<SUBMISSION>
<ACCESSION-NUMBER>0000950133-02-001917
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>1
<PERIOD>20020331
<FILING-DATE>20020513
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>COSTAR GROUP INC
<CIK>0001057352
<ASSIGNED-SIC>7374
<IRS-NUMBER>522091508
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-24531
<FILM-NUMBER>02644219
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>2 BETHESDA METRO CENTER
<STREET2>10TH FLOOR
<CITY>BETHESDA
<STATE>MD
<ZIP>20814
<PHONE>3012158300
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>2 BETHESDA METRO CENTER
<CITY>BETHESDA
<STATE>MD
<ZIP>20814
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>w60575e10-q.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<HEAD>
<TITLE>e10-q</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center"><FONT size="2"><B>UNITED STATES</B>
</FONT>
<P align="center"><FONT size="2"><B>SECURITIES AND EXCHANGE COMMISSION</B>
</FONT>
<P align="center"><FONT size="2"><B>Washington, DC 20549</B>
</FONT>
<P align="center"><FONT size="2"><B>FORM 10-Q</B>
</FONT>
<P align="center"><FONT size="2"><B>(Mark One)</B>
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2"><B>&#091;X&#093;</B></FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2"><B>QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.</B></FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2"><B>For the quarterly period ended: March&nbsp;31, 2002</B>
</FONT>
<P align="center"><FONT size="2"><B>OR</B>
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2"><B>&#091;&nbsp;&nbsp;&nbsp;&#093;</B></FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2"><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.</B></FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2"><B>For the transition period from ___________ to ___________</B>
</FONT>
<P align="center"><FONT size="2"><B>Commission file number: 0-24531</B>
</FONT>
<P align="center"><FONT size="2"><B>COSTAR GROUP, INC.</B>
</FONT>
<P align="center"><FONT size="2"><B>(Exact name of registrant as specified in its charter)</B>
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="55%">
<TR valign="bottom">
        <TD width="51%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="44%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD align="center" valign="top"><FONT size="2"><B>DELAWARE<BR>
(State or other jurisdiction of<BR>
incorporation or organization)</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">
<B>52-2091509<BR>
(IRS Employer<BR>
Identification Number)</B></FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2"><B>2 BETHESDA METRO CENTER<BR>
BETHESDA, MD 20814<BR>
(301)&nbsp;215-8300</B>
</FONT>
<P align="center"><FONT size="2"><B>(Address, including zip code, and telephone number, including area code, of<BR>
registrant&#146;s principal executive offices)</B>
</FONT>
<P><FONT size="2">Indicate by check mark whether the registrant (1)&nbsp;has filed all reports
required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12&nbsp;months (or for such shorter period that the
registrant was required to file such reports), and (2)&nbsp;has been subject to such
filing requirements for the past 90&nbsp;days. Yes &#091; X &#093; &#151; No &#091;&nbsp;&nbsp;&#093;
</FONT>
<P><FONT size="2">As of May&nbsp;07, 2002, there were 15,730,133 shares outstanding of the
Registrant&#146;s Common Stock, par value $.01.
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P align="center"><FONT size="2"><B>COSTAR GROUP, INC.</B>
</FONT>
<P align="center"><FONT size="2"><B>TABLE OF CONTENTS</B>
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="91%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>PART I &#151; FINANCIAL INFORMATION</B></FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;1 - Financial Statements</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:31px; text-indent:-10px"><FONT size="2">Condensed Consolidated Statements of Operations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:31px; text-indent:-10px"><FONT size="2">Condensed Consolidated Balance Sheets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:31px; text-indent:-10px"><FONT size="2">Condensed Consolidated Statements of Cash Flows</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:31px; text-indent:-10px"><FONT size="2">Notes to Condensed Consolidated Financial Statements</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;2 - Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;3 - Quantitative and Qualitative Disclosures About Market Risk</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>PART II &#151; OTHER INFORMATION</B></FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;1 - Legal Proceedings</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;2 - Changes in Securities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;3 - Defaults upon Senior Securities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;4 - Submission of Matters to a Vote of Security Holders</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;5 - Other Information</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Item&nbsp;6 - Exhibits and Reports on Form&nbsp;8-K</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Signatures</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2"><B>2</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2"><B>PART 1 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;FINANCIAL INFORMATION</B>
</FONT>
<P><FONT size="2"><B>ITEM 1 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;FINANCIAL STATEMENTS</B>
</FONT>
<P align="center"><FONT size="2">CoStar Group, Inc.<BR>
Condensed Consolidated Statements of Operations<BR>
(in thousands, except per share data)<BR>
(unaudited)
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="61%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>For the Three Months</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>Ended March 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">19,061</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">17,354</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of revenues</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,096</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,990</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Gross margin</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,965</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,364</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating expenses:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Selling and marketing</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,669</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,909</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Software development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,397</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,229</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">General and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,867</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,701</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchase amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">893</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,790</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">13,826</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17,629</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss from operations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,861</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8,265</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other income, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">239</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">575</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss before income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,622</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(7,690</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income tax benefit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">41</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1,622</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,649</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic and diluted net loss per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.10</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.49</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted average common shares</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,720</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,575</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">See accompanying notes.
</FONT>
<P align="center"><FONT size="2"><B>3</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P align="center"><FONT size="2">CoStar Group, Inc.<BR>
Condensed Consolidated Balance Sheets<BR>
(in thousands)
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="65%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>March 31,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="3"><FONT size="1"><B>(unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">ASSETS</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current assets:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">31,154</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">30,746</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10,489</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,256</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts receivable, less allowance for doubtful
accounts of $2,199 and $2,483 as of
March&nbsp;31, 2002 and December&nbsp;31, 2001</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,282</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,983</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid expenses and other current assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">530</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">957</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">48,455</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">48,942</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">23,711</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">23,266</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated depreciation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(12,626</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(11,390</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,085</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,876</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">25,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">25,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intangible assets, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">34,595</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36,726</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deposits</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">325</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">357</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">120,205</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">123,646</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current liabilities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts payable and accrued expenses</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">8,884</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">11,095</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,843</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,532</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">13,727</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,627</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">106,478</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">108,019</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total liabilities and stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">120,205</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">123,646</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">See accompanying notes.
