CoStar Group (CSGP) 10-K risk factor changes: FY2012 vs FY2011

Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for [removed: 2012] [added: 2013] and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions about our revenues, EBITDA, adjusted EBITDA, non-GAAP net income, non-GAAP net income per share, [added: net income per share,] fully diluted net [removed: income, combined financial metrics related to] [added: income per share, weighted-average outstanding shares,] the [added: anticipated benefits of the] LoopNet [removed: acquisition,] [added: merger,] the timing of [removed: the LoopNet acquisition,] [added: future payments of principal under our Credit Agreement, expectations regarding our compliance with financial and restrictive covenants in our Credit Agreement,] taxable income, cash flow from operating activities, available cash, operating costs, amortization expense, intangible asset recovery, [removed: net income per share, diluted net income per share, weighted-average outstanding shares,] capital and other expenditures, effective tax rate, equity compensation charges, future taxable income, purchase amortization, financing plans, geographic expansion, product [removed: development,] [added: development and release, product integrations, elimination and de-emphasizing of services,] acquisitions, contract renewal rate, capital structure, contractual obligations, legal proceedings and claims, our database, database growth, services and facilities, employee relations, future economic performance, our ability to liquidate or realize our long-term investments, management’s plans, goals and objectives for future operations, and growth and markets for our stock.

The following important factors, in addition to those discussed or referred to under the heading “Risk Factors,” and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: commercial real estate market conditions; the pace of recovery in the commercial real estate market; general economic conditions; our ability to identify, acquire and integrate acquisition candidates; [removed: the possibility that the FTC will request additional extensions to the waiting period imposed by the HSR Act; the possibility that CoStar, LoopNet and the FTC cannot reach a mutually acceptable resolution in a timely manner or at all; the possibility that the LoopNet merger does not close, including, but not limited to, due to the failure to obtain governmental approval; conditions, divestitures or changes relating to the operations or assets of LoopNet and CoStar that may be required to obtain governmental clearances or approvals to the merger;] our ability to realize [added: all or any of the] expected [added: benefits,] cost savings or other synergies from the LoopNet merger on a timely basis or at all; our ability to combine the businesses of CoStar and LoopNet successfully or in a timely and cost-efficient manner; [removed: failure] [added: the possibility that conditions, divestitures or changes relating] to [removed: obtain any required financing on favorable terms;] the [removed: degree] [added: operations or assets] of [added: LoopNet and CoStar as a result of the FTC's consent order may result in unanticipated adverse effects on the combined company;] business disruption relating to the LoopNet [removed: merger;] [added: integration may be greater than expected;] the [removed: use] [added: amount] of [added: investment for] the [removed: net proceeds of our June 2011 equity offering;] [added: sales and marketing campaign to cross-sell services to CoStar and LoopNet subscribers, investments to launch CoStar Suite and CoStarGo in] the [added: U.K., and/or the] amount of investment in CoStarGo [added: or other] marketing [removed: initiatives; our ability to realize expected expense savings from various initiatives, including office consolidations;] [added: initiatives may be higher than expected; the amount of investment for development and expansion of services for the International segment may be higher than expected; development of upgraded services and expansion of service offerings in the International segment may take longer than anticipated;] changes or consolidations within the commercial real estate industry; customer retention; our ability to attract new clients; our ability to sell additional services to existing clients; our ability to integrate our U.S. and international product offerings; our ability to successfully introduce new products in U.S. and foreign markets; [added: our ability to effectively and strategically combine, eliminate or de-emphasize service offerings;] competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully; our ability to effectively penetrate the market for retail real estate information and gain acceptance in that market; our ability to control costs; litigation; changes in accounting policies or practices; release of new and upgraded services [added: or markets] by us or our competitors; data quality; development of our sales force; employee retention; technical problems with our services; managerial execution; changes in relationships with real estate brokers and other strategic partners; legal and regulatory issues; and successful adoption of and training on our services.

The failure to successfully integrate [removed: LoopNet’s] [added: LoopNet's] business and operations and/or fully realize [added: expected] synergies from the merger in the expected time frame [added: or at all] may adversely affect our future [removed: results.][added: results and our business.]

[removed: Assuming completion of the merger with LoopNet, the] [added: The] success of [removed: that] [added: the LoopNet] merger will depend, in part, on our ability to successfully integrate [removed: LoopNet’s] [added: LoopNet's] business and operations and [removed: fully] realize the anticipated benefits and synergies from combining our business and [removed: LoopNet’s business.][added: LoopNet's business, including anticipated growth opportunities and cost savings.]

The integration process could result in the loss of key employees, loss of key clients, [added: loss of key vendors and other business partners,] increases in operating costs, [added: increases in taxes, increases in regulatory compliance costs] or the disruption of each [removed: company’s] [added: company's] ongoing businesses, any or all of which could adversely affect our ability to achieve the anticipated benefits and synergies of the merger.

The success of the merger will [added: also] depend in part on our ability to [removed: realize the anticipated growth opportunities and cost savings from integrating our business and LoopNet’s business, while minimizing] [added: minimize] or [removed: eliminating] [added: eliminate] any difficulties that may [removed: occur.][added: occur in connection with the integration of our business and LoopNet's business.]

[removed: Our and LoopNet’s] [added: The combined company's] business relationships may be subject to disruption as clients [added: of CoStar and/or LoopNet] and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than [removed: us, LoopNet or] the combined [removed: business.][added: company.]

[removed: We may also incur additional unanticipated transaction costs] [added: Costs] in connection with the [removed: merger.][added: merger and integration may be higher than expected, and we may also incur unanticipated acquisition-related costs.]

[removed: This increased level of] [added: Our] indebtedness [added: following the completion of the merger] could adversely affect us, including by decreasing our business flexibility and increasing our [removed: borrowing] costs.

The Credit Agreement contains customary restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that [added: we believe] may be in our long-term best interests.

The operating restrictions and financial covenants in the Credit Agreement and any future financing agreements may limit our ability to finance future operations or capital [removed: needs or] [added: needs,] to engage in other business [removed: activities.][added: activities or to respond to changes in market conditions.]

Our ability to comply with any financial covenants could be materially affected by events beyond our [removed: control, and there can be no assurance that we will satisfy any such requirements.][added: control.]

If we fail to comply with these covenants, we may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce [removed: its] [added: our] expenditures.

We may be unable to obtain such waivers, amendments or alternative or additional financing [added: on a timely basis or] at all, or on favorable terms.

If an event of default occurs, the lenders under the Credit Agreement [removed: are able to] [added: may] declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable and [added: may] exercise remedies in respect of the collateral.

We [removed: and LoopNet] may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.

Uncertainty about the effect of the merger on our employees and LoopNet employees may have an adverse effect on [removed: us and LoopNet, respectively, and consequently,] the combined business.

This uncertainty may impair [removed: each company’s] [added: our] ability to attract, retain and motivate key [removed: personnel until the merger is completed, or longer for the combined entity.][added: personnel.]

If our key employees or [removed: LoopNet’s] [added: LoopNet's] key employees depart, we may [removed: have to] incur significant costs in identifying, [removed: hiring] [added: hiring, training] and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the merger.

A depressed commercial real estate market has a negative impact on our core customer base, which could decrease demand for our [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services.

Consolidation, or other cost-cutting measures by our customers, may lead to more cancellations of our [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services by our customers, reduce the number of our existing clients, reduce the size of our target market or increase our clients’ bargaining power, all of which could cause our revenues to decline and reduce our profitability.

Our success and revenues depend on attracting and retaining subscribers to our [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services.

Our subscription-based [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services generate the largest portion of our revenues.

If clients cancel services or decide not to renew their subscription agreements, and we do not sell new services to our existing clients or attract new clients, then our renewal [removed: rate,] [added: rate] and revenues may decline.

During [removed: 2012,] [added: 2013,] we plan to continue to increase the depth of our coverage in the [removed: U.S., U.K.] [added: U.S.] and [removed: France,] [added: U.K.,] and we may expand into additional [removed: geographies.][added: geographies including Toronto, Canada.]

Our ability to build and develop a strong sales force may be affected by a number of factors, including: our ability to attract, integrate and motivate sales personnel; our ability to effectively train our sales force; the ability of our sales force to sell an increased number of services; our ability to manage effectively an outbound telesales group; the length of time it takes new sales personnel to become productive; the competition we face from other companies in hiring and retaining sales personnel; [added: our ability to effectively structure our sales force;] and our ability to effectively manage a multi-location sales organization.

See “We [removed: and LoopNet] may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger” for a discussion of the impact the [removed: pending] merger with LoopNet may have on our ability to attract, retain and motivate members of our sales force.

See “We [removed: and LoopNet] may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger” for a discussion of the impact the [removed: pending] merger with LoopNet may have on our ability to attract, retain and motivate members [added: of] our management and operating personnel.

If we are unable to increase our revenues or our operating costs are higher than expected, our profitability may [removed: continue to] decline and our operating results may fluctuate significantly.

Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS Information Limited), SPN, Grecam S.A.S., Propex, and Property and Portfolio Research Ltd., a portion of our business is denominated in the British Pound and [removed: Euro and as a result, fluctuations in foreign currencies may have an impact on our business, results of operations and financial position.][added: Euro.]

Further, significant foreign exchange fluctuations resulting in a decline in the [removed: British Pound or Euro] [added: respective, local currency] may decrease the value of our foreign assets, as well as decrease our revenues and earnings from our foreign subsidiaries, which would reduce our profitability and adversely affect our financial position.

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the [removed: United States of America] [added: U.S.] from AAA to AA+.

As of December 31, [removed: 2011,] [added: 2012,] we held [removed: $27.3] [added: $24.4] million par value of ARS, all of which failed to settle at auctions.

Our ARS investments are not currently [added: actively] trading and therefore do not currently have a readily determinable market value.

We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, [removed: 2011.][added: 2012.]

Based on this assessment of fair value, as of December 31, [removed: 2011,] [added: 2012,] we determined there was a decline in the fair value of our ARS investments of approximately [removed: $2.7] [added: $1.9] million.

We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, [removed: 2011.][added: 2012.]

Our potential liability for information distributed by us to others could require us to implement measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services to users.

An impairment in [added: the] carrying value of goodwill could negatively impact our consolidated results of operations and net worth.

Goodwill and identifiable intangible assets not subject to amortization are tested annually by each reporting unit on October [removed: 1st] [added: 1] of each year for impairment and are tested for impairment more frequently based upon the existence of one or more indicators.

Our forward-looking statements are also identified by words such as “hope,” “anticipate,” “may,” “believe,” “expect,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology.

The processes are costly, and our efforts to develop, integrate and enhance our services may not be successful.

As we continue to combine our operations with those that we have acquired, we must continue to assess the purposes for which various services may be used alone or together, and how we can best address those uses through stand-alone services or combinations or coordinating applications thereof.

