8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 20, 2011

COSTAR GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-24531	52-2091509
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

1331 L Street, NW, Washington, DC	20005
(Address of Principal executive offices)	(Zip Code)

Registrant’s Telephone number, including area code: (202) 346-6500

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

þ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

On April 27, 2011, CoStar Group, Inc. (“CoStar”, “we” or the “Company”) announced that we and one of our wholly owned subsidiaries had entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of April 27, 2011, among CoStar, Lonestar Acquisition Sub, Inc., a wholly owned subsidiary of CoStar, and LoopNet, Inc. (“LoopNet”) pursuant to which, and subject to the terms and conditions of which, that subsidiary will be merged with and into LoopNet (the “Merger”), with LoopNet continuing as the surviving corporation and our wholly owned subsidiary.

On May 20, 2011, CoStar entered into Amendment No. 1 (the “Amendment”) to the Merger Agreement. Pursuant to the Merger Agreement, holders of LoopNet’s performance stock options and performance restricted stock units (“RSUs”) are to receive shares of CoStar common stock in lieu of the cash consideration otherwise payable for a portion of such performance stock options and performance RSUs, all as calculated in accordance with the Merger Agreement. The Merger Agreement further provides that if, as a result of the foregoing treatment of LoopNet’s performance stock options and performance RSUs, CoStar would be required to issue an aggregate number of shares of CoStar common stock pursuant to the Merger Agreement such that a vote of CoStar’s stockholders would be required under the rules of the Nasdaq Stock Market, CoStar shall reduce the amount of shares of CoStar common stock payable to holders of LoopNet’s performance stock options and performance RSUs. The Amendment amends and restates this limitation to provide instead that if, as a result of the foregoing treatment of a portion of LoopNet’s performance stock options and performance RSUs, CoStar would be required to issue more than 2.25 million shares of CoStar common stock pursuant to the Merger Agreement, it may choose instead to pay to the holders of the applicable performance stock options and RSUs the amounts in excess of 2.25 million shares in cash.

The description contained in this Item 1.01 of certain terms of the Amendment and the transactions contemplated thereby is qualified in its entirety by reference to the full text of the Amendment, a copy of which is attached hereto as Exhibit 2.1 and incorporated herein by reference. The Merger Agreement was filed as Exhibit 2.1 to CoStar’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 28, 2011, and is incorporated herein by reference.

Item 7.01 Regulation FD Disclosure.

We are providing updated pro forma financial information with respect to LoopNet and the combined consolidated company following the Merger, reflecting the use of approximately $245.6 million of net proceeds from a proposed equity offering by the Company to fund a portion of the cash consideration payable in connection with the Merger. Pursuant to this Item 7.01, we are providing: (i) the consolidated historical financial statements of LoopNet as of December 31, 2009 and 2010 and for each of the years ended December 31, 2008, 2009 and 2010 and as of March 31, 2011 and for the quarterly periods ended March 31, 2010 and 2011, attached as Exhibit 99.1 hereto and incorporated by reference in this Item 7.01; and (ii) certain risk factors relating to LoopNet’s business (the “LoopNet Risk Factors”), attached as Exhibit 99.2 hereto and incorporated by reference in this Item 7.01.

The LoopNet Risk Factors were originally included in LoopNet’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed by LoopNet with the SEC on May 6, 2011, and we are reproducing them without revision in this Form 8-K. As a result, references in the Risk Factors to the “Company,” “we,” “us,” or “our” are references to LoopNet and its subsidiaries, except as the context otherwise requires.

The information provided in and incorporated by reference in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in that filing.

Item 8.01 Other Events.

In this Item 8.01, we are providing the unaudited condensed combined financial statements of the Company and LoopNet, pro forma for the Merger and certain related financing transactions, as of March 31, 2011 and for the three months ended March 31, 2011 and the fiscal year ended December 31, 2010, attached as Exhibit 99.3 hereto and incorporated by reference in this Item 8.01.

Cautionary Statements Regarding Forward-Looking Statements.

This Current Report on Form 8-K and the information incorporated by reference herein contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the Merger, future financial and operating results, the companies’ plans, objectives, expectations and intentions and other statements including words such as “anticipate,” “may,” “believe,” “expect,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology. Such statements are based upon the current beliefs and expectations of management of CoStar and LoopNet and are subject to significant risks and uncertainties. Actual results may differ materially from the results anticipated in the forward-looking statements. The following factors, among others, could cause or contribute to such differences: the risk that expected cost savings or other synergies from the Merger may not be fully realized or may take longer to realize than expected; the risk that the businesses of CoStar and LoopNet may not be combined successfully or in a timely and cost-efficient manner; the possibility that the Merger does not close, including, but not limited to, due to the failure to obtain approval of LoopNet’s stockholders, or the failure to obtain governmental approvals; the risk that business disruption relating to the Merger may be greater than expected; and failure to obtain any required financing on favorable terms. Additional factors that could cause results to differ materially from those anticipated in the forward-looking statements can be found in CoStar’s Annual Report on Form 10-K for the year ended December 31, 2010 and LoopNet’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed with the SEC, including in the “Risk Factors” section of each of these filings, and each company’s other filings with the SEC available at the SEC’s website (http://www.sec.gov). Neither CoStar nor LoopNet undertakes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Additional Information.

In connection with the Merger, CoStar filed with the SEC a registration statement on Form S-4 on May 13, 2011 that includes a preliminary proxy statement of LoopNet that also constitutes a preliminary prospectus of CoStar. These materials are not yet final and will be further amended. The proxy statement/prospectus will be mailed to LoopNet stockholders once it is final. Investors and security holders are urged to read the definitive proxy statement/prospectus when it becomes available and any other relevant documents carefully in their entirety because they will contain important information about the Merger. You may obtain copies of all documents filed with the SEC regarding this transaction, including the definitive proxy statement/prospectus when it becomes available, free of charge at the SEC’s website, www.sec.gov. Copies of the proxy statement/prospectus and the filings with the SEC that are incorporated by reference in the proxy statement/prospectus can also be obtained, free of charge, from CoStar’s website, www.costar.com/Investors.aspx under the “SEC Filings” tab or from LoopNet’s website, investor.loopnet.com, under the tab “Investor Relations.”

CoStar, LoopNet and their respective directors, executive officers and certain other members of management and employees may be deemed to be participants in the solicitation of proxies from the stockholders of LoopNet in respect of the Merger. Information regarding the persons who, under the rules of the SEC, are deemed participants in the solicitation of the stockholders of LoopNet in connection with the Merger is set forth in the preliminary proxy statement/prospectus included in the registration statement on Form S-4 of CoStar filed with the SEC on May 13, 2011. Information about CoStar’s executive officers and directors is available in CoStar’s definitive proxy statement filed with the SEC on April 27, 2011. Information about LoopNet’s executive officers and directors is also available in LoopNet’s definitive proxy statement filed with the SEC on April 4, 2011. Free copies of these documents are available from the CoStar and LoopNet websites using the contact information above.

Item 9.01. Financial Statements and Exhibits.

(d) List of Exhibits

Exhibit No.	Description
Exhibit 2.1	Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., CoStar Group, Inc. and Lonestar Acquisition Sub, Inc.
Exhibit 99.1	Consolidated historical financial statements of LoopNet
Exhibit 99.2	Risk factors related to LoopNet’s business
Exhibit 99.3	Unaudited pro forma condensed combined financial data of the Company and LoopNet

SIGNATURE

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 hereunto duly authorized.

	COSTAR GROUP, INC.
Date: May 23, 2011	By:	/s/ Brian J. Radecki
		Name:	Brian J. Radecki
		Title:	Chief Financial Officer

Exhibit Index

Exhibit 2.1	Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., CoStar Group, Inc. and Lonestar Acquisition Sub, Inc.
Exhibit 99.1	Consolidated historical financial statements of LoopNet
Exhibit 99.2	Risk factors related to LoopNet’s business
Exhibit 99.3	Unaudited pro forma condensed combined financial data of the Company and LoopNet

EX-2.1

Exhibit 2.1

AMENDMENT NO. 1
TO THE
AGREEMENT AND PLAN OF MERGER

          AMENDMENT NO.1 (this “Amendment”) dated as of May 20, 2011 to the Agreement and Plan of Merger (the “Agreement”) dated as of April 27, 2011, among LOOPNET, INC., a Delaware corporation (the “Company”), COSTAR GROUP, INC., a Delaware corporation (“Parent”), and LONESTAR ACQUISITION SUB, INC., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Subsidiary”).

W I T N E S S E T H:

          WHEREAS, Section 11.03 of the Agreement provides for the amendment of the Agreement in accordance with the terms set forth therein;

          WHEREAS, the parties hereto desire to amend the Agreement as set forth below;

          NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained in this Amendment, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

          SECTION 1.01. Definitions; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment shall have the meaning assigned to such term in the Agreement. Each reference to “hereof,” “herein” and “hereunder” and words of similar import when used in the Agreement shall, from and after the date of this Amendment, refer to the Agreement, as amended by this Amendment. Notwithstanding the foregoing, references to the date of the Agreement, as amended hereby, shall in all instances continue to refer to April 27, 2011, references to “the date hereof” and “the date of this Agreement” shall continue to refer to April 27, 2011 and references to the date of the Amendment and “as of the date of the Amendment” shall refer to May 20, 2011.