</FONT>
<P align="center"><FONT size="2"><B>4</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P align="center"><FONT size="2">CoStar Group, Inc.<BR>
Condensed Consolidated Statements of Cash Flows<BR>
(in thousands)<BR>
(unaudited)
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="71%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>For the Three Months</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>Ended March 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1,622</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,649</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Depreciation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,045</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,149</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,153</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,424</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Provision for losses on accounts receivable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">567</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">512</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income tax benefit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(41</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Changes in operating assets and liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,027</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(272</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by (used in) operating activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">116</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,877</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Investing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net purchases of property and equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(535</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(848</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill, intangibles and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(22</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(29</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchases and sales of short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">768</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,640</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by (used in) investing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">211</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,517</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Financing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net proceeds from exercise of stock options</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">81</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">352</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by financing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">81</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">352</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net increase (decrease)&nbsp;in cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">408</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5,042</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents at beginning of period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">30,746</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">43,925</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents at end of period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">31,154</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">38,883</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">See accompanying notes.
</FONT>
<P align="center"><FONT size="2"><B>5</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2"><B>COSTAR GROUP, INC.<br>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</B>
</FONT>
<P><FONT size="2"><B>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ORGANIZATION</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CoStar Group, Inc. (the &#147;Company&#148;) has created a comprehensive,
proprietary database of commercial real estate information for metropolitan
areas throughout the United States. Based on its unique database, the Company
provides information to the commercial real estate and related business
community and operates within one reportable business segment. The information
in the Company&#146;s database is distributed to its clients under license
agreements, which are typically one to three years in duration.
</FONT>
<P><FONT size="2"><B>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES</B>
</FONT>
<P><FONT size="2"><B>BASIS OF PRESENTATION</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements of the Company include the accounts
of LeaseTrend, Inc. (&#147;LeaseTrend&#148;) acquired on January&nbsp;8, 1999, Jamison
Research, Inc. (&#147;Jamison&#148;) acquired on January&nbsp;22, 1999, ARES Development
Group, LLC (&#147;ARES&#148;) acquired on September&nbsp;15, 1999, COMPS.COM, Inc. (&#147;Comps&#148;)
acquired on February&nbsp;10, 2000 and First Image Technologies, Inc. (&#147;First
Image&#148;) acquired and merged into Comps on November&nbsp;9, 2000. LeaseTrend and
Jamison were merged into CoStar Realty Information, Inc. (&#147;CoStar Realty&#148;) on
December&nbsp;31, 1999 and ARES was merged into CoStar Realty on December&nbsp;31, 2000.
Comps was merged into CoStar Realty on December&nbsp;31, 2001.
</FONT>
<P><FONT size="2"><B>INTERIM FINANCIAL STATEMENTS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. In
the opinion of the Company&#146;s management, the financial statements reflect all
adjustments necessary to present fairly the results of operations for the three
month periods ended March&nbsp;31, 2002 and 2001, the Company&#146;s financial position
at March&nbsp;31, 2002, and the cash flows for the three month periods ended March
31, 2002 and 2001. These adjustments are of a normal recurring nature.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain notes and other information have been condensed or omitted from
the interim financial statements presented in this Quarterly Report on Form
10-Q. Therefore, these financial statements should be read in conjunction with
the Company&#146;s Annual Report on Form&nbsp;10-K for the year ended December&nbsp;31, 2001
and the Company&#146;s Quarterly Reports on Form&nbsp;10-Q for the periods ended March
31, 2001, June&nbsp;30, 2001 and September&nbsp;30, 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The results of operations for the three month period ended March&nbsp;31, 2002
are not necessarily indicative of future financial results.
</FONT>
<P align="left"><FONT size="2"><B>CONSOLIDATION</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany
transactions.
</FONT>
<P align="left"><FONT size="2"><B>USE OF ESTIMATES</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
</FONT>
<P align="left"><FONT size="2"><B>RECLASSIFICATIONS</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain previously reported amounts have been reclassified to conform to
the Company&#146;s current presentation.
</FONT>
<P align="center"><FONT size="2"><B>6</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2"><B>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;GOODWILL</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Goodwill consists of the following (in thousands):
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="55%">
<TR valign="bottom">
        <TD width="56%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>March 31,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36,968</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36,968</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(11,223</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(11,223</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">25,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">25,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2"><B>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;INTANGIBLES ASSETS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intangibles assets consists of the following (in thousands):
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="66%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>March 31,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Capitalized product development costs</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,795</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,795</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,265</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,173</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">530</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">622</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Building photography</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,665</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,643</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Acquired database technology</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17,949</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17,949</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Customer base</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">31,945</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">31,945</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Tradename</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,198</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,198</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(24,692</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(22,631</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">34,065</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36,104</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intangible assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">34,595</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">36,726</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2"><B>7</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2"><B>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NEW ACCOUNTING PRONOUNCEMENTS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No.&nbsp;141, &#147;Business Combinations&#148;, and No.
142, &#147;Goodwill and Other Intangible Assets&#148;, effective for fiscal years
beginning after December&nbsp;15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Standards. Other intangible assets will continue to be amortized over their
useful lives. The Company has applied the new rules on accounting for goodwill
and intangible assets deemed to have indefinite lives beginning in the first
quarter of 2002. The Company estimates that the effect of the new rules will
be to decrease amortization expense related to goodwill by approximately $3.2
million for the year ending December&nbsp;31, 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the new rules, the Company will be required to perform an initial
impairment test (transitional test) of goodwill and indefinite lived intangible
assets within six months of adoption and perform subsequent impairment tests at
least annually. The Company expects to complete the transitional test by June
30, 2002 and currently does not anticipate any impairment loss as a result of
completing the initial transitional test. If any impairment charge is taken,
it will be recorded as a change in accounting principle (with respect to the
transitional impairment test completed within six months of adoption) or as an
operating expense in the period of impairment (with respect to the charge
occurring subsequent to the transitional impairment test period).