Our focus on internal and external investments may place downward pressure on our operating margins.

In 2011 and 2012, we increased the rate of investments in our business, including internal investments in product development and sales and marketing, to expand the breadth and depth of services we provide to our customers.

In 2011 and 2012, we also acquired Virtual Premise and LoopNet, respectively.

Our investment strategy is intended to increase our revenue growth in the future as activity in the commercial real estate industry shows signs of economic recovery.

While we believe this strategy will enable us to capitalize on opportunities we see in our industry and extend our leadership position, we expect our operating margins to experience downward pressure in the short term as a result of our investments.

Furthermore, if the industry fails to stabilize or deteriorates further in 2013 and beyond, our investments may not have their intended effect.

For instance, our external investments may lose value and we may incur impairment charges with respect to such investments.

Such impairment charges may negatively impact our profitability.

If we are unable to successfully execute our investment strategy or if we fail to adequately anticipate and address potential problems, we may experience decreases in our revenues and operating margins.

We may not be able to achieve these objectives in whole or in part.

Our efforts to integrate the two companies will divert management's attention and other resources from uses that could otherwise have been beneficial to the company.

In addition, management may decide to combine, eliminate or shift focus away from business lines, products or services if management believes those changes will have an accretive impact on our earnings per share, but any such changes could have a negative impact on revenue and earnings in the short- or long-term.

Further, the terms of the FTC's consent order may prohibit us from taking actions we may wish to take as part of the integration, such as combining or eliminating certain existing business lines, products or services that we believe will result in a long-term positive impact on our revenue and earnings.

Our insurance may not be sufficient to cover any losses we incur in connection with litigation claims.

If we fail to protect confidential information against security breaches, or if customers or potential customers are reluctant to use our services because of privacy concerns, we might face additional costs and could lose customers or potential customers.

We collect, use and disclose personally identifiable information, including among other things names, addresses, phone numbers, and email addresses.

In certain circumstances, we also collect and use credit card information.

Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites.

While we believe that our policies are appropriate and that we are in compliance with our policies, we could be subject to legal claims, government action or harm to our reputation if our practices fail, or are seen as failing, to comply with our policies or with applicable laws concerning personally identifiable information.

Concern of prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from subscribing to our services.

Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws, could deter people from using the Internet or our websites to conduct transactions that involve the transmission of confidential information, which could harm our business.

Under various state laws, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could result in significant costs and harm our reputation and business.

In addition, certain state laws require businesses that maintain personal information in electronic databases to implement reasonable measures to keep that information secure.

Various states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically.

Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions.

We may face adverse publicity and loss of consumer confidence if we are not able to comply with laws requiring us to take adequate measures to assure the confidentiality of the personally identifiable information that our customers had given to us.

This could result in a loss of customers and revenue that could jeopardize our success.

Even if we are in full compliance with all relevant laws and regulations, we may face liability or disruption of business if we do not comply in every instance or if the security of the customer data that we collect is compromised, regardless of whether our practices comply or not.

If we were required to pay any significant amount of money in satisfaction of claims under these laws, or if we were forced to suspend operations for any length of time due to our inability to comply fully with any such laws, our business, operating results and financial condition could be adversely affected.

Judgments made by management relate to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows of the carrying amounts of such assets.

The accuracy of these judgments may be adversely affected by several factors, including the factors listed below:

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Our forward-looking statements are also identified by words such as “believes,” “expects,” “thinks,” “anticipates,” “intends,” “estimates,” “potential” or similar expressions.

Risks Related to our Pending Acquisition of LoopNet

However, to realize these anticipated benefits and synergies, our business and LoopNet’s business must be successfully combined.

If we are not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected.

We and LoopNet have operated and, until the completion of the merger, will continue to operate independently.

Integration efforts between the two companies will also divert management attention and resources.

Even if the integration of our two businesses is successful, it may not result in the realization of the full benefits of the growth opportunities and cost savings that we currently expect or these benefits may not be achieved within the anticipated time frame.

Parties with which we and LoopNet do business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with us, LoopNet or the combined business of both companies.

The adverse effect of such disruptions could be exacerbated by delays in the completion of the merger or termination of the merger agreement.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger.

Those conditions include: obtaining regulatory and antitrust approvals, absence of orders prohibiting the completion of the merger or imposing a “Substantial Detriment” (as defined in the merger agreement), continued accuracy of the representations and warranties by both parties to the merger agreement and the performance by both parties of their covenants and agreements.

In addition, both we and LoopNet have rights to terminate the merger agreement under certain circumstances specified in the merger agreement.

The merger is subject to the receipt of consents and approvals from governmental and regulatory entities that may delay the date of completion of the merger or impose conditions that could have an adverse effect on us.

Before the merger may be completed, approvals must be obtained from governmental authorities.

Both CoStar and LoopNet filed notification and report forms with the Department of Justice and the FTC pursuant to the HSR Act, on May 31, 2011.

As a result, the waiting period under the HSR Act with respect to the proposed merger between us and LoopNet was originally 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 in connection with its review of the merger.

The second request extended the waiting period imposed by the HSR Act until 30 days after the parties have substantially complied with the second request unless that period is extended voluntarily by the parties or terminated sooner by the FTC.

At the FTC’s request, CoStar and LoopNet subsequently agreed to extend the waiting period imposed by the HSR Act from 30 days to 60 days after the date of substantial compliance with the second request, subject to further extension.

On

November 4, 2011, each of CoStar and LoopNet certified as to its substantial compliance with the second request.

CoStar and LoopNet subsequently 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.

If either CoStar and LoopNet, on the one hand, or the FTC Staff, on the other hand, believe that discussions towards a possible consent order are no longer moving forward productively, either may trigger commencement of the 45-day period, in writing, after the expiration of which the waiting period imposed by the HSR Act will expire, unless extended voluntarily by the parties or terminated sooner by the FTC.

As of the date of filing of this Annual Report on Form 10-K, the parties have not yet reached agreement on the terms of a consent order, and there can be no assurance that such agreement will be reached in a timely manner or at all.

In the event the parties do not reach agreement on a consent decree and/or a party triggers commencement of the 45-day period, the FTC may seek an injunction to block consummation of the merger.

In addition, the FTC may include conditions on the completion of the merger or require divestitures or other changes relating to our operations or assets, or LoopNet’s.

Such conditions, divestitures or changes could have the effect of jeopardizing or delaying completion of the merger or reducing the anticipated benefits of the merger, any of which might have a material adverse effect on the combined company following the merger.

We are not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that, individually or in the aggregate, would reasonably be expected to impose a Substantial Detriment, but we could choose to waive this condition.

We will incur significant transaction costs as a result of the merger.

We expect to incur significant one-time transaction costs related to the merger.

These transaction costs include investment banking, legal and accounting fees and expenses and filing fees, printing expenses and other related charges.

A portion of the transaction costs related to the merger will be incurred regardless of whether the merger is completed.

Additional costs will be incurred in connection with integrating the two companies’ businesses, such as IT integration expenses.

Costs in connection with the merger and integration may be higher than expected.

Failure to complete the merger in certain circumstances could require us to pay a termination fee or expenses.

If the merger agreement is terminated under certain circumstances, we could be obligated to pay LoopNet a $51.6 million termination fee.

Payment of the termination fee could materially adversely affect our results of operations or financial condition.

Our indebtedness following the completion of the merger will be substantially greater than our indebtedness on a stand-alone basis and greater than the combined indebtedness of CoStar and LoopNet existing prior to the transaction.

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.

under the headings “Risk Factors [removed: ¾] [added: -] Cautionary Statement Concerning Forward-Looking Statements” and [removed: “¾Risk] [added: “- Risk] Factors,” as well as those described from time to time in our filings with the Securities and Exchange Commission.

CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services to the commercial real estate industry in the U.S. and the U.K. based on the fact that we offer the most comprehensive commercial real estate database [removed: available,] [added: available;] have the largest research department in the [removed: industry,] [added: industry; own and operate the leading online marketplace for commercial real estate in the U.S. based on the number of unique visitors per month;] provide more [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services than any of our competitors and believe [added: that] we generate more revenues than any of our competitors.

We have created [removed: a] [added: and compiled our] standardized [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] platform where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information.

Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, tenant information, information about properties for sale, internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, data [removed: integration,] [added: integration] and industry news.

We also provide market research and analysis for commercial real estate investors and lenders via our [removed: PPR] [added: Property and Portfolio Research, Inc. (“PPR”)] service offerings, portfolio and debt management and reporting capabilities through our Resolve [removed: Technology] [added: Technology, Inc. (“Resolve Technology”)] service offerings, and real estate [added: and lease] management solutions, including lease administration and abstraction services, through our Virtual [removed: Premise] [added: Premise, Inc. (“Virtual Premise”)] service offerings.

[removed: Most recently, on August 15, 2011, we launched] CoStarGo [removed: in the U.S.; CoStarGo] is [removed: an] [added: our] iPad application that integrates [added: and provides mobile access to subscribers of] our comprehensive property, tenant and comparable sales information [removed: in] [added: from] our suite of online [removed: products –] [added: service offerings -] CoStar Property [removed: Professional,] [added: Professional®,] CoStar [removed: Tenant] [added: Tenant®] and CoStar COMPS [removed: Professional.][added: Professional®.]

We [added: have incurred increased expenses associated with this marketing and sales campaign and] expect to continue to incur additional expenses [removed: associated with] [added: for] the [removed: marketing and sale] [added: campaign during the first quarter] of [removed: CoStarGo.][added: 2013.]

[removed: As] [added: Previously, as] part of our integration efforts, in 2007, we introduced the “CoStar Group” as the brand encompassing our international operations, and in early [removed: 2010] [added: 2010,] we launched Showcase, our [removed: Internet] [added: internet] marketing service that provides commercial real estate professionals high quality internet lead generation, in the U.K. [removed: We expect to introduce CoStar Property Professional®, CoStar COMPS Professional®, CoStar Tenant® and CoStarGo™,] [added: Additionally, we have upgraded] our [removed: iPad application, in the] [added: back-end research operations, fulfillment and Customer Relationship Management (“CRM”) systems to support these new] U.K. [removed: in the upcoming future.][added: services.]

In order to implement these [removed: services in the U.K.,] [added: initiatives,] we have incurred, and expect to [removed: incur increased development] [added: continue to incur, additional] costs.

We believe that our continued investments in U.S. [added: and international] products, internationalization of our [added: U.S.] products and integration efforts have created [added: and will continue to build upon] a platform for long-term [removed: growth, which we intend to continue to develop, invest in and expand.][added: revenue growth.]

Any future product development or expansion of [added: services, combination and coordination of] services [added: or elimination of services] could reduce our profitability and increase our capital expenditures.