ARTICLE II

AMENDMENTS TO MERGER AGREEMENT

          SECTION 2.01. Amendment to Section 2.05(b). The second proviso to the first sentence in Section 2.05(b) of the Agreement is hereby amended and restated in its entirety to read as follows:

“provided, further, that in the case of the Selected Company Performance Stock Options, the amount of any Excess that would have been paid in cash pursuant to the foregoing

shall instead be paid in that number of shares of Parent Common Stock that is equal to the quotient obtained by dividing (I) the amount of any such Excess that would have been paid in cash by (II) the Market Price per share of Parent Common Stock (unless, as a result of this second proviso and/or the proviso to Section 2.05(c), Parent would be issuing an aggregate number of shares of Parent Common Stock pursuant to this Article 2 that exceeds 2,250,000 shares of Parent Common Stock (as determined by Parent in good faith), in which case Parent may choose to instead pay such amounts in excess of 2,250,000 shares of Parent Common Stock in cash).”

          SECTION 2.02. Amendment to Section 2.05(c). The proviso to the first sentence in Section 2.05(c) of the Agreement is hereby amended and restated in its entirety to read as follows:

“provided that, in the case of the Selected Company Performance RSUs, the portion of the foregoing consideration that would be paid in cash (which, for the avoidance of doubt, consists of the product obtained by multiplying (A) the aggregate number of Company Shares subject to such Selected Company Performance RSUs by (B) the Company Share Cash Consideration) shall instead be paid in that number of shares of Parent Common Stock that is equal to the quotient obtained by dividing (I) the amount of the aggregate Company Share Cash Consideration that would be paid pursuant to the foregoing by (II) the Market Price per share of Parent Common Stock (unless, as a result of this proviso and/or the second proviso to Section 2.05(b), Parent would be issuing an aggregate number of shares of Parent Common Stock pursuant to this Article 2 that exceeds 2,250,000 shares of Parent Common Stock (as determined by Parent in good faith), in which case Parent may choose to instead pay such amounts in excess of 2,250,000 shares of Parent Common Stock in cash).”

ARTICLE III

GENERAL PROVISIONS

          SECTION 3.01. No Further Amendment. Except as expressly amended hereby, the Agreement is in all respects ratified and confirmed and all the terms, conditions, and provisions thereof shall remain in full force and effect. This Amendment is limited precisely as written and shall not be deemed to be an amendment to any other term or condition of the Agreement.

          SECTION 3.02. Effect of Amendment. This Amendment shall form a part of the Agreement for all purposes, and each party thereto and hereto shall be bound hereby. From and after the execution of this Amendment by the parties hereto, any reference to the Agreement shall be deemed a reference to the Agreement as amended hereby. This Amendment shall be deemed to be in full force and effect from and after the execution of this Amendment by the parties hereto.

-2-

          SECTION 3.03. Headings. The headings contained in this Amendment are for reference purposes only and shall not affect in any way the meaning or interpretation of this Amendment.

          SECTION 3.04. Counterparts. This Amendment may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.

          SECTION 3.05. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law rules of such state.

          SECTION 3.06. Severability. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other Governmental Authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Amendment so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

[signature page follows]

-3-

     IN WITNESS WHEREOF, Parent, Merger Subsidiary and the Company have caused this Amendment to be signed by their respective officers thereunto duly authorized, all as of the date first written above.

LOOPNET, INC.
By:	/s/ Richard J. Boyle, Jr.
	Name:	Richard J. Boyle, Jr.
	Title:	Chairman of the Board of Directors and Chief Executive Officer
COSTAR GROUP, INC.
By:	/s/ Andrew Florance
	Name:	Andrew Florance
	Title:	Chief Executive Officer
LONESTAR ACQUISITION SUB, INC.
By:	/s/ Andrew Florance
	Name:	Andrew Florance
	Title:	Chief Executive Officer

EX-99.1

Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting		F-2
Report of Independent Registered Public Accounting Firm		F-3
Financial Statements
Consolidated Balance Sheets		F-4
Consolidated Statements of Income		F-5
Consolidated Statements of Stockholders’ Equity		F-6
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders

LoopNet, Inc.

We have audited LoopNet, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LoopNet, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, LoopNet, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LoopNet, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 of LoopNet, Inc. and our report dated March 3, 2011 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Los Angeles, California

March 3, 2011

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

LoopNet, Inc.

We have audited the accompanying consolidated balance sheets of LoopNet, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LoopNet, Inc. at December 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LoopNet, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2011 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Los Angeles, California

March 3, 2011

F-3

LOOPNET, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2009			2010
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	125,571		$	88,773
Short-term investments		3,440			3,512
Accounts receivable, net of allowance of $213 and $236, respectively		1,308			1,494
Prepaid expenses and other current assets		1,080			1,095
Deferred income taxes, net		558			1,317
Total current assets		131,957			96,191
Property and equipment, net		2,216			2,010
Goodwill		23,368			41,507
Intangibles, net		4,487			8,940
Deferred income taxes, net, non-current		8,059			17,134
Deposits and other non-current assets		4,162			6,208
Total assets	$	174,249		$	171,990
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	546		$	471
Accrued liabilities		2,027			3,393
Accrued compensation and benefits		2,995			3,522
Income taxes payable		154			—
Deferred revenue		9,025			8,888
Total current liabilities		14,747			16,274
Other long-term liabilities		—			2,491
Commitments and contingencies
Series A convertible preferred stock		48,207			48,546
Stockholders’ equity:
Common stock, $.001 par value, 125,000,000 shares authorized; 39,493,526 and 39,866,097 shares issued, respectively; and 34,567,565 and 32,183,836 shares outstanding, respectively		39			40
Additional paid in capital		122,388			132,019
Other comprehensive loss		(418	)		(389	)
Treasury stock, at cost, 4,925,961 and 7,682,261 shares, respectively		(54,556	)		(86,220	)
Retained earnings		43,842			59,229
Total stockholders’ equity		111,295			104,679
Total liabilities and stockholders’ equity	$	174,249		$	171,990

See accompanying notes.

F-4

LOOPNET, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2008		2009			2010
	(In thousands, except per share data)
Revenues	$	86,074	$	76,487		$	78,002
Cost of revenue		10,858		11,060			12,562
Gross margin		75,216		65,427			65,440
Operating expenses:
Sales and marketing		18,825		15,064			16,785
Technology and product development		9,075		10,707			12,231
General and administrative		17,773		20,677			15,693
Amortization of acquired intangible assets		966		1,191			2,083
Total operating expenses		46,639		47,639			46,792
Income from operations		28,577		17,788			18,648
Interest and other (expense) income, net		1,998		211			(2,461	)
Income before tax		30,575		17,999			16,187
Income tax expense		12,297		6,246			461
Net income		18,278		11,753			15,726
Convertible preferred stock accretion of discount		—		(240	)		(339	)
Net income applicable to common stockholders	$	18,278	$	11,513		$	15,387
Net income per share applicable to common stockholders:
Basic	$	0.51	$	0.28		$	0.38
Diluted	$	0.49	$	0.27		$	0.36
Number of shares used in per share calculations:
Basic		35,772		41,860			40,615
Diluted		37,110		42,844			42,371

See accompanying notes.

F-5

LOOPNET, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

										Accumulated
					Additional					Other								Total
	Common Stock				Paid-in		Retained			Comprehensive			Treasury Stock					Stockholders’
	Shares		Amount		Capital		Earnings			Loss			Shares		Amount			Equity
	(In thousands)
Balance at December 31, 2007		38,908	$	39	$	107,866	$	14,051		$	(103	)		—	$	—		$	121,853
Exercise of stock options		311		—		356		—			—			—		—			356
Stock-based compensation expense		—		—		5,934		—			—			—		—			5,934
Repurchase of common stock		—		—		—		—			—			4,926		(54,556	)		(54,556	)
Tax benefit from exercise of stock options		—		—		759		—			—			—		—			759
Change in unrealized loss on marketable securities		—		—		—		—			(173	)		—		—			(173	)
Net income		—		—		—		18,278			—			—		—			18,278
Total comprehensive income		—		—		—		—			—			—		—			18,105
Balance at December 31, 2008		39,219	$	39	$	114,915	$	32,329		$	(276	)		4,926	$	(54,556	)	$	92,451
Stock-based activity awards		274		—		258		—			—			—		—			258
Stock-based compensation expense		—		—		6,827		—			—			—		—			6,827
Tax benefit from exercise of stock options		—		—		388		—			—			—		—			388
Convertible preferred stock accretion of discount		—		—		—		(240	)		—			—		—			(240	)
Change in unrealized loss on available-for-sale investments		—		—		—		—			(250	)		—		—			(250	)
Change in unrealized loss on marketable securities		—		—		—		—			108			—		—			108
Net income		—		—		—		11,753			—			—		—			11,753
Total comprehensive income		—		—		—		—			—			—		—			11,611
Balance at December 31, 2009		39,493	$	39	$	122,388	$	43,842		$	(418	)		4,926	$	(54,556	)	$	111,295
Stock-based activity awards		373		1		867		—			—			—		—			868
Stock-based compensation expense		—		—		8,232		—			—			—		—			8,232
Repurchase of common stock		—		—		—		—			—			2,756		(31,664	)		(31,664	)
Tax benefit from exercise of stock options		—		—		532		—			—			—		—			532
Convertible preferred stock accretion of discount		—		—		—		(339	)		—			—		—			(339	)
Change in unrealized loss on marketable securities		—		—		—		—			29			—		—			29
Net income		—		—		—		15,726			—			—		—			15,726
Total comprehensive income		—		—		—		—			—			—		—			15,755
Balance at December 31, 2010		39,866	$	40	$	132,019	$	59,229		$	(389	)		7,682	$	(86,220	)	$	104,679

See accompanying notes.

