
lives.  Goodwill for these acquisitions will not be amortized, but is
subject to annual impairment tests.  Goodwill is comprised of acquired
workforce. The results of operations of First CLS, Inc., PPR, and Resolve
Technology have been consolidated with those of the Company since the respective
dates of the acquisitions and are not considered material to the Company’s
consolidated financial statements. Accordingly, pro forma financial information
has not been presented for any of the acquisitions.
 
 4.
INVESTMENTS
 
 The
Company determines the appropriate classification of debt and equity 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,
2009 are as follows (in thousands):
  Maturity
                        
                        Fair
      ValueDue
      in:2010
                        
                        $
                        3,0722011-2014
                        
                        
                        16,6342015-2019
                        
                        
                        1062020
      and
      thereafter
                        
                        
                        30,100Available-for-sale
      investments
                        
                        $
                        49,912
  The
realized gains on the Company’s investments for the years ended December 31,
2008 and 2009 were approximately $329,000 and $4,000,
respectively.  The realized losses on the Company’s investments for
the years ended December 31, 2008 and 2009 were approximately $489,000 and
$5,000, 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 accumulated other comprehensive income (loss) 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.
   17
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 4.
INVESTMENTS 3⁄4
(CONTINUED)
 As of
December 31, 2009, the amortized cost basis and fair value of investments
classified as available-for-sale are as follows (in thousands):
 Amortized
      Cost
                        
                        
                        Gross
      Unrealized Gains
                        
                        
                        Gross
      Unrealized Losses
                        
                        
                        Fair
      ValueCollateralized
      debt obligations
                        
                        $
                        12,987
                        
                        
                        $
                        5
                        
                        
                        $
                        (14
                        )
                        
                        $
                        12,978Corporate
      debt securities
                        
                        
                        6,396
                        
                        
                        
                        331
                        
                        
                        
                        3⁄4
                        
                        
                        
                        6,727Residential
      mortgage-backed securities
                        
                        
                        394
                        
                        
                        
                        3⁄4
                        
                        
                        
                        (7
                        )
                        
                        
                        387Government-sponsored
      enterprise obligations
                        
                        
                        97
                        
                        
                        
                        3⁄4
                        
                        
                        
                        (1
                        )
                        
                        
                        96Auction
      rate securities
                        
                        
                        32,750
                        
                        
                        
                        3⁄4
                        
                        
                        
                        (3,026
                        )
                        
                        
                        29,724Available-for-sale
      investments
                        
                        $
                        52,624
                        
                        
                        $
                        336
                        
                        
                        $
                        (3,048
                        )
                        
                        $
                        49,912
  The
unrealized losses on the Company’s investments as of December 31, 2008 and 2009
were generated primarily from changes 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 does not intend to sell these instruments
and it is not more likely than not that the Company will be required to sell
these instruments prior to anticipated recovery, which may be maturity, it does
not consider these investments to be other-than-temporarily impaired as of
December 31, 2008 and 2009.  See Note 5 to the consolidated financial
statements for further discussion on the fair value of the Company’s financial
assets.
 The
components of the investments in an unrealized loss position for more than
twelve months consists of the following (in thousands):
  December
      31,2008
                          
                          
                          2009Aggregate
                            Fair
                            Value
                          
                          
                          Gross
      Unrealized Losses
                          
                          
                          Aggregate
                            Fair
                            Value
                          
                          
                          Gross Unrealized
                            LossesCollateralized
      debt obligations
                          
                          $
                          19,151
                          
                          
                          $
                          (1,323
                          )
                          
                          $
                          7,578
                          
                          
                          $
                          (14
                          )Corporate
      debt securities
                          
                          
                          2,558
                          
                          
                          
                          (156
                          )
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4Residential
      mortgage-backed securities
                          
                          
                          427
                          
                          
                          
                          (15
                          )
                          
                          
                          387
                          
                          
                          
                          (7
                          )Government-sponsored
      enterprise obligations
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          96
                          
                          
                          
                          (1
                          )Auction
      rate securities
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          29,724
                          
                          
                          
                          (3,026
                          )$
                          22,136
                          
                          
                          $
                          (1,494
                          )
                          
                          $
                          37,785
                          
                          
                          $
                          (3,048
                          )
 
 The
components of the investments in an unrealized loss position for less than
twelve months consists of the following (in thousands):
  December
      31,2008
                          
                          
                          2009Aggregate
                            Fair
                            Value
                          
                          
                          Gross
      Unrealized Losses
                          
                          
                          Aggregate
                            Fair
                            Value
                          
                          
                          Gross Unrealized LossesCollateralized
      debt obligations
                          
                          $
                          3,022
                          
                          
                          $
                          (84
                          )
                          
                          $
                          3⁄4
                          
                          
                          $
                          3⁄4Corporate
      debt securities
                          
                          
                          3,807
                          
                          
                          
                          (268
                          )
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4Residential
      mortgage-backed securities
                          
                          
                          36
                          
                          
                          
                          (1
                          )
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4Government-sponsored
      enterprise obligations
                          
                          
                          130
                          
                          
                          
                          (14
                          )
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4Auction
      rate securities
                          
                          
                          29,340
                          
                          
                          
                          (3,710
                          )
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4$
                          36,335
                          
                          
                          $
                          (4,077
                          )
                          
                          $
                          3⁄4
                          
                          
                          $
                          3⁄4
 18
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 4.
INVESTMENTS 3⁄4
(CONTINUED)
 
 The
gross unrealized gains on the Company’s investments as of December 31, 2008 and
2009 were approximately $128,000 and $336,000, respectively.
 
 5.
FAIR VALUE
 
 In
September 2006, the FASB issued authoritative guidance 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 this
guidance as of January 1, 2008 for financial instruments.  Although
the adoption of the guidance 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.
  There
is 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.
  The
following table represents the Company's fair value hierarchy for its financial
assets (cash, cash equivalents and investments) and liabilities measured at fair
value on a recurring basis as of December 31, 2009 (in thousands):
 
 Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3
                        
                        
                        TotalAssets:Cash
                        
                        $
                        38,721
                        
                        
                        $
                        3⁄4
                        
                        
                        $
                        3⁄4
                        
                        
                        $
                        38,721Money
      market funds
                        
                        
                        167,065
                        
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4
                        
                        
                        
                        167,065Collateralized
      debt obligations
                        
                        
                        3⁄4
                        
                        
                        
                        12,978
                        
                        
                        
                        3⁄4
                        
                        
                        
                        12,978Corporate
      debt securities
                        
                        
                        3⁄4
                        
                        
                        
                        6,727
                        
                        
                        
                        3⁄4
                        
                        
                        
                        6,727Residential
      mortgage-backed securities
                        
                        
                        3⁄4
                        
                        
                        
                        387
                        
                        
                        
                        3⁄4
                        
                        
                        
                        387Government-sponsored
      enterprise obligations
                        
                        
                        3⁄4
                        
                        
                        