Therefore, while we expect current service offerings to remain profitable, driving overall earnings throughout [removed: 2012] [added: 2013] and providing substantial cash flow for our business, it is possible that any new investments [added: or changes to our service offerings] could cause us to generate losses and negative cash flow from operations in the future.

[removed: Our goal is to provide] [added: These integration efforts include providing] additional tools that make our research and analytics even more valuable to subscribers.

[removed: For example, we] [added: We] are [removed: focusing on further integration] [added: also integrating, developing] and [removed: development of] [added: cross-selling] the services offered by the companies we [removed: have] [added: acquired] most [removed: recently acquired, PPR,] [added: recently, including LoopNet, Virtual Premise,] Resolve Technology and [removed: Virtual Premise.][added: PPR.]

[removed: We have launched an initiative] [added: In addition, we expect] to [removed: develop a lease discounted cash flow (“LDCF”) forecasting and valuation solution that effectively integrates] [added: continue our efforts to integrate] the combined capabilities of [removed: CoStar’s market and] [added: CoStar's] property [added: and market-level] information and [removed: PPR’s] [added: PPR's] analytics and forecasting expertise with Resolve [removed: Technology’s and Virtual Premise’s commercial] [added: Technology's] real estate investment [removed: and management] software expertise.

[removed: While our] [added: Our] investments in [removed: PPR,] [added: LoopNet, Virtual Premise,] Resolve [removed: Technology] [added: Technology,] and [removed: Virtual Premise] [added: PPR] have [removed: resulted] [added: increased,] and may continue to [removed: result in an increase in expenses,] [added: increase; however] our revenues have also increased as a result of these acquisitions, [removed: and we have experienced increased] [added: due to revenue from the acquired businesses, as well as our ability to take advantage of] cross-selling opportunities among [added: the customers of] CoStar and the acquired companies.

We [removed: intend to fund] [added: funded] the cash portion of the consideration payable to LoopNet stockholders in the merger through a combination of cash on hand, including the net proceeds of approximately $247.9 million from an equity offering we completed in June 2011 and the proceeds of a $175.0 million term loan facility available to us under a [removed: Credit Agreement,] [added: credit agreement (as amended, the “Credit Agreement”),] dated February 16, 2012, by and among CoStar, as borrower, CoStar Realty Information, [removed: Inc.,] [added: Inc. (“CoStar Realty”),] as co-borrower, [removed: the lenders from time to time party thereto and] JPMorgan [added: Chase] Bank, [added: N.A. (“J.P. Morgan Bank”),] as administrative [removed: agent.][added: agent, and the other lenders thereto.]

The LoopNet transaction [removed: is] [added: was] subject to customary closing conditions, including expiration or termination of the waiting period under the [removed: HSR Act.][added: Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”).]

We [removed: expect that while we await final antitrust approval of the transaction we will] [added: plan to] continue to assess [removed: and finalize] any plans for additional investments in our business [removed: for] [added: in] the foreseeable future.

At this time, [added: as discussed above,] we expect to continue to develop and distribute new services within our current platform.

We [removed: also] plan to continue efforts to integrate [added: CoStar's business with] Virtual [removed: Premise’s] [added: Premise's] real estate [added: and lease] management [removed: solutions with CoStar’s business.][added: solutions.]

While we expect current service offerings to remain profitable, [removed: driving overall earnings for 2012 and] providing substantial cash flow for our business, [added: the costs associated with] our [removed: proposed] merger with LoopNet and the [removed: subsequent] integration of our two businesses [removed: could reduce] [added: has reduced] our [removed: profitability, cause] [added: profitability and caused] us to generate losses [removed: and adversely affect our financial position.][added: in the second quarter of 2012.]

Further, our credit facilities contain restrictive covenants that [removed: will] restrict our operations and use of our cash [removed: flow if the LoopNet acquisition is completed.][added: flow, which may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.]

[removed: There] [added: We] continue to [removed: be] [added: see] clear signs of improving conditions in the commercial real estate industry, including [removed: strong leasing activity] [added: falling vacancy rates] and positive net absorption [added: in the four main types] of [removed: office space.][added: property that we track (office, industrial, retail and apartments).]

However, the extent and duration of continued improvement [removed: of] [added: in] the economy and the commercial real estate industry is unknown.

Continuing risks related to lower than expected job growth, [removed: spiking energy costs] [added: government fiscal challenges] and uncertainty over U.S. and global economic issues may impede the ability and willingness of clients to purchase services from us or result in reductions of services purchased.

We compete against many other commercial real estate [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] service providers for business.

We currently issue stock options and/or restricted stock to our officers, directors and employees, and as a result we record [removed: additional] compensation expense in our consolidated statements of operations.

Our subscription-based information [removed: services, consisting] [added: services consist] primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional, and FOCUS [removed: services currently generate approximately 94% of our total revenues.][added: services.]

CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a suite of similar services and [added: through our mobile application, CoStarGo, and] comprise our primary service offering in our U.S. operating segment.

For the twelve months ended December 31, 2011 and [removed: 2010,] [added: 2012,] our contract renewal rate for [added: annual] subscription-based services was approximately 93% and [removed: 90%,] [added: 94%,] respectively, and therefore our cancellation rate [added: for those services] was approximately 7% and [removed: 10%,] [added: 6%,] respectively, for the same [removed: periods of time.][added: time periods.]

Our ARS investments are not currently [added: actively] trading and therefore do not currently have a readily determinable market value.

We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, [removed: 2011.][added: 2012.]

The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of [added: contractual] cash flows, liquidity risk premiums, expected holding periods and default risk of the ARS.

Based on this assessment of fair value, as of December 31, [removed: 2011,] [added: 2012,] we determined there was a decline in the fair value of our ARS investments of approximately [removed: $2.7] [added: $1.9] million.

We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, [removed: 2011.][added: 2012.]

These assumptions and the estimation of expected forfeitures are based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of [removed: the Company’s] [added: our] stock price.

We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense for the [removed: twelve months] [added: year] ended December 31, [removed: 2011.][added: 2012.]

However, if [removed: significant] changes in these assumptions occur, [added: and, should those changes be significant,] they could have a material impact on our stock-based compensation expense.

| [removed: |] • | Significant underperformance relative to historical or projected future operating results; |

Our subsidiary, LoopNet, Inc. (“LoopNet”), operates an online marketplace that enables property owners, landlords, and commercial real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings.

Commercial real estate agents, buyers and tenants also use LoopNet's online marketplace to search for available property listings that meet their criteria.

We expect to continue to develop and distribute new services, improve existing services, integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations.

We are also committed to supporting and improving our existing core information, analytic and marketing services.

Examples of new tools and services that we are currently developing and expect to introduce to customers in the near future include upgrades to our suite of online service offerings – CoStar Property Professional, CoStar Tenant and CoStar COMPS Professional.

These upgrades are expected to include improvements to the search functionality as well as improvements to the reporting capabilities of the system.

We also plan improvements to property type specific searches included as part of CoStar Property Professional.

We continue to improve our mobile application, CoStarGo®, which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012.

Planned improvements for CoStarGo include a multifamily search function and enhanced analytic capabilities.

Our sales and marketing efforts are and will continue to be focused on cross-selling and marketing our services.

After the acquisition of LoopNet, we launched a sales and marketing campaign directed at cross-selling CoStar's information services to LoopNet customers and LoopNet's marketing services to CoStar customers.

In some cases, when integrating and coordinating our services and assessing industry needs, we may decide to combine, shift focus from, de-emphasize, phase out, or eliminate a service that overlaps or is redundant with other services we offer.

We anticipate that these initiatives will position the company for revenue growth in 2013 and beyond.

We also expect to continue to offer our core products and services individually.

In addition, we intend to continue to upgrade the platform of services and expand the coverage of our service offerings within our International segment and to integrate our international operations more fully with those in the U.S. In furtherance of those initiatives, in the U.K. during the fourth quarter of 2012, we introduced a consistent international platform of service offerings, consisting of CoStarGo, our iPad application, CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant.

We believe the product launch was well received and a significant marketing and sales effort is currently underway.

In order to implement these services in the U.K., we incurred increased development costs through 2012.

We expect that development expenses incurred by the International segment will decrease in 2013.

In late 2013 or early 2014, we expect to expand further internationally by offering services in Toronto, Canada.

We expect these investments to result in further penetration of our international subscription-based information services and the successful cross-selling of our services to customers in existing markets due to the release of our upgraded international platform and expansion of coverage of our international service offerings.

LoopNet Acquisition

On April 30, 2012, we completed the acquisition of LoopNet, which is included within our U.S. operating segment.

The acquisition combines the research capabilities of CoStar with the marketing solutions offered by LoopNet.

We expect the acquisition will create efficiencies in operations and provide greater tools for the combined company's customers.

To acquire LoopNet, we paid stock and cash consideration with an aggregate value of approximately $883.4 million as of the closing date.

On April 26, 2012, the Federal Trade Commission (the “FTC”) accepted a consent order in connection with the LoopNet merger previously agreed to by LoopNet and CoStar.

The consent order was subject to a 30-day public comment period, and on August 29, 2012, the FTC issued its final acceptance of the consent order.

The consent order, which is publicly available on the FTC's website at www.ftc.gov, requires us to maintain certain business practices that the FTC believes will promote competition.

For example, the consent order requires us to maintain our customary practice of selling our products separately and on a market-by-market basis.

It also requires us to license our products to customers who have bought our competitors' products on a non-discriminatory basis, which we have always done in the past.

In addition, we are required to maintain our customary licensing practices with respect to the length of our contracts, to allow customers with multi-year contracts to cancel with one year's advance notice, and to agree to reduce the cost of any litigation with customers by offering to arbitrate certain disputes.

Further, the current economic recovery has been slower than past economic recoveries.

Job growth, in particular, has recovered more slowly than in past economic recoveries.

Improvements in the commercial real estate industry are largely dependent upon employment trends, which drive demand for real estate space.

The amount and timing of the compensation expense that we record depends on the amount and types of equity grants made.

In February 2012, the Compensation Committee (the “Committee”) of the Board of Directors approved grants of restricted common stock to our executive officers that vest based on the achievement of CoStar performance conditions.

These awards support the Committee’s goals of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of CoStar.

In May and December of 2012, we granted additional shares of restricted common stock that vest based on the achievement of CoStar performance conditions to other employees.

These shares of performance-based restricted common stock vest upon our achievement of $90.0 million of cumulative EBITDA over a period of four consecutive calendar quarters, and are subject to forfeiture in the event the foregoing performance condition is not met by March 31, 2017.

We granted a total of 399,413 shares of performance-based restricted common stock during the year ended December 31, 2012, representing a total estimated unrecognized stock-based compensation expense of approximately $24.0 million.

We expect to develop and distribute new services, expand existing services within our current platform (including internationally), and expand and develop our sales and marketing organization.

These initiatives are expected to include continued devleopment of CoStarGo, enhancements to our core information services, including our suite of online services, and development of new services for our brokerage clients.