F-6

LOOPNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2008			2009			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	18,278		$	11,753		$	15,726
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		2,199			2,601			3,480
Stock-based compensation		5,934			6,827			8,232
Tax benefits from exercise of stock options		(759	)		(388	)		(532	)
Deferred income tax		(1,683	)		(2,180	)		(9,834	)
Impairment of equity investment		—			—			1,420
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		23			256			(20	)
Prepaid expenses and other assets		(678	)		388			1,498
Income taxes payable		61			542			(154	)
Accounts payable		(211	)		(76	)		(75	)
Accrued expenses and other liabilities		1,304			7			1,295
Accrued compensation and benefits		198			236			528
Deferred revenue		439			(1,334	)		(302	)
Net cash provided by operating activities		25,105			18,632			21,262
Cash flows from investing activities:
Purchase of property and equipment		(1,319	)		(1,437	)		(1,197	)
Purchase of investments		(1,000	)		(1,250	)		(4,485	)
Acquisitions, net of cash acquired		(12,584	)		(312	)		(22,113	)
Net cash used in investing activities		(14,903	)		(2,999	)		(27,795	)
Cash flows from financing activities:
Net proceeds from exercise of stock options		356			308			1,104
Net proceeds from sale of convertible preferred stock		—			47,967			—
Tax withholding related to net share settlements of restricted stock units		—			(50	)		(237	)
Repurchase of common stock		(54,556	)		—			(31,664	)
Tax benefit from exercise of stock options		759			388			532
Net cash (used in) provided by financing activities		(53,441	)		48,613			(30,265	)
Net (decrease) increase in cash and cash equivalents		(43,239	)		64,246			(36,798	)
Cash and cash equivalents at beginning of year		104,564			61,325			125,571
Cash and cash equivalents at end of year	$	61,325		$	125,571		$	88,773
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	14,444		$	8,535		$	9,791
Settlement of contingent purchase price	$	—		$	312		$	188

See accompanying notes.

F-7

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   The Company and Summary of Significant Accounting Policies

Organization and Basis of Presentation

LoopNet, Inc. (the “Company” or “LoopNet”) was incorporated under the laws of the state of California on June 2, 1997. The Company changed its name from Loop Ventures, Inc. to LoopNet, Inc. on November 3, 1998. Prior to Loop Ventures, Inc., the Company operated as a limited liability corporation known as Loop Ventures, LLC. On August 26, 1997, the owners of Loop Ventures, LLC exchanged all units held for a proportionate number of the shares of Loop Ventures, Inc. The transaction was recorded at historical basis.

On July 13, 2001, the Company merged with PropertyFirst.com, Inc. (“PropertyFirst”), with LoopNet, Inc. being the surviving company. The merger was accounted for under the purchase method of accounting. In order to preserve the existing rights and preferences of the different classes and series of PropertyFirst and LoopNet capital stock, each company reorganized by forming its own holding company. The two holding companies were limited liability companies (the “LLCs”), and continued in separate existence after the business combination of LoopNet and PropertyFirst. The LLCs were the direct owners of LoopNet, Inc. and the LLC members were the beneficial owners. In May 2006, prior to its initial public offering, the Company reincorporated in Delaware via a merger with and into LoopNet, Inc., a Delaware corporation.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company evaluated subsequent events after the balance sheet date through the financial statement issuance date for appropriate accounting and disclosure.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses during the reporting period. Actual results could differ materially from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2010, substantially all of the Company’s cash and cash equivalents were in money market funds.

Short-term Investments

The Company accounts for short-term investments in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance on debt and equity securities investments. Management determines the appropriate classification of investments at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term investments consist of debt securities that the Company classifies as available for sale. The weighted average maturities of short-term investments are less than one year. These securities are carried at fair value, using level 1 indicators, which are quoted market prices for these securities. Unrealized gains and losses if any, net of taxes, are reported as other comprehensive income, a component of stockholders’ equity. Any realized gains or losses on the sale of investments are determined on a specific identification method, and such gains and losses are reflected as a component of interest and other income, net. As of December 31, 2010 and 2009, the cost basis of short-term investments was not significantly different than their carrying value.

Concentration of Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments are placed with high credit quality financial institutions. The Company’s revenue and accounts

F-8

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

receivable are primarily derived from credit card transactions with subscribers and are typically settled within two to three business days.

No single customer accounted for more than 2.0% of the Company’s revenues for the years ended December 31, 2008, 2009 and 2010.

Fair Value of Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these instruments and the relatively stable interest rate environment.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Management reviews the accounts receivable to identify specific subscribers where collectibility may not be probable. The amount of the allowance is determined by management estimates based on historic write-off trends and specific account analysis.

Property and Equipment

Property and equipment are stated at historical cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, generally three years or less, or the shorter of the lease term or the estimated useful lives of the assets, if applicable.

Website Development Costs

The Company follows FASB authoritative guidance, which addresses whether certain web site development costs should be capitalized or expensed. Because the Company’s current website development costs incurred relate to routine maintenance and operating costs, the Company expenses such costs as incurred.

Long-Lived Assets Including Goodwill and Other Intangible Assets

The Company reviews property and equipment and certain identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If property and equipment and these identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. The Company has not recorded any impairment of these assets in any of the years presented.

The Company applies FASB authoritative guidance related to goodwill and other intangibles. The authoritative guidance requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company performed the annual impairment test during the fourth quarter of 2008, 2009 and 2010 and concluded that goodwill and intangible assets with indefinitive useful lives were not impaired.

The authoritative guidance also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable in accordance with the authoritative guidance on property, plant, and equipment.

Intangible assets are comprised of customer relationships, acquired technology and a domain name acquired in connection with the Company’s acquisitions. Amortization is calculated using the straight-line method over estimated useful lives ranging from 0.5 years to 8 years.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method. The Company believes no

F-9

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

events or changes in circumstances have occurred that would require an impairment test for these assets other than required annual tests.

Income Tax Expense

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change during the period in deferred tax assets and liabilities.

On January 1, 2007, the Company adopted new FASB authoritative guidance surrounding accounting for uncertainty in income taxes. The guidance clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The new authoritative guidance must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying the new authoritative guidance at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. The adoption of new authoritative guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Business Segment

The Company considers itself to be in a single business segment which is defined as providing an online marketplace serving the commercial real estate industry and operating businesses for sale industry. Substantially all of the Company’s business comes from customers and operations located within the United States, and the Company does not have any assets located in foreign countries.

Revenue Recognition

The Company derives substantially all its revenue from customers that pay fees for a suite of services to market and search for commercial real estate and operating businesses. These services include a premium membership that gives the customer unlimited access to listings, maximized exposure for their listings along with enhanced services to market their listings. The Company recognizes revenue under the provisions of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) guidance related to revenue recognition, when persuasive evidence of an agreement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Payments received in advance of services being rendered are recorded as deferred revenue and recognized on a straight-line basis over the service period.

Revenue from other sources includes advertising revenues which are recognized ratably over the period in which the advertisement is displayed provided that no significant obligations remain and collection of the resulting receivable is probable. Advertising rates are dependent on the services provided and the placement of the advertisements. To date, the duration of the Company’s advertising commitments has generally averaged two to three months.

Cost of Revenues

Cost of revenues consists of the expenses associated with the operation of the Company’s website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, internet connectivity and hosting costs. Cost of revenues also includes salaries and benefit expenses associated with the

F-10

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.

Sales and Marketing

The Company’s sales and marketing expenses relate primarily to the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.

Advertising costs are expensed in the period they are incurred. Included in sales and marketing expenses were $3.4 million, $2.6 million and $2.6 million for the years ended December 31, 2008, 2009 and 2010, respectively.

Technology and Product Development

Technology and product development costs are expensed as incurred and include expenses for the research and development of new products and services, as well as improvements to existing products and services. Also included are costs associated with the maintenance of the Company’s existing products.

General and Administrative

General and administrative costs consist primarily of salaries and related expenses for executive, accounting and human resources personnel. These costs also include insurance and professional fees, facility costs and related expenses. Professional fees primarily consist of outside legal and audit fees. All costs are expensed as incurred.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale investments. The differences between total comprehensive income and net income as disclosed on the consolidated statements of stockholders’ equity for the years ended December 31, 2008, 2009 and 2010 were insignificant.

Stock-Based Compensation

Since 2006, the Company has applied FASB authoritative guidance surrounding share-based compensation. The guidance requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period.

