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

Years Ended December 31, 2009, 2010, and 2011 (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 Year
Year ended December 31, 2009		$	3,213			$	4,172			$	4,522			$	2,863
Year ended December 31, 2010		$	2,863			$	1,471			$	1,919			$	2,415
Year ended December 31, 2011		$	2,415			$	1,525			$	1,416			$	2,524

(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.

Additional financial statement schedules are omitted because they are not applicable or not required or because the required information is incorporated herein by reference or included in the financial statements or related notes included elsewhere in this report.

(a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this report, which list is incorporated herein by reference.

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 Washington, District of Columbia, on the 23rd day of February 2012.

	COSTAR GROUP, INC.
	By:	/s/ Andrew C. Florance
		Andrew C. Florance
		President and Chief Executive Officer

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

Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Capacity		Date
/s/ Michael R. Klein		Chairman of the Board		February 23, 2012
Michael R. Klein
/s/ Andrew C. Florance		Chief Executive Officer and		February 23, 2012
Andrew C. Florance		President and a Director
		(Principal Executive Officer)
/s/ Brian J. Radecki		Chief Financial Officer		February 23, 2012
Brian J. Radecki		(Principal Financial and Accounting Officer)
/s/ David Bonderman		Director		February 23, 2012
David Bonderman
/s/ Warren H. Haber		Director		February 23, 2012
Warren H. Haber
/s/ Christopher J. Nassetta		Director		February 23, 2012
Christopher J. Nassetta
/s/ Michael J. Glosserman		Director		February 23, 2012
Michael J. Glosserman
/s/ David J. Steinberg		Director		February 23, 2012
David J. Steinberg

INDEX TO EXHIBITS

Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of April 27, 2011, by and among CoStar Group, Inc., Lonestar Acquisition Sub, Inc. and LoopNet, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 28, 2011).
2.2		Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., CoStar Group, Inc. and Lonestar Acquisition Sub, Inc. (Incorporated by referenced to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
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 3.1 to the Registrant’s Current Report on Form 8-K filed April 6, 2011.
4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of the Registrant (Reg. No. 333-174214) filed with the Commission on June 3, 2011.
*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 99.2 to the Registrant’s Current Report on Form 8-K filed June 8, 2011.
*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).

INDEX TO EXHIBITS ¾ (CONTINUED)

Exhibit No.		Description
*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. 2011 Incentive Bonus Plan (Incorporated by referenced to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2011).
*10.15		CoStar Group, Inc. Employee Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2010).
*10.16		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).
*10.17		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).
*10.18		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).
10.19		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).
10.20		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).
10.21		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).
10.22		Purchase and Sale Agreement between 1331 L Street LLC and 1331 L Street Holdings, LLC, dated January 20, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2010).
10.23		Deed of Office Lease by and between GLL L-Street 1331, LLC and CoStar Realty Information, Inc., dated February 18, 2011, and made effective as of June 1, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011).
10.24		Purchase and Sale Agreement by and between 1331 L Street Holdings, LLC and GLL L-Street 1331, LLC, dated February 2, 2011 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011).
10.25		Voting and Support Agreement, dated as of April 27, 2011, by and among CoStar Group, Inc., LoopNet, Inc., the holders of Series A convertible preferred stock of LoopNet, Inc., certain executive officers and the directors of LoopNet, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 28, 2011).
21.1		Subsidiaries of the Registrant (filed herewith).
23.1		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

INDEX TO EXHIBITS ¾ (CONTINUED)

Exhibit No.		Description
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).
**101		The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended December, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, 2009, 2010 and 2011, respectively; (ii) Consolidated Balance Sheets at December 31, 2010 and December 31, 2011, respectively; (iii) Consolidated Statements of Stockholders’’ Equity for the years ended December 31, 2009, 2010 and 2011, respectively; (iv) Consolidated Statements of Cash Flows for years ended December 31, 2009, 2010 and 2011, respectively; (v) Notes to the Consolidated Financial Statements that have been detail tagged; and (vi) Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report).

• Management Contract or Compensatory Plan or Arrangement.

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

COSTAR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the years ended December 31, 2009, 2010 and 2011	F-4
Consolidated Balance Sheets as of December 31, 2010 and 2011	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2010 and 2011	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2010 and 2011	F-7
Notes to Consolidated Financial Statements	F-8

F-1

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, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, 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.

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, 2011, 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 23, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 23, 2012

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of CoStar Group, Inc.

We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CoStar Group, Inc.’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 Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 of CoStar Group, Inc. and our report dated February 23, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 23, 2012

F-3

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

		Year Ended December 31,
		2009				2010				2011
Revenues		$	209,659			$	226,260			$	251,738
Cost of revenues			73,714				83,599				88,167
Gross margin			135,945				142,661				163,571
Operating expenses:
Selling and marketing			42,508				52,455				61,164
Software development			13,942				17,350				20,037
General and administrative			44,248				47,776				58,362
Purchase amortization			3,412				2,305				2,237
			104,110				119,886				141,800
Income from operations			31,835				22,775				21,771
Interest and other income, net			1,253				735				798
Income before income taxes			33,088				23,510				22,569
Income tax expense, net			14,395				10,221				7,913
Net income		$	18,693			$	13,289			$	14,656
Net income per share ¾ basic		$	0.95			$	0.65			$	0.63
Net income per share ¾ diluted		$	0.94			$	0.64			$	0.62
Weighted average outstanding shares ¾ basic			19,780				20,330				23,131
Weighted average outstanding shares ¾ diluted			19,925				20,707				23,527

See accompanying notes.

F-4

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except per share data)

		December 31,
		2010				2011
ASSETS
Current assets:
Cash and cash equivalents		$	206,405			$	545,280
Short-term investments			3,722				3,515
Accounts receivable, less allowance for doubtful accounts of approximately $2,415 and $2,524 as of December 31, 2010 and 2011, respectively			13,094				16,589
Deferred income taxes, net			5,203				11,227
Income tax receivable			4,940				850
Prepaid expenses and other current assets			5,809				5,722
Total current assets			239,173				583,183
Long-term investments			29,189				24,584
Deferred income taxes, net			¾				10,224
Property and equipment, net			69,921				37,571
Goodwill			79,602				91,784
Intangibles and other assets, net			18,774				20,530
Deposits and other assets			2,989				3,159
Total assets		$	439,648			$	771,035
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,123			$	6,010
Accrued wages and commissions			12,465				16,695
Accrued expenses			18,411				12,761
Deferred gain on the sale of building			¾				2,523
Income taxes payable			¾				978
Deferred rent			¾				544
Deferred revenue			16,895				22,271
Total current liabilities			50,894				61,782
Deferred gain on the sale of building			¾				31,333
Deferred rent			4,032				16,592
Deferred income taxes, net			1,450				¾
Income taxes payable			1,770				2,151
Total liabilities			58,146				111,858
Commitments and contingencies			¾				¾
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding			¾				¾
Common stock, $0.01 par value; 30,000 shares authorized; 20,773 and 25,426 issued and outstanding as of December 31, 2010 and 2011, respectively			208				254
Additional paid-in capital			374,981				637,816
Accumulated other comprehensive loss			(8,706	)			(8,568	)
Retained earnings			15,019				29,675
Total stockholders’ equity			381,502				659,177
Total liabilities and stockholders’ equity		$	439,648			$	771,035

See accompanying notes.