We supported the launch with an extensive marketing campaign during the third quarter of 2011, including a 34-city national launch tour to drive early adoption of the service.

We incurred expenses of approximately $3.4 million during the third quarter of 2011 in connection with the launch of CoStarGo.

We also intend to continue to expand the coverage of our service offerings within our International segment and to integrate our International operations more fully with those in the U.S. We have gained operational efficiencies as a result of consolidating a majority of our U.K. research operations in one location in Glasgow and combining the majority of our remaining U.K. operations in one central location in London.

We intend to introduce a consistent international platform of service offerings in the upcoming future.

Additionally, we plan to upgrade back end research operations, fulfillment and CRM systems in the U.K. to support these new U.K. services.

In order to implement this initiative, we have incurred, and expect to continue to incur additional costs.

On April 27, 2011, we signed a definitive agreement to acquire LoopNet.

Pursuant to the merger agreement, as a result of the merger (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 LoopNet Series A Convertible Preferred Stock, unless previously converted into LoopNet common 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 holders of LoopNet’s Series A Convertible Preferred Stock delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.

The boards of directors of CoStar and LoopNet 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, have approved adoption of the merger agreement on July 11, 2011.

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 proceeds of a $50 million revolving credit facility also available to us under the Credit Agreement may be used, on the closing date of the LoopNet merger, to pay for transaction costs related to the merger and, thereafter, for working capital and other general corporate purposes.

In addition, we received a commitment letter from J.P. Morgan Bank on April 27, 2011 for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million is committed.

This commitment letter remains outstanding and available, subject to customary conditions, to fund the LoopNet acquisition and our ongoing working capital needs following the closing.

However, we do not currently anticipate utilizing this commitment.

As previously disclosed in the proxy statement/prospectus dated June 6, 2011, both CoStar and LoopNet filed notification and report forms with the Department of Justice and the FTC pursuant to the HSR Act, on May 31, 2011.

As a result, the waiting period under the HSR Act with respect to the proposed merger between CoStar and LoopNet (the “merger”) 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.

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.

As previously disclosed on January 3, 2012, CoStar 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, CoStar 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.

While there can be no assurance that agreement on the terms of a possible consent order can be reached in a timely manner or at all, the Company believes the discussions with the FTC Staff are currently proceeding constructively and the Company is hopeful that they will in the near term result in an agreement with the FTC Staff on the terms of such a consent order, subject to FTC approval.

In certain circumstances set forth in the LoopNet merger agreement, if the merger is not consummated or the agreement is terminated, LoopNet may be obligated to pay us 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, we may be obligated to pay LoopNet a termination fee of $51.6 million.

In light of our agreement to acquire LoopNet, we are currently evaluating how best to integrate the two businesses.

We expect to continue our efforts to integrate the combined capabilities of CoStar’s market and property information and PPR’s analytics and forecasting expertise with Resolve Technology’s real estate investment software expertise.

FOCUS is our primary service offering in our International operating segment.

The majority of our contracts for our subscription-based information services typically have a minimum term of one year and renew automatically.

Fair Value of Deferred Consideration

We had no Level 3 liabilities as of December 31, 2011.

As of December 31, 2010, we held Level 3 liabilities for deferred consideration related to the October 19, 2009 acquisition of Resolve Technology.

The deferred consideration totaled $3.2 million as of December 31, 2010 and included (i) a potential deferred cash payment two years after closing based on the incremental growth of Resolve Technology’s revenue, and (ii) other potential deferred cash payments for successful completion of operational and sales milestones during the period from closing through October 31, 2013, which period may be extended by the parties to a date no later than December 31, 2014.

On June 24, 2011, we made a payment to the seller of Resolve Technology of $500,000 as a result of the successful completion of one of the operational milestones.

On September 8, 2011, we entered into an agreement to settle all remaining potential deferred cash payments due under the original agreement.

Under the terms of the agreement, we made a payment of $1.6 million on September 14, 2011 to settle the entire obligation.

We reversed the remaining $1.2 million originally recorded as deferred consideration by reducing general and administrative expense during the three months ended September 30, 2011.

We provide [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services to the commercial real estate and related business community in the U.S., U.K. and France.

For the year ended December 31, [removed: 2011,] [added: 2012,] revenue denominated in foreign currencies was approximately [removed: 7.7%] [added: 5.9%] of total revenue.

For the year ended December 31, [removed: 2011,] [added: 2012,] our revenue would have decreased by approximately [removed: $1.9] [added: $2.0] million if the U.S. dollar exchange rate used strengthened by 10%.

A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, [removed: 2011] [added: 2012] would have resulted in an increase of approximately [removed: $1.5] [added: $2.9] million in the carrying amount of net assets.

For the year ended December 31, [removed: 2011,] [added: 2012,] our revenue would have increased by approximately [removed: $1.9] [added: $2.0] million if the U.S. dollar exchange rate used weakened by 10%.

A 10% weakening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, [removed: 2011] [added: 2012] would have resulted in a decrease of approximately [removed: $1.5] [added: $2.9] million in the [added: carrying amount of net assets.]

As of December 31, [removed: 2011,] [added: 2012,] accumulated other comprehensive loss included a loss from foreign currency translation adjustments of approximately [removed: $5.9] [added: $4.6] million.

We do not have material exposure to market risks associated with changes in interest rates related to cash equivalent securities held as of December 31, [removed: 2011.][added: 2012.]

As of December 31, [removed: 2011,] [added: 2012,] we had [removed: $548.8] [added: $156.1] million of cash, cash equivalents and short-term investments.

As of December 31, [removed: 2011,] [added: 2012,] auctions for [removed: $27.3] [added: $24.4] million of our investments in auction rate securities failed.

Based on an assessment of fair value of these investments in ARS as of December 31, [removed: 2011,] [added: 2012,] we determined that there was a decline in the fair value of our ARS investments of approximately [removed: $2.7] [added: $1.9] million, which was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity.

See Notes 4 and 5 to the [removed: consolidated financial statements] [added: Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K] for further discussion.

We have approximately [removed: $112.3] [added: $888.7] million in intangible assets as of December 31, [removed: 2011.][added: 2012.]

As of December 31, [removed: 2011,] [added: 2012,] we believe our intangible assets will be recoverable, however, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability.

As of December 31, 2012, we had $170.6 million of long-term debt bearing interest at a variable rate of LIBOR plus 2.00%.

If there is an increase or decrease in interest rates, there will be a corresponding increase or decrease in the amount of interest expense on our long-term debt.

Based on our outstanding borrowings as of December 31, 2012, an increase in the interest rate by 25 basis points would result in an increase of approximately $400,000 in interest expense annually.

Based on our outstanding borrowings as of December 31, 2012, a decrease in the interest rate by 25 basis points would result in a decrease of approximately $400,000 in interest expense annually.

| | |

carrying amount of net assets.

CoStar Group, Inc., a Delaware corporation, founded in 1987, is the number one provider of [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services to the commercial real estate industry in the United States [removed: (U.S.)] [added: ("U.S.")] and United Kingdom [removed: (U.K.)] [added: ("U.K.")] based on the fact that we offer the most comprehensive commercial real estate database [removed: available,] [added: available;] have the largest research department in the [removed: industry,] [added: industry; own and operate the leading online marketplace for commercial real estate in the U.S. based on the number of unique visitors per month;] provide more [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services than any of our competitors and believe [added: that] we generate more revenues than any of our competitors.

Information about CoStar’s revenues from, and long-lived assets located in, foreign countries is included in Notes 2 and [removed: 11] [added: 12 of the Notes] to [removed: our consolidated financial statements.][added: Consolidated Financial Statements included in this Annual Report on Form 10-K.]

CoStar’s revenues, EBITDA, assets and liabilities, broken out by segment are set forth in Note [removed: 11] [added: 12] to our consolidated financial statements.

We also provide market research and analysis for commercial real estate investors and lenders via our Property and Portfolio Research, Inc. (“PPR”) service [removed: offerings,] [added: offerings;] portfolio and debt management and reporting capabilities through our Resolve Technology, Inc. (“Resolve Technology”) service [removed: offerings,] [added: offerings;] and real estate [added: and lease] management solutions, including lease administration and abstraction services, through our Virtual Premise, Inc. (“Virtual Premise”) service offerings.

We have created and are continually improving [removed: a] [added: our] standardized [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] platform where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information.

Our standardized platform includes the most comprehensive proprietary database in the industry; the largest research department in the industry; proprietary data collection, information management and quality control systems; a large in-house product development team; a broad suite of web-based [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services; a large team of analysts and economists; and a large base of clients.

Our database has been developed and enhanced for more than [removed: 24] [added: 25] years by a research department that makes thousands of daily database updates.

In addition to our internal efforts to grow the database, we have obtained and assimilated [removed: over 70] [added: approximately 80] proprietary databases.

Our subscription-based information [removed: services, consisting] [added: services consist] primarily of CoStar Property [removed: Professional,] [added: Professional®,] CoStar [removed: Tenant,] [added: Tenant®,] CoStar COMPS [removed: Professional] [added: Professional®] and [removed: FOCUS services, currently generate approximately 94% of our total revenues.][added: FOCUS™ services.]

CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a suite of similar services and [added: through our mobile application, CoStarGo, and] comprise our primary service offering in our U.S. operating segment.

Contract rates [added: for subscription-based services] are generally based on the number of sites, number of users, organization size, the client’s business focus, geography and the number of services to which a client subscribes.

[removed: Since 1994, we] [added: We] have [added: continually] expanded the geographical coverage of our existing information services and developed new [removed: information] [added: information, analytics] and [removed: analytic] [added: marketing] services.

[removed: Most recently, in] [added: In] October 2011, we acquired Virtual Premise, a Software as a Service, or on-demand software, provider of real estate [removed: information] [added: and lease] management solutions located in Atlanta, Georgia.

[removed: LoopNet owns and] [added: Our subsidiary, LoopNet, Inc. (“LoopNet”),] operates an online marketplace [removed: for commercial real estate in the U.S.] that enables [added: property owners, landlords, and] commercial real estate [removed: agents,] [added: agents] working on [added: their] behalf [removed: of property owners and landlords,] to list properties for sale or for lease and [added: to] submit detailed information [removed: on] [added: about] property [removed: listings in order to find a buyer or tenant.][added: listings.]

We [removed: intend to fund] [added: funded] the cash portion of the consideration payable to LoopNet stockholders in the merger through a combination of cash on hand, including the net proceeds of approximately $247.9 million from an equity offering we completed in June [removed: 2011,] [added: 2011] and [added: the proceeds of] a $175.0 million term loan facility available to us under a [removed: Credit Agreement we entered into on] [added: credit agreement (as amended, the “Credit Agreement”), dated] February 16, [removed: 2012 with a syndicate of lenders] [added: 2012, by] and [removed: J.P. Morgan] [added: among CoStar, as borrower, CoStar Realty Information, Inc. (“CoStar Realty”), as co-borrower, JPMorgan Chase] Bank, [added: N.A. (“J.P. Morgan Bank”),] as administrative [removed: agent.][added: agent, and the other lenders thereto.]

