Item 15. Exhibits and Financial Statement Schedules

(a)(1) The following financial statements are filed as a part of this report: CoStar Group, Inc. Consolidated Financial Statements.

(a)(2) Financial statement schedules:

Schedule II – Valuation and Qualifying Accounts

Years Ended December 31, 2013, 2014, and 2015 (in thousands):

Allowance for Doubtful Accounts and Billing Adjustments (1)		Balance at Beginning of Year				Charged to Expense				Charged to Other Accounts (2)				Write-offs, Net of Recoveries				Balance at End of Year
Year ended December 31, 2013		$	2,935			$	2,317			$	—			$	1,855			$	3,397
Year ended December 31, 2014		$	3,397			$	4,822			$	881			$	4,285			$	4,815
Year ended December 31, 2015		$	4,815			$	7,002			$	1,470			$	5,809			$	7,478

(1)	Additions to the allowance for doubtful accounts are charged to bad debt expense.

(2)	Amounts represent opening balances from acquired businesses.

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

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

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the 25th day of February 2016.

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

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

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

Signature		Capacity		Date
/s/ Michael R. Klein		Chairman of the Board		February 25, 2016
Michael R. Klein
/s/ Andrew C. Florance		Chief Executive Officer and		February 25, 2016
Andrew C. Florance		President and a Director
		(Principal Executive Officer)
/s/ Scott T. Wheeler		Chief Financial Officer		February 25, 2016
Scott T. Wheeler		(Principal Financial and Accounting Officer)
/s/ Michael J. Glosserman		Director		February 23, 2016
Michael J. Glosserman
/s/ Warren H. Haber		Director		February 18, 2016
Warren H. Haber
/s/ John W. Hill		Director		February 25, 2016
John W. Hill
/s/ Christopher J. Nassetta		Director		February 17, 2016
Christopher J. Nassetta
/s/ David J. Steinberg		Director		February 17, 2016
David J. Steinberg

INDEX TO EXHIBITS

Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of April 27, 2015, by and among CoStar Realty Information, Inc., Orange, LLC, Network Communications, Inc., and Shareholder Representative Services LLC (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on April 29, 2015).
3.1		Third Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 6, 2013).
3.2		Third Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on September 24, 2013).
4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of the Registrant (Reg. No. 333-174214) filed with the Commission on June 3, 2011).
*10.1		CoStar Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005).
*10.2		CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2012).
*10.3		CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007).
*10.4		Form of Stock Option Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.5		Form of Stock Option Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.8.1 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.6		Form of Restricted Stock Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.7		Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed June 22, 2007).
*10.8		Form of 2007 Plan Restricted Stock Unit Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-K for the year ended December 31, 2013).
*10.9		Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
*10.10		Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
*10.11		Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
*10.12		Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its directors (Incorporated by reference to Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
*10.13		Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.12 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
*10.14		Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007).
*10.15		CoStar Group, Inc. 2011 Incentive Bonus Plan (Incorporated by referenced to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2011).
*10.16		CoStar Group, Inc. Amended and Restated Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed with the Commission on September 14, 2015).
*10.17		Summary of Non-Employee Director Compensation (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2013).

INDEX TO EXHIBITS — (CONTINUED)

Exhibit No.		Description
*10.18		Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission on April 27, 1998).
*10.19		First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008).
10.20		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).
10.21		Deed of Office Lease by and between GLL L-Street 1331, LLC and CoStar Realty Information, Inc., dated February 18, 2011, and made effective as of June 1, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011).
10.22		Asset Purchase Agreement, dated as of February 28, 2014, by and between Classified Ventures, LLC and CoStar Group, Inc. (Incorporated by reference to Exhibit 10.1 to CoStar’s Current Report on Form 8-K, filed March 3, 2014).
10.23		Credit Agreement, dated as of April 1, 2014, by and among CoStar Group, Inc., 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 CoStar’s Current Report on Form 8-K, filed April 4, 2014).
10.24		Amendment No. 1 to the Credit Agreement by and among CoStar Group, Inc., as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to CoStar’s Current Report on Form 8-K, filed June 5, 2015).
10.25		Form of Voting Agreement, by and among CoStar Realty Information, Inc. and the funds and accounts managed by Beach Point Capital Management LP (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on April 29, 2015).
21.1		Subsidiaries of the Registrant (filed herewith).
23.1		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101		The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, 2013, 2014 and 2015, respectively; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2014 and 2015, respectively; (iii) Consolidated Balance Sheets at December 31, 2014 and December 31, 2015, respectively; (iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2014 and 2015, respectively; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2014 and 2015, respectively; (vi) Notes to the Consolidated Financial Statements that have been detail tagged; and (vii) Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report).

• Management Contract or Compensatory Plan or Arrangement.

COSTAR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the years ended December 31, 2013, 2014 and 2015	F-4
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2014 and 2015	F-5
Consolidated Balance Sheets as of December 31, 2014 and 2015	F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2014 and 2015	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2014 and 2015	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoStar Group, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CoStar Group, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 25, 2016

F-2

Report of Independent Registered Public Accounting Firm

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

We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). CoStar Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Network Communications, Inc. related to accounts receivable and revenues, which are included in 2015 consolidated financial statements of CoStar Group, Inc. and constituted 0.1% of total assets as of December 31, 2015 and 5.7% of revenues for the year then ended. Our audit of internal control over financial reporting of CoStar Group, Inc. also did not include an evaluation of the internal control over financial reporting of Network Communications, Inc.

In our opinion, CoStar Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, 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 of CoStar Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015 of CoStar Group, Inc. and our report dated February 25, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 25, 2016

F-3

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2013				2014				2015
Revenues	$	440,943			$	575,936			$	711,764
Cost of revenues	129,185				156,979				188,885
Gross margin	311,758				418,957				522,879
Operating expenses:
Selling and marketing	98,708				150,305				302,226
Software development	46,757				55,426				65,760
General and administrative	96,956				103,916				115,507
Purchase amortization	15,183				28,432				27,931
	257,604				338,079				511,424
Income from operations	54,154				80,878				11,455
Interest and other income	326				516				537
Interest and other expense	(6,943		)		(10,481		)		(9,411		)
Income before income taxes	47,537				70,913				2,581
Income tax expense, net	17,803				26,044				6,046
Net income (loss)	$	29,734			$	44,869			$	(3,465	)
Net income (loss) per share — basic	$	1.07			$	1.48			$	(0.11	)
Net income (loss) per share — diluted	$	1.05			$	1.46			$	(0.11	)
Weighted average outstanding shares — basic	27,670				30,215				31,950
Weighted average outstanding shares — diluted	28,212				30,641				31,950

See accompanying notes.

F-4

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

		Year Ended December 31,
		2013				2014				2015
Net income (loss)		$	29,734			$	44,869			$	(3,465	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment		610				(1,690		)		(1,466		)
Net decrease in unrealized loss on investments		378				836				256
Total other comprehensive income (loss)		988				(854		)		(1,210		)
Total comprehensive income (loss)		$	30,722			$	44,015			$	(4,675	)

See accompanying notes.

F-5

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2014				2015
ASSETS
Current assets:
Cash and cash equivalents	$	527,012			$	421,818
Accounts receivable, net of allowance for doubtful accounts of approximately $4,815 and $7,478 as of December 31, 2014 and 2015, respectively	38,694				40,276
Deferred and other income taxes, net	20,007				—
Income tax receivable	1,027				430
Prepaid expenses and other current assets	9,736				10,209
Total current assets	596,476				472,733
Long-term investments	17,151				15,507
Deferred income taxes, net	—				9,107
Property and equipment, net	73,753				88,311
Goodwill	1,138,805				1,252,945
Intangible assets, net	241,622				238,318
Deposits and other assets	2,676				2,650
Total assets	$	2,070,483			$	2,079,571
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	16,665			$	16,746
Accounts payable	8,608				9,673
Accrued wages and commissions	23,155				31,045
Accrued expenses	27,001				31,469
Deferred gain on the sale of building	2,523				2,523
Deferred rent	—				1,687
Deferred revenue	38,003				42,138
Total current liabilities	115,955				135,281
Long-term debt, less current portion	355,136				338,366
Deferred gain on the sale of building	23,762				21,239
Deferred rent	27,032				29,628
Deferred income taxes, net	30,349				4,585
Income taxes payable	4,703				6,692
Total liabilities	556,937				535,791
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—				—
Common stock, $0.01 par value; 60,000 shares authorized; 32,318 and 32,509 issued and outstanding as of December 31, 2014 and 2015, respectively	323				325
Additional paid-in capital	1,405,414				1,440,321
Accumulated other comprehensive loss	(6,384		)		(7,594		)
Retained earnings	114,193				110,728
Total stockholders’ equity	1,513,546				1,543,780
Total liabilities and stockholders’ equity	$	2,070,483			$	2,079,571