F-5

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

																			Accumulated				Retained
														Additional					Other				Earnings				Total
		Comprehensive				Common Stock								Paid-In					Comprehensive				(Accumulated				Stockholders’
		Income				Shares					Amount			Capital					Income (Loss)				Deficit)				Equity
Balance at December 31, 2008							19,733			$	197			$	333,983			$	(13,796	)		$	(16,963	)		$	303,421
Net income		$	18,693				¾				¾				¾				¾				18,693				18,693
Foreign currency translation adjustment			3,671				¾				¾				¾				3,671				¾				3,671
Net unrealized gain on investments			2,560				¾				¾				¾				2,560				¾				2,560
Comprehensive income		$	24,924
Exercise of stock options							85				¾				2,232				¾				¾				2,232
Restricted stock grants							237				2				¾				¾				¾				2
Restricted stock grants surrendered							(44	)			¾				(672	)			¾				¾				(672	)
Stock compensation expense, net of forfeitures							¾				¾				6,438				¾				¾				6,438
ESPP							7				¾				230				¾				¾				230
Consideration for PPR							573				6				20,897				¾				¾				20,903
Consideration for Resolve Technology							26				1				1,124				¾				¾				1,125
Excess tax benefit for exercised stock options							¾				¾				403				¾				¾				403
Balance at December 31, 2009							20,617				206				364,635				(7,565	)			1,730				359,006
Net income		$	13,289				¾				¾				¾				¾				13,289				13,289
Foreign currency translation adjustment			(1,064	)			¾				¾				¾				(1,064	)			¾				(1,064	)
Net unrealized loss on investments			(77	)			¾				¾				¾				(77	)			¾				(77	)
Comprehensive income		$	12,148
Exercise of stock options							138				2				3,720				¾				¾				3,722
Restricted stock grants							113				¾				¾				¾				¾				¾
Restricted stock grants surrendered							(103	)			¾				(2,906	)			¾				¾				(2,906	)
Stock compensation expense, net of forfeitures							¾				¾				8,270				¾				¾				8,270
ESPP							8				¾				360				¾				¾				360
Excess tax benefit for exercised stock options							¾				¾				902				¾				¾				902
Balance at December 31, 2010							20,773				208				374,981				(8,706	)			15,019				381,502
Net income		$	14,656				¾				¾				¾				¾				14,656				14,656
Foreign currency translation adjustment			25				¾				¾				¾				25				¾				25
Net unrealized gain on investments			113				¾				¾				¾				113				¾				113
Comprehensive income		$	14,794
Exercise of stock options							198				2				6,212				¾				¾				6,214
Restricted stock grants							197				1				¾				¾				¾				1
Restricted stock grants surrendered							(63	)			¾				(2,307	)			¾				¾				(2,307	)
Stock compensation expense, net of forfeitures							¾				¾				8,056				¾				¾				8,056
Stock issued for equity offering							4,313				43				247,881				¾				¾				247,924
ESPP							8				¾				452				¾				¾				452
Excess tax benefit for exercised stock options							¾				¾				2,541				¾				¾				2,541
Balance at December 31, 2011							25,426			$	254			$	637,816			$	(8,568	)		$	29,675			$	659,177

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Year Ended December 31,
		2009				2010				2011
Operating activities:
Net income		$	18,693			$	13,289			$	14,656
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			7,583				8,607				8,435
Amortization			7,093				5,042				4,417
Deferred income tax expense, net			(2,428	)			1,675				(17,104	)
Provision for losses on accounts receivable			4,172				1,471				1,525
Excess tax benefit from stock options			(403	)			(902	)			(2,541	)
Stock-based compensation expense			6,460				8,306				8,103
Deferred consideration settlement			¾				¾				(1,207	)
Property and equipment write-off			603				674				628
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(1,610	)			(1,776	)			(4,573	)
Interest receivable			97				70				4
Income tax receivable			¾				(4,940	)			4,090
Prepaid expenses and other current assets			(1,521	)			(714	)			1,042
Deposits and other assets			(1,013	)			(385	)			(154	)
Accounts payable and other liabilities			1,531				6,690				4,030
Deferred revenue			(812	)			2,162				4,334
Net cash provided by operating activities			38,445				39,269				25,685
Investing activities:
Settlement of investments			17,159				16,854				4,911
Proceeds from sale of building, net			¾				¾				83,553
Purchases of property and equipment and other assets			(9,420	)			(57,358	)			(15,013	)
Acquisitions, net of cash acquired			(3,207	)			¾				(15,085	)
Net cash provided by (used in) investing activities			4,532				(40,504	)			58,366
Financing activities:
Excess tax benefit from stock options			403				902				2,541
Repurchase of restricted stock to satisfy tax withholding obligations			(672	)			(2,904	)			(2,307	)
Proceeds from equity offering, net of transaction costs			¾				¾				247,924
Proceeds from exercise of stock options and ESPP			2,441				4,044				6,622
Net cash provided by financing activities			2,172				2,042				254,780
Effect of foreign currency exchange rates on cash and cash equivalents			655				(188	)			44
Net increase in cash and cash equivalents			45,804				619				338,875
Cash and cash equivalents at beginning of year			159,982				205,786				206,405
Cash and cash equivalents at end of year		$	205,786			$	206,405			$	545,280

See accompanying notes.

F-7

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

1. ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar”) has created a comprehensive, proprietary database of commercial real estate information covering the United States (“U.S.”), as well as parts of the United Kingdom and France. Based on its unique database, the Company provides information and analytic services to the commercial real estate and related business community and operates within two operating segments, U.S. and International. The Company’s information 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 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 U.S. generally accepted accounting principles (“GAAP”) 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.

Revenue Recognition

The Company primarily derives revenues by 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, geography 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 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.

Significant Customers

No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2009, 2010 and 2011.

F-8

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Foreign Currency Translation

The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars as of the balance sheet dates. 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, 2010 and 2011.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):

	Year Ended December 31,
	2010				2011
Foreign currency translation adjustment		$	(5,915	)		$	(5,890	)
Accumulated net unrealized loss on investments, net of tax			(2,791	)			(2,678	)
Total accumulated other comprehensive loss		$	(8,706	)		$	(8,568	)

Advertising Costs

The Company expenses advertising costs as incurred. E-commerce advertising expenses were approximately $3.3 million, $3.0 million and $2.5 million for the years ended December 31, 2009, 2010 and 2011, 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. Interest and penalties related to income tax matters are recognized in income tax expense.

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 potentially dilutive 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.

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.

F-9

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Stock-Based Compensation¾ (Continued)

Cash flows resulting from excess tax benefits are classified as part of net 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 and the purchase of shares under the Employee Stock Purchase Plan (“ESPP”) were approximately $2.4 million, $4.0 million and $6.6 million for the years ended December 31, 2009, 2010 and 2011, respectively. There were approximately $400,000, $900,000 and $2.5 million of excess tax benefits realized from stock option and award exercises for the years ended December 31, 2009, 2010 and 2011.

Stock-based compensation expense for stock options and restricted stock under equity incentive plans and stock purchases under the ESPP included in the Company's results of operations was as follows (in thousands):

		Year Ended December 31,
		2009				2010				2011
Cost of revenues		$	888			$	1,504			$	1,635
Selling and marketing			1,125				1,518				1,339
Software development			588				949				1,130
General and administrative			3,859				4,335				3,999
Total stock-based compensation		$	6,460			$	8,306			$	8,103

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, commercial paper and U.S. Government Securities. As of December 31, 2010 and 2011, cash of approximately $190,000 and $195,000, 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 re-evaluates 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 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 variable rate debt instruments with an auction reset feature, referred to as auction rate securities (“ARS”). Investments are carried at fair 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 estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’s lack of dependence on any individual customer mitigates 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.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Accounts Receivable, Net of Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an 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:

Building		Thirty-nine years
Leasehold improvements		Shorter of lease term or useful life
Furniture and office equipment		Five to ten years
Research vehicles		Five years
Computer hardware and software		Two to five years

Qualifying internal-use software costs incurred during the application development stage, which consist primarily of outside services, purchased software license costs and internal product development 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 acquired businesses. Goodwill and intangible assets acquired in a 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, if any. 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 are reviewed at least annually 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.