Recent Accounting Pronouncements

In June 2009, the FASB issued new authoritative guidance which amends the evaluation criteria for determining the primary beneficiary of a Variable Interest Entity, or “VIE.” This new guidance requires an ongoing assessment of whether an enterprise is the primary beneficiary of a variable interest entity. The effective date for this amendment is reporting periods beginning after November 15, 2009. The Company adopted this guidance effective January 1, 2010, and there has been no material impact to the consolidated financial statements upon adoption.

F-11

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2)   Earnings per Share

The number of shares used to compute basic and diluted net income per share is calculated as follows (in thousands):

	Year Ended December 31,
	2008		2009		2010
Weighted average common shares outstanding		35,772		34,420		33,175
Convertible preferred stock		—		7,440		7,440
Shares used to compute basic net income applicable to common stockholders		35,772		41,860		40,615
Add dilutive common equivalents:
Stock options		1,270		930		1,308
Restricted stock units		8		54		448
Unvested restricted stock(1)		60		—		—
Shares used to compute diluted net income applicable to common stockholders		37,110		42,844		42,371

(1) Outstanding unvested common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been anti-dilutive (in thousands):

	Year Ended December 31,
	2008		2009		2010
Stock options		3,294		4,673		3,595
Restricted stock units		—		113		55

F-12

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):

	Year Ended December 31,
	2008		2009			2010
Calculation of basic net income per share applicable to common shareholders:
Net income	$	18,278	$	11,753		$	15,726
Convertible preferred stock accretion of discount		—		(240	)		(339	)
Net income applicable to common shareholders	$	18,278	$	11,513		$	15,387
Shares used to compute basic net income applicable to common shareholders		35,772		41,860			40,615
Basic net income per share applicable to common shareholders	$	0.51	$	0.28		$	0.38
Calculation of diluted net income per share applicable to common shareholders:
Net Income	$	18,278	$	11,753		$	15,726
Convertible preferred stock accretion of discount		—		(240	)		(339	)
Net income applicable to common shareholders	$	18,278	$	11,513		$	15,387
Shares used to compute diluted net income applicable to common shareholders		37,110		42,844			42,371
Dilutive net income per share applicable to common shareholders	$	0.49	$	0.27		$	0.36

(3)   Property and Equipment, net

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

	As of December 31,
	2009			2010
Computer equipment and purchased software	$	6,363		$	6,839
Office equipment and furniture (includes leasehold improvements)		1,057			1,102
		7,420			7,941
Less accumulated depreciation and amortization		(5,204	)		(5,931	)
Property and equipment, net	$	2,216		$	2,010

During 2010, the Company recorded an adjustment to eliminate from property and equipment approximately $0.6 million of fully depreciated property and equipment.

(4)   Acquisitions

During the year ended December 31, 2010, the Company acquired BizQuest on January 4, 2010, Reaction Web on March 15, 2010 and LandsofAmerica on September 1, 2010, each pursuant to Asset Purchase Agreements for a total cash consideration of $22.1 million (net of cash acquired), plus potential gross earn-out payments ranging from zero to $4.3 million that are contingent upon achievement of certain performance targets. As of December 31, 2010, the Company recorded a discounted contingent liability of $2.6 million for these potential earn-out payments. With these acquisitions, LoopNet has expanded its business-for-sale and land marketplaces, as well, as enhanced the Company’s suite of products.

F-13

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The acquisitions were accounted for as business combinations consistent with the authoritative guidance regarding business combinations, and accordingly, the purchase prices have been allocated to the tangible assets and identifiable intangible assets acquired based on their estimated fair values on the acquisition date. The excess of the purchase prices over the aggregate fair values were recorded as goodwill. Goodwill recorded in connection with the above acquisitions is primarily attributable to the assembled workforces of the acquired businesses and the synergies expected to arise after the Company’s acquisition of those businesses.

As a result of the above acquisitions, the Company recorded intangible assets related to customer relationships, developed technology and non-competition agreements in the aggregate of $4.0 million that are being amortized on a straight-line basis. Also, included in other intangible assets are trade names of $2.5 million which have an indefinite life and are tested on an annual basis for impairment. The remaining excess purchase price over tangible assets and identifiable intangible assets for these acquisitions of $18.0 million have been recorded as goodwill.

The Company’s purchase prices were allocated as follows (in thousands):

Customer relationships	$	1,852
Trade names		2,521
Developed technology		2,068
Non-competition agreements		95
Goodwill		17,951
Total	$	24,487

Customer relationships, developed technology and non-competition agreements have a weighted-average useful life of 3.4 years, 2.0 years and 2.9 years, respectively from the date of acquisition. The amount of goodwill expected to be deductible for tax purposes is $18.0 million.

The results of operations of the entities have been included in the Company’s consolidated statements of income for the period subsequent to the Company’s acquisition. The entities’ results of operations for the periods prior to the acquisition were not material to the Company’s consolidated statement of income and, accordingly, pro forma financial information have not been presented.

(5)   Goodwill and Intangible Assets, net

The changes in the carrying amount of goodwill for the years ended December 31, 2008, 2009 and 2010 were as follows (in thousands):

Balance as of December 31, 2007	$	15,233
Goodwill acquired		8,349
Goodwill adjustment		(526	)
Balance as of December 31, 2008		23,056
Goodwill adjustment		312
Balance as of December 31, 2009		23,368
Goodwill acquired		17,951
Goodwill adjustment		188
Balance as of December 31, 2010	$	41,507

The $188,000 and $312,000 goodwill adjustments in 2010 and 2009, respectively were due to the contingent payments earned upon the achievement of certain performance targets by LandAndFarm.com, Inc. The $526,000 goodwill adjustment in 2008 was due to the release of a portion of the valuation allowance against Cityfeet’s net operating losses.

F-14

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Intangible assets, net consisted of the following (in thousands):

	As of December 31,
	2009			2010
Cost:
Customer relationships	$	1,711		$	3,563
Technology		3,377			5,445
Non-competition agreement		63			158
Domain name		1,994			4,515
Total cost		7,145			13,681
Accumulated amortization:
Customer relationships		(831	)		(1,416	)
Technology		(1,479	)		(2,791	)
Non-competition agreement		(30	)		(65	)
Domain name		(318	)		(469	)
Total accumulated amortization		(2,658	)		(4,741	)
Intangible assets, net	$	4,487		$	8,940

Customer relationships, developed technology and non-competition agreements have a weighted-average useful life of 5.0 years, 0.8 years and 1.4 years, respectively from the date of acquisition. Amortization expense was $1.0 million, $1.2 million and $2.1 million for the years ended December 31, 2008, 2009 and 2010, respectively. As of December 31, 2010, expected amortization expense for acquisition-related intangible assets for each of the next five years and thereafter is as follows (in thousands):

2011	$	2,556
2012		1,807
2013		640
2014		198
2015 and thereafter		114
	$	5,315

(6)   Income Tax Expense

Income tax expense (benefit) was comprised of the following (in thousands):

	Year Ended December 31,
	2008			2009			2010
Current:
Federal	$	11,136		$	6,688		$	8,025
State		2,901			1,767			2,352
Total	$	14,037		$	8,455		$	10,377
Deferred:
Federal	$	(1,204	)	$	(1,513	)	$	(9,066	)
State		(536	)		(696	)		(850	)
Total	$	(1,740	)	$	(2,209	)	$	(9,916	)
Income tax expense	$	12,297		$	6,246		$	461

F-15

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:

	Year Ended December 31,
	2008			2009			2010
Statutory federal tax rate		35.0	%		35.0	%		35.0	%
State tax rate, net of federal benefit		5.0	%		3.9	%		6.0	%
Change in valuation allowance		(1.9	)%		(4.4	)%		(39.6	)%
Other adjustments		2.1	%		0.2	%		1.5	%
Effective tax rate		40.2	%		34.7	%		2.9	%

The tax effects of temporary differences that gave rise to significant components of deferred tax assets (liabilities) were as follows (in thousands):

	As of December 31,
	2009			2010
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	11,480		$	10,108
Depreciation and amortization		(92	)		598
Stock-based compensation		5,122			7,235
Accruals and allowances		379			364
Tax credits		1,235			1,235
Intangibles		(1,750	)		(1,750	)
Valuation allowance		(8,084	)		(564	)
Other		327			1,225
Deferred tax assets, net	$	8,617		$	18,451

In the fourth quarter of 2010, the Company determined that it is more likely than not that it would generate sufficient taxable income from operations in future years to realize tax benefits arising from the use of our net operating loss carryforwards and therefore in 2010 the Company reversed $6.6 million of the valuation allowance on the deferred tax assets. The release of the valuation allowance in the fourth quarter of 2010 resulted in a tax benefit of $6.6 million that was recognized in our results from operations. As of December 31, 2010, the Company continued to maintain a valuation allowance of approximately $0.6 million for certain state net operating loss carryforwards due to the uncertainty of realization. The Company utilized net operating loss carryforwards against taxable income of $3.7 million for the fiscal years 2008, 2009 and 2010, respectively.

At December 31, 2010, the Company had approximately $24.1 million of federal and $19.7 million of state net operating loss carryforwards available to reduce future taxable income which will begin to expire in 2019 for federal and 2014 for state purposes, respectively.

Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforwards is limited based upon changes in the percentage of the ownership of the Company. As a result of prior ownership changes, the Company was limited to using $3.7 million of net operating losses to offset taxable income in 2010 and estimates that the Company will be able to utilize approximately $3.7 million in 2011, $2.9 million in 2012 and $2.0 million each year thereafter until 2021.