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As required by the new rules, the results for the prior year&#146;s quarter
(the quarter ended March&nbsp;31, 2001) have not been restated. Reconciliations of
previously reported net loss and net loss per share to the amounts adjusted for
the exclusion of goodwill amortization net of the related tax effects are as
follows:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="65%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>For the Three Months</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>Ended March 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Reported net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1,622</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,649</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill amortization, net of tax</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">808</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjusted net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1,622</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(6,841</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic and diluted net loss per share<br>
As reported</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.10</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.49</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD COLSPAN="2"><FONT size="2">&nbsp;&nbsp;&nbsp;Goodwill amortization, net of tax</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0.05</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjusted basic and diluted net loss per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.10</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.44</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted average common shares</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,720</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,575</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2"><B>8</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2"><B>ITEM 2 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following Management&#146;s Discussion and Analysis of Financial Condition
and Results of Operations contains &#147;forward-looking statements,&#148; which involve
many risks and uncertainties that could cause actual results to differ
materially from those discussed in these statements. Factors that could cause or
contribute to such differences include, but are not limited to, successful
adoption of our products, competition, general economic conditions, changes or
consolidations in the commercial real estate industry, managerial execution,
customer retention, development of our sales force, data quality, employee
retention, and our ability to adapt to technological changes. More information
concerning these and other potential factors that could cause actual results to
differ materially from those discussed in any forward-looking statements
include, but are not limited to, those stated below under the heading &#147;Risk
Factors&#148; and those included from time-to-time in our filings with the
Securities and Exchange Commission. All forward-looking statements are based
on information available to us on the date of this filing, and we assume no
obligation to update such statements. The following discussion should be read
in conjunction with our filings with the Securities and Exchange Commission and
the unaudited condensed consolidated financial statements included in this
report.
</FONT>
<P align="left"><FONT size="2"><B>Overview</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CoStar is the leading provider of information services to the U.S.
commercial real estate industry. We have created a digital marketplace where
the members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized commercial real estate information. Our wide array of
digital service offerings includes a leasing marketplace, a selling
marketplace, comparable sales information, decision support, tenant
information, property marketing, data hosting for clients&#146; Web sites, contact
management, property data integration and industry news. Substantially all of
our current services are digitally delivered over the Internet.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We completed our initial public offering in July, 1998, and received net
proceeds of approximately $22.7&nbsp;million. We primarily used those net proceeds
to fund the geographic and service expansion of our business, including three
strategic acquisitions, and to expand our sales and marketing organization. In
May, 1999, we completed a follow-on public offering and received net proceeds
of approximately $97.4&nbsp;million. We used a portion of those net proceeds to fund
the acquisition of COMPS.COM, Inc. (&#147;Comps&#148;) and we expect to use the remainder
of the proceeds primarily for development and distribution of new services,
expansion of all existing services across our current markets, geographic
expansion in the United States and international markets, strategic
acquisitions and working capital and general corporate purposes.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From 1994 through 2001, we expanded the geographical coverage of our
existing services and developed new services. In addition to internal growth,
this expansion included the acquisitions of Chicago ReSource, Inc. in Chicago
in 1996 and New Market Systems, Inc. in San Francisco in 1997. In August, 1998,
we expanded into the Houston region through the acquisition of Houston-based
real estate information provider C Data Services, Inc. In January, 1999, we
expanded further into the Midwest and Florida by acquiring LeaseTrend, and into
Atlanta and Dallas/Fort Worth by acquiring Jamison Research, Inc. In September,
1999, we acquired ARES, a Los Angeles based developer and distributor of ARES
for ACT!. In February, 2000, we acquired Comps. In November, 2000, we acquired
First Image Technologies.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since our inception, the development of our business has required
substantial investments for the expansion of services and the establishment of
operating regions throughout the United States, which has resulted in
substantial net losses on an overall basis. Throughout 1999 and 2000, we
experienced a rapid expansion in the number of services that we offer and the
number of regions in which we operate. By the beginning of 2001, we had
substantially completed our goal of establishing a national platform of
operating regions and service offerings in 50 market areas from which we
believe we can appropriately meet the needs of the commercial real estate
community for comprehensive national building specific information. During
2001, we focused on continuing to grow revenue while controlling and reducing
costs, in an effort to reduce operating losses, and ultimately, move our
business to profitability. As a result, in the third and fourth quarters of
2001 and the first quarter of 2002, the Company generated positive earnings
before interest, taxes, depreciation and amortization. We believe that the
opportunity to continue to grow revenue from our existing national platform and
services is significant and that a large component of the operating cost
structure of the Company consists of fixed operating costs. Therefore, based
on expected revenue growth and continued cost control, we believe that during
2002 we can reduce our overall operating losses as compared to 2001 and
generate positive operating cash flows.
</FONT>
<P align="center"><FONT size="2"><B>9</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may develop and distribute new services and expand existing services
across our current regions and we may experience continued geographic expansion
in the United States and/or international markets. The incremental cost of
introducing new services in the future may reduce the profitability of a region
or cause it to incur losses. Therefore, while we expect current services
offerings in existing regions to remain profitable and provide substantial
funding for our business, it is possible that further overall expansion could
cause us to generate losses and negative cash flow from operations in the
future.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While our services continue to expand, our CoStar Property, CoStar Tenant
and CoStar COMPS services currently generate the largest portion of our
revenue. The CoStar Property, CoStar Tenant and CoStar COMPS subscription
contracts generally have terms of one to three years and renew automatically.