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (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 estimated 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 in the amount by 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 disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Capitalized Product Development Costs

Product development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized. Costs are capitalized, to the extent that the capitalizable costs do not exceed the realizable value of such costs, until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. The Company’s capitalized product development costs had a total net book value of approximately $0 and $493,000 as of December 31, 2010 and 2011, respectively. These capitalized product development costs are included in intangible and other assets in the Company’s consolidated balance sheets. Amortization is computed using a straight-line method over the remaining estimated economic life of the product, typically three to five years after the software is ready for its intended use. No amortization expense for capitalized product development costs was recognized by the Company for the years ended December 31, 2009 and 2010, respectively. The Company amortized capitalized product development costs of approximately $80,000 for the year ended December 31, 2011.

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized as interest expense over the term of the related debt using the effective interest method. The Company capitalized debt issuance costs of approximately $0 and $900,000 as of December 31, 2010 and 2011, respectively. The debt issuance costs are associated with the financing commitment from JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”) and the credit facility entered into subsequent to December 31, 2011. See Notes 19 and 20 for additional information regarding the financing commitment from J.P. Morgan Bank and the credit facility entered into subsequent to December 31, 2011. No amortization expense for debt issuance costs was recognized by the Company for the years ended December 31, 2009, 2010 and 2011, respectively.

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“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 began expensing acquisition and deal-related costs in 2009 based on the issued authoritative guidance.

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 requires 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 resulted in significant changes in the subsequent events that the Company reports, either through recognition or disclosure, in its financial statements.

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 is effective for the first annual reporting period beginning after November 15, 2009. This guidance did not have a material impact on the Company’s results of operations, financial position or related disclosures.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Recent Accounting Pronouncements¾ (Continued)

In June 2009, the FASB issued authoritative guidance which replaced the previous hierarchy of U.S. GAAP and establishes the FASB Accounting Standards 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 have a material impact on 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 did not have a material impact on 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. This guidance did not have a material impact on the Company’s results of operations or financial position.

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, issuances, 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 did not have a material impact on the Company’s results of operations or financial position, but did require changes to the disclosures in its interim and annual financial statements.

In February 2010, the FASB issued authoritative guidance that amends the disclosure requirements related to subsequent events. This guidance includes the definition of a Securities and Exchange Commission filer, removes the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued for interim and annual periods ending after February 2010. This guidance did not have a material impact on the Company’s results of operations or financial position, but did require changes to the Company’s disclosures in its financial statements.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)

Recent Accounting Pronouncements¾ (Continued)

In April 2010, the FASB issued authoritative guidance related to the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved if the milestone is: (a) commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the item delivered; (b) relates solely to past performance; and (c) is reasonable relative to all deliverables and payment terms in the arrangement. This guidance is effective on a prospective basis for financial statements issued for interim and annual periods ending after June 15, 2010, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In May 2011, the FASB issued authoritative guidance to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). This guidance clarifies the intent of the existing fair value measurement and disclosure requirements and modifies principles and requirements for measuring fair value and for disclosing information about fair value measurement. This guidance is effective on a prospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011. 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.

In June 2011, the FASB issued authoritative guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This guidance requires changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. This guidance is effective on a retrospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011. This guidance is not expected to have a material impact on the Company’s results of operations or financial position, but will require changes to the consolidated statement of stockholders’ equity and the addition of the consolidated statement of comprehensive income.

In September 2011, the FASB issued authoritative guidance to simplify how companies test goodwill for impairment. The guidance permits a company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed for interim and annual periods beginning after December 15, 2011, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s results of operations or financial position.

In December 2011, the FASB issued authoritative guidance to defer the effective date pertaining to the presentation of reclassification adjustments out of accumulated other comprehensive income previously established in the authoritative guidance issued in June 2011. This guidance also defers the presentation of the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. This guidance is effective on a retrospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011. This guidance is not expected to have a material impact on the Company’s results of operations or financial position, but will require changes to the consolidated statement of stockholders’ equity and the addition of the consolidated statement of comprehensive income.

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

3. ACQUISITIONS

On October 25, 2011, the Company acquired Virtual Premise, Inc. (“Virtual Premise”), a Software as a Service (“SaaS”) provider of real estate information management solutions. Pursuant to the terms of the acquisition agreement, the Company paid approximately $17.2 million in cash, approximately 80% of which was paid on the closing date to the Virtual Premise stockholders and the remaining 20% of which will be held in escrow until paid 270 days after the closing date, subject to use of such funds to satisfy any post-closing net working capital adjustments or indemnification claims made prior to such date. The purchase price was later reduced by approximately $200,000 after taking into account post-closing purchase price adjustments and this amount is expected to be paid from the escrow fund to the Company.

The purchase price for the Virtual Premise acquisition was allocated as follows (in thousands):

Acquired trade names and other		$	740
Acquired customer base			3,740
Acquired database technology			810
Goodwill			12,205
Other assets and liabilities			(529	)
Total purchase consideration		$	16,966

This acquisition was accounted for using the acquisition method which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The purchase price was allocated to tradenames, customer base, database technology, goodwill and various other asset and liability accounts. The acquired customer base for the acquisition, which consists of one distinct intangible asset 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 are amortized over their estimated useful lives. Goodwill for this acquisition is not amortized, but is subject to annual impairment tests. The results of operations of Virtual Premise have been consolidated with those of the Company since the date of the acquisition and are not considered material to the Company’s consolidated financial statements. Accordingly, pro forma financial information has not been presented for the acquisition. The purchase accounting is preliminary and is subject to change.

4. INVESTMENTS

The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates 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 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 variable rate debt instruments with an auction reset feature, referred to as “ARS”. Investments are carried at fair market value.

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

4. INVESTMENTS ¾ (CONTINUED)

Scheduled maturities of investments classified as available-for-sale as of December 31, 2011 are as follows (in thousands):

Maturity			Fair Value
Due in:
2012			$	3,461
2013-2016				¾
2017-2021				54
2022 and thereafter				24,584
Available-for-sale investments			$	28,099

The realized gains on the Company’s investments for the years ended December 31, 2009, 2010 and 2011 were approximately $4,000, $11,000 and $0, respectively. The realized losses on the Company’s investments for the years ended December 31, 2009, 2010 and 2011 were approximately $5,000, $41,000 and $0, 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.

As of December 31, 2011, 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 Value
Corporate debt securities		$	3,397			$	64			$	¾			$	3,461
Government-sponsored enterprise obligations			55				¾				(1	)			54
Auction rate securities			27,325				¾				(2,741	)			24,584
Available-for-sale investments		$	30,777			$	64			$	(2,742	)		$	28,099

As of December 31, 2010, 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 Value
Collateralized debt obligations		$	46			$	¾			$	¾			$	46
Corporate debt securities			3,407				196				¾				3,603
Government-sponsored enterprise obligations			74				¾				(1	)			73
Auction rate securities			32,175				¾				(2,986	)			29,189
Available-for-sale investments		$	35,702			$	196			$	(2,987	)		$	32,911

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

4. INVESTMENTS ¾ (CONTINUED)

The unrealized losses on the Company’s investments as of December 31, 2010 and 2011 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 more likely than not that the Company will not 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, 2010 and 2011. See Note 5 to the consolidated financial statements for further discussion of the fair value of the Company’s financial assets.

The components of the Company’s investments in an unrealized loss position for more than twelve months consists of the following (in thousands):

		December 31,
		2010								2011
		Aggregate Fair Value				Gross Unrealized Losses				Aggregate Fair Value				Gross Unrealized Losses
Government-sponsored enterprise obligations		$	73			$	(1	)		$	54			$	(1	)
Auction rate securities			29,189				(2,986	)			24,584				(2,741	)
Investments in an unrealized loss position		$	29,262			$	(2,987	)		$	24,638			$	(2,742	)

The Company did not have any investments in an unrealized loss position for less than twelve months as of December 31, 2010 and 2011, respectively.