[removed: Most recently, on] [added: On] August 15, 2011, we launched [removed: CoStarGo™] [added: CoStarGo] in the U.S.; CoStarGo is an iPad application that integrates [added: and provides mobile access to subscribers of] our comprehensive property, tenant and comparable sales information in our suite of online [removed: products] [added: service offerings] – CoStar Property [removed: Professional®,] [added: Professional,] CoStar [removed: Tenant®] [added: Tenant] and CoStar COMPS [removed: Professional®.][added: Professional.]

[removed: We also intend to continue to expand the coverage of our service offerings within our International segment and to integrate our International operations more fully with those in the U.S.] In December 2006, our U.K. subsidiary, CoStar Limited, acquired Grecam S.A.S., a provider of commercial property information and market-level surveys, studies and consulting services, located in Paris, France.

[removed: In] [added: As part of our integration efforts, in 2007, we introduced the “CoStar Group” as the brand encompassing our international operations, and in] early [removed: 2010] [added: 2010,] we launched Showcase, our internet marketing service that provides commercial real estate professionals [removed: with] high quality internet lead generation, in the U.K. [removed: We expect to introduce CoStar] [added: Our July 2009 acquisition of PPR and] Property [removed: Professional, CoStar COMPS Professional, CoStar Tenant] and [removed: CoStarGo in] [added: Portfolio Research Ltd. (“PPR UK”), also expanded] the [added: market research capabilities of our] U.K. [removed: in the upcoming future.][added: operations.]

Additionally, we [removed: plan to upgrade back end] [added: have upgraded our back-end] research operations, fulfillment and Customer Relationship Management (“CRM”) systems [removed: in the U.K.] to support these new U.K. services.

In order to implement these [removed: services and improvements in the U.K.,] [added: initiatives,] we have incurred, and expect to [removed: incur increased development] [added: continue to incur, additional] costs.

We believe that our [removed: U.S. and International expansion,] continued investments in U.S. [added: and international] products, internationalization of our [added: U.S.] products and integration efforts have created [added: and will continue to build upon] a platform for long-term [removed: growth, which we intend to continue to develop, invest in and expand.][added: revenue growth.]

| [removed: |] • | Sales and leasing brokers | • | Government agencies |

| [removed: |] • | Property owners | • | Mortgage-backed security issuers |

| [removed: |] • | Property managers | • | Appraisers |

| [removed: |] • | Design and construction professionals | • | Pension fund managers |

| [removed: |] • | Real estate developers | • | Reporters |

| [removed: |] • | Real estate investment trust managers | • | Tenant vendors |

| [removed: |] • | Investment bankers | • | Building services vendors |

| [removed: |] • | Commercial bankers | • | Communications providers |

| [removed: |] • | Mortgage bankers | • | Insurance companies’ managers |

| [removed: |] • | Mortgage brokers | • | Institutional advisors |

| [removed: |] • | Retailers | • | Investors and asset managers |

By combining our extensive database, approximately [removed: 1,005] [added: 1,108] researchers and outside contractors, our experienced team of analysts and economists, technological expertise and broad customer base, we believe that we have created such a platform.

CoStar has spent more than [removed: 24] [added: 25] years building and acquiring a database of commercial real estate information, which includes information on leasing, sales, comparable sales, tenants, and demand statistics, as well as digital images.

As of January 31, [removed: 2012,] [added: 2013,] our database of real estate information covered the U.S., London, England and other parts of the [removed: U.K. and parts of France,] [added: U.K.,] and contained information about:

| [removed: |] • | Approximately [removed: 1.5] [added: 1.6] million sale and lease listings; |

| [removed: |] • | Approximately 4.2 million total properties; |

| [removed: |] • | Approximately [removed: 10.0] [added: 9.0] billion square feet of sale and lease listings; |

| [removed: |] • | Approximately [removed: 8.1] [added: 5.8] million tenants; |

| [removed: |] • | Approximately 1.9 million sales transactions valued in the aggregate at approximately [removed: $4.1] [added: $4.5] trillion; and |

Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, tenant information, information about properties for sale, internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, data integration and industry news.

Our service offerings span all commercial property types, including office, industrial, retail, land, mixed-use, hospitality and multifamily.

Commercial real estate agents, buyers and tenants also use LoopNet's online marketplace to search for available property listings that meet their criteria.

Additionally, we introduced CoStar Property Professional, CoStar COMPS Professional, CoStar Tenant and CoStarGo in the U.K. in the fourth quarter of 2012.

Our subscription-based services consist primarily of similar services offered over the Internet to commercial real estate industry and related professionals.

Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of one year.

Most recently, in April 2012, we acquired LoopNet; the LoopNet acquisition is described below under "LoopNet Acquisition."

LoopNet Acquisition

On April 30, 2012, we completed the acquisition of LoopNet.

The acquisition combines the research capabilities of CoStar with the marketing solutions offered by LoopNet.

We expect the acquisition will create efficiencies in operations and provide greater tools for the combined company's customers.

To acquire LoopNet, we paid stock and cash consideration with an aggregate value of approximately $883.4 million as of the closing date.

In connection with the LoopNet acquisition, we agreed to the terms of a consent order issued by the Federal Trade Commission (the “FTC”).

The consent order, which is publicly available on the FTC's website at www.ftc.gov, requires us to maintain certain business practices that the FTC believes will promote competition.

For example, the consent order requires us to maintain our customary practice of selling our products separately and on a market-by-market basis.

It also requires us to license our products to customers who have bought our competitors' products on a non-discriminatory basis, which we have always done in the past.

In addition, we are required to maintain our customary licensing practices with respect to the length of our contracts, to allow customers with multi-year contracts to cancel with one year's advance notice, and to agree to reduce the cost of any litigation with customers by offering to arbitrate certain disputes.

We expect to continue to develop and distribute new services, improve existing services, integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations.

We are also committed to supporting and improving our existing core information, analytic and marketing services.

Examples of new tools and services that we are currently developing and expect to introduce to customers in the near future include upgrades to our suite of online service offerings – CoStar Property Professional, CoStar Tenant and CoStar COMPS Professional.

These upgrades are expected to include improvements to the search functionality as well as improvements to the reporting capabilities of the system.

We also plan improvements to property type specific searches included as part of CoStar Property Professional.

We continue to improve our mobile application, CoStarGo®, which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012.

Planned improvements for CoStarGo include a multifamily search function and enhanced analytic capabilities.

We are integrating, developing and cross-selling the services offered by the companies we acquired most recently, including LoopNet, Virtual Premise, Resolve Technology and PPR.

Our sales and marketing efforts are and will continue to be focused on cross-selling and marketing our services.

After the acquisition of LoopNet, we launched a sales and marketing campaign directed at cross-selling CoStar's information services to LoopNet customers and LoopNet's marketing services to CoStar customers.

We have incurred increased expenses associated with this marketing and sales campaign and expect to continue to incur additional expenses for the campaign during the first quarter of 2013.

We anticipate that these initiatives will position the company for revenue growth in 2013 and beyond.

Our investments in LoopNet, Virtual Premise, Resolve Technology, and PPR have increased, and may continue to increase; however our revenues have also increased as a result of these acquisitions, due to revenue from the acquired businesses, as well as our ability to take advantage of cross-selling opportunities among the customers of CoStar and the acquired companies.

In addition, we expect to continue our efforts to integrate the combined capabilities of CoStar's property and market-level information and PPR's analytics and forecasting expertise with Resolve Technology's real estate investment software expertise.

We plan to continue efforts to integrate CoStar's business with Virtual Premise's real estate and lease management solutions.

These integration efforts include providing additional tools that make our research and analytics even more valuable to subscribers.

We also expect to continue to offer our core products and services individually.

We also intend to continue to expand the coverage of our service offerings within our International segment.

We have recently begun to research commercial properties in Toronto, Canada and plan to introduce services covering this area in late 2013 or early 2014.

In addition, we intend to continue to upgrade our platform of services and to integrate our international operations more fully with those in the U.S. In furtherance of these initiatives, in the U.K. during the fourth quarter of 2012, we introduced a consistent international platform of service offerings, consisting of CoStarGo, our iPad application, CoStar Property Professional, CoStar COMPS Professional, and CoStar Tenant.

We believe the product launch was well received and a significant marketing and sales effort is currently underway.

In order to implement these services in the U.K., we incurred increased development costs through 2012.

We expect that development expenses incurred by the International segment will decrease in 2013.

CoStar’s integrated suite of services offers customers online access to the most comprehensive database of commercial real estate information, which has been researched and verified by our team of researchers, currently covering the U.S., as well as London and other parts of the U.K. and parts of France.

The majority of our contracts for our subscription-based information services typically have a minimum term of one year and renew automatically.

In addition, we have also signed a definitive agreement to acquire LoopNet, Inc. (“LoopNet”) (NASDAQ: LOOP); the pending LoopNet acquisition is described below under “Pending Acquisition.”

Pending Acquisition

On April 27, 2011, we signed a definitive agreement to acquire LoopNet.

Pursuant to the merger agreement, as a result of the merger (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 LoopNet Series A Convertible Preferred Stock, unless previously converted into LoopNet common 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 holders of LoopNet’s Series A Convertible Preferred Stock delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.

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 Convertible Preferred Stock, voting together as a single class on an as-converted basis, approved adoption of the merger agreement on July 11, 2011.

Information about the LoopNet merger agreement can be found in the registration statement on Form S-4 filed by CoStar on May 13, 2011, which was amended on June 3, 2011, under the heading “The Merger Agreement.”

The LoopNet transaction is subject to customary closing conditions, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”).

As previously disclosed in our proxy statement/prospectus dated June 6, 2011, both CoStar 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 acquisition of LoopNet by CoStar (the “merger”) 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.

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.

As previously disclosed on January 3, 2012, CoStar 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, CoStar 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.

While there can be no assurance that agreement on the terms of a possible consent order can be reached in a timely manner or at all, the Company believes the discussions with the FTC Staff are currently proceeding constructively and the Company is hopeful that they will in the near term result in an agreement with the FTC Staff on the terms of such a consent order, subject to FTC approval.

Additional information about the merger and the risks associated with the merger can be found under “Item 1A.

− Risk Factors” below.

The LoopNet transaction is not subject to a financing condition.

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.

See Notes 19 and 20 to the consolidated financial statements for additional information regarding the financing commitment from J.P. Morgan Bank and the credit facility entered into subsequent to December 31, 2011.

We intend to continue to grow our standardized platform of commercial real estate information and analytic services and to expand our service offerings, both in terms of geographical coverage and the scope of services offered.