Upon renewal, many of the contract rates increase in accordance with contract
provisions or as a result of contract renegotiations. To encourage clients to
use our services regularly, we generally charge fixed amounts rather than fees
based on actual system usage. We charge our clients based on the number of
sites, organization size, the company&#146;s business focus and the number of
services to which a client subscribes.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our contract renewal rate historically has exceeded 90% on an annual
basis. However, during 2001 many telecommunications companies, which
represented approximately 6% of our revenues at their peak, discontinued or
curtailed their operations. This has resulted in an increased number of
cancellations of our services by these telecommunications companies. Sales to
telecommunications companies currently represent approximately 1% of our
revenues. These cancellations, together with the impact of general economic
conditions on our entire customer base, have resulted in renewal rates of
approximately 85% over the past twelve months.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Over 90% of our revenues arise from clients under subscription contracts.
Our subscription clients pay contract fees on an annual, quarterly or monthly
basis. We recognize this revenue over the life of the contract on a
straight-line basis beginning with the installation or renewal date. Annual and
quarterly advance payments result in deferred revenue, substantially reducing
the working capital requirements generated by accounts receivable.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has applied the new rules on accounting for goodwill and
intangible assets deemed to have indefinite lives beginning in the first
quarter of 2002. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Standards. Other intangible assets
will continue to be amortized over their useful lives. The Company has applied
the new rules on accounting for goodwill and intangible assets deemed to have
indefinite lives beginning in the first quarter of 2002. The Company estimates
that the effect of the new rules will be to decrease amortization expense
related to goodwill by approximately $3.2&nbsp;million for the year ending December
31, 2002. Under the new rules, the Company will be required to perform an
initial impairment test (transitional test) of goodwill and indefinite lived
intangible assets within six months of adoption and perform subsequent
impairment tests at least annually. The Company expects to complete the
transitional test by June&nbsp;30, 2002 and does not anticipate any impairment loss
as a result of completing the initial transitional test. If any impairment
charge is taken, it will be recorded as a change in accounting principle (with
respect to the transitional impairment test completed within six months of
adoption) or as an operating expense in the period of impairment (with respect
to the charge occurring subsequent to the transitional impairment test period).
</FONT>
<P align="center"><FONT size="2"><B>10</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P align="center"><FONT size="2"><B>Three Months Ended March&nbsp;31, 2001 Compared To<BR>
Three Months Ended March&nbsp;31 2002</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Revenues.</I> Revenues grew 9.8% from $17.4&nbsp;million in the first quarter of
2001 to $19.1&nbsp;million in the first quarter of 2002. The growth was principally
the result of further penetration of our services in our potential customer
base across our national platform, as well as the successful cross-selling of our services
into our existing customer base. Subscription based information products,
including CoStar Property, CoStar Tenant, CoStar COMPS, CoStar Exchange and
CoStar Connect, continue to account for over 90% of the Company&#146;s revenues.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Gross Margin.</I> Gross margin increased from $9.4&nbsp;million in the first
quarter of 2001 to $12.0&nbsp;million in first quarter of 2002. Gross margin
percentage also increased from 54.0% to 62.8%. The increase in gross margin
amounts and percentages resulted from significant revenue growth combined with
a decline in the cost of revenues due to decreases in postage and delivery,
telecommunications and outside services expenses. Additionally, our cost of
revenues for the three months ended March&nbsp;31, 2002 includes purchase price
amortization from the LeaseTrend, Jamison, ARES, Comps and First Image
acquisitions amounting to $954,000 compared to $1.3&nbsp;million for the same period
in 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Selling and Marketing Expenses.</I> Selling and marketing expenses decreased
17.4% from $6.9&nbsp;million in the first quarter of 2001 to $5.7&nbsp;million in the
first quarter of 2002 and decreased as a percentage of revenues from 40% to
30%. Selling and marketing expenses decreased principally as a result of a
reduction in marketing and advertising activities as well as a reduction in
operating costs associated with the sales organization, including
communications, travel and recruiting and decreased personnel costs,
particularly in the area of electronic advertising.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Software Development Expenses.</I> Software development expenses increased
from $1.2&nbsp;million in the first quarter of 2001 to $1.4&nbsp;million in the first
quarter of 2002 and remained constant as a percentage of revenues at 7%. The
increase in software development expenses reflects development costs for the
increased number of products we now support including CoStar COMPS, CoStar
Exchange and CoStar Connect, as well as the increase in support of internal
systems to manage the Company&#146;s growth.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and Administrative Expenses.</I> General and administrative expenses
decreased from $7.7&nbsp;million in the first quarter of 2001 to $5.9&nbsp;million in the
first quarter of 2002 and decreased as a percentage of revenues from 44% to
31%. General and administrative expenses decreased due to reductions in
administrative headcount, communications, consulting, travel costs and outside
services during 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Purchase Amortization.</I> Purchase amortization decreased from $1.8&nbsp;million
in the first quarter of 2001 to $893,000 in the first quarter of 2002. Purchase
amortization decreased primarily due to the adoption of the Statements of
Financial Accounting Standards No.&nbsp;141, &#147;Business Combinations&#148;, and No.&nbsp;142,
&#147;Goodwill and Other Intangible Assets&#148;. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Standards. The Company estimates that the effect of the new rules was to
decrease amortization expense related to goodwill by approximately
$808,000 for the first quarter of 2002 as compared to the same period in 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other Income, Net.</I> Interest and other income decreased from $575,000 in
the first quarter of 2001 to $239,000 in the first quarter of 2002. This
decrease was primarily a result of lower average cash, cash equivalents and
short-term investments balances from one period to another, and a decline in
market interest rates for invested cash, cash equivalents and short-term
investments.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Income Tax Benefit.</I> Income tax benefit decreased from $41,000 in the first
quarter of 2001 to $0 in the first quarter of 2002 as a result of the previous
recognition of net operating losses.