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock							Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total Stockholders’ Equity
	Shares			Amount
Balance at December 31, 2012	28,348			$	283			$	792,988			$	(6,518	)		$	39,590			$	826,343
Net income	—			—				—				—				29,734				29,734
Foreign currency translation adjustment	—			—				—				610				—				610
Net decrease in unrealized loss on investments	—			—				—				378				—				378
Exercise of stock options	409			3				16,820				—				—				16,823
Restricted stock grants	238			2				(2		)		—				—				—
Restricted stock grants surrendered	(158	)		—				(8,469		)		—				—				(8,469		)
Stock compensation expense, net of forfeitures	—			—				41,403				—				—				41,403
Employee stock purchase plan	11			—				1,455				—				—				1,455
Excess tax benefit from stock-based compensation	—			—				19,585				—				—				19,585
Balance at December 31, 2013	28,848			288				863,780				(5,530		)		69,324				927,862
Net income	—			—				—				—				44,869				44,869
Foreign currency translation adjustment	—			—				—				(1,690		)		—				(1,690		)
Net decrease in unrealized loss on investments	—			—				—				836				—				836
Exercise of stock options	68			1				3,802				—				—				3,803
Restricted stock grants	260			2				(2		)		—				—				—
Restricted stock grants surrendered	(321	)		(2		)		(50,553		)		—				—				(50,555		)
Stock compensation expense, net of forfeitures	—			—				28,503				—				—				28,503
Stock issued for equity offering	3,450			34				529,326				—				—				529,360
Employee stock purchase plan	13			—				2,152				—				—				2,152
Excess tax benefit from stock-based compensation	—			—				28,406				—				—				28,406
Balance at December 31, 2014	32,318			323				1,405,414				(6,384		)		114,193				1,513,546
Net loss	—			—				—				—				(3,465		)		(3,465		)
Foreign currency translation adjustment	—			—				—				(1,466		)		—				(1,466		)
Net decrease in unrealized loss on investments	—			—				—				256				—				256
Exercise of stock options	60			1				5,068				—				—				5,069
Restricted stock grants	239			2				(2		)		—				—				—
Restricted stock grants surrendered	(121	)		(1		)		(16,435		)		—				—				(16,436		)
Stock compensation expense, net of forfeitures	—			—				35,153				—				—				35,153
Employee stock purchase plan	13			—				2,595				—				—				2,595
Excess tax benefit from stock-based compensation	—			—				8,528				—				—				8,528
Balance at December 31, 2015	32,509			$	325			$	1,440,321			$	(7,594	)		$	110,728			$	1,543,780

See accompanying notes.

F-7

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2013				2014				2015
Operating activities:
Net income (loss)	$	29,734			$	44,869			$	(3,465	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	12,495				15,111				19,967
Amortization	27,563				55,261				58,565
Amortization of debt issuance costs	3,014				3,312				3,311
Impairment loss	—				1,799				2,778
Property and equipment write-off	104				1,004				681
Excess tax benefit from stock-based compensation	(19,585		)		(28,406		)		(8,528		)
Stock-based compensation expense	41,549				28,267				34,537
Deferred income tax benefit, net	(12,740		)		(1,366		)		(5,792		)
Provision for losses on accounts receivable	2,317				4,822				7,002
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(6,607		)		(12,353		)		(3,999		)
Income taxes payable	29,295				24,542				11,380
Prepaid expenses and other current assets	2,934				(2,846		)		367
Deposits and other assets	399				(157		)		686
Accounts payable and other liabilities	(3,882		)		6,078				9,938
Deferred revenue	1,708				3,972				3,817
Net cash provided by operating activities	108,298				143,909				131,245
Investing activities:
Proceeds from sale and settlement of investments	76				5,675				1,900
Purchases of property and equipment and other assets	(19,042		)		(27,444		)		(35,061		)
Acquisitions, net of cash acquired	—				(584,218		)		(182,341		)
Net cash used in investing activities	(18,966		)		(605,987		)		(215,502		)
Financing activities:
Proceeds from long-term debt	—				550,000				—
Payments of long-term debt	(17,500		)		(318,125		)		(20,000		)
Payments of debt issuance costs	—				(9,969		)		—
Payments of deferred consideration	(1,344		)		(1,344		)		—
Excess tax benefit from stock-based compensation	19,585				28,406				8,528
Repurchase of restricted stock to satisfy tax withholding obligations	(8,469		)		(50,555		)		(16,436		)
Proceeds from equity offering, net of transaction costs	—				529,360				—
Proceeds from exercise of stock options and employee stock purchase plan	18,133				5,740				7,404
Net cash provided by (used in) financing activities	10,405				733,513				(20,504		)
Effect of foreign currency exchange rates on cash and cash equivalents	189				(376		)		(433		)
Net increase (decrease) in cash and cash equivalents	99,926				271,059				(105,194		)
Cash and cash equivalents at beginning of year	156,027				255,953				527,012
Cash and cash equivalents at end of year	$	255,953			$	527,012			$	421,818

See accompanying notes.

F-8

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

1.	ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and online marketplace services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information covering the United States (“U.S.”) and parts of the United Kingdom (“U.K.”), Canada, Spain and France. The Company provides online marketplaces for commercial real estate, apartment rentals, lands for sale and businesses for sale. The Company operates within two operating segments, North America and International, and its services are typically distributed to its clients under subscription-based license agreements that renew automatically, a majority of which have a term of one year.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, useful lives of property and equipment and intangible assets, recoverability of long-lived assets and intangible assets with definite lives, goodwill, income taxes, fair value of equity instruments, fair value of auction rate securities, accounting for business combinations and contingencies, among others. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses. Actual results could differ from these estimates.

Reclassifications

Certain previously reported amounts in the consolidated balance sheets as of December 31, 2014 and Note 12 have been reclassified to conform to the Company's current presentation as a result of the retrospective application of the authoritative guidance to simplify the presentation of debt issuance costs. Additionally, certain previously reported amounts in Note 10 have been reclassified to conform to the Company's current presentation within the reconciliation of the Company’s provision for income taxes and the amount computed at the statutory federal income tax rate.

Revenue Recognition

The Company primarily derives revenues by providing access to its proprietary database of commercial real estate information. The Company generally charges a fixed monthly amount for its subscription-based services. The Company and its subsidiaries' subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography, the number and types of services to which a client subscribes, the number of properties a client advertises and the prominence and placement of a client's advertised properties in the search results. A majority of the subscription-based license agreements have a term of one year and renew automatically.

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed and determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured.

Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sale of subscription licenses and is recognized over the term of the license agreement.

F-9

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Cost of Revenues

Cost of revenues principally consists of salaries and related expenses for the Company’s researchers who collect and analyze the commercial real estate data that is the basis for the Company’s information, analytics and online marketplaces. Additionally, cost of revenues includes the cost of data from third-party data sources, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names and other intangible assets and database technology.

Foreign Currency Translation

The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars using the exchange rates as of the balance sheet dates. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period. Gains and losses resulting from translation are included in accumulated other comprehensive loss. Net gains or losses resulting from foreign currency exchange transactions are included in the consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2013, 2014 and 2015.

Accumulated Other Comprehensive Loss

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

	As of December 31,
	2014				2015
Foreign currency translation adjustment	$	(5,693	)		$	(7,159	)
Accumulated net unrealized loss on investments, net of tax	(691		)		(435		)
Total accumulated other comprehensive loss	$	(6,384	)		$	(7,594	)

There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2013, 2014 and 2015, respectively.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs include e-commerce, television, radio, print and other media advertising. Advertising costs were approximately $7.9 million, $28.7 million and $132.1 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Income Taxes

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the Company expects differences to reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that some or all of an asset may not be realized through future taxable earnings or implementation of tax planning strategies. Interest and penalties related to income tax matters are recognized in income tax expense.

Net Income (Loss) Per Share

Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s potentially dilutive securities include stock options and restricted stock. Diluted net income (loss) per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Stock-Based Compensation

Equity instruments issued in exchange for employee services are accounted for using a fair-value based method and the fair value of such equity instruments is recognized as expense in the consolidated statements of operations.