Historically, our development and expansion efforts have included both geographic expansion and product development.

In 2004, we began research for a 21-market U.S. expansion effort.

By the end of the first quarter of 2006, we had successfully launched service in each of those 21 markets.

In addition, following our acquisition of National Research Bureau in January 2005, we launched various research initiatives as part of our expansion into real estate information for retail properties.

We launched the new retail component of our flagship product, CoStar Property Professional®, in May 2006.

In July 2006, we announced our intention to commence actively researching commercial properties in approximately 81 new Core Based Statistical Areas (“CBSAs”) across the U.S. in an effort to expand the geographical coverage of our service offerings, including our new retail service.

In the fourth quarter of 2007, we released our CoStar Property Professional service in the 81 new CBSAs across the U.S. In 2008, we released CoStar Showcase, an internet marketing service that provides commercial real estate professionals the opportunity to make their listings accessible to all visitors to our public websites, www.CoStar.com and www.showcase.com.

During the second half of 2009, as part of our strategy to provide subscribers with tools for conducting primary research and analysis on commercial real estate, we expanded subscribers’ capabilities to use our database of research-verified commercial property information to conduct in-depth analysis and generate reports on trends in sales and leasing activity online.

Further, in support of our initiative to expand subscribers’ analytic capabilities, in July 2009 we acquired PPR and its wholly owned subsidiary, which provide real estate investment analysis and market forecasting services.

In October 2009, we acquired Resolve Technology, including its business intelligence and portfolio management software used by institutional real estate investment companies, and in October 2011, we acquired Virtual Premise, a provider of real estate management solutions, including lease administration and abstraction services; both of these acquisitions enabled us to provide our customers with additional tools for analyzing commercial real estate markets and portfolios.

Our July 2009 acquisition of PPR and PPR UK also expanded the market research capabilities of our U.K. operations.

We intend to introduce a consistent international platform of service offerings in the upcoming future.

In 2007, we introduced the “CoStar Group” as the brand encompassing our international operations.

| --- | --- | --- | --- | --- |

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In 2008, CoStar released CoStar Showcase, an internet marketing service that provides commercial real estate professionals the opportunity to make their listings accessible to all visitors to our public websites, www.CoStar.com and www.showcase.com.

Certain pending legal proceedings are discussed in Note 11 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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For the fiscal year ended December 31, [removed: 2011][added: 2012]

| | [removed: ] [added: ] |

| CoStar Group, Inc. | [removed: |]

| (Exact name of registrant as specified in its charter) | [removed: |]

| Delaware | [removed: |] 52-2091509 |

| (State or other jurisdiction of incorporation or organization) | [removed: |] (I.R.S. Employer Identification No.) |

| 1331 L Street, NW, Washington, DC 20005 | [added: |]

| (Address of principal executive offices) (zip code) | [added: |]

| (202) 346-6500 | [added: |]

| [removed: Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code] [added: code)] | [added: |]

| (877) 739-0486 | [added: |]

| [removed: Registrant’s] [added: (Registrant’s] facsimile number, including area [removed: code] [added: code)] | [added: |]

Yes x No [removed: o][added: ¨]

Yes [removed: o] [added: ¨] No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes x No [removed: o][added: ¨]

| Large accelerated filer x | Accelerated filer [removed: o] [added: ¨] |

| Non-accelerated filer [removed: o] [added: ¨] | Smaller reporting company [removed: o] [added: ¨] |

Based on the closing price of the common stock on June [removed: 30, 2011] [added: 29, 2012] on the Nasdaq Stock Market, Nasdaq Global Select Market, the aggregate market value of registrant’s common stock held by non-affiliates of the registrant was approximately [removed: $1.4] [added: $2.2] billion.

As of February [removed: 17, 2012,] [added: 22, 2013,] there were [removed: 25,445,864] [added: 28,339,028] shares of the registrant’s common stock outstanding.

Portions of the registrant’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, [removed: 2011,] [added: 2012,] are incorporated by reference into Part III of this Report.

| Item 1. | [removed: [Business](#business)] [added: [Business](#sC90F616D7B7EE1DF5A36C2E195B1C1D9)] | [removed: 4] [added: [4](#sC90F616D7B7EE1DF5A36C2E195B1C1D9)] |

| Item 1A. | [Risk [removed: Factors](#risk)] [added: Factors](#s260986EF94099548012EC2E195E05E92)] | [removed: 18] [added: [17](#s260986EF94099548012EC2E195E05E92)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#unresolved)] [added: Comments](#s06D2EFB3983EC30F5C34C2E19603A4A7)] | [removed: 27] [added: [27](#s06D2EFB3983EC30F5C34C2E19603A4A7)] |

| Item 2. | [removed: [Properties](#properties)] [added: [Properties](#sAAD176B6B549B82BAD1EC2E1962553BE)] | [removed: 27] [added: [27](#sAAD176B6B549B82BAD1EC2E1962553BE)] |

| Item 3. | [Legal [removed: Proceedings](#legal)] [added: Proceedings](#s300BBBFE0E9AF7F77A91C2E196591146)] | [removed: 28] [added: [28](#s300BBBFE0E9AF7F77A91C2E196591146)] |

| Item 4. | [Mine Safety [removed: Disclosures](#mine)] [added: Disclosures](#sFE9F66BAC93F34DF556AC2E1967A3E5C)] | [removed: 28] [added: [28](#sFE9F66BAC93F34DF556AC2E1967A3E5C)] |

| Item 5. | [Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#market)] [added: Securities](#s252B13515B4930AE0FCCC2E191C04CD0)] | [removed: 29] [added: [29](#s252B13515B4930AE0FCCC2E191C04CD0)] |

| Item 6. | [Selected Consolidated Financial and Operating [removed: Data](#selected)] [added: Data](#sA6797F6D13DBAD1B6179C2E1919C99F4)] | [removed: 31] [added: [31](#sA6797F6D13DBAD1B6179C2E1919C99F4)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#mda)] [added: Operations](#sF01F77E8956855B305DCC2E197206BF6)] | [removed: 32] [added: [32](#sF01F77E8956855B305DCC2E197206BF6)] |

| Item 7A. | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#qq)] [added: Risk](#s867E1286DEF9855FE453C2E19A0FDD72)] | [removed: 50] [added: [50](#s867E1286DEF9855FE453C2E19A0FDD72)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#financial)] [added: Data](#sEED15B714B3AC2D5A1C3C2E19A41F630)] | [removed: 51] [added: [51](#sEED15B714B3AC2D5A1C3C2E19A41F630)] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#changes)] [added: Disclosure](#s60C265FF17350F9913C8C2E19A618686)] | [removed: 51] [added: [51](#s60C265FF17350F9913C8C2E19A618686)] |

| Item 9A. | [Controls and [removed: Procedures](#controls)] [added: Procedures](#sED0E3DCB143C52B3DA18C2E19A943407)] | [removed: 51] [added: [51](#sED0E3DCB143C52B3DA18C2E19A943407)] |

| Item 9B. | [Other [removed: Information](#other)] [added: Information](#s549A9FDCCE20F7F7CA55C2E19AB53477)] | [removed: 52] [added: [52](#s549A9FDCCE20F7F7CA55C2E19AB53477)] |

| Item 10. | [Directors, Executive Officers and Corporate [removed: Governance](#directors)] [added: Governance](#sD5B303027A46CE454F72C2E19B09E056)] | [removed: 53] [added: [53](#sD5B303027A46CE454F72C2E19B09E056)] |

| Item 11. | [Executive [removed: Compensation](#execcomp)] [added: Compensation](#s0AB86737C7FD205954A6C2E19B3BBA00)] | [removed: 53] [added: [53](#s0AB86737C7FD205954A6C2E19B3BBA00)] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#security)] [added: Matters](#sBCEE8985C1E3AA9892DEC2E19B5C3CF6)] | [removed: 53] [added: [53](#sBCEE8985C1E3AA9892DEC2E19B5C3CF6)] |

| Item 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#certain)] [added: Independence](#sFA22E891C7122F4FEC09C2E19B8EB3B0)] | [removed: 53] [added: [53](#sFA22E891C7122F4FEC09C2E19B8EB3B0)] |

| Item 14. | [Principal Accountant Fees and [removed: Services](#principal)] [added: Services](#s890718C41C7BBC733CEAC2E19BAFD469)] | [removed: 53] [added: [53](#s890718C41C7BBC733CEAC2E19BAFD469)] |

| Item 15. | [Exhibits and Financial Statement [removed: Schedules](#exhibits)] [added: Schedules](#sEC0A1B9530F53EC6BD5AC2E19C030221)] | [removed: 54] [added: [54](#sEC0A1B9530F53EC6BD5AC2E19C030221)] |

10-K 1 csgp20121231-10k.htm 2012 10-K

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Yes x No ¨

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Yes ¨ No x

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10-K 1 form_10-k.htm 2011 10-K

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Additionally, we lease office space in a variety of other metropolitan [removed: areas, which generally house our field sales offices.][added: areas.]

These locations include, without limitation, the following: New York; Los Angeles; Chicago; San Francisco; Sacramento; Boston; Manchester, England; Orange County, California; Philadelphia; Houston; Atlanta; Phoenix; [added: Tucson;] Detroit; Pittsburgh; Fort Lauderdale; Denver; Dallas; Kansas City; Cleveland; Cincinnati; Indianapolis; Austin; Salt Lake City; Seattle; [removed: Portland and] [added: Portland;] St. [removed: Louis.][added: Louis; Glendora, California; San Luis Obispo, California; and Durham, North Carolina.]

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Our subsidiaries, PPR and Resolve Technology, share space with CoStar in one facility leased in Boston, Massachusetts.

Our subsidiary, Virtual Premise, leases a facility in Atlanta, Georgia.

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| | [removed: |] High | | | | Low | | |

| Year Ended December 31, [removed: 2010 |] [added: 2011] | | | | | | | |

| Year Ended December 31, [removed: 2011 |] [added: 2012] | | | | | | | |

| First Quarter | [removed: |] $ | 62.89 | | | $ | 55.58 | |

| Second Quarter | [removed: |] $ | 72.84 | | | $ | 55.86 | |

| Third Quarter | [removed: |] $ | 59.50 | | | $ | 46.70 | |

| Fourth Quarter | [removed: |] $ | 68.39 | | | $ | 49.22 | |

As of February 1, [removed: 2012,] [added: 2013,] there were [removed: 559] [added: 695] holders of record of our common stock.

We did not issue any unregistered securities during the year ended December 31, [removed: 2011.][added: 2012.]