</FONT>
<P align="center"><FONT size="2"><B>11</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P align="left"><FONT size="2"><B>Liquidity and Capital Resources</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal sources of liquidity are cash, cash equivalents and
short-term investments. Our cash and cash equivalents balance was $31.1
million and $30.7&nbsp;million, and our short-term investments balance was $10.5
million and $11.3&nbsp;million at March&nbsp;31, 2002 and December&nbsp;31, 2001,
respectively. Total cash, cash equivalents and short-term investments were
$41.6&nbsp;million at March&nbsp;31, 2002 a decrease of $408,000 from $42.0&nbsp;million at December
31, 2001. This decrease was due principally to purchases of property and
equipment totaling $535,000, partially offset by cash provided by operating and
financing activities. Net cash provided by operating activities for the three
month period ended March&nbsp;31, 2002 was $116,000 compared to net cash used in
operating activities of $2.9&nbsp;million for the three month period ended March&nbsp;31,
2001. This $3.0&nbsp;million increase in net cash provided by operating activities
was a result of revenue growth and a reduction in operating expenses, both of
which contributed to a reduction of our net loss for the first three months of
2002 compared to the first three months of 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by investing activities amounted to $211,000 for the
three months ended March&nbsp;31, 2002 as compared to net cash used in investing
activities of $2.5&nbsp;million for the three months ended March&nbsp;31, 2001. Net cash
provided by investing activities increased by $2.7&nbsp;million during the first
three months of 2002 compared to the first three months of 2001 due to a
decline in purchases of property and equipment, building photography and
short-term investments.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have entered into numerous operating leases for office space throughout
the country, including our headquarters, and have annual commitments for total
rent payments ranging from $450,000 to $5,060,000 over the next ten years. We
currently have no material commitments for capital expenditures.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To date, we have grown in part by acquiring other companies, and we may
continue to make acquisitions. Our acquisitions may vary in size and could be
material to our current operations. We expect to use cash, stock and/or other
means of funding to make these acquisitions.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the first three months of 2002, we experienced overall losses
combined with positive cash flow from operating activities. For the remainder
of 2002, as the Company continues to emerge from a period of rapid product and
geographical expansion, we expect continued sequential quarterly growth in
revenue, which we believe will generally exceed growth in our cost structure, a
large component of which consists of fixed operating costs. As a result, we
expect reductions in the level of overall operating losses in 2002 as compared
to 2001 and continued positive operating cash flow during 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on current plans, we believe that our available cash combined with
positive cash flow from our operations should be sufficient to fund our
operations for the next 12&nbsp;months.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although we have experienced losses to date, future profits, to the extent
not offset by the benefits of loss carryforwards, would result in income tax
liabilities. In addition, we have recorded a valuation allowance for the
portion of the deferred tax assets related to tax loss carryforwards.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not believe the impact of inflation has significantly affected our
operations.
</FONT>
<P align="left"><FONT size="2"><B>Recent Accounting Pronouncements</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No.&nbsp;141, &#147;Business Combinations&#148;, and No.
142, &#147;Goodwill and Other Intangible Assets&#148;, effective for fiscal years
beginning after December&nbsp;15, 2001. Under the new rule, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Standards. Other
intangible assets will continue to be amortized over their useful lives. We
have applied the new rules on accounting for goodwill and intangible assets
deemed to have indefinite lives beginning in the first quarter of 2002. We
estimate that the effect of the new rules will be to decrease amortization
expense related to goodwill by approximately $3.2&nbsp;million for the year ending
December&nbsp;31, 2002. Under the new rules, the Company will be required to
perform an initial impairment test (transitional test) of goodwill and
indefinite lived intangible assets within six months of adoption and perform
subsequent impairment tests at least annually. The Company expects to complete
the transitional test by June&nbsp;30, 2002 and does not anticipate any impairment
loss as a result of completing the initial transitional test. If any impairment
charge is taken, it will be recorded as a change in accounting principle (with
respect to the transitional impairment test completed within six months of
adoption) or as an operating expense in the period of impairment (with respect
to the charge occurring subsequent to the transitional impairment test period).
</FONT>
<P align="center"><FONT size="2"><B>12</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P align="left"><FONT size="2"><B>Cautionary Statement Concerning Forward-Looking Statements</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have made forward-looking statements in this Report that are subject to
risks and uncertainties. Forward-looking statements include information that is
not purely historic fact, including statements concerning our financial outlook
for 2002 and estimates for the future, our possible or assumed future results of operations
generally, and other statements and information regarding assumptions about our
revenues, earnings per share, capital and other expenditures, operating losses,
financing plans, cash flow, capital structure, amortization expense, impairment losses, legal
proceedings and claims, future economic performance, operating income,
management&#146;s plans, goals and objectives for future operations and growth and
markets for stock. The sections of this Report, which contain forward-looking
statements, include the Financial Statements and Notes thereto and
&#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of
Operations.&#148;
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our forward-looking statements are also identified by words such as
&#147;believes,&#148; &#147;expects,&#148; &#147;anticipates,&#148; &#147;intends,&#148; &#147;estimates&#148; or similar
expressions. You should understand that these forward-looking statements are
necessarily estimates reflecting our judgment, not guarantees of future
performance. They are subject to a number of assumptions, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. You should understand
that the following important factors, in addition to those discussed in &#147;Risk
Factors,&#148; could affect our future results and could cause those results or
other outcomes to differ materially from those expressed or implied in our
forward-looking statements: competition; technological innovation by
competitors; general economic conditions; events that affect commercial real
estate; customer retention; business combinations and strategic alliances by
other industry participants; managerial execution; development of our sales
force; growth in commerce conducted over the Internet; changes in relationships
with real estate brokers and other strategic partners; and legal and regulatory
issues.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accordingly, you should not place undue reliance on forward-looking
statements, which speak only as of the date of this Report. All subsequent
written and oral forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this Report or to reflect the occurrence of unanticipated events.