The Company evaluates its tax positions for all income tax items based on their technical merits to determine whether each position satisfies the “more likely than not to be sustained upon examination” test. The tax benefits are then measured as the largest amount of benefit, determined on a cumulative basis, that is “more likely than not” to be realized upon ultimate settlement. The Company will report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the

F-16

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

quarter in which such change occurs. As of December 31, 2010, the Company has a $145,000 liability for unrecognized tax benefits.

(7)   Series A Convertible Preferred Stock

On April 14, 2009, the Company completed a $50 million private placement to accredited investors (the “Purchasers”). The transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Pursuant to the Securities Purchase Agreement (the “Purchase Agreement”), the Company agreed to sell to the Purchasers an aggregate of 50,000 shares of its newly-created Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). The Series A Preferred Stock is initially convertible into an aggregate of 7,440,476 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), at a conversion price of $6.72 per share (as may be adjusted for stock dividends, stock splits or similar recapitalizations).

The holders of the Series A Preferred Stock are entitled to receive, prior to any distribution to the holders of the Common Stock, an amount per share equal to the greater of (1) the Original Issue Price, plus any declared and unpaid dividends and (2) the amount that Purchasers would receive in respect of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock if all of the then outstanding Series A Preferred Stock were converted into Common Stock. The rights, privileges and preferences of the Series A convertible preferred stock are set forth in the Certificate of Designations of Series A Convertible Preferred Stock attached as an exhibit to the Company’s Form 8-K filed with the SEC on April 2, 2009.

The transaction closed on April 14, 2009. The net proceeds of $48 million from the issuance of the Series A Preferred Stock are net of issuance costs of $2 million. The Series A Preferred Stock reported on the Company’s consolidated balance sheet consists of the net proceeds plus the amount of accretion for issuance costs. Such accretion costs are being accreted over 72 months with such accretion being recorded as a reduction in retained earnings.

A summary of activity related to the Series A convertible preferred stock is as follows (in thousands):

Gross Proceeds	$	50,000
Costs and expenses of issuance		(2,033	)
Accretion of discount		240
Net convertible preferred stock at December 31, 2009	$	48,207

The rights, privileges and preferences of the Series A convertible preferred stock are set forth in the Certificate of Designations of Series A Convertible Preferred Stock attached as an exhibit to the Company’s Form 8-K filed with the SEC on April 2, 2009.

Voting

Each share of Series A Preferred Stock shall entitle the holder thereof to vote, in person or by proxy, at a special or annual meeting of the stockholders of the Company, on all matters voted on by holders of Common Stock, voting together as a single class with the holders of the Common Stock and all other shares entitled to vote thereon as a single class with the Common Stock. With respect to all such matters, each issued and outstanding share of Series A Preferred Stock shall entitle the holder thereof to cast that number of votes per share as is equal to the number of votes that such holder would be entitled to cast had such holder converted such holder’s Series A Preferred Stock into Common Stock on the record date for determining the stockholders of the Company eligible to vote on any such matters.

Dividends

Whenever the Company shall pay a dividend or distribution on the Common Stock of the Company, par value $0.001 per share, each holder of a share of Series A Preferred Stock shall be entitled to receive, at the same time the dividend or distribution is paid on the Common Stock, out of the assets of the Company legally available therefore, a dividend or distribution equal to the amount that would have been paid in respect of the Common Stock issuable

F-17

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

upon conversion of such share of Series A Preferred Stock immediately prior to the close of business on the record date for determining the holders entitled to receive such dividend or distribution on the Common Stock, or, if no such record is taken, the date on which the record holders of Common Stock entitled to such dividend or distribution is determined.

The holders of shares of Series A Preferred Stock shall not be entitled to receive any dividends except as provided herein.

Liquidation

Upon the effective date of any voluntary or involuntary liquidation, dissolution or winding up of the Company (“Liquidation Event”), the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Company legally available for distribution to its stockholders an amount per share (“Liquidation Preference”) equal to the greater of (a) (i) $1,000 (subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) (” Original Issue Price ”) plus (ii) all declared but unpaid dividends and (b) the amount that the holder of such shares of Series A Preferred Stock would receive in respect of the shares of Common Stock issuable upon conversion of such shares of Series A Preferred Stock if all of the then outstanding shares of Series A Preferred Stock were converted into Common Stock in accordance herewith immediately prior to the Liquidation Event. A Change of Control (as defined below) shall not be deemed a Liquidation Event. If, upon the effective date of a Liquidation Event, the assets of the Company shall be insufficient to make payment in full of the Liquidation Preference to all holders of the Series A Preferred Stock and all other now or hereafter authorized capital stock of the Company ranking on a parity with (upon liquidation, dissolution or winding up) the Series A Preferred Stock, then such assets shall be distributed among the holders of Series A Preferred Stock and the holders of such other capital stock of the Company ranking on a parity with (upon dissolution, liquidation or winding up) the Series A Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.

No distribution shall be made in respect of any shares of Series A Preferred Stock pursuant to Section 3(a) unless, at the time of such distribution, all amounts due in respect of any shares of any now or hereafter authorized capital stock of the Company ranking senior to (upon liquidation, dissolution or winding-up) the Series A Preferred Stock have been paid in full.

Upon the effective date of a Liquidation Event, no distribution shall be made in respect of any shares of Common Stock or any other now or hereafter authorized capital stock of the Company ranking junior to (upon liquidation, dissolution or winding-up) the Series A Preferred Stock unless, at the time of such distribution, the holders of shares of Series A Preferred Stock shall have received the full Liquidation Preference with respect to each share.

After payment in full of the Liquidation Preference to holders of all shares of Series A Preferred Stock, the Series A Preferred Stock shall not be entitled to receive any additional cash, property or other assets of the Company upon the liquidation, dissolution or winding up of the Company.

Conversion

Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price. The Conversion Price shall initially be $6.72, and shall be subject to adjustment.

Redemption at the option of the Company

If at any time the closing price of the Common Stock as reported by the principal exchange or quotation system on which such Common Stock is traded or reported exceeds sixteen dollars and eighty cents ($16.80) per share for 20 consecutive trading or reporting days, the Company shall have the option, at its sole discretion, to redeem all, but not less than all, of the then outstanding Series A Preferred Stock for cash consideration per share of Series A

F-18

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Preferred Stock in an amount equal to one-hundred and one percent (101%) of the Original Issue Price plus all accrued but unpaid dividends.

Redemption at the option of the Holder

At any time on or after the sixth (6th ) anniversary of the Original Issuance Date and on or before the date that is ten (10) Business Days thereafter, each holder of shares of Series A Preferred Stock shall have the option, at such holder’s sole discretion, to request that the Company redeem any or all, of such holder’s then outstanding Series A Preferred Stock for cash consideration per share of Series A Preferred Stock in an amount equal to the Original Issue Price plus all declared but unpaid dividends.

(8)   Treasury Stock

LoopNet’s Board of Directors authorized the repurchase of up to $50.0 million of the company’s common stock on February 5, 2008 and an additional authorized level of $50.0 million was announced on July 30, 2008. In February 2010, the Board of Directors approved the repurchase of up to an additional $29.6 million in shares of the company’s common stock, bringing to $75.0 million the total amount of currently authorized common stock repurchases, of which $43.3 million remained available as of December 31, 2010. Repurchased shares are recorded as treasury stock and are accounted for under the cost method.

(9)   Stock Option Plan

The Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”), which became effective on completion of our initial public offering in June 2006. The 2006 Plan provides for the grant of stock options, stock appreciation rights, stock units and other similar stock awards. Options granted under the 2006 Plan may be either “incentive stock options,” as defined under Section 422 of the Internal Revenue Code, or non-qualified stock options. Through December 31, 2006 the Board of Directors had reserved 7,000,000 shares of common stock to be issued under the 2006 Plan. The 2006 Plan provides for an automatic annual increase in the number of shares available for issuance on January 1st of each year for the life of the plan starting 2007, equal to the least of (i) 1,800,000 shares, (ii) 4% of the shares outstanding as of the end of the prior fiscal year, or (iii) a lesser number determined by the Board of Directors or Compensation Committee.

Prior to June 6, 2006, the Company issued options under the 2001 Stock Option Plan (the “2001 Plan”). The 2001 Plan was terminated on June 6, 2006 with respect to new grants. Available shares created by cancellations will be transferred automatically to the 2006 Plan.

Incentive and nonqualified stock options typically vest over a four-year period, 25% for the first year and monthly thereafter over the remaining three years. Stock options may be exercised during continued employment, or within 60 days of terminating employment and they expire seven years from the date of grant for the 2006 Plan and ten years from the date of grant for the 2001 Plan.