5. FAIR VALUE

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. 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 for identical assets; 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 for 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) measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

		Level 1				Level 2				Level 3				Total
Assets:
Cash		$	75,688			$	¾			$	¾			$	75,688
Money market funds			220,996				¾				¾				220,996
Commercial paper			248,596				¾				¾				248,596
Corporate debt securities			¾				3,461				¾				3,461
Government-sponsored enterprise obligations			¾				54				¾				54
Auction rate securities			¾				¾				24,584				24,584
Total assets measured at fair value		$	545,280			$	3,515			$	24,584			$	573,379

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

5. FAIR VALUE ¾ (CONTINUED)

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, 2010 (in thousands):

		Level 1				Level 2				Level 3				Total
Assets:
Cash		$	55,496			$	¾			$	¾			$	55,496
Money market funds			150,909				¾				¾				150,909
Collateralized debt obligations			¾				46				¾				46
Corporate debt securities			¾				3,603				¾				3,603
Government-sponsored enterprise obligations			¾				73				¾				73
Auction rate securities			¾				¾				29,189				29,189
Total assets measured at fair value		$	206,405			$	3,722			$	29,189			$	239,316
Liabilities:
Deferred consideration		$	¾			$	¾			$	3,222			$	3,222
Total liabilities measured at fair value		$	¾			$	¾			$	3,222			$	3,222

The Company’s Level 2 assets consist of collateralized debt obligations, corporate debt 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 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.

The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2007 to December 31, 2011 (in thousands):

		Auction Rate Securities
Balance at December 31, 2007		$	53,975
Change in unrealized loss included in other comprehensive loss			(3,710	)
Settlements			(20,925	)
Balance at December 31, 2008			29,340
Change in unrealized gain included in other comprehensive loss			684
Settlements			(300	)
Balance at December 31, 2009			29,724
Change in unrealized gain included in other comprehensive loss			40
Settlements			(575	)
Balance at December 31, 2010			29,189
Change in unrealized gain included in other comprehensive loss			245
Settlements			(4,850	)
Balance at December 31, 2011		$	24,584

F-19

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

5. FAIR VALUE ¾ (CONTINUED)

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, 2011, the Company held ARS with $27.3 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, 2011.

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. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2011. 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, 2011, the Company determined there was a decline in the fair value of its ARS investments of approximately $2.7 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/or 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.

As of December 31, 2011, the Company had no Level 3 liabilities. As of December 31, 2010, the Company held Level 3 liabilities for deferred consideration related to the Company’s October 19, 2009 acquisition of Resolve Technology, Inc. (“Resolve Technology”). The deferred consideration totaled $3.2 million as of December 31, 2010 and included (i) a potential deferred cash payment due approximately two years after closing based on the incremental growth of Resolve Technology’s revenue as of September 2011 over its revenue as of September 2009, and (ii) other potential deferred cash payments for successful completion of operational and sales milestones during the period from closing through no later than October 31, 2013, which period may be extended by the parties to a date no later than December 31, 2014. On June 24, 2011, the Company made a payment of $500,000 for the successful completion of one of the operational milestones. On September 8, 2011, the Company entered into an agreement to settle all remaining potential deferred cash payments due under the original agreement. Under the terms of the agreement, the Company made a payment of $1.6 million on September 14, 2011 to settle the entire obligation. The Company reversed the remaining $1.2 million deferred consideration as a reduction to general and administrative expense during the three months ended September 30, 2011.

The following table summarizes changes in fair value of the Company’s Level 3 liabilities from December 31, 2009 to December 31, 2011 (in thousands):

		Deferred Consideration
Balance at December 31, 2009		$	3,082
Accretion for 2010			140
Balance at December 31, 2010			3,222
Accretion for 2011			85
Payments made in 2011			(2,100	)
Adjustments made in 2011			(1,207	)
Balance at December 31, 2011		$	¾

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

5. FAIR VALUE ¾ (CONTINUED)

Prior to the settlement on September 8, 2011, the Company used a discounted cash flow model to determine the estimated fair value of its Level 3 liabilities. The significant assumptions used in preparing the discounted cash flow model included 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,
		2010				2011
Building		$	42,920			$	¾
Leasehold improvements			16,290				24,029
Furniture, office equipment and research vehicles			21,116				23,740
Computer hardware and software			24,354				28,561
			104,680				76,330
Accumulated depreciation and amortization			(34,759	)			(38,759	)
Property and equipment, net		$	69,921			$	37,571

Depreciation expense for property and equipment was approximately $7.6 million, $8.6 million and $8.4 million for the years ended December 31, 2009, 2010 and 2011.

7. GOODWILL

The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):

		United States				International				Total
Goodwill, December 31, 2009		$	55,260			$	25,061			$	80,321
Effect of foreign currency translation			¾				(719	)			(719	)
Goodwill, December 31, 2010			55,260				24,342				79,602
Acquisitions			12,205				¾				12,205
Effect of foreign currency translation			¾				(23	)			(23	)
Goodwill, December 31, 2011		$	67,465			$	24,319			$	91,784

The Company recorded goodwill of approximately $12.2 million in connection with the October 2011 acquisition of Virtual Premise.

During the fourth quarters of 2010 and 2011, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

8. INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consist of the following (in thousands, except amortization period data):

		December 31,								Weighted- Average
		2010				2011				Amortization Period (in years)
Capitalized product development cost		$	1,795			$	2,140				4
Accumulated amortization			(1,795	)			(1,647	)
Capitalized product development cost, net			¾				493
Building photography			11,771				12,031				5
Accumulated amortization			(10,311	)			(11,122	)
Building photography, net			1,460				909
Acquired database technology			26,034				25,140				4
Accumulated amortization			(22,150	)			(21,477	)
Acquired database technology, net			3,884				3,663
Acquired customer base			55,380				58,576				10
Accumulated amortization			(43,349	)			(45,055	)
Acquired customer base, net			12,031				13,521
Acquired trade names and other			9,640				10,376				7
Accumulated amortization			(8,241	)			(8,432	)
Acquired trade names and other, net			1,399				1,944
Intangibles and other assets, net		$	18,774			$	20,530

Amortization expense for intangibles and other assets was approximately $7.1 million, $5.0 million and $4.4 million for the years ended December 31, 2009, 2010 and 2011.

In the aggregate, amortization for intangibles and other assets existing as of December 31, 2011 for future periods is expected to be approximately $4.1 million, $3.2 million, $2.6 million, $2.3 million and $2.2 million for the years ending December 31, 2012, 2013, 2014, 2015 and 2016, respectively.

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (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,
		2009				2010				2011
Current:
Federal		$	15,194			$	7,061			$	22,779
State			1,593				1,424				2,226
Foreign			26				61				12
Total current			16,813				8,546				25,017
Deferred:
Federal			(2,097	)			1,706				(14,661	)
State			(199	)			(6	)			(2,425	)
Foreign			(122	)			(25	)			(18	)
Total deferred			(2,418	)			1,675				(17,104	)
Total provision for income taxes		$	14,395			$	10,221			$	7,913

The components of deferred tax assets and liabilities consists of the following (in thousands):

		December 31,
		2010				2011
Deferred tax assets:
Reserve for bad debts		$	921			$	963
Accrued compensation			3,030				3,987
Stock compensation			3,087				4,049
Net operating losses			3,365				6,129
Accrued reserve			961				5,789
Capital loss carryovers			312				¾
Unrealized loss on securities			1,074				1,025
Deferred rent			1,546				1,781
Deferred revenue			1,154				1,180
Other non-deductible liabilities			226				147
Deferred gain from sale of building			¾				13,504
Total deferred tax assets			15,676				38,554
Deferred tax liabilities:
Prepaids			(725	)			(1,054	)
Depreciation			(2,396	)			(3,546	)
Intangibles			(4,132	)			(7,233	)
Total deferred tax liabilities			(7,253	)			(11,833	)
Net deferred tax asset			8,423				26,721
Valuation allowance			(4,670	)			(5,270	)
Net deferred taxes		$	3,753			$	21,451

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

9. INCOME TAXES ¾ (CONTINUED)

For the years ended December 31, 2010 and 2011, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance for the years ended December 31, 2010 and 2011 includes an allowance for unrealized losses, foreign deferred tax assets and state net operating loss carryforwards. The valuation allowance for the deferred tax asset for unrealized losses has been recorded as an adjustment to accumulated other comprehensive loss. For the year ended December 31, 2010, the valuation allowance also included an allowance for capital losses. In 2011, the capital losses were used to offset the capital gains resulting from the Company’s sale of the office building located at 1331 L Street, NW, in downtown Washington, DC (the “DC Office Building”), which sale closed on February 18, 2011. See Note 17 for details on the sale of the building. As a result of the sale, the valuation allowance for capital losses was no longer required for the year ended December 31, 2011.