</FONT>
<P align="left"><FONT size="2"><B>Risk Factors</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our future profitability is uncertain due to our continuing operating
losses. </I>To date, we have not recorded an overall operating profit because the
investment required for geographic expansion and new services has exceeded the
profits generated in our markets. Our ability to earn a profit will largely
depend on our ability to manage our growth, and to generate profits that exceed
our investment in geographic expansion and new services. In addition, our
ability to earn a profit, to increase revenues or to control costs could be
affected by the factors set forth below. We may not be able to generate
revenues or control expenses sufficient to earn a profit, to maintain profits
on a quarterly or annual basis, or to sustain or increase our future revenue
growth.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our operating results may fluctuate significantly.</I> Our operating results,
revenues and expenses may fluctuate with general economic conditions and also
for many other reasons, such as: successful adoption of the Company&#146;s products;
competition; loss of clients or revenues; changes or consolidation in the real
estate industry; the development of our sales force; managerial execution;
cancellations or non-renewals of our products; data quality; employee
retention; our investments in geographic expansion; the timing of new service
introductions and enhancements; the timing of investing the net proceeds from
our offerings; acquisitions of other companies or assets; sales, brand
enhancement and marketing promotional activities; client training and support
activities; changes in client budgets; our ability to control expenses; our
investments in other corporate resources; or changes in accounting policies or
practices.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may not be able to attract and retain clients.</I> Our success and revenues
depend on attracting and retaining subscribers to our services. The CoStar
Property, CoStar Tenant and CoStar COMPS subscription contracts, which generate
the largest portion of our revenue, generally range from terms of one to three
years. Our clients may decide not to renew or to cancel their agreements as a
result of several factors, including: a decision that they have no need for our
products; a decision to use alternative products; pricing and budgetary
constraints; consolidation in the real estate industry; data quality; technical
problems; or economic or competitive pressures. If clients decide not to renew
or cancel their agreements, and we do not attract new clients, then our
revenues will be adversely affected.
</FONT>
<P align="center"><FONT size="2"><B>13</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our operating costs may be higher than we expect.</I> Many of our expenses,
particularly personnel costs and occupancy costs, are relatively fixed. As a
result, we may not be able to adjust spending quickly enough to offset any
unexpected revenue shortfall or increase in expenses. Additionally, we may
experience higher than expected operating costs, including increased personnel
costs, selling and marketing costs, occupancy costs, communications costs,
travel costs, software development costs, outside
services costs and other costs. If operating costs exceed our expectations or
cannot be adjusted accordingly, our business, results of operations and
financial condition will be adversely affected.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Competition could render our services uncompetitive.</I> The market for
information systems and services in general is highly competitive and rapidly
changing. The barriers to entry for Web-based services and businesses are low,
making it possible for the number of competitors to proliferate rapidly. Our
existing competitors, or potential new competitors, may have longer operating
histories in the Internet market, greater name recognition, larger customer
bases, lower prices, easier access to data, greater user traffic or greater
financial, technical and marketing resources than we have. Our competitors may
be able to undertake more extensive marketing campaigns, obtain more data,
adopt more aggressive pricing policies, make more attractive offers to
potential employees, subscribers, distribution partners and content providers
and may be able to respond more quickly to new or emerging technologies and
changes in Internet user requirements. Increased competition could result in
lower revenues and higher expenses, which would reduce our profitability.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If our data is not accurate, comprehensive or reliable, our business could
be harmed. </I>Our success depends on our clients&#146; confidence in the
comprehensiveness, accuracy and reliability of the data we provide. The task of
establishing and maintaining accurate and reliable data is challenging. If our
data is not current, accurate, comprehensive or reliable, we could experience
reduced demand for our services or legal claims by our customers, which could
result in lower revenues and higher expenses.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If we are unable to hire, retain and continue to develop our sales force,
it could have a material adverse effect on our business. </I>In order to support
revenue growth, we need to continue to develop, train and retain our sales
force. Our ability to build and develop a strong sales force may be affected by
a number of factors, including: our ability to integrate and motivate sales
personnel; our ability to effectively train our sales force; the ability of our
sales force to sell an increased number of products; the length of time it
takes new sales personnel to become productive; the competition we face from
other companies in hiring and retaining sales personnel; and our ability to
manage a multi-location sales organization. If we are unable to hire, develop
or retain the members of our sales force, or if our sales force is
unproductive, it could have a material adverse effect on our revenues and
expenses.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cyclical downturns and consolidation in the commercial real estate
industry could have an adverse effect on our business. </I>Our business may be
affected by conditions in the commercial real estate industry, including
conditions affecting businesses that supply or invest in that industry. A
decrease in the level of commercial real estate activities could adversely
affect demand for our services. The traditional economic downturns in the
commercial real estate industry could also harm our business. These changes
could increase cancellation rates, which could have a material adverse impact
on our operating results. Also, companies in this industry are consolidating,
often in order to reduce expenses. Consolidation could reduce the number of our
existing clients, reduce the size of our target market and increase our
clients&#146; bargaining power. Any of these factors could adversely affect our
business.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General economic conditions could have an adverse effect on our business.</I>
Our business and the commercial real estate industry are particularly affected
by negative trends in the general economy. The success of our business depends
on a number of factors relating to general global, national, regional and local
economic conditions, including inflation, interest rates, perceived and actual
economic conditions, taxation policies, availability of credit, employment
levels, and wage and salary levels. Negative trends in any of these general
economic conditions could adversely affect our business. For example, a recent
downturn in the telecommunications industry has forced many of our telecom
company clients to discontinue or curtail their operations, which has resulted
in an increased number of cancellations of our services. If other clients
choose to cancel our services as a result of economic conditions, and we do not
acquire new clients, our financial position could be adversely affected.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may not be able to successfully introduce new product or upgraded
products. </I>Our future business and financial success will depend on our ability
to continue to introduce new products and upgraded products into the
marketplace. Developing new products and upgrades to products imposes heavy
burdens on our systems development department, product managers, management and
researchers. In addition, successfully launching and selling a new product,
such as CoStar Office Report or CoStar Connect, puts pressure on our sales and
marketing resources. If we are unable to develop new products or upgrades to
our products, then our customers may choose a competitive service over ours and
our business may be adversely affected. In addition, if we incur significant
costs in developing new products or upgrades to our products, or are not
successful in marketing and selling these new products or upgrades, it could
have a material adverse effect on our results of operations.