                        96
                        
                        
                        
                        3⁄4
                        
                        
                        
                        96Auction
      rate securities
                        
                        
                        3⁄4
                        
                        
                        
                        3⁄4
                        
                        
                        
                        29,724
                        
                        
                        
                        29,724Total
      assets measured
      at fair value
                        
                        $
                        205,786
                        
                        
                        $
                        20,188
                        
                        
                        $
                        29,724
                        
                        
                        $
                        255,698Liabilities:Deferred
      consideration
                        
                        $
                        3⁄4
                        
                        
                        $
                        3⁄4
                        
                        
                        $
                        3,082
                        
                        
                        $
                        3,082Total liabilities
      measured
      at fair value
                        
                        $
                        3⁄4
                        
                        
                        $
                        3⁄4
                        
                        
                        $
                        3,082
                        
                        
                        $
                        3,082
 
 The
Company’s Level 2 assets consist of collateralized debt obligations, corporate
debt securities, residential mortgage-backed securities and government-sponsored
enterprise obligations, which do not have directly observable quoted prices in
active markets.  The Company’s Level 2 assets are valued using matrix
pricing.
 
 The
Company’s Level 3 assets consist of auction rate securities (“ARS”), whose
underlying assets are primarily student loan securities supported by guarantees
from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department
of Education.
  19
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 5.
FAIR VALUE 3⁄4
(CONTINUED)
 The
following table summarizes changes in fair value of the Company’s Level 3 assets
from December 31, 2007 to December 31, 2009 (in thousands):
 Auction
                            Rate
                            SecuritiesBalance
      at December 31, 2007
                          
                          $
                          53,975Unrealized
      loss included in other comprehensive loss
                          
                          
                          (3,710
                          )Net
      settlements
                          
                          
                          (20,925
                          )Balance
      at December 31, 2008
                          
                          $
                          29,340Unrealized
      gain included in other comprehensive loss
                          
                          
                          684Net
      settlements
                          
                          
                          (300
                          )Balance
      at December 31, 2009
                          
                          $
                          29,724
  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.
 
 As of
December 31, 2009, the Company held ARS with $32.8 million par value, all of
which failed to settle at auction.  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, 2009.
 
 While the
Company continues to earn interest on its ARS investments at the 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, 2009.  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, 2009, the Company determined there was a
decline in the fair value of its ARS investments of approximately $3.0
million.  The decline was deemed to be a temporary impairment and
recorded as an unrealized loss in accumulated other comprehensive loss 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 accumulated other comprehensive loss or
an other-than-temporary impairment charge to earnings on these
investments.
 
 The
Company’s Level 3 liabilities consist of a $3.1 million liability for deferred
consideration related to the October 19, 2009 acquisition of Resolve Technology.
The deferred consideration is for (i) a potential deferred cash payout two years
after closing based on the incremental growth of Resolve Technology’s revenue,
and (ii) other potential deferred cash payouts for successful completion of
operational and sales milestones during the period from closing through June 30,
2013, which period may be subject to extension to a date no later than December
31, 2014.
 
 The
following table summarizes changes in fair value of the Company’s Level 3
liabilities from December 31, 2008 to December 31, 2009 (in
thousands):
  Deferred
      ConsiderationBalance
      at December 31, 2008
                        
                        $
                        3⁄4Deferred
      consideration upon acquisition
                        
                        
                        3,052Accretion
      for 2009
                        
                        
                        30Balance
      at December 31, 2009
                        
                        $
                        3,082
   20
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 5.
FAIR VALUE 3⁄4
(CONTINUED)
 
 The
Company has used a discounted cash flow model to determine the estimated fair
value of its Level 3 liabilities as of December 31, 2009.  The
significant assumptions used in preparing the discounted cash flow model include
the discount rate, estimates for future incremental revenue growth and
probabilities for completion of operational and sales milestones.
 6.
PROPERTY AND EQUIPMENT
 Property
and equipment consists of the following (in thousands):
  December
      31,2008
                          
                          
                          2009Leasehold
      improvements
                          
                          $
                          7,808
                          
                          
                          $
                          10,333Furniture,
      office equipment and research vehicles
                          
                          
                          19,305
                          
                          
                          
                          20,279Computer
      hardware and software
                          
                          
                          27,938
                          
                          
                          
                          28,25955,051
                          
                          
                          
                          58,871Accumulated
      depreciation and amortization
                          
                          
                          (38,175
                          )
                          
                          
                          (39,709
                          )Property
      and equipment, net
                          
                          $
                          16,876
                          
                          
                          $
                          19,162
 
  7.
GOODWILL
 
 The
changes in the carrying amount of goodwill by operating segment consist of the
following (in thousands):
 United
      States
                        
                        
                        International
                        
                        
                        TotalGoodwill,
      December 31, 2007
                        
                        $
                        30,428
                        
                        
                        $
                        31,426
                        
                        
                        $
                        61,854Acquisitions
                        
                        
                        1,119
                        
                        
                        
                        3⁄4
                        
                        
                        
                        1,119Effect
      of foreign currency translation
                        
                        
                        3⁄4
                        
                        
                        
                        (8,645
                        )
                        
                        
                        (8,645
                        )Goodwill,
      December 31, 2008
                        
                        
                        31,547
                        
                        
                        
                        22,781
                        
                        
                        
                        54,328Acquisitions
                        
                        
                        23,858
                        
                        
                        
                        3⁄4
                        
                        
                        
                        23,858Effect of foreign currency translation
                        
                        
                        3⁄4
                        
                        
                        
                        2,280
                        
                        
                        
                        2,280Purchase accounting adjustment
                        
                        
                        (145
                        )
                        
                        
                        3⁄4
                        
                        
                        
                        (145
                        )Goodwill, December 31, 2009
                        
                        $
                        55,260
                        
                        
                        $
                        25,061
                        
                        
                        $
                        80,321
 The
Company recorded goodwill of approximately $1.1 million in connection with the
First CLS, Inc. acquisition in April 2008, which was decreased by $145,000 in
2009, upon completion of purchase accounting.  Approximately $1.7
million in additional goodwill was recorded in connection with the First CLS,
Inc. acquisition as a result of the payment of deferred consideration of $1.7
million in August 2009.  The Company recorded goodwill of
approximately $16.6 million in connection with the July 2009 acquisition of
PPR.  Initially in July 2009, the Company had recorded $12.1 million
in goodwill for the PPR acquisition, that was increased by $4.5 million in
December 2009 upon completion of the Company’s review of the income tax
attributes and deferred taxes related to the PPR.purchase accounting. The
Company recorded goodwill of approximately $5.6 million in connection with the
Resolve Technology acquisition in October 2009
 
 During
the fourth quarters of 2008 and 2009, the Company completed the annual
impairment test of goodwill and concluded that goodwill was not
impaired.
  21
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 8.
INTANGIBLES AND OTHER ASSETS
 