F-19

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the Company’s stock option activity was as follows:

	Options Outstanding					Options Exercisable
				Weighted				Weighted
				Average				Average
	Number of			Exercise		Number of		Exercise
	Shares			Price		Shares		Price
Outstanding at December 31, 2007		3,638,382		$	8.93		1,339,128	$	4.59
Granted		1,600,496		$	11.62
Exercised		(310,357	)	$	1.15
Cancelled		(291,281	)	$	13.41
Outstanding at December 31, 2008		4,637,240		$	10.10		2,175,935	$	7.96
Granted		2,391,697		$	7.37
Exercised		(232,802	)	$	1.32
Cancelled		(343,510	)	$	13.15
Outstanding at December 31, 2009		6,452,625		$	9.24		3,331,025	$	9.11
Granted		2,987,000		$	10.37
Exercised		(285,670	)	$	3.86
Cancelled		(200,287	)	$	11.17
Outstanding at December 31, 2010		8,953,668		$	9.75		4,548,818	$	9.73

Included in the options granted during the twelve month period ended December 31, 2010 are 1,440,000 shares of performance-based options awarded to its executive officers by the Board of Directors. These options are tied to incentivizing execution of the Company’s long-term strategic plan. The Company is unable to assess the likelihood of achieving the strategic plan at this time and therefore the recognition of the compensation expense for these options has been deferred.

Additional information regarding stock options outstanding and exercisable as of December 31, 2010 is as follows:

	Options Outstanding						Options Exercisable
			Weighted								Weighted
			Average		Weighted				Weighted		Average
	Number		Remaining		Average				Average		Remaining
	Options		Contractual		Exercise		Number		Exercise		Contractual
Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price		Life (Years)
$0.10		311,113		2.5	$	0.10		311,113	$	0.10
$0.23 — $4.08		757,591		5.0		3.63		757,591		3.62
$5.70 — $7.96		2,063,218		5.1		7.21		924,274		7.21
$8.00 — $9.97		2,070,981		6.1		9.85		271,678		9.44
$10.00 — $11.99		1,818,983		5.3		11.04		588,757		11.03
$12.00 — $12.98		607,249		3.5		12.10		491,625		12.10
$13.18 — $15.61		461,296		3.4		13.98		406,002		14.06
$16.07 — $16.94		554,659		3.2		16.10		521,611		16.10
$17.06 — $19.68		136,766		3.2		18.77		129,004		18.77
$20.80 — $24.40		171,812		3.6		22.35		147,163		22.35
$0.10 — $24.40		8,953,668		4.9	$	9.75		4,548,818	$	9.73		4.1

In connection with the FASB authoritative guidance of stock-based compensation (see Note 1), the Company reviewed and updated, among other things, its forfeiture rate, expected life and volatility assumptions. The weighted

F-20

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

average expected option life reflects the application of the simplified method. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Estimated volatility also reflects the application of the authoritative guidance and, accordingly, incorporates historical volatility of similar entities whose share prices are publicly available.

The fair value of each stock option was estimated on the date of grant using the Black-Scholes method with the following assumptions:

	Year Ended December 31,
	2008			2009			2010
Risk-free interest rate		2.80	%		2.19	%		1.93	%
Expected volatility		42	%		49	%		48	%
Expected life		4.6 years			4.6 years			4.6 years
Dividend yield		0	%		0	%		0	%

The weighted-average fair value of options granted in the years ended December 31, 2008, 2009 and 2010 was $4.47, $3.05, and $4.37, respectively, using the Black-Scholes option-pricing model. The total intrinsic value (market value on date of exercise less exercise price) of options exercised during 2008, 2009 and 2010 totaled $3.1 million, $1.5 million and $2.2 million, respectively. The aggregate intrinsic values of stock options outstanding and exercisable at December 31, 2010 were $20.0 million and $13.2 million, respectively.

For the year ended December 31, 2010, the Company’s stock-based compensation expense related to stock option grants was $6.6 million. As of December 31, 2010, there was $8.9 million of unrecognized compensation expense related to unvested stock options, net of estimated forfeitures. That compensation expense is expected to be recognized over a weighted-average period of 1.3 years.

Cash received from stock options exercised for 2008, 2009 and 2010 was $0.4 million, $0.3 million and $1.1 million, respectively. Tax benefits realized from tax deductions associated with options exercises for 2008, 2009 and 2010 totaled $0.8 million, $0.4 million, and $0.5 million, respectively.

Under the 2006 Plan, the Company also issued restricted stock units. A restricted stock unit award is an agreement to issue specified numbers of shares of the Company’s common stock at specified vesting dates. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. Restricted stock units vest in equal 25% increments over a four-year period on the anniversary of the grant date.

A summary of the Company’s restricted stock unit activity is as follows:

	Unvested Restricted Stock Units
						Weighted
				Weighted		Average
				Average		Remaining
	Number of			Grant Date		Contractual
	Shares			Fair Value		Life (Years)
Outstanding at December 31, 2008		195,000		$	11.47		1.74
Granted		245,000		$	7.19
Vested		(48,750	)	$	11.47
Cancelled		—		$	—
Outstanding at December 31, 2009		391,250		$	8.79		1.49
Granted		1,122,500		$	10.29
Vested		(110,000	)	$	9.09
Cancelled		—		$	—
Outstanding at December 31, 2010		1,403,750		$	9.98		3.74

Included in the restricted stock units granted during the twelve month period ended December 31, 2010 are 690,000 shares of performance-based restricted stock units awarded to its executive officers by the Board of Directors. These restricted stock units are tied to incentivizing execution of the Company’s long-term strategic plan.

F-21

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company is unable to assess the likelihood of achieving the strategic plan at this time and therefore the recognition of the compensation expense for these options has been deferred.

For the year ended December 31, 2010, the Company’s stock-based compensation expense related to restricted stock units was $1.6 million. As of December 31, 2010, there was $4.0 million of unrecognized compensation expense related to unvested restricted stock units, net of forecasted forfeitures. That compensation expense is expected to be recognized over a weighted-average period of 1.8 years.

Total stock-based compensation has been allocated as follows (in thousands):

	Year Ended December 31,
	2008		2009		2010
Cost of revenue	$	570	$	495	$	546
Sales and marketing		2,198		894		1,786
Technology and product development		1,311		2,298		2,680
General and administrative		1,855		3,140		3,220
Total	$	5,934	$	6,827	$	8,232

(10)   Commitments and Contingencies

Leases

The Company leases office space in California. The offices are currently leased under noncancelable operating lease agreements which expire at various dates through 2018. Future minimum payments under these noncancelable operating leases as of December 31, 2010, are as follows (in thousands):

2011	$	3,028
2012		2,994
2013		3,022
2014		3,080
2015 and thereafter		3,837
	$	15,961

Rent expense under operating leases for the years ended December 31, 2008, 2009 and 2010 totaled approximately $2.5 million, $2.9 million and $2.9 million, respectively.

Litigation

April 2008, LoopNet and CityFeet (collectively the “Defendants”) were sued by Real Estate Alliance, Ltd. (“REAL”) in the U.S. District Court for the Central District of California for alleged infringement of certain patents (“the REAL v. LoopNet Action”). The complaint seeks unspecified damages, attorney fees and costs. The Defendants deny the alleged infringement and have filed a counter-claim for a declaratory judgment that the patents-in-suit are invalid and not infringed. To date, discovery in the REAL v. LoopNet Action has been limited and the court has not yet set a trial date. Moreover, because the patents-in-suit have been asserted against several other entities, in another pending lawsuit in the same court, (“the earlier filed action”), the REAL v. LoopNet Action was stayed in February 2009, and administratively closed in February 2010. It is possible that REAL may attempt to re-institute the REAL v. LoopNet Action, depending upon the outcome of the earlier filed action, which is currently on appeal to the U.S. Court of Appeals for the Federal Circuit. At this time, the Company cannot predict the outcome of either the earlier filed action or the REAL v. LoopNet Action, but if the REAL v. LoopNet Action is re-instituted, the Company intends to vigorously defend itself.

From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot assure you as to the ultimate outcome of any legal proceedings, we are not currently party to any

F-22

LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

legal proceedings that management believes would have a material adverse effect on our financial position or results of operations.

(11)   401(k) Plan

Employees may participate in the Company’s 401(k) Plan. Participating employees may contribute a portion of their salary to the Plan up to the maximum allowed by the federal tax guidelines. The Company matches employee contributions up to 4% of the employee’s salary. Employee and Company contributions are fully vested when contributed. The company contributed $0.5 million, $0.6 million and $0.7 million for the years ended December 31, 2008, 2009 and 2010, respectively.

F-23

TABLE OF CONTENTS

	Page
FINANCIAL INFORMATION
Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of December 31, 2010 and March 31, 2011		F-25
Condensed Consolidated Statements of Income for the three month periods ended March 31, 2010 and 2011		F-26
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2010 and 2011		F-27
Notes to Condensed Consolidated Financial Statements		F-28

F-24

LOOPNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	December 31,			March 31,
	2010			2011
				(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	88,773		$	93,805
Short-term investments		3,512			3,530
Accounts receivable, net of allowance of $236 and $195 , respectively		1,494			1,744
Prepaid expenses and other current assets		1,095			1,111
Deferred income taxes, net		1,317			1,315
Total current assets		96,191			101,505
Property and equipment, net		2,010			2,556
Goodwill		41,507			41,507
Intangibles, net		8,940			8,299
Deferred income taxes, net, non-current		17,134			16,432
Deposits and other non-current assets		6,208			6,526
Total assets	$	171,990		$	176,825
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	471		$	820
Accrued liabilities and other current liabilities		3,393			3,167
Accrued compensation and benefits		3,522			2,531
Deferred revenue		8,888			9,443
Total current liabilities		16,274			15,961
Other long-term liabilities		2,491			2,644
Commitments and contingencies
Series A convertible preferred stock		48,546			48,631
Stockholders’ equity:
Common stock, $.001 par value, 125,000,000 shares authorized; 32,183,836 and 32,504,472 shares outstanding, respectively		40			40
Additional paid in capital		132,019			135,172
Other comprehensive loss		(389	)		(383	)
Treasury stock, at cost, 7,682,261 and 7,682,962 shares, respectively		(86,220	)		(86,227	)
Retained earnings		59,229			60,987
Total stockholders’ equity		104,679			109,589
Total liabilities and stockholders’ equity	$	171,990		$	176,825

The accompanying notes are an integral part of these unaudited condensed financial statements.