Stock-based compensation expense is measured at the grant date of the stock-based awards that vest over set time periods based on their fair values, and is recognized on a straight-line basis as expense over the vesting periods of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on performance, the Company assesses the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition may fluctuate from period to period based on those estimates. For equity instruments that vest based on a performance condition and a market condition, the Company estimates the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards. Stock-based compensation expense is updated based on the expected achievement of the related performance conditions at the end of each reporting period. If the performance conditions are not met, no stock-based compensation expense will be recognized, and any previously recognized stock-based compensation expense will be reversed.

In 2012, the Company granted performance-based restricted common stock awards that vest upon the Company’s achievement of $90.0 million of cumulative net income before interest, income taxes, depreciation and amortization (“EBITDA”) over a period of four consecutive calendar quarters if such performance is achieved by March 31, 2017, subject to certain approvals under the CoStar Group, Inc. 2007 Stock Incentive Plan. As of March 31, 2014, the Company had satisfied all performance conditions and the award recipients had satisfied all service conditions, and as a result, the restricted common stock granted under these awards vested. The Company recorded approximately $21.8 million, $2.2 million and $0 of stock-based compensation expense related to the 2012 performance-based restricted common stock awards for the years ended December 31, 2013, 2014 and 2015, respectively.

In February 2014, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2016. In March 2015, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2017. These grants of restricted common stock are also subject to continuing employment requirements and a market condition based on total shareholder return (“TSR”). The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the same three-year performance period. As of December 31, 2015, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that the performance and market conditions for the 2014 and 2015 awards would be met by their respective forfeiture dates. As a result, the Company recorded a total of approximately $1.1 million and $2.8 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the years ended December 31, 2014 and 2015, respectively. The Company expects to record estimated stock-based compensation expense related to the performance-based restricted common stock awards of approximately $5.3 million over the periods 2016, 2017 and 2018.

Cash flows resulting from excess tax benefits are classified as part of cash flows from operating and financing activities. Excess tax benefits represent tax benefits for stock-based compensation in excess of the associated deferred tax asset for such equity compensation recorded as an increase to stockholders' equity. Net cash proceeds from the exercise of stock options and the purchase of shares under the Employee Stock Purchase Plan (“ESPP”) were approximately $18.1 million, $5.7 million and $7.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. The Company realized approximately $19.6 million, $28.4 million and $8.5 million of excess tax benefits from stock options exercised and restricted stock awards vested for the years ended December 31, 2013, 2014 and 2015, respectively.

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Stock-Based Compensation — (Continued)

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

	Year Ended December 31,
	2013				2014				2015
Cost of revenues	$	4,553			$	4,759			$	5,815
Selling and marketing	4,954				3,776				5,114
Software development	7,244				5,095				5,712
General and administrative	24,798				14,637				17,896
Total stock-based compensation	$	41,549			$	28,267			$	34,537

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market fund investments and commercial paper.

Investments

The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities (“ARS”). Investments are carried at fair value.

Concentration of Credit Risk and Financial Instruments

The Company performs ongoing credit evaluations of its customers’ financial conditions and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’s lack of dependence on any individual customer mitigates the risk of nonpayment of the Company’s accounts receivable. No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2013, 2014 and 2015. The carrying amount of the accounts receivable approximates the net realizable value. The carrying value of the accounts receivable, accounts payable, accrued expenses and long-term debt approximates fair value.

The Company holds cash at major financial institutions that often exceed Federal Deposit Insurance Corporation insured limits. The Company believes its credit risk is minimal. The Company manages its credit risk associated with cash concentrations by concentrating its cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits.

Accounts Receivable, Net of Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the aging of the balances, and current economic conditions that may affect a customer’s ability to pay.

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation and amortization. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:

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

Qualifying internal-use software costs incurred during the application development stage, which consist primarily of internal product development costs, outside services and purchased software license costs are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred.

Goodwill and Intangible Assets

Goodwill represents the excess of costs over the fair value of assets of acquired businesses. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually by each reporting unit. The Company’s operating segments, North America and International, are the reporting units tested for potential impairment. To determine whether it is necessary to perform the two-step goodwill impairment test, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to assess qualitative factors, then the Company performs the two-step process. The first step is to determine the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the Company's discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss.

To determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount or if the Company elects not to assess qualitative factors, then the Company performs a quantitative impairment test. The Company estimates the fair value of its existing indefinite-lived intangible assets using the relief from royalty method that includes significant assumptions and estimates including the Company's discount rate, revenue growth rate and royalty rate. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the revenue growth rate are based on the Company's forecasts, business plans and economic projections. Assumptions about the royalty rate are based on royalty agreements for comparable companies with similar intangible assets.

Intangible assets with estimable useful lives that arose from acquisitions on or after July 1, 2001 are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Intangible assets are reviewed for impairment at least annually, and more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Goodwill and Intangible Assets — (Continued)

Acquired database technology, customer base and trade names and other intangible assets are related to the Company’s acquisitions (see Notes 3, 7 and 8). Acquired database technology is amortized on a straight-line basis over periods ranging from five months to eight years. With the exception of the acquired trade name recorded in connection with the acquisition of LoopNet, acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from seven months to fifteen years. The acquired trade name recorded in connection with the LoopNet acquisition has an indefinite estimated useful life and is not amortized, but is subject to annual impairment tests. Acquired intangible assets characterized as customer base consists of acquired customer contracts and the related customer relationships and are amortized over periods ranging from ten years to thirteen years. Acquired customer bases are typically amortized on an accelerated basis related to the expected economic benefit of the intangible asset. The cost of capitalized building photography is amortized on a straight-line basis over periods ranging from five months to five years.

Long-Lived Assets

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized as interest expense over the term of the related debt using the effective interest method. These amounts are reflected in the consolidated balance sheets as a direct deduction from a combination of the current and long-term portion of debt. Upon a refinancing, previously capitalized debt issuance costs are expensed and included in loss on extinguishment of debt if the Company determines that there has been a substantial modification of the related debt. If the Company determines that there has not been a substantial modification of the related debt, any previously capitalized debt issuance costs are amortized as interest expense over the term of the new debt instrument using the effective interest method. The Company had capitalized debt issuance costs, net of amortization, of approximately $13.2 million and $9.9 million as of December 31, 2014 and 2015, respectively. The debt issuance costs are associated with the financing commitment received from JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”) on April 27, 2011, the subsequent term loan facility and revolving credit facility established under a credit agreement dated February 16, 2012 (the “2012 Credit Agreement”), the financing commitment received from J.P. Morgan Bank, Bank of America, N.A., SunTrust Bank and Wells Fargo Bank, National Association on February 28, 2014, and the subsequent term loan facility and revolving credit facility established under a credit agreement dated April 1, 2014 (the “2014 Credit Agreement”). See Note 9 for additional information regarding the term loan facility and revolving credit facility. The Company amortized debt issuance costs of approximately $3.0 million, $3.3 million and $3.3 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Business Combinations

The Company allocates the purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired database technology, and acquired trade names from a market participant's perspective, useful lives and discount rates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. See Note 3 for additional information regarding the Company's recent business combinations.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard that is designed to improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance permits the use of either a full retrospective method or a modified retrospective approach. The modified retrospective approach would be applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. The original effective date of the new standard was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued an accounting standards update that defers by one year the effective date of this new revenue recognition standard. As a result, the new standard will be effective for annual reporting periods beginning after December 15, 2017, although companies may adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The Company has not yet determined when it will adopt the standard or selected a transition method and is currently evaluating the impact this guidance will have on its financial statements.

In April 2015, the FASB issued authoritative guidance to simplify the presentation of debt issuance costs. This guidance requires a company to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. In August 2015, the FASB issued an accounting standards update to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The guidance allows an entity to present debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the line-of-credit arrangement. The April 2015 guidance and the August 2015 guidance are effective on a retrospective basis for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The Company has elected to early adopt this guidance on a retrospective basis. This guidance did not have a material impact on the Company's results of operations for the years ended December 31, 2013, 2014 and 2015, but it did require changes to the presentation of the 2014 and 2015 consolidated balance sheets and the notes to the consolidated financial statements. The Company had capitalized debt issuance costs, net of amortization, of approximately $13.2 million and $9.9 million as of December 31, 2014 and December 31, 2015, respectively. These amounts are reflected in the consolidated balance sheets as a direct deduction from a combination of the current and long-term portion of debt, rather than as an asset, in accordance with the authoritative guidance. See Note 9 for further details on the presentation of debt issuance costs.