 Intangibles
and other assets consist of the following (in thousands, except amortization
period data):
 
 Weighted-AverageDecember
      31,
                          
                          
                          Amortization
      Period2008
                          
                          
                          2009
                          
                          
                          (in
      years)Building
      photography
                          
                          $
                          11,011
                          
                          
                          $
                          11,504
                          
                          
                          
                          5Accumulated
      amortization
                          
                          
                          (7,711
                          )
                          
                          
                          (9,089
                          )Building
      photography, net
                          
                          
                          3,300
                          
                          
                          
                          2,415Acquired
      database technology
                          
                          
                          20,711
                          
                          
                          
                          25,790
                          
                          
                          
                          4Accumulated
      amortization
                          
                          
                          (20,361
                          )
                          
                          
                          (21,144
                          )Acquired
      database technology, net
                          
                          
                          350
                          
                          
                          
                          4,646Acquired
      customer base
                          
                          
                          48,198
                          
                          
                          
                          55,770
                          
                          
                          
                          10Accumulated
      amortization
                          
                          
                          (37,192
                          )
                          
                          
                          (41,208
                          )Acquired
      customer base, net
                          
                          
                          11,006
                          
                          
                          
                          14,562Acquired
      trade names and other
                          
                          
                          7,744
                          
                          
                          
                          9,755
                          
                          
                          
                          7Accumulated
      amortization
                          
                          
                          (5,979
                          )
                          
                          
                          (7,988
                          )Acquired
      trade names and other, net
                          
                          
                          1,765
                          
                          
                          
                          1,767Intangibles
      and other assets, net
                          
                          $
                          16,421
                          
                          
                          $
                          23,390
 
 Amortization
expense for intangibles and other assets was approximately $8.4 million for the
years ended December 31, 2007 and 2008, respectively and $7.1 million for the
year ended December 31, 2009.
  In
the aggregate, amortization for intangibles and other assets existing as of
December 31, 2009 for future periods is expected to be approximately $3.8
million, $3.4 million, $3.3 million, $2.3 million and $1.8 million for the years
ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively.
 22
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 9.
INCOME TAXES
  The
components of the provision (benefit) for income taxes attributable to
operations consist of the following (in thousands):
  Year
      Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009Current:Federal
                          
                          $
                          574
                          
                          
                          $
                          18,289
                          
                          
                          $
                          15,194State
                          
                          
                          821
                          
                          
                          
                          3,842
                          
                          
                          
                          1,593Foreign
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          26Total
      current
                          
                          
                          1,395
                          
                          
                          
                          22,131
                          
                          
                          
                          16,813Deferred:Federal
                          
                          
                          9,716
                          
                          
                          
                          (408
                          )
                          
                          
                          (2,097
                          )State
                          
                          
                          72
                          
                          
                          
                          (52
                          )
                          
                          
                          (199
                          )Foreign
                          
                          
                          (1,237
                          )
                          
                          
                          (1,592
                          )
                          
                          
                          (122
                          )Total
      deferred
                          
                          
                          8,551
                          
                          
                          
                          (2,052
                          )
                          
                          
                          (2,418
                          )Total
      provision for income taxes
                          
                          $
                          9,946
                          
                          
                          $
                          20,079
                          
                          
                          $
                          14,395
  The
components of deferred tax assets and liabilities consists of the following (in
thousands):
 
 December
      31,2008
                        
                        
                        2009Deferred
      tax assets:Reserve
      for bad debts
                        
                        $
                        928
                        
                        
                        $
                        1,093Accrued
      compensation
                        
                        
                        2,144
                        
                        
                        
                        3,156Stock
      compensation
                        
                        
                        2,115
                        
                        
                        
                        3,168Net
      operating losses
                        
                        
                        3,077
                        
                        
                        
                        2,985Accrued reserve
                        
                        
                        3⁄4
                        
                        
                        
                        238Capital
      loss carryovers
                        
                        
                        345
                        
                        
                        
                        348Unrealized
      loss on securities
                        
                        
                        2,088
                        
                        
                        
                        1,076Other
      liabilities
                        
                        
                        1,401
                        
                        
                        
                        317Total
      deferred tax assets
                        
                        
                        12,098
                        
                        
                        
                        12,381Deferred
      tax liabilities:Prepaids
                        
                        
                        (522
                        )
                        
                        
                        (638
                        )Depreciation
                        
                        
                        (626
                        )
                        
                        
                        (587
                        )Intangibles
                        
                        
                        (2,607
                        )
                        
                        
                        (2,743
                        )Total
      deferred tax
      liabilities
                        
                        
                        (3,755
                        )
                        
                        
                        (3,968
                        )Net deferred tax
      asset
                        
                        
                        8,343
                        
                        
                        
                        8,413Valuation
      allowance
                        
                        
                        (3,047
                        )
                        
                        
                        (2,985
                        )Net deferred
      taxes
                        
                        $
                        5,296
                        
                        
                        $
                        5,428
 
 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.
 
 23
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 9. INCOME TAXES 3⁄4(CONTINUED)
 
 For
the years ended December 31, 2008 and 2009, 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 an increase of
approximately $3.0 million for the year ended December 31, 2008 and a decrease
of approximately $62,000 for the year ended December 31, 2009.The
decrease for the year ended December 31, 2009 is primarily due to the decrease
in unrealized losses on securities, which was offset by an increase in the
valuation allowance for foreign loss carryforwards. The valuation allowance for
the deferred tax asset for unrealized losses has been recorded as an adjustment
to accumulated other comprehensive loss. The valuation allowance for the years
ended December 31, 2008 and 2009 also includes an allowance for capital loss
carryforwards and for state net operating loss carryforwards.
 
 For
the year ended December 31, 2009, the Company had income of approximately $39.0
million subject to applicable U.S. federal and state income tax laws and a loss
of approximately $5.9 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):
 Year
      Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009Expected
      federal income tax provision at statutory rate
                          
                          $
                          8,805
                          
                          
                          $
                          15,646
                          
                          
                          $
                          11,581State
      income taxes, net of federal benefit
                          
                          
                          841
                          
                          
                          
                          2,505
                          
                          
                          
                          1,778Foreign
      income taxes, net effect
                          
                          
                          156
                          
                          
                          
                          497
                          
                          
                          
                          347Stock
      compensation
                          
                          
                          146
                          
                          
                          
                          87
                          
                          
                          
                          300(Decrease)
      increase in valuation allowance
                          
                          
                          (274
                          )
                          
                          
                          1,023
                          
                          
                          
                          1,446Disregarded
      entity election
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          (1,477
                          )Other
      adjustments
                          
                          
                          272
                          
                          
                          
                          321
                          
                          
                          
                          420Income
      tax expense, net
                          
                          $
                          9,946
                          
                          
                          $
                          20,079
                          
                          
                          $
                          14,395
 
 The
Company paid approximately $1.1 million, $13.4 million, and $19.4 million in
income taxes for the years ended December 31, 2007, 2008 and 2009,
respectively.
 