The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities and the capital loss carryovers as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. For the year ended December 31, 2011, the Company’s sale of the DC Office Building generated capital gains, but the Company does not expect to engage in similar transactions on a regular basis. The Company continues to maintain a valuation allowance as of December 31, 2011, for the unrealized losses on securities because it is uncertain as to whether the losses will be realized in a year such that the losses could be carried back to offset the gain from the Company’s sale of the DC Office Building. A valuation allowance was established for the foreign deferred tax assets due to the uncertainty of future foreign taxable income. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses before they expire.

The Company’s change in valuation allowance was an increase of approximately $1.7 million for the year ended December 31, 2010 and an increase of approximately $600,000 for the year ended December 31, 2011. The increase for the year ended December 31, 2011 is primarily due to the increase in the valuation allowance for foreign deferred tax assets of approximately $900,000, which was partially offset by approximately $300,000 for the release of the valuation allowance for the capital loss upon the Company’s sale of the DC Office Building.

The Company had U.S. income of approximately $39.0 million, $30.2 million and $29.1 million for the years ended December 31, 2009, 2010 and 2011, respectively. The Company had foreign losses of approximately $5.9 million, $6.7 million and $6.6 million for the years ended December 31, 2009, 2010 and 2011, respectively.

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

9. INCOME TAXES ¾ (CONTINUED)

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,
		2009				2010				2011
Expected federal income tax provision at statutory rate		$	11,581			$	8,229			$	7,899
State income taxes, net of federal benefit			1,778				1,372				(123	)
Foreign income taxes, net effect			347				(1,688	)			(961	)
Stock compensation			300				289				(143	)
Increase in valuation allowance			1,446				1,657				643
Disregarded entity election			(1,477	)			(992	)			¾
Nondeductible compensation			140				945				448
Other adjustments			280				409				150
Income tax expense, net		$	14,395			$	10,221			$	7,913

The Company paid approximately $19.4 million, $12.9 million, and $19.5 million in income taxes for the years ended December 31, 2009, 2010 and 2011, respectively.

The Company has net operating loss carryforwards for international income tax purposes of approximately $15.9 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $4.6 million that begin to expire in 2020 and state income tax credit carryforwards of approximately $600,000 that begin to expire in 2020.

The following tables summarize the activity related to the Company’s unrecognized tax benefits (in thousands):

Unrecognized tax benefit as of December 31, 2008		$	1,558
Increase for current year tax positions			69
Increase for prior year tax positions			257
Expiration of the statute of limitation for assessment of taxes			(28	)
Unrecognized tax benefit as of December 31, 2009			1,856
Increase for current year tax positions			70
Decrease for prior year tax positions			(116	)
Expiration of the statute of limitation for assessment of taxes			(44	)
Unrecognized tax benefit as of December 31, 2010			1,766
Increase for current year tax positions			1,243
Increase for prior year tax positions			445
Expiration of the statute of limitation for assessment of taxes			(107	)
Unrecognized tax benefit as of December 31, 2011		$	3,347

Approximately $244,000 and $1.4 million of the unrecognized tax benefit as of December 31, 2010, and 2011, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. During 2009, the Company recognized approximately $10,000 of interest benefit 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 2010, the Company recognized approximately $20,000 of interest and $7,000 of penalties, and had total accruals of approximately $184,000 for interest and $61,000 for penalties as of December 31, 2010. During 2011, the Company recognized approximately $31,000 of interest and $8,000 of penalties, and had total accruals of approximately $215,000 for interest and $69,000 for penalties as of December 31, 2011. The Company does not anticipate the amount of the unrecognized tax benefits to change significantly over the next twelve months.

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

9. INCOME TAXES ¾ (CONTINUED)

The Company’s federal and state income tax returns for tax years 2008 through 2010 remain open to examination. The Company’s U.K. income tax returns for tax years 2005 through 2010 remain open to examination.

10. 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, 2009, 2010 and 2011 was approximately $9.1 million, $12.0 million and $13.3 million, respectively.

Future minimum lease payments as of December 31, 2011 are as follows (in thousands):

2012		$	13,420
2013			11,055
2014			9,151
2015			8,882
2016			8,912
2017 and thereafter			72,854
		$	124,274

On April 27, 2011, the Company signed a definitive agreement to acquire LoopNet, Inc. (“LoopNet”) (NASDAQ: LOOP). Pursuant to the merger agreement, (a) each outstanding share of LoopNet common stock will be converted into a unit consisting of (i) $16.50 in cash (the “Cash Consideration”), without interest and (ii) 0.03702 shares of CoStar common stock (the “Stock Consideration”), and (b) each outstanding share of Series A Preferred Stock will be converted into a unit consisting of (i) the product of 148.80952 multiplied by the Cash Consideration and (ii) the product of 148.80952 multiplied by the Stock Consideration, representing a total equity value of approximately $860.0 million and an enterprise value of $762.0 million as of April 27, 2011. The transaction is subject to customary closing conditions, including antitrust clearance. The holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis, approved the adoption of the merger agreement on July 11, 2011. The Company engaged J.P. Morgan Securities LLC (“J.P. Morgan”) to act as its financial advisor in connection with the acquisition. On April 27, 2011, CoStar received a commitment letter from J.P. Morgan Bank for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million are committed, which will be available, subject to customary conditions, to fund the acquisition and the ongoing working capital needs of the Company and its subsidiaries following the transaction. See Note 20 for additional information regarding the financing commitment from J.P. Morgan Bank and the credit facility entered into subsequent to December 31, 2011.

The Company is obligated to pay $4.0 million to J.P. Morgan if the acquisition closes. Completion of the merger remains subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”) and other customary closing conditions. As of December 31, 2011, the parties have not yet reached agreement with the Federal Trade Commission (the “FTC”) on the terms of a consent order with the FTC, and there can be no assurance that such agreement will be reached in a timely manner or at all. See Note 20 for further details on the waiting period imposed by the HSR Act and discussions with the FTC that occurred subsequent to December 31, 2011.

In certain circumstances set forth in the merger agreement, if the merger is not consummated or the agreement is terminated, LoopNet may be obligated to pay the Company a termination fee of $25.8 million. Similarly, in certain circumstances set forth in the merger agreement, if the merger is not consummated or the agreement is terminated, the Company may be obligated to pay LoopNet a termination fee of $51.6 million. See Note 19 for further details on the pending acquisition and Notes 19 and 20 for additional information regarding the waiting period imposed by the HSR Act.