</FONT>
<P align="center"><FONT size="2"><B>14</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may not be able to adapt to the rapid technological changes to the
Internet and Internet products. </I>To be successful, we must adapt to the rapid
technological changes to the Internet and Internet products by continually
enhancing our products and services, and introducing and integrating new
services and products to capitalize on the technological advances in the
Internet. This process is costly and we cannot assure you that we will be able to
successfully integrate our services and products with the Internet&#146;s
technological advances. The products that collect, store, manage and
disseminate commercial real estate information from a centralized database on
the Internet were developed recently and continue to evolve. Our market is
characterized by rapidly changing technologies, evolving industry standards,
increasingly sophisticated customer needs and frequent new product
introductions. These factors are exacerbated by the rapid technological change
experienced in the computer and software industries. Our business increasingly
depends on our ability to anticipate and adapt to all of these changes, as well
as our customers&#146; ability to adapt to the use of our existing and future
services and products on the Internet. We could incur substantial costs if we
need to modify our services or infrastructure in order to adapt to these
changes, and our customers&#146; failure to accept these changes could have a
material adverse effect on our revenues. If we incurred significant costs
without adequate results or we are unable to adapt to rapid technological
changes, it could have a material adverse effect on our business.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Unsatisfactory Internet performance, interruption or failure could have an
adverse effect on our business. </I>Our business increasingly depends upon the
satisfactory performance, reliability and availability of our Web site, the
Internet and the World Wide Web. Problems with our Web site, the Internet or
the Web may impede the development of our business for a number of reasons. As
the number of Internet users or their use of Internet resources continues to
grow, and as companies deliver increasingly larger amounts of data over the
Internet, the Internet&#146;s infrastructure must also grow. Growth in Internet
usage that is not matched by comparable growth of the infrastructure supporting
the Internet could result in slower response time, cause outright failure of
the Internet, or otherwise adversely affect usage. In addition, if we
experience technical problems in distributing our products over the Web,
including interruption or failure of services provided by our local exchange
carriers or Internet service providers, we could experience reduced demand for
our products.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Temporary or permanent outages of our computers, software or
telecommunications equipment could have an adverse effect on our business. </I>Our
operations depend on our ability to protect our database, computers and
software, telecommunications equipment and facilities against damage from
potential dangers such as fire, power loss, security breaches and
telecommunications failures. Any temporary or permanent loss of one or more of
these systems or facilities from an accident, equipment malfunction or some
other cause could harm our business. If we experience a failure that results in
our not being able to deliver our products to clients, or to update our
products, we could experience reduced demand for our products.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may be subject to legal liability for displaying or distributing
information. </I>Because the content in our database is distributed to others, we
may be subject to claims for defamation, negligence or copyright or trademark
infringement or claims based on other theories. We could also be subject to
claims based upon the content that is accessible from our Web site through
links to other Web sites or information on our Web site supplied by third
parties. Even if these claims do not result in liability to us, we could incur
significant costs in investigating and defending against any claims. Our
potential liability for information distributed by us to others could require
us to implement measures to reduce our exposure to liability, which may require
the expenditure of substantial resources and limit the attractiveness of our
service to users.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may be unable to enforce or defend our ownership and use of
intellectual property. </I>The success of our business depends in large part on the
intellectual property involved in our methodologies, database and software. We
rely on a combination of trade secret, patent, copyright and other laws,
nondisclosure and noncompetition provisions, license agreements and other
contractual provisions and technical measures to protect our intellectual
property rights. However, current law may not provide for adequate protection
of our databases and the actual data. In addition, legal standards relating to
the validity, enforceability and scope of protection of proprietary rights in
Internet-related businesses are uncertain and evolving, and we cannot assure
you of the future viability or value of any of our proprietary rights. Our
business could be significantly harmed if we are not able to protect our
content and our other intellectual property. The same would be true if a court
found that our services infringe other persons&#146; intellectual property rights.
Any intellectual property lawsuits in which we are involved, either as a
plaintiff or as a defendant, could cost us a significant amount of time and
money. In addition, if any intellectual property claims are adversely
determined, this could result in a material adverse result on our financial
position and our business.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Litigation in which we become involved may adversely affect our business.</I>
Currently and from time to time, we are involved in litigation incidental to
the conduct of our business. We cannot assure you that we will have insurance
to cover our pending claims or our future claims. Any lawsuits in which we are
involved could cost us a significant amount of time and money. If any pending
claims or future claims are adversely determined, they could have a material
adverse effect on our financial position or results of operations.
</FONT>
<P align="center"><FONT size="2"><B>15</B>
</FONT>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our business depends on retaining and attracting highly capable management
and operating personnel. </I>Our success depends in large part on our ability to
retain and attract management and operating personnel, including our President
and Chief Executive Officer, Andrew Florance, our officers and other key
employees. Our business requires highly skilled technical, sales,
management, Web-development, marketing and research personnel, who are in high
demand and are often subject to competing offers. To retain and attract key
personnel, we use various measures, including employment agreements, a stock
option plan and incentive bonuses for key executive officers. These measures
may not be enough to retain and attract the personnel we need or to offset the
impact on our business of the loss of the services of Mr.&nbsp;Florance or other key
officers or employees.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Problems with our software could impair the use of our services. </I>The
software underlying our services is complex and may contain undetected errors.
We have previously discovered errors in our proprietary software. Despite
testing, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our software. Any errors could result
in adverse publicity, impaired use of our services, loss of revenues, cost
increases and legal claims by customers. All these factors could seriously
damage our business, operating results and financial condition.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>International expansion may result in new business risks. </I>If we expand
internationally, this expansion could subject us to new business risks,
including: adapting to the differing business practices and laws in foreign
commercial real estate markets; difficulties in managing foreign operations;
limited protection for intellectual property rights in some countries;
difficulty in collecting accounts receivable and longer collection periods;
costs of enforcing contractual obligations; impact of recessions in economies
outside the United States; currency exchange rate fluctuations; and potentially
adverse tax consequences. In addition, the investment required for
international expansion could exceed the profit generated from such expansion,
which could adversely affect our financial condition.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We may not be able to manage successfully our geographic expansion. </I>Our
future business and financial success will depend on our ability to manage our
geographic expansion. Our efforts to manage expanded growth must occur while
information technology is rapidly changing. These efforts impose additional
burdens on our research, systems development, sales and general managerial
resources. If we were not able to manage our expanded growth successfully, it
would have a material adverse effect on our profitability.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If we are unable to provide our clients with training and customer
support, our business could be harmed. </I>It is important that our clients find
our products easy to use. To meet these needs, we provide client training and
have developed a client support network that seeks to respond to client
inquiries as soon as possible. If we do not maintain adequate training and
support levels, we could experience reduced demand for our services.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If there is a reduction in our supply of data from public record
providers, our business could be harmed. </I>We license a small portion of our data
from public records providers and other data providers to enhance our products
and services. If we are unable to enter into licensing agreements with these
entities, or if this data becomes unavailable for any reason, we could
experience increased costs and our financial position could be adversely
affected.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our increasing use of the Internet and the World Wide Web exposes us to
regulatory and other uncertainties. </I>Most of our clients currently receive their
CoStar data via the Internet. This exposes us to various uncertainties arising
from the future course of development of the Internet and the World Wide Web.