 The
Company has net operating loss carryforwards for international income tax
purposes of approximately $12.6 million, which do not expire.
 
 The
Company adopted FASB authoritative guidance for uncertain income tax positions
on January 1, 2007. As a result of the implementation of this guidance, 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
                          
                          $
                          217Increase
      for current year tax
      positions
                          
                          
                          44Decrease
      for prior year tax
      positions
                          
                          
                          (6
                          )Expiration
      of the statute of limitation for assessment of
      taxes
                          
                          
                          (22
                          )Unrecognized
      tax benefit as of December 31,
      2007
                          
                          $
                          233
 
 
 24
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 9. INCOME TAXES 3⁄4(CONTINUED)
 
 Unrecognized
      tax benefit as of December 31,
      2007
                          
                          $
                          233Increase
      for current year tax
      positions
                          
                          
                          1,451Decrease
      for prior year tax
      positions
                          
                          
                          (9
                          )Expiration
      of the statute of limitation for assessment of
      taxes
                          
                          
                          (117
                          )Unrecognized
      tax benefit as of December 31,
      2008
                          
                          
                          1,558Increase
      for current year tax
      positions
                          
                          
                          69Increase
      for prior year tax
      positions
                          
                          
                          257Expiration
      of the statute of limitation for assessment of
      taxes
                          
                          
                          (28
                          )Unrecognized
      tax benefit as of December 31,
      2009
                          
                          $
                          1,856
 
 Approximately
$217,000 and $142,000 of the unrecognized tax benefit as of December 31, 2009,
and 2008, respectively, would favorably affect the annual effective tax rate, if
recognized in future periods. During 2009, the Company recognized approximately
$(10,000) of interest and $20,000 of penalties, and had total accruals of
approximately $164,000 for interest and $54,000 for penalties as of December 31,
2009. 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. 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 2006 through 2008
remain open to examination. The Company’s U.K. income tax returns for tax years
2003 through 2008 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, 2007, 2008 and 2009 was approximately
$8.1 million, $8.0 million and $9.1 million, respectively.
  Future
minimum lease payments as of December 31, 2009 are as follows (in
thousands):
 
 2010
                          
                          $
                          10,5302011
                          
                          
                          6,8402012
                          
                          
                          4,9112013
                          
                          
                          2,4102014
                          
                          
                          6512015
      and thereafter
                          
                          
                          883$
                          26,225
 
 25
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 11.
COMMITMENTS AND CONTINGENCIES 3⁄4
(CONTINUED)
 
 The
Company and its wholly owned subsidiary CoStar U.K. Limited are defendants in
legal proceedings filed in England by Nokia U.K. Limited (“Nokia”) related to
obligations under an agreement to sublease certain office space from
Nokia.  Nokia served its complaint upon the Company in September 2009,
and the litigation is in its very early stages.  If there is a trial,
it is not expected to occur until October 2010. The Company has filed a response
asserting that Nokia’s claim is without merit.  The Company intends to
defend itself vigorously against Nokia’s claim.  Since the outcome of these
legal proceedings is uncertain at this time and because Nokia has requested
equitable relief as an alternative to financial relief, the Company cannot
estimate the amount of liability, if any, that could result from an adverse
resolution of this matter.
 
 On
December 23, 2008, the Company initiated a Financial Industry Regulatory
Authority (“FINRA”) arbitration against Credit Suisse First Boston (“CSFB”)
related to CSFB’s purchase of auction rate securities for the Company’s
account.  An arbitration hearing was originally scheduled to begin during
the week beginning December 7, 2009, but was rescheduled at the request of CSFB
and is now set to begin on March 8, 2010.  The Company expects to receive a
ruling on its claim during the second quarter of 2010.  Since the outcome
of this legal proceeding is uncertain at this time, the Company cannot estimate
the amount of gain or loss, if any, that could result from the resolution of
this matter.
 
 On
December 8, 2009, a former employee filed a lawsuit against the Company in the
United States District Court for the Southern District of California alleging
violations of the Fair Labor Standards Act and California state wage-and-hour
laws and seeking unspecified damages under those laws.  The complaint also
seeks to declare a class of all similarly situated employees to pursue similar
claims.  The Company believes that the lawsuit is meritless and intends to
defend itself vigorously against these claims and any certification of class
status.  Nevertheless, because the lawsuit is in its early stages, the
outcome of the claim is uncertain at this time and the Company cannot estimate
the amount of liability, if any, that could result from an adverse resolution of
this matter.
 
 In
December 2009, the Company and LoopNet, Inc. settled all pending litigation
between the companies.  No monetary consideration was involved in the
settlement.
 
 Currently,
and from time to time, the Company is involved in litigation incidental to the
conduct of its business.  In accordance with GAAP, the Company records
a provision for a liability when it is both probable that a liability has been
incurred and the amount can be reasonably estimated.  At the present
time, while it is reasonably possible that an unfavorable outcome may occur as a
result of the Company’s current litigation, management has concluded that it is
not probable that a loss has been incurred in connection with the Company’s
current litigation.  In addition, the Company is unable to estimate
the possible loss or range of loss that could result from an unfavorable outcome
in the Company’s current litigation and accordingly, the Company has not
recognized any liability in the consolidated financial statements for
unfavorable results, if any. Legal defense costs are expensed as
incurred.
 
 
 26
 
 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 decision-making being the U.S. and International, which includes
the U.K. and France. The Company’s subscription-based information services,
consisting primarily of CoStar Property Professional®,
CoStar Tenant®,
CoStar COMPS Professional®,
and FOCUSTMservices, currently generate more than 95% 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):
 
 Year
      Ended December 31,2007
                          
                          
                          2008
                          
                          2009RevenuesUnited
      States
                          
                          $
                          170,298
                          
                          
                          $
                          190,075
                          
                          
                          $
                          191,556InternationalExternal
      customers
                          
                          
                          22,507
                          
                          
                          
                          22,353
                          
                          
                          
                          18,103Intersegment
      revenue
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          898Total
      international revenue
                          
                          
                          22,507
                          
                          
                          
                          22,353
                          
                          
                          
                          19,001Intersegment
      eliminations
                          
                          
                          3⁄4
                          
                          
                          
                          3⁄4
                          
                          
                          
                          (898
                          )Total
      revenues
                          
                          $
                          192,805
                          
                          
                          $
                          212,428
                          
                          
                          $
                          209,659EBITDAUnited
      States
                          
                          $
                          32,872
                          
                          
                          $
                          58,813
                          
                          
                          $
                          47,697International
                          
                          
                          1,127
                          
                          
                          
                          (2,224
                          )
                          
                          
                          (1,186
                          )Total
      EBITDA
                          
                          $
                          33,999
                          
                          
                          $
                          56,589
                          
                          
                          $
                          46,511Reconciliation
      of EBITDA to net incomeEBITDA
                          