F-26

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES ¾ (CONTINUED)

In May 2011, LoopNet, the Board of Directors of LoopNet (“the LoopNet Board”) and/or the Company were named as defendants in three purported class action lawsuits brought by alleged LoopNet stockholders challenging LoopNet’s proposed merger with the Company. The stockholder actions allege, among other things, that (i) each member of the LoopNet Board breached his fiduciary duties to LoopNet and its stockholders in authorizing the sale of LoopNet to the Company, (ii) the merger does not maximize value to LoopNet stockholders, (iii) LoopNet and the Company have made incomplete or materially misleading disclosures about the proposed transaction and (iv) LoopNet and the Company aided and abetted the breaches of fiduciary duty allegedly committed by the members of the LoopNet Board. The stockholder actions seek class action certification and equitable relief, including an injunction against consummation of the merger. The parties have stipulated to the consolidation of the actions, and to permit the filing of a consolidated complaint. In June 2011, counsel for the parties entered into a memorandum of understanding in which they agreed on the terms of a settlement of this litigation, which could result in a loss to the Company of approximately $100,000. The proposed settlement is conditioned upon, among other things, the execution of an appropriate stipulation of settlement, consummation of the merger and final approval of the proposed settlement by the court.

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 one or more of the Company’s current litigation matters, management has concluded that it is not probable that a loss has been incurred in connection with the Company’s current litigation other than as described above. In addition, other than as described above, 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, other than described above. Legal defense costs are expensed as incurred.

11. SEGMENT REPORTING

The Company manages its 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 FOCUSTM services, currently generate approximately 94% 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 operating segment EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating 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.

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

11. SEGMENT REPORTING¾ (CONTINUED)

Summarized information by operating segment was as follows (in thousands):

		Year Ended December 31,
		2009				2010			2011
Revenues
United States		$	191,556			$	208,463			$	233,381
International
External customers			18,103				17,797				18,357
Intersegment revenue			898				1,266				1,140
Total international revenue			19,001				19,063				19,497
Intersegment eliminations			(898	)			(1,266	)			(1,140	)
Total revenues		$	209,659			$	226,260			$	251,738
EBITDA
United States		$	47,697			$	39,607			$	38,099
International			(1,186	)			(3,183	)			(3,476	)
Total EBITDA		$	46,511			$	36,424			$	34,623
Reconciliation of EBITDA to net income
EBITDA		$	46,511			$	36,424			$	34,623
Purchase amortization in cost of revenues			(2,389	)			(1,471	)			(1,353	)
Purchase amortization in operating expenses			(3,412	)			(2,305	)			(2,237	)
Depreciation and other amortization			(8,875	)			(9,873	)			(9,262	)
Interest income, net			1,253				735				798
Income tax expense, net			(14,395	)			(10,221	)			(7,913	)
Net income		$	18,693			$	13,289			$	14,656

Intersegment revenue is attributable to services performed for the Company’s wholly owned subsidiary, Property and Portfolio Research, Inc. (“PPR”), by Property and Portfolio Research Ltd., a wholly owned subsidiary of PPR. Intersegment revenue is recorded at an amount 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.

International EBITDA includes a corporate allocation of approximately $500,000, $400,000 and $800,000 for the years ended December 31, 2009, 2010 and 2011, respectively. The corporate allocation represents costs incurred for U.S. employees involved in management and expansion activities of the Company’s International operating segment.

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

11. SEGMENT REPORTING¾ (CONTINUED)

Summarized information by operating segment consists of the following (in thousands):

		December 31,
		2010				2011
Property and equipment, net
United States		$	67,076			$	35,044
International			2,845				2,527
Total property and equipment, net		$	69,921			$	37,571
Goodwill
United States		$	55,260			$	67,465
International			24,342				24,319
Total goodwill		$	79,602			$	91,784
Assets
United States		$	469,449			$	808,930
International			39,038				38,061
Total operating segment assets		$	508,487			$	846,991
Reconciliation of operating segment assets to total assets
Total operating segment assets		$	508,487			$	846,991
Investment in subsidiaries			(18,344	)			(18,344	)
Intercompany receivables			(50,495	)			(57,612	)
Total assets		$	439,648			$	771,035
Liabilities
United States		$	52,482			$	107,776
International			47,944				53,221
Total operating segment liabilities		$	100,426			$	160,997
Reconciliation of operating segment liabilities to total liabilities
Total operating segment liabilities		$	100,426			$	160,997
Intercompany payables			(42,280	)			(49,139	)
Total liabilities		$	58,146			$	111,858

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

12. 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.

13. 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,
		2009				2010				2011
Numerator:
Net income		$	18,693			$	13,289			$	14,656
Denominator:
Denominator for basic net income per share ¾ weighted-average outstanding shares			19,780				20,330				23,131
Effect of dilutive securities:
Stock options and restricted stock			145				377				396
Denominator for diluted net income per share ¾ weighted-average outstanding shares			19,925				20,707				23,527
Net income per share ¾ basic		$	0.95			$	0.65			$	0.63
Net income per share ¾ diluted		$	0.94			$	0.64			$	0.62

Stock options to purchase approximately 483,800, 167,000 and 2,300 shares that were outstanding as of December 31, 2009, 2010 and 2011, respectively, 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 during the period and, therefore, the effect would have been anti-dilutive.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

14. 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 provided 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 could 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 was determined by the Board of Directors and was 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 (including an increase of 1,300,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 2, 2010): (a) 2,300,000 shares of common stock, plus (b) 121,875 shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan), and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards issued under the 2007 Plan prior to that date. Approximately 1.9 million and 1.3 million shares were available for future grant under the 2007 Plan as of December 31, 2010 and 2011, respectively.

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

14. EMPLOYEE BENEFIT PLANS ¾ (CONTINUED)

Stock Incentive Plans ¾ (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, 2008			815,586			$16.20 - 55.07				$33.98
Granted			267,756			$25.00 - 40.13				$31.05
Exercised			(85,228	)		$17.35 - 36.38				$26.20
Canceled or expired			(44,818	)		$30.06 - 46.81				$39.40
Outstanding at December 31, 2009			953,296			$16.20 - 55.07				$33.60
Granted			160,892			$40.06 - 54.51				$43.49
Exercised			(137,724	)		$16.20 - 45.18				$27.01
Canceled or expired			(30,768	)		$18.31 - 44.86				$37.83
Outstanding at December 31, 2010			945,696			$17.34 - 55.07				$36.10
Granted			111,470			$57.16 - 60.23				$57.28
Exercised			(198,132	)		$17.97 - 54.51				$31.37
Canceled or expired			(11,932	)		$36.48 - 54.51				$40.65
Outstanding at December 31, 2011			847,102			$17.34 - 60.23				$39.93					5.72			$22,701
Exercisable at December 31, 2009			650,063			$16.20 - 55.07				$33.60
Exercisable at December 31, 2010			609,274			$17.34 - 55.07				$35.21
Exercisable at December 31, 2011			558,849			$17.34 - 55.07				$37.15					4.35			$16,531

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at December 31, 2009, 2010 and 2011 and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of December 31, 2009, 2010 and 2011, that had an exercise price less than the closing price on that date. Options to purchase 85,228, 137,724 and 198,132 shares were exercised for the years ended December 31, 2009, 2010, and 2011, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was $1.2 million, $2.5 million and $6.1 million for the years ended December 31, 2009, 2010, and 2011, respectively.

At December 31, 2011, there was $14.2 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 2.5 years.

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

14. EMPLOYEE BENEFIT PLANS ¾ (CONTINUED)

Stock Incentive Plans ¾ (Continued)

The weighted-average grant date fair value of each option granted during the years ended December 2009, 2010 and 2011 using the Black-Scholes option-pricing model was $12.72, $16.54 and $21.57 respectively.

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,
		2009				2010				2011
Dividend yield			0	%			0	%			0	%
Expected volatility			43	%			40	%			40	%
Risk-free interest rate			2.2	%			2.2	%			2.2	%
Expected life (in years)			5				5				5

The assumptions above and the estimation of expected forfeitures are based on multiple facts, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of the Company’s stock price.