The following table is a summary of our repurchases of common stock during each of the three months in the quarter ended December 31, [removed: 2011:][added: 2012:]

| Month, [removed: 2011] [added: 2012] | | Total Number of Shares Purchased | | [added: |] Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |

| October 1 through 31 | | [removed: ¾] [added: —] | | [removed: ¾] | [added: —] | [removed: ¾] | [added: —] | [removed: ¾] | [added: — |]

| November 1 through 30 | | [removed: ¾] [added: —] | | [removed: ¾] | [added: —] | [removed: ¾] | [added: —] | [removed: ¾] | [added: — |]

(1) The number of shares purchased consists of shares of common stock tendered by employees to the Company to satisfy the employees’ [added: minimum] tax withholding obligations arising as a result of vesting of restricted stock grants under the Company’s [removed: 1998 Stock Incentive Plan, as amended, and the Company’s] 2007 Stock Incentive Plan, as amended, which shares were purchased by the Company based on their fair market value on the vesting date.

| [removed: ·] [added: •] | An equal investment in the Standards & Poor's Stock 500 (“S&P 500”) [removed: Index.] [added: Index;] |

| [removed: ·] [added: •] | An equal investment in the S&P 500 Application Software Index. |

The comparison covers the period beginning December 31, [removed: 2006,] [added: 2007,] and ending on December 31, [removed: 2011,] [added: 2012,] and assumes the reinvestment of any dividends.

[removed: ][added: ]

| Company / Index | | [removed: 12/31/06 | | | |] 12/31/07 | | | [removed: |] 12/31/08 | | | [removed: |] 12/31/09 | | | [removed: |] 12/31/10 | | | [removed: |] 12/31/11 | | | [added: 12/31/12 | |]

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| First Quarter | $ | 69.86 | | | $ | 56.67 | |

| Second Quarter | $ | 81.20 | | | $ | 67.26 | |

| Third Quarter | $ | 85.40 | | | $ | 77.79 | |

| Fourth Quarter | $ | 89.54 | | | $ | 77.06 | |

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| December 1 through 31 | | 4,485 | | | $86.47 | | — | | — |

| Total | | 4,485 | (1) | | $86.47 | | — | | — |

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| • | An equal investment in the S&P 500 Internet Software & Services Index; and |

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As a result of the evolving nature of our business and our acquisition of LoopNet, on April 30, 2012, the company's Global Industry Classification Standard ("GICS") code was re-assigned by Standard & Poor's as Internet Software & Services.

Therefore, we now use the S&P 500 Internet Software & Services Index instead of the S&P 500 Application Software Index presented in prior years as an industry index for comparison against our total return.

In general, a comparable S&P 500 Index may change whenever there is a major corporate action.

SEC rules require that if an index is selected which is different from the index used in the immediately preceding fiscal year, the total return must be compared with both the newly selected index and the index used in the prior year.

As a result, a comparison of our total return to that of the S&P 500 Internet Software & Services Index and the S&P 500 Application Software Index is presented below.

We believe that the S&P 500 Internet Software & Services Index is an appropriate index to compare us with other companies in our industry and that it is a widely recognized and used index for which components and total return information are readily accessible to our stockholders to assist in their understanding of our performance relative to other companies in our industry.

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| CoStar Group, Inc. | | 100 | | | 69.71 | | | 88.40 | | | 121.82 | | | 141.23 | | | 189.14 | |

| S&P 500 Index | | 100 | | | 63.00 | | | 79.67 | | | 91.68 | | | 93.61 | | | 108.59 | |

| S&P 500 Internet Software & Services Index | | 100 | | | 45.41 | | | 83.86 | | | 86.01 | | | 90.53 | | | 108.48 | |

| S&P 500 Application Software Index | | 100 | | | 54.67 | | | 87.37 | | | 117.42 | | | 103.20 | | | 133.32 | |

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| First Quarter | | $ | 42.97 | | | $ | 38.22 | |

| Second Quarter | | $ | 45.95 | | | $ | 38.80 | |

| Third Quarter | | $ | 49.53 | | | $ | 37.66 | |

| Fourth Quarter | | $ | 57.75 | | | $ | 48.86 | |

| December 1 through 31 | | 5,099 | | $65.93 | | ¾ | | ¾ |

| Total | | 5,099 (1) | | $65.93 | | ¾ | | ¾ |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| CoStar Group, Inc. | | | 100 | | | | 88.22 | | | | 61.50 | | | | 77.99 | | | | 107.47 | | | | 124.59 | |

| S&P 500 Index | | | 100 | | | | 105.49 | | | | 66.46 | | | | 84.05 | | | | 96.71 | | | | 98.76 | |

| S&P 500 Application Software Index | | | 100 | | | | 111.07 | | | | 60.72 | | | | 97.04 | | | | 130.42 | | | | 114.62 | |

The following table provides selected consolidated financial and other operating data for the five years ended December 31, [removed: 2011.][added: 2012.]

The consolidated statement of operations data shown below for each of the three years ended December 31, [removed: 2009,] 2010, [added: 2011,] and [removed: 2011] [added: 2012] and the consolidated balance sheet data as of December 31, [removed: 2010 and] 2011 [added: and 2012] are derived from audited consolidated financial statements that are included in this report.

The consolidated statement of operations data for each of the years ended December 31, [removed: 2007 and] 2008 and [added: 2009 and] the consolidated balance sheet data as of December 31, [removed: 2007,] 2008, [added: 2009,] and [removed: 2009] [added: 2010] shown below are derived from audited consolidated financial statements for those years that are not included in this report.

| | [removed: |] Year Ended December 31, | | | | | | | | | | | | | | | | | | |

| Consolidated Statement of Operations Data: | [removed: | 2007 | | | |] 2008 | | | | 2009 | | | | 2010 | | | | 2011 | | | [added: | 2012 | | |]

| Revenues | [removed: |] $ | [removed: 192,805] [added: 212,428] | | | $ | [removed: 212,428] [added: 209,659] | | | $ | [removed: 209,659] [added: 226,260] | | | $ | [removed: 226,260] [added: 251,738] | | | $ | [removed: 251,738] [added: 349,936] | |

| Cost of revenues | [removed: |] [added: 73,408] | [removed: 76,704] | | | [added: 73,714] | [removed: 73,408] | | | [added: 83,599] | [removed: 73,714] | | | [added: 88,167] | [removed: 83,599] | | | [added: 114,866] | [removed: 88,167] | |

| Gross margin | [removed: |] [added: 139,020] | [removed: 116,101] | | | [added: 135,945] | [removed: 139,020] | | | [added: 142,661] | [removed: 135,945] | | | [added: 163,571] | [removed: 142,661] | | | [added: 235,070] | [removed: 163,571] | |

| Operating expenses | [removed: |] [added: 99,232] | [removed: 98,249] | | | [added: 104,110] | [removed: 99,232] | | | [added: 119,886] | [removed: 104,110] | | | [added: 141,800] | [removed: 119,886] | | | [added: 207,630] | [removed: 141,800] | |

| Income from operations | [removed: |] [added: 39,788] | [removed: 17,852] | | | [added: 31,835] | [removed: 39,788] | | | [added: 22,775] | [removed: 31,835] | | | [added: 21,771] | [removed: 22,775] | | | [added: 27,440] | [removed: 21,771] | |

| Interest and other [removed: income, net |] [added: income] | [added: 4,914] | [removed: 8,045] | | | [added: 1,253] | [removed: 4,914] | | | [added: 735] | [removed: 1,253] | | | [added: 798] | [removed: 735] | | | [added: 526] | [removed: 798] | |

| Income before income taxes | [removed: |] [added: 44,702] | [removed: 25,897] | | | [added: 33,088] | [removed: 44,702] | | | [added: 23,510] | [removed: 33,088] | | | [added: 22,569] | [removed: 23,510] | | | [added: 23,134] | [removed: 22,569] | |

| Income tax expense, net | [removed: |] [added: 20,079] | [removed: 9,946] | | | [added: 14,395] | [removed: 20,079] | | | [added: 10,221] | [removed: 14,395] | | | [added: 7,913] | [removed: 10,221] | | | [added: 13,219] | [removed: 7,913] | |

| Net income | [removed: |] $ | [removed: 15,951] [added: 24,623] | | | $ | [removed: 24,623] [added: 18,693] | | | $ | [removed: 18,693] [added: 13,289] | | | $ | [removed: 13,289] [added: 14,656] | | | $ | [removed: 14,656] [added: 9,915] | |

| Net income per share [removed: \-] [added: —] basic | [removed: |] $ | [removed: 0.84] [added: 1.27] | | | $ | [removed: 1.27] [added: 0.95] | | | $ | [removed: 0.95] [added: 0.65] | | | $ | [removed: 0.65] [added: 0.63] | | | $ | [removed: 0.63] [added: 0.37] | |

| Net income per share [removed: \-] [added: —] diluted | [removed: |] $ | [removed: 0.82] [added: 1.26] | | | $ | [removed: 1.26] [added: 0.94] | | | $ | [removed: 0.94] [added: 0.64] | | | $ | [removed: 0.64] [added: 0.62] | | | $ | [removed: 0.62] [added: 0.37] | |

| Weighted average shares outstanding [removed: \-] [added: —] basic | [removed: |] [added: 19,372] | [removed: 19,044] | | | [added: 19,780] | [removed: 19,372] | | | [added: 20,330] | [removed: 19,780] | | | [added: 23,131] | [removed: 20,330] | | | [added: 26,533] | [removed: 23,131] | |

| Weighted average shares outstanding [removed: \-] [added: —] diluted | [removed: |] [added: 19,550] | [removed: 19,404] | | | [added: 19,925] | [removed: 19,550] | | | [added: 20,707] | [removed: 19,925] | | | [added: 23,527] | [removed: 20,707] | | | [added: 26,949] | [removed: 23,527] | |

| | [removed: |] As of December 31, | | | | | | | | | | | | | | | | | | |

| Consolidated Balance Sheet Data: | [removed: | 2007 | | | |] 2008 | | | | 2009 | | | | 2010 | | | | 2011 | | | [added: | 2012 | | |]

| Cash, cash equivalents, short-term and long-term investments | [removed: |] $ | [removed: 187,426] [added: 224,590] | | | $ | [removed: 224,590] [added: 255,698] | | | $ | [removed: 255,698] [added: 239,316] | | | $ | [removed: 239,316] [added: 573,379] | | | $ | [removed: 573,379] [added: 177,726] | |

| Working capital | [removed: |] [added: 183,347] | [removed: 167,441] | | | [added: 203,660] | [removed: 183,347] | | | [added: 188,279] | [removed: 203,660] | | | [added: 521,401] | [removed: 188,279] | | | [added: 97,925] | [removed: 521,401] | |

| Total assets | [removed: |] [added: 334,384] | [removed: 321,843] | | | [added: 404,579] | [removed: 334,384] | | | [added: 439,648] | [removed: 404,579] | | | [added: 771,035] | [removed: 439,648] | | | [added: 1,165,139] | [removed: 771,035] | |

| Stockholders’ equity | [removed: |] [added: 303,421] | [removed: 281,805] | | | [added: 359,006] | [removed: 303,421] | | | [added: 381,502] | [removed: 359,006] | | | [added: 659,177] | [removed: 381,502] | | | [added: 826,343] | [removed: 659,177] | |

| | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | |

| Interest and other expense | — | | | | — | | | | — | | | | — | | | | (4,832 | | ) |

| | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | |

| Total long-term liabilities | 1,827 | | | | 1,826 | | | | 7,252 | | | | 50,076 | | | | 237,158 | | |

| | |

| --- | --- |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Total liabilities | | | 40,038 | | | | 30,963 | | | | 45,573 | | | | 58,146 | | | | 111,858 | |

| | | As of December 31, | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Other Operating Data: | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | |

| Number of subscription client sites | | 14,467 | | | 15,920 | | | 16,020 | | | 16,781 | | | 18,183 | |

| Millions of properties in database | | 2.7 | | | 3.2 | | | 3.6 | | | 4.0 | | | 4.2 | |

| | |

| | |

As of December 31, [removed: 2011,] [added: 2012,] we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or supervised by, the Company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with [removed: generally accepted accounting principles.][added: GAAP.]