Governments in the United States and abroad might adopt laws or regulations
applicable to Internet commerce that could harm our business by, for example,
regulating our transmissions over the Internet or exposing our business to new
taxes in various jurisdictions. User concerns about the privacy and security of
Internet-distributed communications might impede the growth of our business. We
may need to expend substantial resources to protect against security breaches
on our Web site or in our Internet communications.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We face risks associated with legislation in the real estate industry.</I>
Real estate is a regulated industry in the United States. These laws and
related regulations, and any newly adopted regulations, may limit or restrict
our activities or could require us to expend significant resources to comply.
As the real estate industry evolves in the Internet environment, legislators,
regulators and industry participants may advocate additional legislative or
regulatory initiatives. Should existing laws or regulations be amended or new
laws or regulations be adopted, we may need to comply with additional legal
requirements and incur resulting costs, or we may be precluded from certain
activities. In addition, if we are found to be in violation of these
regulations, we may incur penalties and legal costs or we may be precluded from
certain activities.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our business depends on our management team&#146;s ability to execute our
business plan. </I>Our business depends on the ability of our assembled management
team to successfully execute our business plan. The inability of our management
team to successfully execute our business plan could have an adverse effect on
our operations.
</FONT>
<P align="center"><FONT size="2"><B>16</B>
</FONT>
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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If we do not generate sufficient cash flows from operations, we may need
additional capital. </I>To date, we have financed our operations through cash from
profitable operations in certain of our regions, the sale of our stock and
borrowing money. If we do not generate enough cash from operations to finance
our business in the future, we will need to raise additional funds through
public or private financing. Selling additional equity securities could dilute
the equity interests of our stockholders. If we borrow money, we will have to
pay interest and agree to restrictions that may limit our operating
flexibility. We may not be able to obtain funds needed to finance our
operations at all or may be able to obtain funds only on unattractive terms. If
we require additional funds and are not able to obtain such funds, it would
have a material adverse effect on our operations.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Market volatility may have an adverse effect on our stock price. </I>The
trading price of our common stock has fluctuated widely in the past, and we
expect that it will continue to fluctuate in the future. The price could
fluctuate widely based on numerous factors, including: quarter-to-quarter
variations in our operating results; changes in analysts&#146; estimates of our
earnings; announcements by us or our competitors of technological innovations
or new services; general conditions in the commercial real estate industry;
developments or disputes concerning copyrights or proprietary rights;
regulatory developments; and economic or other factors. In addition, in recent
years, the stock market in general, and the shares of Internet-related and
other technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of the specific companies.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Stock ownership by executive officers and directors provides substantial
influence over matters requiring a vote of stockholders. </I>Our executive officers
and directors, and entities affiliated with them, beneficially own a sufficient
number of shares of our outstanding common stock to exercise substantial
influence over the election of directors and other matters requiring a vote of
stockholders. This concentrated ownership might delay or prevent a change in
control and may impede or prevent transactions in which stockholders might
otherwise receive a premium for their shares.
</FONT>
<P><FONT size="2"><B>ITEM 3 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>
</FONT>
<P><FONT size="2">We do not have significant exposure to market risks associated with the changes
in interest rates related to cash equivalent securities held as of March&nbsp;31,
2002.
</FONT>
<P align="center"><FONT size="2"><B>17</B>
</FONT>
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<P><FONT size="2"><B>PART II. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OTHER INFORMATION</B>
</FONT>
<P><FONT size="2"><B>ITEM 1 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;LEGAL PROCEEDINGS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Currently and from time to time, we are involved in litigation incidental
to the conduct of our business. We are not a party to any lawsuit or proceeding
that, in the opinion of our management, is likely to have a material adverse
effect on our financial position or results of operations.
</FONT>
<P><FONT size="2"><B>ITEM 2 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CHANGES IN SECURITIES</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None
</FONT>
<P><FONT size="2"><B>ITEM 3 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DEFAULTS UPON SENIOR SECURITIES</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None
</FONT>
<P><FONT size="2"><B>ITEM 4 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None
</FONT>
<P><FONT size="2"><B>ITEM 5 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OTHER INFORMATION</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None
</FONT>
<P><FONT size="2"><B>ITEM 6 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;EXHIBITS AND REPORTS ON FORM 8-K</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp; None
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp; The Company did not file any reports on Form&nbsp;8-K during the first quarter of 2002.
</FONT>
<P align="center"><FONT size="2"><B>18</B>
</FONT>
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<P><FONT size="2"><B>SIGNATURES</B>
</FONT>
<P><FONT size="2">Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
</FONT>
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        <TD><FONT size="2">&nbsp;</FONT></TD>
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<B>COSTAR GROUP, INC.</B></FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Date: May 13, 2002</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
By: /s/ Frank A. Carchedi<BR>
</FONT><HR size="1" noshade><FONT size="2">
Frank A. Carchedi<BR>
Chief Financial Officer<BR>
(Principal Financial and Accounting Officer<BR>
and Duly Authorized Officer)</FONT></TD>
</TR>
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<P align="center"><FONT size="2"><B>19</B>
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