The following table summarizes information regarding options outstanding at December 31, 2011:

			Options Outstanding						Options Exercisable
Range of Exercise Price			Number of Shares		Weighted-Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
$	17.34 - 23.08		45,400		0.79		$20.68		45,400		$20.68
$	25.00 - 25.00		117,379		7.17		$25.00		74,810		$25.00
$	28.15 - 30.06		85,290		1.71		$28.76		85,290		$28.76
$	36.48 - 39.00		149,763		4.76		$38.10		113,470		$38.41
$	39.53 - 42.10		21,597		3.39		$39.82		17,221		$39.74
$	42.29 - 42.29		102,767		8.19		$42.29		31,698		$42.29
$	42.71 - 44.86		116,596		5.35		$44.12		104,667		$44.24
$	45.18 - 55.07		96,840		5.63		$52.25		86,293		$51.97
$	57.16 - 57.16		102,700		9.17		$57.16		¾		¾
$	58.06 - 60.23		8,770		9.18		$58.63		¾		¾
$	17.34 - 60.23		847,102		5.72		$39.93		558,849		$37.15

F-33

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

14. EMPLOYEE BENEFIT PLANS ¾ (CONTINUED)

Stock Incentive Plans ¾ (Continued)

The following table presents unvested restricted stock awards activity for the year ended December 31, 2011:

		Number of Shares				Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock at December 31, 2010			314,374			$	39.09
Granted			196,827			$	60.91
Vested			(122,144	)		$	39.16
Canceled			(22,466	)		$	43.37
Unvested restricted stock at December 31, 2011			366,591			$	50.52

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 2009, 2010 and 2011, 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, 2009, 2010 and 2011 were approximately $1.4 million, $1.5 million and $1.9 million, respectively. The Company did not have administrative expenses in connection with the 401(k) plan for the years ended December 31, 2009, 2010 and 2011, respectively.

Employee Pension Plan

The Company maintains a company personal pension plan for all eligible employees in the Company’s U.K. offices. 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, 2009, 2010 and 2011 were approximately $130,000, $160,000 and $160,000, 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 specified amounts 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 64,106 and 56,339 shares available for purchase under the ESPP as of December 31, 2010 and 2011, respectively and approximately 8,100 and 7,800 shares of the Company’s common stock were purchased under the ESPP during 2010 and 2011, respectively.

15. LEASE RESTRUCTURING CHARGES

Effective September 24, 2010, the Company consolidated its three facilities located in the Boston, Massachusetts area, including the facilities used by CoStar, PPR, and Resolve Technology, into one facility. The consolidation of the facilities resulted in a lease restructuring charge of approximately $1.3 million recorded in general and administrative expense in the third quarter of 2010. The third quarter lease restructuring charge included amounts for the abandonment of certain lease space as well as the impairment of leasehold improvements totaling approximately $100,000.

F-34

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

15. LEASE RESTRUCTURING CHARGES ¾ (CONTINUED)

Effective July 18, 2011, the Company consolidated its White Marsh, Maryland office with its Columbia, Maryland and Washington, DC offices. The consolidation of the facility resulted in a lease restructuring charge of approximately $1.5 million recorded in general and administrative expense in the third quarter of 2011. The third quarter lease restructuring charge included amounts for the abandonment of certain lease space as well as the impairment of leasehold improvements, furniture and other equipment totaling approximately $500,000.

The amount of the lease restructuring charges recorded were based upon management’s best estimate of amounts and timing of certain events that are expected to occur in the future. It is possible that the actual outcome of these events may differ from estimates. The Company reassesses the expected cost to complete the consolidation of the facilities at the end of each reporting period and adjusts the restructuring accrual as necessary to reflect any changes. As a result of reassessments, for the year ended December 31, 2011, an adjustment of approximately $195,000 was recorded due to changes in the Company’s assumed sublease income over the remaining lease term. The Company did not record an adjustment to the initial lease restructuring charges for the years ended December 31, 2009 and 2010, respectively. Any future changes will be made to the restructuring accrual when any such differences become determinable.

The following table summarizes the amount included in accrued expenses related to these restructuring charges from December 31, 2009 to December 31, 2011 (in thousands):

		Lease Restructuring Accrual
Accrual balance at December 31, 2009		$	¾
Original charge for Boston offices			1,160
Rent payments made in 2010			(229	)
Accrual balance at December 31, 2010			931
Original charge for White Marsh office			959
Rent payments made in 2011			(1,319	)
Adjustment for assumed sublease income and accretion in 2011			262
Accrual balance at December 31, 2011		$	833

16. PURCHASE OF BUILDING

In February 2010, the Company purchased a 169,429 square-foot office building located at 1331 L Street, NW in downtown Washington, DC together with the tenancy in the underlying ground lease for the property for a purchase price of $41.25 million in cash. This facility is being used primarily by the Company’s U.S. segment. The Company began relocating its Bethesda-based employees and infrastructure to the new building starting in July 2010 and completed its relocation by October 15, 2010.

In connection with the purchase of the building, the Company assumed the ground lease for the parcel of land under the building. The lease, which expires February 29, 2088, requires the payment of minimum annual rent of $778,000 through February 29, 2012, then approximately $918,000 annually through February 29, 2024. Thereafter, the minimum rate is adjusted to fair market value, as defined in the lease, once every 7 years.

The purchase of the building was accounted for as an asset acquisition. The total purchase price of $41.25 million, plus $1.7 million of direct transaction costs was allocated to the building. No other significant assets or liabilities were acquired in this transaction. See Note 17 for further details on the subsequent sale of the building in February 2011.

F-35

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

17. SALE OF BUILDING

On February 2, 2011, 1331 L Street Holdings, LLC (“Holdings”), a wholly owned subsidiary of the Company, and GLL L-Street 1331, LLC (“GLL”), an affiliate of Munich-based GLL Real Estate Partners GmbH, entered into a purchase and sale agreement pursuant to which (i) Holdings agreed to sell to GLL its interest in the 169,429 square-foot office building located at 1331 L Street, NW, in downtown Washington, DC, and (ii) CoStar Realty Information, Inc. (“CoStar Realty”), a wholly owned subsidiary of the Company, agreed to enter into a lease expiring May 31, 2025 with GLL to lease back 149,514 square feet of the office space located in this building, which the Company continues to use as its corporate headquarters. The closing of the sale took place on February 18, 2011. The aggregate consideration paid by GLL to Holdings pursuant to the purchase and sale agreement was $101.0 million in cash, $15.0 million of which was designated to fund additional build-out and planned improvements at the building. Approximately $12.5 million of the $15.0 million additional build-out is recorded as a leasehold improvement in property and equipment. The carrying value of the building at the time of the sale was approximately $47.5 million. Pursuant to the purchase and sale agreement, Holdings entered into an assignment and assumption agreement with GLL regarding the existing ground lease.

The office lease will expire May 31, 2025. The initial base rent is $38.50 per square foot of occupied space, escalating 2.5% per year commencing June 1, 2011. Minimum lease payments will be approximately $6.0 million, $6.1 million, $6.3 million, $6.4 million and $6.6 million for fiscal years 2012 through 2016, respectively, and a total of $62.6 million from 2017 to the end of the lease term.

The transaction qualified for sale-leaseback accounting under an operating lease as all of the risks and rewards of ownership were transferred to the buyer upon closing of the transaction and the leaseback arrangement did not include any form of continuing involvement, other than a normal leaseback. The $36.0 million gain on sale has been deferred and is being recorded as a reduction in rent expense over the term of the lease in accordance with the accounting guidance for sale-leaseback transactions. The Company recorded approximately $2.2 million from the gain on sale for the year ended December 31, 2011. The closing costs incurred in connection with the sale-leaseback agreement were approximately $2.4 million, primarily due to legal costs, broker commissions and transfer costs which were recorded as a reduction to the gain in the first quarter of 2011.

18. EQUITY OFFERING

During June 2011, the Company completed an equity offering of 4,312,500 shares of common stock for $60.00 per share. Net proceeds from the equity offering were approximately $247.9 million, after deducting approximately $10.4 million of underwriting discounts and commissions and offering expenses of approximately $500,000. The Company intends to use the net proceeds from the sale of the securities to fund a portion of the cash consideration payable in connection with its acquisition of LoopNet and, to the extent that any proceeds remain thereafter, or the acquisition is not completed, for general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, investments in the Company’s subsidiaries, possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock. The net proceeds may be temporarily invested or applied to repay short-term or revolving debt prior to use.