                          $
                          33,999
                          
                          
                          $
                          56,589
                          
                          
                          $
                          46,511Purchase
      amortization in cost of revenues
                          
                          
                          (2,170
                          )
                          
                          
                          (2,284
                          )
                          
                          
                          (2,389
                          )Purchase
      amortization in operating expenses
                          
                          
                          (5,063
                          )
                          
                          
                          (4,880
                          )
                          
                          
                          (3,412
                          )Depreciation
      and other amortization
                          
                          
                          (8,914
                          )
                          
                          
                          (9,637
                          )
                          
                          
                          (8,875
                          )Interest
      income, net
                          
                          
                          8,045
                          
                          
                          
                          4,914
                          
                          
                          
                          1,253Income
      tax expense, net
                          
                          
                          (9,946
                          )
                          
                          
                          (20,079
                          )
                          
                          
                          (14,395
                          )Net
      income
                          
                          $
                          15,951
                          
                          
                          $
                          24,623
                          
                          
                          $
                          18,693
 
 Intersegment
revenue is attributable to services performed by Property and Portfolio Research
Ltd., a wholly owned subsidiary of PPR, for PPR.  Intersegment revenue
is recorded at cost plus an agreed margin, which the Company believes
approximates fair value.  U.S. EBITDA includes a corresponding cost
for the services performed by Property and Portfolio Research Ltd. for
PPR
 
 27
 
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
 12.
                        SEGMENT
      REPORTING — (CONTINUED)
  International
EBITDA includes a corporate allocation of approximately $2.6 million, $1.1
million and $500,000for the years ended
December 31, 2007, 2008 and 2009, respectively.
  Summarized
information by segment consists of the following (in thousands):
 
 December
      31,2008
                        
                        
                        2009Property
      and equipment, netUnited
      States
                        
                        $
                        13,927
                        
                        
                        $
                        14,851International
                        
                        
                        2,949
                        
                        
                        
                        4,311Total
      property and equipment,
      net
                        
                        $
                        16,876
                        
                        
                        $
                        19,162GoodwillUnited
      States
                        
                        $
                        31,547
                        
                        
                        $
                        55,260International
                        
                        
                        22,781
                        
                        
                        
                        25,061Total
      goodwill
                        
                        $
                        54,328
                        
                        
                        $
                        80,321AssetsUnited
      States
                        
                        $
                        353,084
                        
                        
                        $
                        424,479International
                        
                        
                        43,474
                        
                        
                        
                        44,558Total
      segment assets
                        
                        $
                        396,558
                        
                        
                        $
                        469,037Reconciliation
      of segment assets to total assetsTotal
      segment
      assets
                        
                        $
                        396,558
                        
                        
                        $
                        469,037Investment
      in
      subsidiaries
                        
                        
                        (18,343
                        )
                        
                        
                        (18,344
                        )Intercompany
      receivables
                        
                        
                        (43,831
                        )
                        
                        
                        (46,114
                        )Total
      assets
                        
                        $
                        334,384
                        
                        
                        $
                        404,579LiabilitiesUnited
      States
                        
                        $
                        24,180
                        
                        
                        $
                        37,838International
                        
                        
                        40,053
                        
                        
                        
                        46,678Total
      segment
      liabilities
                        
                        $
                        64,233
                        
                        
                        $
                        84,516Reconciliation
      of segment liabilities to total liabilitiesTotal
      segment
      liabilities
                        
                        $
                        64,233
                        
                        
                        $
                        84,516Intercompany
      payables
                        
                        
                        (33,270
                        )
                        
                        
                        (38,943
                        )Total
      liabilities
                        
                        $
                        30,963
                        
                        
                        $
                        45,573
 
 28
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(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):
  Year
      Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Numerator:Net
      income
                        
                        $
                        15,951
                        
                        
                        $
                        24,623
                        
                        
                        $
                        18,693Denominator:Denominator
      for basic net income per share 3⁄4
      weighted-average outstanding shares
                        
                        
                        19,044
                        
                        
                        
                        19,372
                        
                        
                        
                        19,780Effect
      of dilutive securities:Stock
      options and restricted stock
                        
                        
                        360
                        
                        
                        
                        178
                        
                        
                        
                        145Denominator
      for diluted net income per share 3⁄4
      weighted-average outstanding shares
                        
                        
                        19,404
                        
                        
                        
                        19,550
                        
                        
                        
                        19,925Net
      income per share 3⁄4 basic
                        
                        $
                        0.84
                        
                        
                        $
                        1.27
                        
                        
                        $
                        0.95Net
      income per share 3⁄4 diluted
                        
                        $
                        0.82
                        
                        
                        $
                        1.26
                        
                        
                        $
                        0.94
  Stock
options to purchase approximately 80,400, 250,200 and 483,800 shares were
outstanding as of December 31, 2007, 2008 and 2009, 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.
  29
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(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 880,000
and 430,000 shares were available for future grant under the 2007 Plan as of
December 31, 2008 and 2009, respectively.
 30
 
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 15.
EMPLOYEE BENEFIT PLANS 3⁄4  (CONTINUED)
 
 Stock Incentive Plans3⁄4(Continued)
 
 Option
activity was as follows:
  Number
      of Shares
                        
                        
                        Range
      of Exercise Price
                        
                        
                        Weighted-
      Average
                          Exercise
      Price
                        
                        
                        Weighted-
      Average Remaining Contract Life (in years)
                        
                        
                        Aggregate
      Intrinsic Value
                          (in
      thousands)Outstanding
      at December 31, 2006
                        
                        
                        1,274,477
                        
                        
                        $
                        9.00
      - $52.13
                        
                        
                        $
                        32.23Granted
                        
                        
                        7,000
                        
                        
                        $
                        48.25
      - $54.12
                        
                        
                        $
                        50.77Exercised
                        
                        
                        (288,757
                        )
                        
                        $
                        9.00
      - $45.18
                        
                        
                        $
                        28.16Canceled
      or expired
                        
                        
                        (24,875
                        )
                        
                        $
                        21.28
      - $51.92
                        
                        
                        $
                        44.82Outstanding
      at December 31, 2007
                        
                        
                        967,845
                        
                        
                        $
                        16.20
      - $54.12
                        
                        
                        $
                        33.25Granted
                        
                        
                        93,900
                        
                        
                        $
                        43.99
      - $55.07
                        
                        
                        $
                        45.76Exercised
                        
                        
                        (198,434
                        )
                        
                        $
                        17.77
      - $45.18
                        
                        
                        $
                        33.05Canceled
      or expired
                        
                        
                        (47,725
                        )
                        
                        $
                        39.00
      - $52.13
                        
                        
                        $
                        46.36Outstanding
      at December 31, 2008
                        
                        
                        815,586
                        
                        
                        $
                        16.20
      - $55.07
                        
                        
                        $
                        33.98Granted
                        
                        
                        267,756
                        
                        
                        $
                        25.00
      - $40.13
                        
                        
                        $
                        31.05Exercised
                        
                        
                        (85,228
                        )
                        