In November 2015, the FASB issued authoritative guidance to simplify the presentation of deferred income taxes. This guidance requires a company to present deferred income tax assets and liabilities as non-current in the balance sheets. The guidance requiring a tax-paying component of a company to offset deferred tax liabilities and assets and present the deferred taxes as a single amount is not affected by this guidance. This guidance is effective on either a prospective or retrospective basis for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is permitted. The Company has elected to early adopt this guidance on a prospective basis and as a result, prior periods were not retrospectively adjusted. This guidance did not have a material impact on the Company's results of operations for the year ended December 31, 2015.

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

3.	ACQUISITIONS

Apartments.com

On February 28, 2014, the Company and Classified Ventures, LLC (“CV”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”). Pursuant to the Asset Purchase Agreement, on April 1, 2014 (the “Closing Date”), the Company purchased from CV certain assets and assumed certain liabilities, in each case, related to the Apartments.comTM business (collectively referred to as “Apartments.com”). Apartments.com is a national online apartment rentals resource for renters, property managers and owners. Apartments.com offers renters a searchable database of apartment listings and provides professional property management companies and landlords with an advertising destination. Renters can conduct personalized searches of apartment listings and view video demonstrations and community reviews through the Apartments.com website and mobile applications. The Apartments.com network of rental websites also includes ApartmentHomeLiving.com, another national online apartment rentals resource. The acquisition increased the Company's presence in the multifamily vertical.

In consideration for the purchase of Apartments.com, on April 1, 2014, the Company paid $587.1 million in cash, including an estimated $2.1 million in connection with a preliminary net working capital adjustment as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the purchase price was reduced by approximately $2.9 million following the final determination of the net working capital of Apartments.com as of the Closing Date, and CV paid the Company $2.9 million on July 9, 2014.

The Company applied the acquisition method to account for the Apartments.com transaction, which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The following table summarizes the amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands):

Accounts receivable	$	11,402
Goodwill	421,724
Acquired trade names and other intangible assets	71,779
Acquired customer base	69,684
Acquired database technology	11,489
Acquired building photography	1,006
Other assets and liabilities	(2,866		)
Fair value of identifiable net assets acquired	$	584,218

The net assets of Apartments.com were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based on, but were not limited to, future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates.

The acquired customer base for the acquisition consists of one distinct intangible asset, is composed of acquired customer contracts and the related customer relationships, and has an estimated useful life of ten years. The acquired database technology had an estimated useful life of one year due to the Company's intent to replace the acquired database technology, which it did in February of 2015. The acquired trade names and other intangible assets have a weighted average estimated useful life of thirteen years. The acquired building photography has an estimated useful life of three years. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology, acquired building photography and acquired trade names and other intangible assets is recognized on a straight-line basis over their respective estimated useful lives. Goodwill recorded in connection with this acquisition is not amortized, but is subject to annual impairment tests. The $421.7 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment and the Company expects the entire amount of goodwill to be deductible for income tax purposes in future periods.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the Apartments.com acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with Apartments.com's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

3.	ACQUISITIONS — (CONTINUED)

As a result of the acquisition of Apartments.com, the Company recorded approximately $1.4 million in acquisition-related costs for the year ended December 31, 2014. These costs include expenses directly related to acquiring Apartments.com, are expensed as incurred and are recorded in general and administrative expense. The Company did not record any acquisition-related costs as a result of the acquisition of Apartments.com for the years ended December 31, 2013 and 2015.

Apartment Finder

Pursuant to the definitive agreement and plan of merger with Network Communications, Inc. (“NCI”) dated April 27, 2015 (the “Merger Agreement”), on June 1, 2015, the Company acquired 100% of the outstanding stock of NCI and the related Apartment Finder business (collectively referred to as “Apartment Finder”) from the former stockholders of NCI. Apartment Finder provides lead generation, advertising and Internet marketing solutions to property managers and owners through its main service, ApartmentFinder.comTM. The acquisition furthered the Company's expansion into the multifamily vertical.

In consideration for the purchase of Apartment Finder, on June 1, 2015, the Company paid $172.7 million in cash, including an estimated $2.7 million in connection with a preliminary adjustment for net working capital as of the closing date. Pursuant to the terms of the Merger Agreement, the purchase price was increased by approximately $21,000 following the final determination of the net working capital of NCI as of the closing date, and this amount was paid to NCI in the third quarter of 2015.

The Company applied the acquisition method to account for the Apartment Finder transaction, which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The following table summarizes the preliminary amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands):

Cash and cash equivalents	$	39
Accounts receivable	4,556
Goodwill	107,692
Acquired trade names and other intangible assets	23,642
Acquired customer base	21,856
Acquired database technology	4,076
Acquired building photography	2,425
Deferred income taxes, net	9,290
Other assets and liabilities	(849		)
Fair value of identifiable net assets acquired	$	172,727

The net assets of Apartment Finder were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based on, but were not limited to, future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates.

The acquired customer base for the acquisition consisted of three distinct intangible assets, is composed of acquired customer contracts and the related customer relationships, and has a weighted average estimated useful life of ten years. The acquired database technology had an estimated useful life of five months due to the Company's intent to replace the acquired database technology, which it did in December of 2015. The acquired trade names and other intangible assets have a weighted average estimated useful life of nine years. The acquired building photography had an estimated useful life of five months. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology, acquired building photography and acquired trade names and other intangible assets is recognized on a straight-line basis over their respective estimated useful lives. Goodwill recorded in connection with this acquisition is not amortized, but is subject to annual impairment tests. The $107.7 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. None of the goodwill recognized is expected to be deductible for income tax purposes in future periods.

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

3.	ACQUISITIONS — (CONTINUED)

Apartment Finder — (Continued)

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the Apartment Finder acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with Apartment Finder's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

4.	INVESTMENTS

The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as ARS. Investments are carried at fair value.

Scheduled maturities of investments classified as available-for-sale as of December 31, 2015 are as follows (in thousands):

Maturity		Fair Value
Due in:
2016		$	—
2017 — 2020		1,052
2021 — 2025		—
2026 and thereafter		14,455
Available-for-sale investments		$	15,507

The Company had no realized gains on its investments for the years ended December 31, 2013, 2014 and 2015, respectively. The Company had no realized losses on its investments for the years ended December 31, 2013, 2014 and 2015, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

Changes in unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss in stockholders’ equity until realized. A decline in market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.

As of December 31, 2015, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Auction rate securities	$	15,942			$	610			$	(1,045	)		$	15,507
Available-for-sale investments	$	15,942			$	610			$	(1,045	)		$	15,507

As of December 31, 2014, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Auction rate securities	$	17,842			$	380			$	(1,071	)		$	17,151
Available-for-sale investments	$	17,842			$	380			$	(1,071	)		$	17,151

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

4.	INVESTMENTS — (CONTINUED)

The unrealized losses on the Company’s investments as of December 31, 2014 and 2015 were generated primarily from changes in interest rates and ARS that failed to settle at auction, due to adverse conditions in the global credit markets. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company does not intend to sell these instruments and it is not more likely than not that the Company will be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2014 and 2015. See Note 5 for further discussion of the fair value of the Company’s financial assets.

The components of the Company’s investments in an unrealized loss position for twelve months or longer were as follows (in thousands):

	December 31,
	2014								2015
	Aggregate Fair Value				Gross Unrealized Losses				Aggregate Fair Value				Gross Unrealized Losses
Auction rate securities	$	16,329			$	(1,071	)		$	14,455			$	(1,045	)
Investments in an unrealized loss position	$	16,329			$	(1,071	)		$	14,455			$	(1,045	)

The Company did not have any investments in an unrealized loss position for less than twelve months as of December 31, 2014 and 2015, respectively.

5.	FAIR VALUE

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2015 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Cash	$	405,597			$	—			$	—			$	405,597
Money market funds	5,043				—				—				5,043
Commercial paper	11,178				—				—				11,178
Auction rate securities	—				—				15,507				15,507
Total assets measured at fair value	$	421,818			$	—			$	15,507			$	437,325

F-19

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

5.	FAIR VALUE — (CONTINUED)

The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2014 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Cash	$	160,275			$	—			$	—			$	160,275
Money market funds	310,482				—				—				310,482
Commercial paper	56,255				—				—				56,255
Auction rate securities	—				—				17,151				17,151
Total assets measured at fair value	$	527,012			$	—			$	17,151			$	544,163

The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education.

The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2013 to December 31, 2015 (in thousands):

	Auction Rate Securities
Balance at December 31, 2013	$	21,990
Decrease in unrealized loss included in accumulated other comprehensive loss	836
Settlements	(5,675		)
Balance at December 31, 2014	$	17,151
Decrease in unrealized loss included in accumulated other comprehensive loss	256
Settlements	(1,900		)
Balance at December 31, 2015	$	15,507

ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The majority of the underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value.