The Company’s internal control over financial reporting is supported by written 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 Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with [removed: generally accepted accounting principles,] [added: GAAP,] and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; 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.

In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2011] [added: 2012] based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).

Based on this assessment, management did not identify any material weakness in the Company's internal control, and management has concluded that the Company's internal control over financial reporting was effective as of December 31, [removed: 2011.][added: 2012.]

| | |

| | |

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2012] [added: 2013] annual meeting of stockholders.

| | |

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2012] [added: 2013] annual meeting of stockholders.

| | |

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2012] [added: 2013] annual meeting of stockholders.

| | |

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2012] [added: 2013] annual meeting of stockholders.

| | |

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2012] [added: 2013] annual meeting of stockholders.

| | |

Years Ended December 31, [removed: 2009,] 2010, [added: 2011,] and [removed: 2011] [added: 2012] (in thousands):

| Allowance for doubtful accounts and billing adjustments (1) | | Balance at Beginning of Year | | | | Charged to Expense | | | | [added: Charged to Other Accounts (2) | | | |] Write-offs, Net of Recoveries | | | | Balance at End of Year | | |

| Year ended December 31, 2010 | | $ | 2,863 | | | $ | 1,471 | | | $ | [added: — | | | $ |] 1,919 | | | $ | 2,415 | |

| Year ended December 31, 2011 | | $ | 2,415 | | | $ | 1,525 | | | $ | [added: — | | | $ |] 1,416 | | | $ | 2,524 | |

| (1) | Additions to the allowance for doubtful accounts are charged to bad debt expense. [removed: Additions to the allowance for billing adjustments are charged against revenues.] |

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 [removed: 23rd] [added: 28th] day of February [removed: 2012.][added: 2013.]

| /s/ Michael R. Klein | | Chairman of the Board | | February [removed: 23, 2012] [added: 28, 2013] |

| /s/ Andrew C. Florance | | Chief Executive Officer and | | February [removed: 23, 2012] [added: 28, 2013] |

| /s/ Brian J. Radecki | | Chief Financial Officer | | February [removed: 23, 2012] [added: 28, 2013] |

| /s/ David Bonderman | | Director | | February [removed: 23, 2012] [added: 28, 2013] |

| /s/ Warren H. Haber | | Director | | February [removed: 23, 2012] [added: 21, 2013] |

| /s/ Christopher J. Nassetta | | Director | | February [removed: 23, 2012] [added: 21, 2013] |

| /s/ Michael J. Glosserman | | Director | | February [removed: 23, 2012] [added: 26, 2013] |

| /s/ David J. Steinberg | | Director | | February [removed: 23, 2012] [added: 25, 2013] |

| 2.2 | | Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., [removed: CoStar Group, Inc.] [added: the Registrant] 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). |

| [removed: 3.1] [added: 4.1] | | [removed: Restated] [added: Specimen Common Stock] Certificate [removed: of Incorporation] (Incorporated by reference to Exhibit [removed: 3.1] [added: 4.1 to] the Registration Statement on Form [removed: S-1] [added: S-4] of the Registrant (Reg. No. [removed: 333-47953)] [added: 333-174214)] filed with the Commission on [removed: March 13, 1998 (the “1998 Form S-1”)).] [added: June 3, 2011).] |

| [removed: 3.2] [added: 3.1] | | [removed: Certificate of Amendment of] [added: Amended and] Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the [removed: Registrant’s] [added: Registrant's Current] Report on Form [removed: 10-Q for] [added: 8-K filed with] the [removed: quarter ended] [added: Commission on] June [removed: 30, 1999).] [added: 8, 2012).] |

| [removed: 3.3] [added: 3.2] | | 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, [removed: 2011.] [added: 2011).] |

| *10.2 | | CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit [removed: 99.2] [added: 10.1] to the Registrant’s Current Report on Form 8-K filed June 8, [removed: 2011.] [added: 2012).] |

INDEX TO EXHIBITS [removed: ¾] [added: —] (CONTINUED)

| [removed: 10.19] [added: 10.20] | | 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). |

| [removed: 10.20] [added: 10.21] | | 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). |

| [removed: 10.21] [added: 10.22] | | 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). |

| 10.25 | | Voting and Support Agreement, dated as of April 27, 2011, by and among [removed: CoStar Group, Inc.,] [added: the Registrant,] 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). |

| 101 | | The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended December, [removed: 2011,] [added: 2012,] formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, [removed: 2009, 2010] [added: 2010, 2011] and [removed: 2011,] [added: 2012,] respectively; (ii) Consolidated [added: Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012, respectively; (iii) Consolidated] Balance Sheets at December 31, [removed: 2010] [added: 2011] and December 31, [removed: 2011,] [added: 2012,] respectively; [removed: (iii)] [added: (vi)] Consolidated Statements of [removed: Stockholders’’] [added: Stockholders’] Equity for the years ended December 31, [removed: 2009, 2010] [added: 2010, 2011] and [removed: 2011,] [added: 2012,] respectively; (iv) Consolidated Statements of Cash Flows for years ended December 31, [removed: 2009, 2010] [added: 2010, 2011] and [removed: 2011,] [added: 2012,] 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). |

| Reports of Independent Registered Public Accounting Firm | [removed: F-2] [added: [F-2](#sDC5E3EBB6E43C704192CC2E19CA96BEB)] |

| Consolidated Statements of Operations for the years ended December 31, [removed: 2009, 2010 and] [added: 2010,] 2011 [added: and 2012] | [removed: F-4] [added: [F-4](#s2C48429DB29CD2B25000C2E1919E7F80)] |

| Consolidated Balance Sheets as of December 31, [removed: 2010 and] 2011 [added: and 2012] | [removed: F-5] [added: [F-6](#sB961206715709D5973EBC2E191B001E3)] |

| Consolidated Statements of Stockholders’ Equity for the years ended December 31, [removed: 2009, 2010 and] [added: 2010,] 2011 [added: and 2012] | [removed: F-6] [added: [F-7](#s72DAB101BE737FA53B07C2E1919ADB23)] |

| Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2009, 2010 and] [added: 2010,] 2011 [added: and 2012] | [removed: F-7] [added: [F-8](#s80F87443A0D7D4414B4CC2E1919DA0FA)] |

| Notes to Consolidated Financial Statements | [removed: F-8] [added: [F-9](#sE1B2D62B8364039A5B13C2E19D81E43E)] |

We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, [removed: 2011] [added: 2012] and [removed: 2010,] [added: 2011,] and the related consolidated statements of operations, [removed: stockholders’] [added: comprehensive income, stockholders'] equity, and cash flows for each of the three years in the period ended December 31, [removed: 2011.][added: 2012.]

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, [removed: 2011] [added: 2012] and [removed: 2010,] [added: 2011,] and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2011,] [added: 2012,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CoStar Group, [removed: Inc.’s] [added: Inc.'s] internal control over financial reporting as of December 31, [removed: 2011,] [added: 2012,] 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 [removed: 23, 2012] [added: 28, 2013] expressed an unqualified opinion thereon.

We have audited CoStar Group, [removed: Inc.’s] [added: Inc.'s] internal control over financial reporting as of December 31, [removed: 2011,] [added: 2012,] based on criteria established in Internal [removed: Control—Integrated] [added: Control-Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).

In our opinion, CoStar Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2011,] [added: 2012,] 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 [added: of CoStar Group, Inc.] as of December 31, [removed: 2011] [added: 2012] and [removed: 2010,] [added: 2011,] and the related consolidated statements of operations, [removed: stockholders’] [added: comprehensive income, stockholders'] equity, and cash flows for each of the three years in the period ended December 31, [removed: 2011 of CoStar Group, Inc.] [added: 2012] and our report dated February [removed: 23, 2012] [added: 28, 2013] expressed an unqualified opinion thereon.

| | [removed: |] Year Ended December 31, | | | | | | | | | | |

| | [removed: | 2009] [added: 2010] | | | | [removed: 2010] [added: 2011] | | | | [removed: 2011] [added: 2012] | | |

| Revenues | [removed: |] $ | [removed: 209,659] [added: 226,260] | | | $ | [removed: 226,260] [added: 251,738] | | | $ | [removed: 251,738] [added: 349,936] | |

| | | | | | | | | | | | | | | | | | | | | |

| Year ended December 31, 2012 | | $ | 2,524 | | | $ | 1,456 | | | $ | 475 | | | $ | 1,520 | | | $ | 2,935 | |

| | |

| | |

| (2) | Amounts represent opening balances from acquired businesses. |

| | | |

| | | | | |

| | | | | |

| /s/ John W. Hill | | Director | | February 25, 2013 |

| John W. Hill | | | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| *10.19 | | Leaving Agreement dated February 27, 2013, between CoStar U.K. Limited and Paul Marples (filed herewith). |

| 10.26 | | Credit Agreement dated February 16, 2012, by and among the Registrant, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2012). |

| 10.27 | | First Amendment dated as of April 25, 2012, to the Credit Agreement dated as of February 16, 2012, among the Registrant, CoStar Realty Information, Inc., the Lenders from time to time party thereto and JPMorgan Chase Bank N.A., as Administrative Agent (Incorporated by referenced to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 30, 2012). |

| | |

| | |

| Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012 | [F-5](#s70C931B83EFD78120B7ED6C794BD00BE) |

February 28, 2013

February 28, 2013

| | | | | | | | | | | | |

| | | | | | | | | | | | |

| | | | | | | | | | | | |

| | | | | | | | | | | | |

| Interest and other expense | — | | | | — | | | | (4,832 | | ) |

| | | | | | | | | | | | |

| | | | | | | | | | | | |

| Other comprehensive income (loss), net of tax | | | | | | | | | | | | |

| Foreign currency translation adjustment | | (1,064 | | ) | | 25 | | | | 1,277 | | |