                        $
                        17.35
      - $36.38
                        
                        
                        $
                        26.20Canceled
      or expired
                        
                        
                        (44,818
                        )
                        
                        $
                        30.06
      - $46.81
                        
                        
                        $
                        39.40Outstanding
      at December 31, 2009
                        
                        
                        953,296
                        
                        
                        $
                        16.20
      - $55.07
                        
                        
                        $
                        33.60
                        
                        
                        
                        5.54
                        
                        
                        $
                        9,119Exercisable
      at December 31, 2007
                        
                        
                        826,782
                        
                        
                        $
                        16.20
      - $52.13
                        
                        
                        $
                        31.07Exercisable
      at December 31, 2008
                        
                        
                        701,975
                        
                        
                        $
                        16.20
      - $54.12
                        
                        
                        $
                        31.84Exercisable
      at December 31, 2009
                        
                        
                        650,063
                        
                        
                        $
                        16.20
      - $55.07
                        
                        
                        $
                        33.60
                        
                        
                        
                        3.87
                        
                        
                        $
                        6,376
  The
aggregate intrinsic value is calculated as the difference between (i) the
closing price of the common stock at December 31, 2007, 2008 and 2009 and (ii)
the exercise prices of the underlying awards, multiplied by the shares
underlying options as of December 31, 2007, 2008 and 2009, that had an exercise
price less than the closing price on that date. Options to purchase 288,757,
198,434, and 85,228 shares were exercised for the years ended December 31, 2007,
2008, and 2009, respectively.  The aggregate intrinsic value of
options exercised, determined as of the date of option exercise, was $7.5
million, $3.4 million and $1.2 million, respectively.
 
 At
December 31, 2009, there was $11.3 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 2.2 years.
 
 The
weighted-average grant date fair value of each option granted during the years
ended December 2007, 2008 and 2009 was $32.70, $27.81and $12.72,
respectively.
  31
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 15.
EMPLOYEE BENEFIT PLANS 3⁄4
(CONTINUED)
 
 Stock
Incentive Plans 3⁄4
(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:
 
 Year
      Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        61
                        %
                        
                        
                        59
                        %
                        
                        
                        43
                        %Risk-free
      interest rate
                        
                        
                        4.7
                        %
                        
                        
                        3.0
                        %
                        
                        
                        2.2
                        %Expected
      life (in years)
                        
                        
                        5
                        
                        
                        
                        5
                        
                        
                        
                        3
 
 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, 2009:
 
 Options
      Outstanding
                        
                        
                        Options
      ExercisableRange
      of
                          Exercise
      Price
                        
                        
                        Number
      of Shares
                        
                        
                        Weighted-Average
      Remaining Contractual Life (in years)
                        
                        
                        Weighted-Average
      Exercise Price
                        
                        
                        Number
      of Shares
                        
                        
                        Weighted-Average
      Exercise Price$
                        16.20
      - $20.30
                        
                        
                        
                        146,522
                        
                        
                        
                        2.13
                        
                        
                        $
                        18.85
                        
                        
                        
                        146,522
                        
                        
                        $
                        18.85$
                        20.60
      - $24.88
                        
                        
                        
                        44,000
                        
                        
                        
                        2.33
                        
                        
                        $
                        23.13
                        
                        
                        
                        44,000
                        
                        
                        $
                        23.13$
                        25.00
      - $25.00
                        
                        
                        
                        133,600
                        
                        
                        
                        9.16
                        
                        
                        $
                        25.00
                        
                        
                        
                        0
                        
                        
                        $
                        0.00$
                        25.01
      - $30.06
                        
                        
                        
                        139,516
                        
                        
                        
                        3.26
                        
                        
                        $
                        28.71
                        
                        
                        
                        139,516
                        
                        
                        $
                        28.71$
                        30.75
      - $37.42
                        
                        
                        
                        108,276
                        
                        
                        
                        8.93
                        
                        
                        $
                        36.62
                        
                        
                        
                        7,063
                        
                        
                        $
                        31.86$
                        38.63
      - $39.53
                        
                        
                        
                        106,057
                        
                        
                        
                        4.00
                        
                        
                        $
                        39.10
                        
                        
                        
                        106,057
                        
                        
                        $
                        39.10$
                        39.81
      - $43.99
                        
                        
                        
                        106,375
                        
                        
                        
                        7.31
                        
                        
                        $
                        43.00
                        
                        
                        
                        50,289
                        
                        
                        $
                        42.56$
                        44.06
      - $51.92
                        
                        
                        
                        150,950
                        
                        
                        
                        5.74
                        
                        
                        $
                        47.89
                        
                        
                        
                        149,616
                        
                        
                        $
                        47.88$
                        54.12
      - $54.12
                        
                        
                        
                        3,000
                        
                        
                        
                        7.42
                        
                        
                        $
                        54.12
                        
                        
                        
                        2,000
                        
                        
                        $
                        54.12$
                        55.07
      - $55.07
                        
                        
                        
                        15,000
                        
                        
                        
                        8.67
                        
                        
                        $
                        55.07
                        
                        
                        
                        5,000
                        
                        
                        $
                        55.07$
                        16.20
      - $55.07
                        
                        
                        
                        953,296
                        
                        
                        
                        5.54
                        
                        
                        $
                        33.60
                        
                        
                        
                        650,063
                        
                        
                        $
                        33.60
 
 The
following table presents unvested restricted stock awards activity for the year
ended December 31, 2009:
 
 Number
      of Shares
                        
                        
                        Weighted-Average
      Grant Date
                          Fair
      Value per ShareUnvested
      restricted stock at December 31,
      2008
                        
                        
                        273,353
                        
                        
                        $
                        49.12Granted
                        
                        
                        236,661
                        
                        
                        $
                        29.43Vested
                        
                        
                        (67,433
                        )
                        
                        $
                        45.52Canceled
                        
                        
                        (23,234
                        )
                        
                        $
                        34.33Unvested
      restricted stock at December 31,
      2009
                        
                        
                        419,347
                        
                        
                        $
                        39.40
  32
  COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 15.
EMPLOYEE BENEFIT PLANS 3⁄4
(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 2007and 2008, the
Company matched 100% of employee contributions up to a maximum of 6% of total
compensation. In 2009, the Company matched 50% 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, 2007, 2008 and 2009 were approximately $2.3 million, $2.6 million
and $1.4 million, respectively. The Company paid administrative expenses in
connection with the 401(k) plan of approximately $22,000, $28,000 and $0 for the
years ended December 31, 2007, 2008 and 2009, 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, 2007, 2008 and 2009 were approximately
$281,000, $265,000 and $130,000, 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 78,840 and 72,237 shares available for
purchase under the plan as of December 31, 2008 and 2009, respectively and
approximately 7,400 and 6,600 shares of the Company’s common stock were
purchased during 2008 and 2009, respectively.
 