As of December 31, 2015, the Company held ARS with $16.8 million par value, all of which failed to settle at auction. The majority of these investments are of high credit quality with AAA credit ratings and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s consolidated balance sheet as of December 31, 2015.

While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2015. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period.

The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents the Company's estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of December 31, 2014 and 2015 was approximately 4.1% and 4.7%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS.

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

5.	FAIR VALUE — (CONTINUED)

Based on this assessment of fair value, as of December 31, 2015, the Company determined there was a net decline in the fair value of its ARS investments of approximately $435,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, the Company may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.

6.	PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

	December 31,
	2014				2015
Leasehold improvements	$	42,026			$	49,752
Furniture, office equipment and research vehicles	31,016				38,129
Computer hardware and software	49,655				56,656
Property and equipment, gross	122,697				144,537
Accumulated depreciation and amortization	(48,944		)		(56,226		)
Property and equipment, net	$	73,753			$	88,311

Depreciation expense for property and equipment was approximately $12.5 million, $15.1 million and $20.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.

7.	GOODWILL

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

	North America				International				Total
Goodwill, December 31, 2013	$	692,639			$	25,948			$	718,587
Acquisition	421,724				—				421,724
Effect of foreign currency translation	—				(1,506		)		(1,506		)
Goodwill, December 31, 2014	1,114,363				24,442				1,138,805
Acquisitions	112,947				2,400				115,347
Effect of foreign currency translation	—				(1,207		)		(1,207		)
Goodwill, December 31, 2015	$	1,227,310			$	25,635			$	1,252,945

The Company recorded goodwill of approximately $421.7 million in connection with the April 1, 2014 acquisition of the Apartments.com Business. The Company recorded goodwill of approximately $107.7 million in connection with the June 1, 2015 acquisition of Apartment Finder and recorded goodwill of approximately $2.4 million in connection with the July 1, 2015 acquisition of the assets of Belbex Corporate, S.L., a small commercial real estate information provider operating in Madrid, Spain. Additionally, the Company recorded goodwill of approximately $5.3 million during the year ended December 31, 2015 in connection with the acquisitions of certain assets related to the business operations of Apartment Finder's independent distributors within various markets.

During the fourth quarters of 2013, 2014 and 2015, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

8.	INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands, except amortization period data):

	December 31,								Weighted- Average Amortization Period (in years)
	2014				2015
Capitalized product development cost	$	2,140			$	2,243			4
Accumulated amortization	(2,140		)		(2,172		)
Capitalized product development cost, net	—				71
Building photography	14,943				17,677				4
Accumulated amortization	(12,665		)		(15,875		)
Building photography, net	2,278				1,802
Acquired database technology	88,739				77,905				5
Accumulated amortization	(60,498		)		(62,818		)
Acquired database technology, net	28,241				15,087
Acquired customer base	199,826				221,409				10
Accumulated amortization	(102,443		)		(129,782		)
Acquired customer base, net	97,383				91,627
Acquired trade names and other intangible assets(1)	128,171				153,910				12
Accumulated amortization	(14,451		)		(24,179		)
Acquired trade names and other intangible assets, net	113,720				129,731
Intangible assets, net	$	241,622			$	238,318

(1) The weighted-average amortization period for acquired trade names excludes $48.7 million for acquired trade names recorded in connection with the LoopNet acquisition on April 30, 2012, which amount is not amortized, but is subject to annual impairment tests.

Amortization expense for intangible assets was approximately $27.6 million, $55.3 million and $58.6 million for the years ended December 31, 2013, 2014 and 2015, respectively.

In the aggregate, the Company expects amortization for intangible assets existing as of December 31, 2015 for future periods to be approximately $43.0 million, $28.5 million, $20.3 million, $17.4 million and $15.8 million for the years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively.

During the fourth quarter of 2015, the Company completed the annual impairment test of the acquired trade name recorded in connection with the LoopNet acquisition and concluded that this indefinite-lived intangible asset was not impaired.

During the first quarter of 2014, the Company finalized a branding initiative plan that included, among other things, re-branding some of the services provided by its wholly owned subsidiaries, in order to better organize, update, streamline and optimize the Company’s branding strategy. The Company launched the branding initiative externally in the second quarter of 2014. Following the external launch of the branding initiative, the Company ceased using certain of its trade names. The Company evaluated these assets for impairment during the first quarter of 2014 and determined that the carrying value of trade names that the Company ceased using exceeded the fair value. The adjusted carrying value of the Company's trade name intangible assets associated with the branding initiative was amortized through the date of the external launch of the branding initiative and the fully amortized gross carrying amount was written off during the three months ended June 30, 2014.

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

8.	INTANGIBLE ASSETS — (CONTINUED)

During the third quarter of 2014, the Company finalized and launched a separate marketing plan that included the re-branding of a service provided by another one of its wholly owned subsidiaries, in order to provide its customers with a more enhanced experience. Following the external launch of the marketing plan, the Company ceased using one of its trade names. The Company evaluated the asset for impairment during the third quarter of 2014 and determined that the carrying value of the trade name that the Company ceased using exceeded the fair value.

As a result of these branding and marketing plans, during 2014, the Company recorded impairment charges of approximately $1.8 million in cost of revenues in the consolidated statements of operations within its North America operating segment for the year ended December 31, 2014.

In February 2015, as a result of the Company's product development efforts, it launched an improved Apartments.com website with a cleaner look, information about actual rental availabilities, rents and other fees, and better search functionality. In conjunction with the launch, the Company ceased using the database technology acquired in the acquisition of Apartments.com. The Company evaluated the acquired database technology for impairment during the first quarter of 2015 and determined that the carrying value of the acquired database technology was impaired as the Company had ceased using the asset. The Company recorded an impairment charge of approximately $1.4 million in cost of revenues in the consolidated statements of operations within the Company's North America operating segment for the year ended December 31, 2015.

In June 2015, following the June 1, 2015 acquisition of Apartment Finder, the Company decided to cease providing certain Apartment Finder services. Additionally, in June 2015, the Company decided to cease development work related to a development project within Apartment Finder. The Company evaluated the acquired customer base and acquired database technology for impairment during the second quarter of 2015 and, based on that evaluation, determined that the customer base and database technology assets associated with the ceased services and development work were impaired as they were not expected to provide any economic benefit to the Company. The Company recorded an impairment charge of approximately $1.4 million, most of which was recorded in general and administrative expenses in the consolidated statements of operations within the Company's North America operating segment for the year ended December 31, 2015.

9.	LONG-TERM DEBT

On April 1, 2014, the Company entered into the 2014 Credit Agreement by and among the Company, 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. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing of $150.0 million under the revolving credit facility on the Closing Date were used to refinance the 2012 Credit Agreement, including related fees and expenses, and to pay a portion of the consideration and transaction costs related to the acquisition of Apartments.com. The undrawn proceeds of the revolving credit facility are available for the Company's working capital needs and other general corporate purposes. During June 2014, the Company repaid the $150.0 million initial borrowing under the revolving credit facility. The carrying value of the term loan facility approximates fair value and can be estimated through Level 3 unobservable inputs using a valuation technique based on expected cash flows discounted using the current credit-adjusted risk-free rate, which approximates the rate of interest on the term loan facility at origination.

Effective April 1, 2014, the Company terminated the 2012 Credit Agreement and repaid all amounts outstanding thereunder, which amounts totaled $148.8 million. The Company evaluated the execution of the 2014 Credit Agreement and termination of the 2012 Credit Agreement and determined that the transactions did not qualify as an extinguishment of debt because the change in the present value of future cash flows between the initial term loan facility under the 2012 Credit Agreement and the new term loan facility under the 2014 Credit Agreement was not considered a substantial modification.

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

9.	LONG-TERM DEBT — (CONTINUED)

The revolving credit facility includes a subfacility for swingline loans of up to $10.0 million, and up to $10.0 million of the revolving credit facility is available for the issuance of letters of credit. The term loan facility will amortize in quarterly installments in amounts resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year after the Closing Date, with the remainder payable at final maturity. The loans under the 2014 Credit Agreement bear interest, at the Company's option, either (i) during any interest period selected by the Company, at the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus an initial spread of 2.00% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement) of the Company, or (ii) at the greatest of (x) the prime rate from time to time announced by JPMorgan Chase Bank, N.A., (y) the federal funds effective rate plus 0.5% and (z) LIBOR for a one-month interest period plus 1.00%, plus an initial spread of 1.00% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurs under the 2014 Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the 2014 Credit Agreement are guaranteed by all material subsidiaries of the Company and are secured by a lien on substantially all of the assets of the Company and those of its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date.