F-25

LOOPNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

	Three months ended March 31,
	2010			2011
	(Unaudited)
Revenues	$	18,822		$	20,713
Cost of revenue (1)		2,846			3,157
Gross margin		15,976			17,556
Operating expenses:
Sales and marketing (1)		4,290			5,134
Technology and product development (1)		2,949			3,659
General and administrative (1)		4,371			4,924
Amortization of acquired intangible assets		445			641
Total operating expenses		12,055			14,358
Income from operations		3,921			3,198
Interest and other (expense) income, net		(104	)		(317	)
Income before tax		3,817			2,881
Income tax expense		1,417			1,038
Net income		2,400			1,843
Convertible preferred stock accretion of discount		(85	)		(85	)
Net income applicable to common stockholders	$	2,315		$	1,758
Net income per share applicable to common shareholders:
Basic	$	0.06		$	0.04
Diluted	$	0.05		$	0.04
Shares used in per share calculations:
Basic		41,938			39,791
Diluted		43,281			41,881

(1) Stock-based compensation is allocated as follows:

Cost of revenue	$	128	$	130
Sales and marketing		485		585
Technology and product development		682		801
General and administrative		827		994

The accompanying notes are an integral part of these unaudited condensed financial statements.

F-26

LOOPNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Three months ended March 31,
	2010			2011
	(Unaudited)
Cash flows from operating activities:
Net income	$	2,400		$	1,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		817			995
Stock-based compensation		2,122			2,510
Tax benefits from exercise of stock options		(141	)		(165	)
Deferred income tax		557			704
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		(385	)		(250	)
Prepaid expenses and other assets		(820	)		320
Accounts payable		9			348
Accrued expenses and other liabilities		95			(73	)
Accrued compensation and benefits		(855	)		(991	)
Deferred revenue		202			555
Net cash provided by operating activities		4,001			5,796
Cash flows from investing activities:
Purchase of property and equipment		(153	)		(900	)
Purchase of investments		(2,050	)		(500	)
Acquisitions, net of acquired cash		(9,430	)		—
Net cash used in investing activities		(11,633	)		(1,400	)
Cash flows from financing activities:
Net proceeds from exercise of stock options		76			960
Tax withholdings related to net share settlements of restricted stock units		(168	)		(482	)
Repurchase of common stock		(2,924	)		(7	)
Tax benefits from exercise of stock options		141			165
Net cash provided by (used in) financing activities		(2,875	)		636
Net increase (decrease) in cash and cash equivalents		(10,507	)		5,032
Cash and cash equivalents at beginning of period		125,571			88,773
Cash and cash equivalents at end of period	$	115,064		$	93,805

The accompanying notes are an integral part of these unaudited condensed financial statements.

F-27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Background and Basis of Presentation

The Company

     LoopNet, Inc. (“we,” the “Company” or “LoopNet”) was incorporated under the laws of the state of California on June 2, 1997, and was reincorporated as a Delaware corporation in May 2006.

     We own and operate the leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace, which averaged approximately 2.1 million during the first quarter of 2011, compared with approximately 1.5 million during 2010, and approximately 985,000 during 2009, as reported by comScore Media Metrix. comScore Media Metrix defines a unique visitor as an individual who visited any content of a website, a category, a channel, or an application. Our online marketplace, available at www.LoopNet.com, enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings including qualitative descriptions, financial and tenant information, photographs and key property characteristics, in order to find a buyer or tenant. Commercial real estate agents, buyers and tenants use the LoopNet online marketplace to search for available property listings that meet their commercial real estate criteria. By connecting the sources of commercial real estate supply and demand in an efficient manner, we believe that our online marketplace enables commercial real estate participants to initiate and complete more transactions more cost-effectively than through other means. As of March 31, 2011, the LoopNet online marketplace contained 816,471 listings.

     The Company derives most of its revenue from customers that pay fees for a suite of services to market and search for commercial real estate and operating businesses. These services include a premium membership that gives the customer unlimited access to listings, maximized exposure for their listings along with enhanced services to market their listings.

Basis of Presentation

     The accompanying condensed consolidated balance sheet as of March 31, 2011, the statements of income for the three months ended March 31, 2010 and 2011 and the statements of cash flows for the three months ended March 31, 2010 and 2011 are unaudited. These statements should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2010 and include normal and recurring adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2011. The Company has evaluated subsequent events after the balance sheet date through the financial statement issuance date for appropriate accounting and disclosure.

Use of Estimates

     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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.

F-28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 2 — Earnings Per Share (EPS)

     The share count used to compute basic and diluted net income per share is calculated as follows (in thousands):

	Three Months Ended
	March 31,
	2010		2011
	(Unaudited)
Weighted average common shares outstanding		34,498		32,351
Convertible preferred stock		7,440		7,440
Shares used to compute basic net income applicable to common shareholders		41,938		39,791
Add dilutive common equivalents:
Stock options		1,094		1,489
Restricted stock units		248		601
Shares used to compute diluted net income applicable to common shareholders		43,281		41,881

     The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been anti-dilutive (in thousands):

	Three Months Ended
	March 31,
	2010		2011
	(Unaudited)
Stock options		4,979		3,721
Restricted stock units		98		—

     The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):

	Three Months Ended
	March 31,
	2010			2011
	(Unaudited)
Calculation of basic net income per share applicable to common shareholders:
Net income	$	2,400		$	1,843
Convertible preferred stock accretion of discount		(85	)		(85	)
Net income applicable to common shareholders	$	2,315		$	1,758
Shares used to compute basic net income applicable to common shareholders		41,938			39,791
Basic net income per share applicable to common shareholders	$	0.06		$	0.04
Calculation of diluted net income per share applicable to common shareholders:
Net income	$	2,400		$	1,843
Convertible preferred stock accretion of discount		(85	)		(85	)
Net income applicable to common shareholders	$	2,315		$	1,758
Shares used to compute diluted net income applicable to common shareholders		43,281			41,881
Dilutive net income per share applicable to common shareholders	$	0.05		$	0.04

F-29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 3 — Acquisitions

     In 2010, the Company acquired three entities, each pursuant to Asset Purchase Agreements for a total cash consideration of $22.1 million (net of cash acquired), plus potential gross earn-out payments up to $4.3 million that are contingent upon achievement of certain performance targets. In February 2011, the Company made a cash payment of $0.3 million, which represents the first potential contingent payment obligation.

     The acquisitions were accounted for as a business combination consistent with the authoritative guidance regarding business combinations (see the Company’s 2010 Form 10-K for additional information). The results of operations of the three entities were included in the Company’s condensed consolidated statements of income for the period subsequent to their respective acquisition dates. The entities results of operations for the periods prior to the acquisitions were not material to our condensed consolidated statement of income and, accordingly, pro forma financial information has not been presented.

Note 4 — Series A Convertible Preferred Stock

     The Company completed a $50 million private placement to accredited investors in 2009. The Company sold an aggregate of 50,000 shares of its newly-created Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), which is initially convertible into an aggregate of 7,440,476 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a conversion price of $6.72 per share (as may be adjusted for stock dividends, stock splits or similar recapitalizations). Holders of Series A Preferred Stock are entitled to receive, prior to any distribution to the holders of the Common Stock, an amount per share equal to the greater of (1) the Original Issue Price, plus any declared and unpaid dividends and (2) the amount that Purchasers would receive in respect of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock if all of the then outstanding Series A Preferred Stock were converted into Common Stock.

     The net proceeds of $48 million from the issuance of the Series A Preferred Stock are net of issuance costs of $2 million. The Series A Preferred Stock reported on the Company’s condensed consolidated balance sheet consists of the net proceeds plus the amount of accretion for issuance costs. Such accretion costs are being accreted over 72 months with such accretion being recorded as a reduction in retained earnings. For the three month periods ended March 31, 2011, the Company recorded accretion on the issuance costs of $85,000.

Note 5 — Stock Plan

Stock Plan Activity

     Stock options and other equity awards are granted by the Company under its 2006 Equity Incentive Plan. The 2006 Equity Incentive Plan became effective on June 9, 2006. Prior to that date, stock options were granted under the Company’s 2001 Stock Option Plan, which terminated on June 9, 2006.