F-36

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

19. PENDING ACQUISITION

On April 27, 2011, the Company signed a definitive agreement to acquire LoopNet, Inc. Pursuant to the merger agreement, (a) each outstanding share of LoopNet common stock will be converted into a unit consisting of (i) $16.50 in cash, without interest and (ii) 0.03702 shares of CoStar common stock, and (b) each outstanding share of Series A Preferred Stock will be converted into a unit consisting of (i) the product of 148.80952 multiplied by the Cash Consideration and (ii) the product of 148.80952 multiplied by the Stock Consideration, representing a total equity value of approximately $860.0 million and an enterprise value of $762.0 million as of April 27, 2011. The boards of directors of both companies have unanimously approved the transaction, and the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis, approved the adoption of the merger agreement on July 11, 2011. The transaction remains subject to customary closing conditions, including antitrust clearance. On April 27, 2011, CoStar received a commitment letter from J.P. Morgan Bank for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million are committed, which will be available, subject to customary conditions, to fund the acquisition and the ongoing working capital needs of the Company and its subsidiaries following the transaction. As a result of the pending LoopNet acquisition, the Company recorded approximately $14.2 million in acquisition-related costs in general and administrative expense for the year ended December 31, 2011. See Note 20 for additional information regarding the financing commitment from J.P. Morgan Bank and the credit facility entered into subsequent to December 31, 2011.

As previously disclosed in the proxy statement/prospectus dated June 6, 2011, both the Company and LoopNet filed notification and report forms with the Department of Justice and the Federal Trade Commission (the “FTC”) pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”), on May 31, 2011. As a result, the waiting period under the HSR Act with respect to the proposed merger between the Company and LoopNet was scheduled to expire on June 30, 2011. As previously reported in a Current Report on Form 8-K, on June 30, 2011, CoStar and LoopNet each received a request for additional information (commonly referred to as a “second request”) from the FTC with respect to the proposed merger of Lonestar Acquisition Sub, Inc., a wholly-owned subsidiary of CoStar, and LoopNet (the “merger”). At the FTC’s request, CoStar and LoopNet subsequently agreed to extend the waiting period imposed by the HSR Act from 30 to 60 days after the date of substantial compliance with the second request unless that period is extended voluntarily by the parties or terminated sooner by the FTC. On November 4, 2011, each of the Company and LoopNet certified as to its substantial compliance with the second request. Completion of the merger remains subject to the expiration or termination of the waiting period under the HSR Act and other customary closing conditions. See Note 20 for further details on the status of the pending acquisition and the waiting period imposed by the HSR Act subsequent to December 31, 2011.

The transaction is not subject to a financing condition. In certain circumstances set forth in the merger agreement, if the merger is not consummated or the agreement is terminated, LoopNet may be obligated to pay the Company a termination fee of $25.8 million. Similarly, in certain circumstances set forth in the merger agreement, if the merger is not consummated or the agreement is terminated, the Company may be obligated to pay LoopNet a termination fee of $51.6 million. The Company is not in a position yet to estimate the financial impact the proposed merger will have on its operations.

20. SUBSEQUENT EVENTS

As previously disclosed on January 3, 2012, the Company and LoopNet voluntarily agreed to further extend the waiting period imposed by the HSR Act on a 45-day rolling basis to allow them to engage in discussions with the FTC to determine whether there is a possible basis for, and to discuss the possible terms of, a mutually acceptable consent order that would allow the merger to close. On January 31, 2012, the Company and LoopNet mutually agreed to extend the date after which either party may individually elect to terminate the merger agreement from January 31, 2012 to April 30, 2012. As of December 31, 2011, the parties have not yet reached agreement with the FTC on the terms of such a consent order, and there can be no assurance that such agreement will be reached in a timely manner or at all. Completion of the merger remains subject to the expiration or termination of the waiting period under the HSR Act and other customary closing conditions. As of December 31, 2011, discussions are ongoing with the FTC and neither the Company and LoopNet, on the one hand, nor the FTC Staff, on the other hand, has triggered commencement of the 45-day period.

F-37

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)

20. SUBSEQUENT EVENTS ¾ (CONTINUED)

On February 16, 2012, the Company entered into a credit agreement (the “Credit Agreement”) by and among CoStar, as borrower, CoStar Realty Information, Inc., as co-borrower, the lenders from time to time party thereto and JPMorgan Bank, as administrative agent. The Credit Agreement provides for a $175.0 million term loan facility and a $50.0 million revolving credit facility, each with a term of five years. The obligation of the lenders to make the loans under the Credit Agreement is subject to the simultaneous closing of the merger with LoopNet and the satisfaction of certain other conditions precedent. The Company expects to use the proceeds of the term loan facility on the date on which such conditions are satisfied along with net proceeds from the equity offering in June 2011 to pay a portion of the merger consideration and transaction costs related to the merger. The proceeds of the revolving credit facility may be used, on the closing date, to pay for transaction costs related to the merger and, thereafter, for working capital and other general corporate purposes of CoStar and its subsidiaries.

The revolving credit facility includes a subfacility for swingline loans of up to $5.0 million and up to $10.0 million of the revolving credit facility is available for the issuance of letters of credit. The term loan facility will amortize in quarterly installments in amounts resulting in an annual amortization of 5% during the first year, 10% during the second year, 15% during the third year, 20% during the fourth year and 50% during the fifth year after the closing date. The loans under the Credit Agreement will bear interest, at the Company’s option, either (i) during any interest period selected by CoStar, at the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus a spread of 2.00% per annum, or (ii) at the greatest of (x) the prime rate from time to time announced by J.P. Morgan Bank, (y) the federal funds effective rate plus ½ of 1% and (z) LIBOR for a one-month interest period plus 1.00%, plus a spread of 1.00% per annum. If an event of default occurs under the Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the Credit Agreement will be guaranteed by all material subsidiaries of the Company and secured by a lien on substantially all of the assets of the Company and its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents to be entered into on the closing date.

The original commitment letter from J.P. Morgan Bank received on April 27, 2011 remains outstanding and available, subject to customary conditions, to fund the LoopNet acquisition and the ongoing working capital needs of the Company and its subsidiaries following the LoopNet transaction until the earlier of funding of the term loan facility into escrow pursuant to the Credit Agreement, if applicable, and the business day after the beginning of the marketing period under the merger agreement. However, the Company does not currently anticipate utilizing that original commitment.

The Credit Agreement requires the Company to maintain a debt service coverage ratio of at least 1.5 to 1.0 and a total leverage ratio not exceeding 3.25 to 1.00 during the first two fiscal quarters after the closing date, 3.00 to 1.00 during the third and fourth full fiscal quarters after the closing date, 2.75 to 1.00 during the period from the fifth to the eighth full fiscal quarter after the closing date and 2.50 to 1.00 thereafter. The Credit Agreement also includes other covenants, including covenants that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries (i) to incur additional indebtedness, (ii) to create, incur, assume or permit to exist any liens, (iii) to enter into mergers, consolidations or similar transactions, (iv) to make investments and acquisitions, (v) to make certain dispositions of assets, (vi) to make dividends, distributions and prepayments of certain indebtedness, and (vii) to enter into certain transactions with affiliates.

In connection with obtaining the facility pursuant to the Credit Agreement, the Company expects to incur approximately $10.6 million in debt issuance costs, which will be capitalized and amortized as interest expense over the term of the Credit Agreement using the effective interest method. The debt issuance costs will be comprised of approximately $9.1 million in underwriting fees and approximately $1.5 million primarily related to legal fees associated with the debt issuance. The Company has incurred approximately $900,000 in debt issuance costs as of December 31, 2011.

F-38