The 2014 Credit Agreement requires the Company to maintain (i) a First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 4.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 3.50 to 1.00 thereafter and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2014 Credit Agreement, a Total Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 5.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 4.50 to 1.00 thereafter. The 2014 Credit Agreement also includes other covenants, including covenants that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Company was in compliance with the covenants in the 2014 Credit Agreement as of December 31, 2015.

In connection with obtaining the term loan facility and revolving credit facility pursuant to the 2014 Credit Agreement, the Company incurred approximately $10.1 million in debt issuance costs as of April 1, 2014. The debt issuance costs were comprised of approximately $9.7 million in underwriting fees and approximately $400,000 primarily related to legal fees associated with the debt issuance. Approximately $10.0 million of the fees associated with the refinancing, along with the unamortized debt issuance cost from the 2012 Credit Agreement were capitalized and are amortized as interest expense over the term of the 2014 Credit Agreement using the effective interest method.

As of December 31, 2014 and 2015, no amounts were outstanding under the revolving credit facilities. Total interest expense for the term loan facilities and revolving credit facilities was approximately $6.9 million, $10.5 million and $9.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. Interest expense included amortized debt issuance costs of approximately $3.0 million, $3.3 million and $3.3 million for the years ended December 31, 2013, 2014 and 2015, respectively. Total interest paid for the term loan facilities was approximately $4.3 million, $7.0 million and $6.1 million for the years ended December 31, 2013, 2014 and 2015, respectively.

The following table represents the Company's long-term debt (in thousands):

	December 31,
	2014				2015
Term loan facility	$	385,000			$	365,000
Debt issuance costs, net	(13,199		)		(9,888		)
Total debt	371,801				355,112
Current maturities of long-term debt	(20,000		)		(20,000		)
Current debt issuance costs, net	3,335				3,254
Total long-term debt, less current portion	$	355,136			$	338,366

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

9.	LONG-TERM DEBT — (CONTINUED)

Maturities of the Company's borrowings under the 2014 Credit Agreement for each of the next four years as of December 31, 2015 are as follows (in thousands):

Year ending December 31,	Maturities
Due in:
2016	$	20,000
2017	35,000
2018	55,000
2019	255,000
Long-term debt, including current maturities	$	365,000

10.	INCOME TAXES

The components of the provision for income taxes attributable to operations consist of the following (in thousands):

	Year Ended December 31,
	2013				2014				2015
Current:
Federal	$	26,516			$	24,741			$	10,295
State	3,996				2,761				1,503
Foreign	31				53				40
Total current	30,543				27,555				11,838
Deferred:
Federal	(10,919		)		(698		)		(7,475		)
State	(1,849		)		(813		)		1,683
Foreign	28				—				—
Total deferred	(12,740		)		(1,511		)		(5,792		)
Total provision for income taxes	$	17,803			$	26,044			$	6,046

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

10.	INCOME TAXES — (CONTINUED)

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

	December 31,
	2014				2015
Deferred tax assets:
Reserve for bad debts	$	1,825			$	2,849
Accrued compensation	7,287				10,725
Stock compensation	8,758				12,686
Net operating losses	15,665				36,406
Accrued reserve and other	3,360				3,515
Unrealized loss on securities	491				377
Deferred rent	5,902				7,274
Deferred revenue	1,879				2,243
Deferred gain on the sale of building	10,690				9,128
Total deferred tax assets, prior to valuation allowance	55,857				85,203
Valuation allowance	(7,783		)		(9,347		)
Total deferred tax assets, net of valuation allowance	48,074				75,856
Deferred tax liabilities:
Prepaids	(1,258		)		(1,335		)
Depreciation	(9,806		)		(13,047		)
Intangibles	(47,720		)		(56,952		)
Total deferred tax liabilities	(58,784		)		(71,334		)
Net deferred tax assets (liabilities)	$	(10,710	)		$	4,522

As of December 31, 2014 and 2015, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2014 includes an allowance for unrealized losses on ARS investments and foreign deferred tax assets. The valuation allowance as of December 31, 2015 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and state net operating losses and tax credits. The valuation allowance for the deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss.

The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses and tax credits in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses and tax credits before they expire.

The Company’s change in valuation allowance was a decrease of approximately $3.2 million for the year ended December 31, 2014 and an increase of approximately $1.6 million for the year ended December 31, 2015. The increase for the year ended December 31, 2015 is due to an increase in the valuation allowance for U.S. deferred tax assets of approximately $2.2 million primarily related to the change in local tax law that occurred during the first quarter of 2015, partially offset by the decrease in the valuation allowance for foreign deferred tax assets of approximately $551,000.

F-26

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

10.	INCOME TAXES — (CONTINUED)

The Company had U.S. income before income taxes of approximately $53.2 million, $70.6 million and $1.5 million for the years ended December 31, 2013, 2014 and 2015, respectively. The Company had foreign losses of approximately $5.6 million for the year ended December 31, 2013. The Company had foreign income before income taxes of approximately $273,000 and $1.1 million for the years ended December 31, 2014 and 2015, respectively.

The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands):

	Year Ended December 31,
	2013				2014				2015
Expected federal income tax provision at statutory rate	$	16,638			$	24,820			$	903
State income taxes, net of federal benefit	885				1,965				(678		)
Foreign income taxes, net effect	(724		)		336				469
Increase (decrease) in valuation allowance	588				(2,397		)		1,956
Nondeductible compensation	431				554				574
Nondeductible transaction costs	—				—				229
Meals and entertainment	272				415				1,032
Tax rate changes	25				61				1,203
Other adjustments	(312		)		290				358
Income tax expense, net	$	17,803			$	26,044			$	6,046

The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities.

The Company paid approximately $6.5 million, $3.0 million, and $1.3 million in income taxes for the years ended December 31, 2013, 2014 and 2015, respectively.

The Company has net operating loss carryforwards for international income tax purposes of approximately $24.6 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $64.3 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $6.9 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $2.3 million that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $1.2 million and $1.3 million in 2014 and 2015, respectively.

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

10.	INCOME TAXES — (CONTINUED)

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

Unrecognized tax benefits as of December 31, 2012	$	3,909
Increase for current year tax positions	66
Increase for prior year tax positions	2,037
Expiration of the statute of limitation for assessment of taxes	(55		)
Unrecognized tax benefits as of December 31, 2013	5,957
Increase for current year tax positions	51
Decrease for prior year tax positions	(189		)
Expiration of the statute of limitation for assessment of taxes	(70		)
Unrecognized tax benefits as of December 31, 2014	5,749
Increase for prior year tax positions	1,954
Expiration of the statute of limitation for assessment of taxes	(39		)
Unrecognized tax benefits as of December 31, 2015	$	7,664

Approximately $1.5 million and $1.4 million of the unrecognized tax benefits as of December 31, 2014 and 2015, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The Company recognized $62,000, $62,000 and $83,000 for interest and penalties in its consolidated statements of operations for the years ended December 31, 2013, 2014 and 2015, respectively. The Company had liabilities of $404,000, $466,000 and $549,000 for interest and penalties in its consolidated balance sheets as of December 31, 2013, 2014 and 2015, respectively. The Company does not anticipate the amount of the unrecognized tax benefits to change significantly over the next twelve months.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s federal income tax returns and most state income tax returns for tax years 2012 through 2014 remain open to examination. For states that have a four year statute of limitations, the state income tax returns for tax years 2011 through 2014 remain open to examination. The Company’s U.K. income tax returns for tax years 2009 through 2014 remain open to examination.

11.	COMMITMENTS AND CONTINGENCIES

The Company leases office facilities and office equipment under various non-cancelable operating leases. The leases contain various renewal options. Rent expense for the years ended December 31, 2013, 2014 and 2015 was approximately $18.3 million, $19.2 million and $21.4 million, respectively.

Future minimum lease payments as of December 31, 2015 are as follows (in thousands):

2016	$	22,896
2017	22,131
2018	20,477
2019	18,224
2020	18,130
2021 and thereafter	66,732
Total future minimum lease payments	$	168,590

On April 1, 2014, the Company entered into the 2014 Credit Agreement. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. See Note 9 for additional information regarding the term loan facility and revolving credit facility.