 16.
RELATED PARTY TRANSACTIONS
 
 In April
2009, the Company entered into an engagement with ghSMART & Company, Inc.
(“ghSMART”), a management consulting firm, to evaluate the Company’s sales force
senior management and provide guidance with respect to hiring and recruiting
best practices for the Company’s sales force. Randy Street, a Partner of
ghSMART, is the brother-in-law of the Company’s Chief Executive Officer. Mr.
Street has acted and will continue to act as the senior client manager on this
project. He has a less than 0.5 percent equity stake in ghSMART. Mr. Street is
paid 25 percent of the amounts paid by the Company pursuant to the engagement.
Pursuant to the engagement, the Company paid ghSMART approximately $202,000 plus
expenses. The Audit Committee reviewed and approved the engagement with ghSMART
prior to commencement of the engagement.  In October 2009, the Audit
Committee reviewed and approved phase II of the engagement for an additional
amount of approximately $255,000 plus expenses. Mr. Street will act in the same
capacity during phase II and receive the same percentage compensation for this
portion of the engagement. The Company may enter into additional engagements
with ghSMART in the future.
 
 
 33
  
 COSTAR
GROUP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 3⁄4
(CONTINUED)
 
 17.
SUBSEQUENT EVENTS
 
 In
February 2010, the Company purchased a 169,429 square-foot LEED Gold certified
office building located at 1331 L Street, NW in downtown Washington, D.C.
together with the tenancy in the underlying ground lease for the property for a
purchase price of $41.25 million in cash. This facility will be used primarily
by the Company’s U.S. segment. The Company intends to begin relocating its
Bethesda-based employees and infrastructure to the new building starting in the
second quarter of 2010. The Company currently expects to complete its relocation
by October 2010 and allow the lease of its Bethesda property to
expire.
 
 In
February 2010, the Company assumed the ground lease for the parcel of land under
a building purchased in Washington, D.C. The lease, which expires February 29,
2088, requires the payment of minimum annual rent of $778,000 through February
29, 2012, then $918,040 annually to February 29, 2024. Thereafter, the minimum
rate is adjusted to fair market value, as defined in the lease, once every 7
years.
 
 Subsequent
events have been evaluated through February 25, 2010, the date these financial
statements were issued.
   34
 Schedule
II – Valuation and Qualifying Accounts
  Years
Ended December 31, 2009, 2008, and 2007 (in thousands):
  Allowance for doubtful accounts
      and billing adjustments(1)
                          
                          Balance
      at Beginning
                            of
      Year
                          
                          
                          Charged
      to
                            Expense
                          
                          
                          Write-offs,
      Net of Recoveries
                          
                          
                          Balance
      at
                            End
      of YearYear
      ended December 31, 2009
                          
                          $
                          3,213
                          
                          
                          $
                          4,172
                          
                          
                          $
                          4,522
                          
                          
                          $
                          2,863Year
      ended December 31, 2008
                          
                          $
                          2,959
                          
                          
                          $
                          4,042
                          
                          
                          $
                          3,788
                          
                          
                          $
                          3,213Year
      ended December 31, 2007
                          
                          $
                          1,966
                          
                          
                          $
                          2,464
                          
                          
                          $
                          1,471
                          
                          
                          $
                          2,959
 
 (1)
                          Additions
      to the allowance for doubtful accounts are charged to bad debt expense.
      Additions to the allowance for billing adjustments are charged against
      revenues.
 Consolidated
Quarterly Results of Operations (Unaudited)
 
 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):
 
 2008
                          
                          
                          2009Mar.
      31
                          
                          
                          Jun.
      30
                          
                          
                          Sep.
      30
                          
                          
                          Dec.
      31
                          
                          
                          Mar.
      31
                          
                          
                          Jun.
      30
                          
                          
                          Sep.
      30
                          
                          
                          Dec.
      31Revenues
                          
                          $
                          52,264
                          
                          
                          $
                          53,478
                          
                          
                          $
                          53,757
                          
                          
                          $
                          52,929
                          
                          
                          $
                          51,370
                          
                          
                          $
                          50,064
                          
                          
                          $
                          53,590
                          
                          
                          $
                          54,635Cost
      of revenues
                          
                          
                          19,721
                          
                          
                          
                          18,341
                          
                          
                          
                          17,613
                          
                          
                          
                          17,733
                          
                          
                          
                          16,894
                          
                          
                          
                          16,744
                          
                          
                          
                          19,149
                          
                          
                          
                          20,927Gross
      margin
                          
                          
                          32,543
                          
                          
                          
                          35,137
                          
                          
                          
                          36,144
                          
                          
                          
                          35,196
                          
                          
                          
                          34,476
                          
                          
                          
                          33,320
                          
                          
                          
                          34,441
                          
                          
                          
                          33,708Operating
      expenses
                          
                          
                          25,313
                          
                          
                          
                          26,627
                          
                          
                          
                          24,864
                          
                          
                          
                          22,428
                          
                          
                          
                          23,735
                          
                          
                          
                          25,129
                          
                          
                          
                          27,490
                          
                          
                          
                          27,756Income
      from operations
                          
                          
                          7,230
                          
                          
                          
                          8,510
                          
                          
                          
                          11,280
                          
                          
                          
                          12,768
                          
                          
                          
                          10,741
                          
                          
                          
                          8,191
                          
                          
                          
                          6,951
                          
                          
                          
                          5,952Interest
      and other income, net
                          
                          
                          1,938
                          
                          
                          
                          1,243
                          
                          
                          
                          951
                          
                          
                          
                          782
                          
                          
                          
                          442
                          
                          
                          
                          322
                          
                          
                          
                          263
                          
                          
                          
                          226Income
      before income taxes
                          
                          
                          9,168
                          
                          
                          
                          9,753
                          
                          
                          
                          12,231
                          
                          
                          
                          13,550
                          
                          
                          
                          11,183
                          
                          
                          
                          8,513
                          
                          
                          
                          7,214
                          
                          
                          
                          6,178Income
      tax expense, net
                          
                          
                          4,126
                          
                          
                          
                          4,318
                          
                          
                          
                          5,586
                          
                          
                          
                          6,049
                          
                          
                          
                          5,077
                          
                          
                          
                          3,897
                          
                          
                          
                          2,889
                          
                          
                          
                          2,532Net
      income
                          
                          $
                          5,042
                          
                          
                          $
                          5,435
                          
                          
                          $
                          6,645
                          
                          
                          $
                          7,501
                          
                          
                          $
                          6,106
                          
                          
                          $
                          4,616
                          
                          
                          $
                          4,325
                          
                          
                          $
                          3,646Net
      income per share -
      basic
                          
                          $
                          0.26
                          
                          
                          $
                          0.28
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.39
                          