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

11.	COMMITMENTS AND CONTINGENCIES — (CONTINUED)

Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. In accordance with GAAP, the Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome may occur as a result of one or more of the Company’s current litigation matters, management has concluded that it is not probable that a loss has been incurred in connection with the Company’s current litigation. In addition, the Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in the Company’s current litigation and accordingly, the Company has not recognized any liability in the consolidated financial statements for unfavorable results, if any. Legal defense costs are expensed as incurred.

12.	SEGMENT REPORTING

The Company manages its business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and parts of Canada, and International, which includes parts of the U.K., Spain and France. The Company and its subsidiaries' subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. The Company’s subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through the Company's mobile application, CoStarGo®. CoStar Suite is the Company’s primary service offering in the North America and International operating segments. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is the Company’s net income (loss) before interest, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

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

	Year Ended December 31,
	2013				2014				2015
Revenues
North America	$	420,817			$	552,141			$	686,573
International
External customers	20,126				23,795				25,191
Intersegment revenue	339				57				41
Total International revenue	20,465				23,852				25,232
Intersegment eliminations	(339		)		(57		)		(41		)
Total revenues	$	440,943			$	575,936			$	711,764
EBITDA
North America	$	97,348			$	148,913			$	87,092
International	(3,136		)		2,337				2,895
Total EBITDA	$	94,212			$	151,250			$	89,987

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

12.	SEGMENT REPORTING — (CONTINUED)

The reconciliation of EBITDA to net income (loss) consists of the following (in thousands):

	Year Ended December 31,
	2013				2014				2015
EBITDA	$	94,212			$	151,250			$	89,987
Purchase amortization in cost of revenues	(11,883		)		(26,290		)		(30,077		)
Purchase amortization in operating expenses	(15,183		)		(28,432		)		(27,931		)
Depreciation and other amortization	(12,992		)		(15,650		)		(20,524		)
Interest income	326				516				537
Interest expense	(6,943		)		(10,481		)		(9,411		)
Income tax expense, net	(17,803		)		(26,044		)		(6,046		)
Net income (loss)	$	29,734			$	44,869			$	(3,465	)

Intersegment revenue recorded during 2013 was attributable to services performed for the Company’s wholly owned subsidiary, CoStar Portfolio Strategy, by Property and Portfolio Research Ltd., a wholly owned subsidiary of CoStar Portfolio Strategy. Intersegment revenue recorded during 2014 and 2015 was attributable to services performed for CoStar Portfolio Strategy by Grecam S.A.S. (“Grecam”), a wholly owned subsidiary of CoStar Limited, the Company's wholly owned U.K. holding company. Intersegment revenue is recorded at an amount the Company believes approximates fair value. North America EBITDA includes a corresponding cost for the services performed by Grecam and Property and Portfolio Research Ltd.

North America EBITDA includes an allocation of approximately $844,000, $1.1 million and $954,000 for the years ended December 31, 2013, 2014 and 2015, respectively. This allocation represents costs incurred for International employees involved in development activities of the Company's North America operating segment.

International EBITDA includes a corporate allocation of approximately $411,000, $261,000 and $256,000 for the years ended December 31, 2013, 2014 and 2015, respectively. This corporate allocation represents costs incurred for North America employees involved in management and expansion activities of the Company’s International operating segment.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

12.	SEGMENT REPORTING — (CONTINUED)

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

	December 31,
	2014				2015
Property and equipment, net
North America	$	71,209			$	86,191
International	2,544				2,120
Total property and equipment, net	$	73,753			$	88,311
Goodwill
North America	$	1,114,363			$	1,227,310
International	24,442				25,635
Total goodwill	$	1,138,805			$	1,252,945
Assets
North America	$	2,125,569			$	2,130,202
International	41,896				41,370
Total operating segment assets	$	2,167,465			$	2,171,572
Reconciliation of operating segment assets to total assets
Total operating segment assets	$	2,167,465			$	2,171,572
Investment in subsidiaries	(18,344		)		(18,344		)
Intersegment receivables	(78,638		)		(73,657		)
Total assets	$	2,070,483			$	2,079,571
Liabilities
North America	$	551,633			$	525,566
International	75,584				72,544
Total operating segment liabilities	$	627,217			$	598,110
Reconciliation of operating segment liabilities to total liabilities
Total operating segment liabilities	$	627,217			$	598,110
Intersegment payables	(70,280		)		(62,319		)
Total liabilities	$	556,937			$	535,791

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

13.	STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2015. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series.

Common Stock

The Company has 60,000,000 shares of common stock, $0.01 par value, authorized for issuance. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock.

Equity Offering

During June 2014, the Company completed a public equity offering of 3,450,000 shares of common stock for $160.00 per share. Net proceeds from the public equity offering were approximately $529.4 million, after deducting approximately $22.1 million of underwriting discounts and commissions and offering expenses of approximately $500,000. The Company has used and intends to continue to use the net proceeds from the sale of the securities to fund all or a portion of the costs of any strategic acquisitions it determines to pursue, to finance the growth of its business and for general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries, possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock.

14.	NET INCOME (LOSS) PER SHARE

The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousands except per share data):

	Year Ended December 31,
	2013				2014				2015
Numerator:
Net income (loss)	$	29,734			$	44,869			$	(3,465	)
Denominator:
Denominator for basic net income (loss) per share — weighted-average outstanding shares	27,670				30,215				31,950
Effect of dilutive securities:
Stock options and restricted stock	542				426				—
Denominator for diluted net income (loss) per share — weighted-average outstanding shares	28,212				30,641				31,950
Net income (loss) per share — basic	$	1.07			$	1.48			$	(0.11	)
Net income (loss) per share — diluted	$	1.05			$	1.46			$	(0.11	)

Employee stock options with exercise prices greater than the average market price of the Company’s common stock for the period are excluded from the calculation of diluted net income per share as their inclusion would be anti-dilutive. Additionally, shares of restricted common stock that vest based on Company performance and service conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. Finally, shares of restricted common stock units that vest based on Company service conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share.

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	NET INCOME (LOSS) PER SHARE — (CONTINUED)

Other than the shares of restricted common stock that vest based on Company performance conditions, no other potential common shares were excluded from the calculation of diluted net income for the year ended December 31, 2013. Stock options to purchase approximately 80,000 shares that were outstanding for the year ended December 31, 2014 were not included in the computation of diluted net income per share because the exercise price of the stock options was greater than the average market share price of the common stock during the period. The Company did not consider the impact of potentially dilutive securities for the year ended December 31, 2015 when calculating the diluted net loss per share because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Shares underlying restricted common stock awards and restricted stock units that vest based on Company performance and/or service conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. The following table summarizes the shares underlying the performance-based restricted stock awards and service-based restricted stock units excluded from the basic and diluted calculation (in thousands):

	Year Ended December 31,
	2013			2014			2015
Performance-based restricted stock awards	379			23			55
Service-based restricted stock units	—			1			1
Total shares excluded from computation	379			24			56

15.	EMPLOYEE BENEFIT PLANS

Stock Incentive Plans

In June 1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”) prior to consummation of the Company’s initial public offering. In April 2007, the Company’s Board of Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. All shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (excluding shares subject to outstanding awards) were rolled into the 2007 Plan and, as of that date, no shares of common stock were available for new awards under the 1998 Plan. The 1998 Plan continues to govern unexercised and unexpired awards issued under the 1998 Plan prior to June 7, 2007. The 1998 Plan provided for the grant of stock and stock options to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 1998 Plan could be incentive or non-qualified, and the exercise price for an incentive stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options and restricted stock grants under the 1998 Plan was determined by the Board of Directors or a committee thereof and was generally three to four years. Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all outstanding unexercisable options and restricted stock grants under the 1998 Plan immediately become exercisable.

F-33

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Incentive Plans — (Continued)

The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, employees, directors and consultants of the Company and its subsidiaries. Stock options granted under the 2007 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2007 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2007 Plan may be based on performance conditions. The Company has issued and/or reserved the following shares of common stock for issuance under the 2007 Plan (including an increase of 1,300,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 2, 2010 and an increase of 900,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 5, 2012): (a) 3,200,000 shares of common stock, plus (b) 121,875 shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan), and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards issued under the 2007 Plan prior to that date. Approximately 1.2 million and 1.0 million shares were available for future grant under the 2007 Plan as of December 31, 2014 and 2015, respectively.

At December 31, 2015, there was $61.7 million of unrecognized compensation cost related to stock incentive plans, net of forfeitures, which the Company expects to recognize over a weighted-average-period of 2.4 years.

Stock Options

Option activity was as follows:

	Number of Shares			Range of Exercise Price		Weighted- Average Exercise Price				Weighted- Average Remaining Contract Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2012	673,719			$25.00 - $60.23		$	45.20
Granted	126,800			$102.16 - $102.16		$	102.16
Exercised	(409,799	)		$25.00 - $58.95		$	41.05
Canceled or expired	(16,380	)		$36.48 - $58.95		$	47.54
Outstanding at December 31, 2013	374,340			$36.48 - $102.16		$	68.94
Granted	87,700			$201.04 - $201.04		$	201.04
Exercised	(68,126	)		$39.00 - $102.16		$	55.81
Canceled or expired	(23,735	)		$58.95 - $201.04		$	124.09
Outstanding at December 31, 2014	370,179			$36.48 - $201.04		$	99.12
Granted	89,500			$193.69 - $193.69		$	193.69
Exercised	(59,602	)		$36.48 - $201.04		$	85.48
Outstanding at December 31, 2015	400,077			$36.48 - $201.04		$	122.30			6.98		$	33,761
Exercisable at December 31, 2013	146,161			$36.48 - $60.23		$	47.72
Exercisable at December 31, 2014	188,656			$36.48 - $102.16		$	60.54
Exercisable at December 31, 2015	220,107			$36.48 - $201.04		$	77.63			5.76		$	28,408

F-34

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Options — (Continued)

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at the end of the period and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of the end of the period that had an exercise price less than the closing price on that date. Options to purchase 409,799, 68,126 and 59,602 shares were exercised during the years ended December 31, 2013, 2014, and 2015, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was $39.0 million, $8.9 million and $6.8 million for the years ended December 31, 2013, 2014, and 2015, respectively.

The weighted-average grant date fair value of each option granted during the years ended December 31, 2013, 2014 and 2015 using the Black-Scholes option-pricing model was $34.10, $58.12 and $56.53, respectively.

The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions in the following table:

	Year Ended December 31,
	2013			2014			2015
Dividend yield	0	%		0	%		0	%
Expected volatility	37	%		30	%		30	%
Risk-free interest rate	0.9	%		1.5	%		1.6	%
Expected life (in years)	5			5			5

The assumptions above 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 the Company’s stock price.

The following table summarizes information regarding options outstanding at December 31, 2015:

		Options Outstanding									Options Exercisable
Range of Exercise Price		Number of Shares			Weighted-Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price				Number of Shares			Weighted- Average Exercise Price
$36.48 - $42.50		55,051			4.06		$	41.25			55,051			$	41.25
$42.51 - $58.06		48,638			4.88		$	55.94			48,638			$	55.94
$58.07 - $59.59		45,567			6.14		$	58.95			45,567			$	58.95
$59.60 - $81.19		2,320			5.42		$	60.23			2,320			$	60.23
$81.20 - $147.93		82,801			7.19		$	102.16			45,599			$	102.16
$147.94 - $197.37		89,500			9.17		$	193.69			—			$	—
$197.38 - $201.04		76,200			8.16		$	201.04			22,932			$	201.04
$36.48 - $201.04		400,077			6.98		$	122.30			220,107			$	77.63

F-35

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Restricted Stock Awards

In February 2012, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the achievement of certain performance conditions. These awards support the Company’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 the Company. In May and December of 2012, the Company granted additional shares of restricted common stock that vest based on the achievement of certain performance conditions to other employees. These shares of performance-based restricted common stock vest upon the Company’s 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. The Company granted a total of 399,413 shares of performance-based restricted common stock during the year ended December 31, 2012. All of the awards were made under the 2007 Plan and pursuant to the Company’s standard form of restricted stock grant agreement. The number of shares granted was based on the fair market value of the Company’s common stock on the grant date. As of March 31, 2014, the Company had satisfied all performance conditions and the award recipients had satisfied all service conditions, and as a result, the restricted common stock granted under these awards vested. The Company recorded approximately $21.8 million, $2.2 million and $0 of stock-based compensation expense related to the 2012 performance-based restricted common stock for the years ended December 31, 2013, 2014 and 2015, respectively.

In February 2014, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2016. In March 2015, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2017. The number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 200% (if performance meets or exceeds the maximum achievement level) of the target award. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement. These awards support the Company’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 the Company.

The 2014 and 2015 performance-based restricted common stock awards are subject to continuing employment requirements and to a market condition. The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the same three-year performance period. At the end of the three-year performance period, if the performance condition is achieved at or above the pre-established threshold, the number of shares earned is further adjusted by a TSR payout percentage, which ranges between 80.0% and 120.0%, based on the Company’s TSR performance relative to that of the Russell 1000 Index over the respective three-year period. The Company granted a total of 24,720 shares of 2014 performance-based restricted common stock during the year ended December 31, 2014 and a total of 32,400 shares of 2015 performance-based restricted common stock during the year ended December 31, 2015.

The Company estimates the fair value of its performance-based restricted common stock awards with a market condition on the date of grant using a Monte-Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine the expected TSR performance ranking. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of performance-based restricted common stock awards with a market condition granted were as follows:

	Year Ended December 31,			Year Ended December 31,
	2014			2015
Dividend yield	0		%	0		%
Expected volatility	30		%	26		%
Risk-free interest rate	0.6		%	1.0		%
Expected life (in years)	3			3
Weighted-average grant date fair value	$	216.20		$	208.08

F-36

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Restricted Stock Awards — (Continued)

As of December 31, 2015, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that the performance and market conditions for the 2014 and 2015 performance-based restricted common stock awards would be met by their forfeiture dates. As a result, the Company recorded a total of approximately $1.1 million and $2.8 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the years ended December 31, 2014 and 2015, respectively. The Company expects to record an estimated stock-based compensation expense related to the performance-based restricted common stock awards of approximately $5.3 million over the periods 2016, 2017 and 2018.

The following table presents unvested restricted stock awards activity without a market condition and performance-based restricted common stock awards activity with a market condition for the year ended December 31, 2015:

	Restricted Stock Awards — without Market Condition							Restricted Stock Awards — with Market Condition
	Number of Shares			Weighted-Average Grant Date Fair Value per Share				Number of Shares			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock awards at December 31, 2014	556,793			$	126.01			22,560			$	216.20
Granted	207,442			$	201.88			32,400			$	208.08
Vested	(221,546	)		$	102.02			—			$	—
Canceled	(39,576	)		$	144.28			—			$	—
Unvested restricted stock awards at December 31, 2015	503,113			$	166.42			54,960			$	211.41

Restricted Stock Units

The following table presents unvested restricted stock units activity for the year ended December 31, 2015:

	Number of Shares			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock units at December 31, 2014	887			$	169.16
Granted	543			$	211.98
Vested	—			$	—
Canceled	—			$	—
Unvested restricted stock units at December 31, 2015	1,430			$	185.42

Employee 401(k) Plan

The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. In addition to the traditional 401(k), effective January 1, 2015, eligible employees have the option of making an after-tax contribution to a Roth 401(k) plan or a combination of both. In 2013, 2014 and 2015, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the 401(k) by the Company to match employee contributions for the years ended December 31, 2013, 2014 and 2015 were approximately $5.1 million, $6.1 million and $7.5 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2013, 2014 and 2015, respectively.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Employee Pension Plan

The Company maintains a Group Personal Pension Plan (the “Plan”) for all eligible employees in the Company’s U.K. offices. The Plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by Her Majesty's Revenue and Customs. In 2013, 2014 and 2015, the Company's matching contribution was based on the percentage contributed by the employee, up to a maximum of 6% of total compensation. Amounts contributed to the Plan by the Company to match employee contributions for the years ended December 31, 2013, 2014 and 2015 were approximately $280,000, $390,000 and $420,000, respectively.

Registered Retirement Savings Plan

As of January 1, 2015, the Company introduced a registered retirement savings plan (“RRSP”) for all eligible employees in the Company’s Canadian offices. In 2015, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the RRSP by the Company to match employee contributions for the year ended December 31, 2015 were approximately $40,000.

Employee Stock Purchase Plan

As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees participating in the plan authorize the Company to withhold specified amounts from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during each offering period. An offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. On June 3, 2015, the Company’s stockholders approved an amendment to the ESPP to increase the number of shares available for purchase under the ESPP by 100,000 shares. On September 14, 2015, the Company registered the issuance of these additional shares under the ESPP pursuant to the registration statement filed September 14, 2015. There were 21,774 and 108,547 shares available for purchase under the ESPP as of December 31, 2014 and 2015, respectively, and approximately 13,121 and 13,227 shares of the Company’s common stock were purchased under the ESPP during 2014 and 2015, respectively.

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