                          
                          $
                          0.31
                          
                          
                          $
                          0.24
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.18Net
      income per share -
      diluted
                          
                          $
                          0.26
                          
                          
                          $
                          0.28
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.38
                          
                          
                          $
                          0.31
                          
                          
                          $
                          0.24
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.18
 
 2008
                          
                          
                          2009Mar.
      31
                          
                          
                          Jun.
      30
                          
                          
                          Sep.
      30
                          
                          
                          Dec.
      31
                          
                          
                          Mar.
      31
                          
                          
                          Jun.
      30
                          
                          
                          Sep.
      30
                          
                          
                          Dec.
      31Revenues
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %Cost
      of revenues
                          
                          
                          37.7
                          
                          
                          
                          34.3
                          
                          
                          
                          32.8
                          
                          
                          
                          33.5
                          
                          
                          
                          32.9
                          
                          
                          
                          33.4
                          
                          
                          
                          35.7
                          
                          
                          
                          38.3Gross
      margin
                          
                          
                          62.3
                          
                          
                          
                          65.7
                          
                          
                          
                          67.2
                          
                          
                          
                          66.5
                          
                          
                          
                          67.1
                          
                          
                          
                          66.6
                          
                          
                          
                          64.3
                          
                          
                          
                          61.7Operating
      expenses
                          
                          
                          48.5
                          
                          
                          
                          49.8
                          
                          
                          
                          46.2
                          
                          
                          
                          42.4
                          
                          
                          
                          46.2
                          
                          
                          
                          50.2
                          
                          
                          
                          51.3
                          
                          
                          
                          50.8Income
      from operations
                          
                          
                          13.8
                          
                          
                          
                          15.9
                          
                          
                          
                          21.0
                          
                          
                          
                          24.1
                          
                          
                          
                          20.9
                          
                          
                          
                          16.4
                          
                          
                          
                          13.0
                          
                          
                          
                          10.9Interest
      and other income, net
                          
                          
                          3.7
                          
                          
                          
                          2.3
                          
                          
                          
                          1.8
                          
                          
                          
                          1.5
                          
                          
                          
                          0.9
                          
                          
                          
                          0.6
                          
                          
                          
                          0.5
                          
                          
                          
                          0.4Income
      before income taxes
                          
                          
                          17.5
                          
                          
                          
                          18.2
                          
                          
                          
                          22.8
                          
                          
                          
                          25.6
                          
                          
                          
                          21.8
                          
                          
                          
                          17.0
                          
                          
                          
                          13.5
                          
                          
                          
                          11.3Income
      tax expense, net
                          
                          
                          7.9
                          
                          
                          
                          8.0
                          
                          
                          
                          10.4
                          
                          
                          
                          11.4
                          
                          
                          
                          9.9
                          
                          
                          
                          7.8
                          
                          
                          
                          5.4
                          
                          
                          
                          4.6Net
      income
                          
                          
                          9.6
                          %
                          
                          
                          10.2
                          %
                          
                          
                          12.4
                          %
                          
                          
                          14.2
                          %
                          
                          
                          11.9
                          %
                          
                          
                          9.2
                          %
                          
                          
                          8.1
                          %
                          
                          
                          6.7
                          %
 35
 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)
Financial statement schedules:  Schedule II - Valuation and Qualifying
Accounts.
  (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 elsewhere in this
report, which list is incorporated herein by reference.
   36
 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 3rd day of March 2010.
  COSTAR
      GROUP, INC.By:
                  /s/
      Brian J. RadeckiBrian
      J. RadeckiChief Financial
      Officer
 
 37
 
 INDEX TO EXHIBITS
 
 Exhibit
      No.
                  
                  Description2.1
                  
                  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).3.1
                  
                  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”)).3.2
                  
                  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).3.3
                  
                  Amended
      and Restated By-Laws (Incorporated by reference to Exhibit 3.3 to the
      Registrant’s Report on Form 10-K for the year ended December 31,
      2008).4.1
                  
                  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).*10.1
                  
                  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).*10.2
                  
                  CoStar
      Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by
      reference to Exhibit 10.2 to the Registrant’s Report on Form 10-K for
      the year ended December 31, 2008).*10.3
                  
                  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).*10.4
                  
                  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).*10.5
                  
                  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).*10.6
                  
                  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).*10.7
                  
                  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).*10.8
                  
                  Form
      of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant
      and certain of its officers and employees (Incorporated by reference to
      Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year
      ended December 31, 2008).*10.9
                  
                  Form
      of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant
      and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to
      the Registrant’s Report on Form 10-K for the year ended December 31,
      2008).*10.10
                  
                  Form
      of 2007 Plan Nonqualified Stock Option Grant Agreement between the
      Registrant and certain of its officers and employees (Incorporated by
      reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K
      for the year ended December 31, 2008).*10.11
                  
                  Form
      of 2007 Plan Nonqualified Stock Option Grant Agreement between the
      Registrant and certain of its directors (Incorporated by reference to
      Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year
      ended December 31, 2008).*10.12
                  
                  Form
      of 2007 Plan Nonqualified Stock Option Grant Agreement between the
      Registrant and Andrew C. Florance (Incorporated by reference to
      Exhibit 10.12 to the Registrant’s Report on Form 10-K for the year
      ended December 31, 2008).*10.13
                  
                  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).*10.14
                  
                  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).*10.15
                  
                  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).
 
 
 38
 
 INDEX
TO EXHIBITS 3⁄4
(Continued)
 
 Exhibit
      No.
                  
                  Description*10.16
                  
                  First
      Amendment to Andrew C. Florance Employment Agreement, effective January 1,
      2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s
      Report on Form 10-K for the year ended December 31,
  2008).*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 10-K 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 U.K. 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
                  
                  Agreement
      for Lease between CoStar UK Limited and Wells Fargo & Company, dated
      August 25, 2009 (Incorporated by reference to Exhibit 10.26 to the
      Registrant’s Report on Form 10-K for the year ended December 31,
      2009).10.27
                  
                  Addendum
      No. 5 to Office Lease, dated as of October 23, 2009, between Newlands
      Building Venture, LLC, and CoStar Realty Information, Inc. (Incorporated
      by reference to Exhibit 10.27 to the Registrant’s Report on Form 10-K for
      the year ended December 31, 2009).10.28
                  
                  Sub-Underlease
      between CoStar UK Limited and Wells Fargo & Company, dated November
      18, 2009 (Incorporated by reference to Exhibit 10.28 to the Registrant’s
      Report on Form 10-K for the year ended December 31,
  2009).10.29
                  
                  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 (Incorporated by reference to Exhibit 21.1 to the
      Registrant’s Report on Form 10-K for the year ended December 31,
      2009).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 Sarbanes-Oxley 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 Sarbanes-Oxley Act of 2002 (filed
      herewith).
 
 *
Management Contract or Compensatory Plan or Arrangement.
 
 39