     A summary of the Company’s stock option activity is as follows:

	Options Outstanding							Options Exercisable
						Weighted						Weighted
				Weighted		Average				Weighted		Average
				Average		Remaining				Average		Remaining
	Number of			Exercise		Contractual		Number of		Exercise		Contractual
	Shares			Price		Life (Years)		Shares		Price		Life (Years)
Outstanding at December 31, 2010		8,953,668		$	9.75		4.9		4,548,818	$	9.73		4.1
Granted		813,500		$	11.66
Exercised		(187,016	)	$	5.13
Cancelled		(86,696	)	$	15.07
Outstanding at March 31, 2011 (unaudited)		9,493,456		$	9.95		4.9		4,670,165	$	9.88		4.0

     Included in the options outstanding at March 31, 2011 are 1,440,000 shares of performance-based options awarded to its executive officers by the Board of Directors. These options are tied to incentivizing execution of the Company’s long-term strategic plan. The Company has determined that the performance condition criteria have not been met to date, and therefore recognition of the compensation expense for these options has been deferred.

F-30

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     A summary of the Company’s restricted stock unit activity is as follows:

	Unvested Restricted Stock Units
				Weighted		Weighted Average
				Average		Remaining
				Grant Date		Contractual
	Number of Shares			Fair Value		Life (Years)
Balance at December 31, 2010		1,403,750		$	9.98		3.7
Granted		230,000		$	11.71
Vested		(175,625	)	$	9.43
Cancelled		—		$	—
Outstanding at March 31, 2011 (unaudited)		1,458,125		$	10.31		3.8

     Included in the restricted stock units outstanding at March 31, 2011 are 690,000 shares of performance-based restricted stock units awarded to its executive officers by the Board of Directors. These restricted stock units are tied to incentivizing execution of the Company’s long-term strategic plan. The Company has determined that the performance condition criteria have not been met to date, and therefore recognition of the compensation expense for these options has been deferred.

Stock-based Compensation

     Since 2006, the Company has applied the authoritative guidance surrounding stock-based compensation. The guidance requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The Company adopted this guidance effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006.

     In connection with this guidance, the Company reviews and updates, among other things, its forfeiture rate, expected term and volatility assumptions. Commencing in the first quarter of 2011, the Company began estimating the weighted average expected life of the options based upon the historical exercise behavior of our employees. Prior to the first quarter of 2011, the Company used the simplified method to calculate the weighted average expected life of the options. The estimated volatility for the three month period ended March 31, 2011 reflects the application of the authoritative guidance and, accordingly, incorporates historical volatility of similar companies whose share price is publicly available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

     The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:

	Three months ended
	March 31,
	2010			2011
	(Unaudited)
Risk-free interest rate		2.42	%		2.12	%
Expected volatility		47	%		48	%
Expected life (in years)		4.6			4.0
Dividend yield		0	%		0	%

     The weighted-average fair value of options granted during the three month periods ended March 31, 2010 and 2011 was $4.20 and $4.62, respectively, using the Black-Scholes method.

     The total stock-based compensation has been allocated as follows (in thousands):

	Three months ended
	March 31,
	2010		2011
	(Unaudited)
Cost of revenue	$	128	$	130
Sales and marketing		485		585
Technology and product development		682		801
General and administrative		827		994
Total	$	2,122	$	2,510

F-31

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 7 — Income Taxes

     The Company recorded a provision for income taxes of $1.0 million for the three month period ended March 31, 2011, based upon a 36.0% effective tax rate. The effective tax rate is based upon the Company’s estimated fiscal 2011 income before the provision for income taxes. To the extent the estimate of fiscal 2011 income before the provision for income taxes changes, the Company’s provision for income taxes will change as well.

Note 8 — Stock Repurchases

     The Company’s Board of Directors (the “Board”) authorized the repurchase of up to $50.0 million of the Company’s common stock on February 5, 2008 and an additional authorized level of $50.0 million of the Company’s common stock on July 30, 2008. In February 2010, the Board approved the repurchase of up to an additional $29.6 million in shares of the Company’s common stock, bringing to $75.0 million the total amount of authorized Common Stock repurchases, of which $43.3 million remained available as of March 31, 2011.

     The stock repurchase program may be limited or terminated at any time without prior notice. Stock repurchases under this program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate and will be funded using the Company’s working capital. The timing and actual number of shares repurchased will depend on a variety of factors including corporate and regulatory requirements, price and other market conditions. The program is intended to comply with the volume, timing and other limitations set forth in Rule 10b-18 under the Securities Exchange Act of 1934.

Note 9 — Litigation and Other Contingencies

Litigation and Other Legal Matters

     The Company and its board of directors are named as defendants in a putative class action lawsuit brought by an alleged stockholder challenging our proposed merger with CoStar. The shareholder action was filed on or around May 3, 2011 in the Superior Court of California, County of San Francisco. The complaint alleges, among other things, that each member of the Company’s board of directors breached his fiduciary duties to the Company’s stockholders by authorizing the sale of the Company to CoStar for consideration that does not maximize value to the shareholders and engineering the transaction to benefit themselves without regard to the Company’s shareholders. The amended complaint also alleges that the Company aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The shareholder action seeks equitable relief, including an injunction against consumating the merger. The Company believes that the claims are without merit, and is currently reviewing the recently filed action.

     Except as set forth above, there have been no material changes from legal proceedings as previously disclosed in Part I Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 3, 2011.

Note 10 — Subsequent Events

Merger Agreement with CoStar Group, Inc.

     On April 27, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CoStar Group, Inc., a Delaware corporation (“CoStar”) and Lonestar Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of CoStar (“Merger Subsidiary”), pursuant to which Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company surviving as a wholly-owned subsidiary of CoStar.

     Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive a unit consisting of (i) $16.50 in cash, without interest, and (ii) 0.03702 shares of CoStar common stock (the “Common Stock Consideration”). The holders of the Company’s Series A Preferred Stock will receive the Common Stock Consideration on an as-converted basis.

     Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each of the Company’s outstanding equity awards (including stock options and restricted stock units), whether vested or unvested, will be cancelled in exchange for cash and/or shares of CoStar common stock (depending on the type of award and the exercise price of the award, if any) based on the Common Stock Consideration less, in the case of a stock option, the per share exercise price.

     The Company’s board of directors has unanimously approved the Merger Agreement. The Merger Agreement requires that the Merger be approved by the holders of a majority of the outstanding shares of the Company’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis (the “Stockholder Approval”).

F-32

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     In addition to the Stockholder Approval, consummation of the Merger is subject to other customary closing conditions including the receipt of antitrust approvals and the absence of any government order or other legal restraint prohibiting the Merger. Consummation of the Merger is not subject to any financing condition.

     The Merger Agreement contains customary representations, warranties and covenants by each of the Company and CoStar.

     The Merger Agreement contains termination rights for both the Company and CoStar, including for the Company if its board of directors changes its recommendation of the Merger to its stockholders in connection with a superior proposal. Upon termination of the Merger Agreement under certain circumstances, the Company may be obligated to pay CoStar a termination fee of $25,800,000. Upon termination of the Merger Agreement in the event necessary antitrust approval is not obtained, CoStar may be obligated to pay the Company a termination fee of $51,600,000.

     Concurrently with the execution of the Merger Agreement, the Company’s directors and certain of its executive officers and significant stockholders entered into a voting and support agreement (the “Support Agreement”) with CoStar and the Company, and have agreed, in their capacities as stockholders of the Company, to, among other things, vote their shares of the Company’s capital stock in favor of the Merger and the Merger Agreement.

     The foregoing description of the Merger, the Merger Agreement and the Support Agreement is qualified in its entirety by reference to the Merger Agreement and the Support Agreement, copies of which are attached as Exhibit 2.1 and Exhibit 2.2, respectively, to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 28, 2011 and which are incorporated by reference herein.

     The Company cannot guarantee that the Merger will be completed or that, if completed, it will be exactly on the terms as set forth in the Merger Agreement. The Company and CoStar will file a joint proxy statement/prospectus with the SEC in connection with the proposed Merger, which will form a part of the Registration Statement on Form S-4 to register shares of CoStar common stock to be issued in the Merger.

F-33

EX-99.2

Exhibit 99.2

Risk factors related to LoopNet’s Business

The ongoing uncertainty in the commercial real estate market and overall economy could negatively affect our revenues, expenses and operating results.

     Our business is sensitive to trends in the general economy and trends in commercial real estate markets, which are unpredictable and continue to be volatile and subject to uncertainty. Although we are currently seeing signs of stabilization after a prolonged downturn, the depressed debt markets continue to affect the investment sales market and have been contributing to a slow down in our industry, which we anticipate will continue through 2011. These negative general economic conditions could further reduce the overall amount of sale and leasing activity in the commercial real estate industry, and hence the demand for our services. Conditions such as continued tightening in credit markets, reduced industry-wide transaction volumes and negative trends in consumer confidence in global and domestic markets could also further dampen the general economy, and our business. While we believe the increase in the number of distressed sales and resulting decrease in asset prices will eventually translate to greater market activity, the current overall reduction in sales transaction volume continues to negatively impact our business. Therefore, our operating results, to the extent they reflect changes in the broader commercial real estate industry, may be subject to significant fluctuations. Factors that are affecting and could further affect the commercial real estate industry include:

• periods of economic slowdown or recession globally, in the United States or locally;

• inflation;

• flows of capital into or out of real estate investment in the United States or various regions of the United States;

• rates of unemployment;

• interest rates;

• the availability and cost of capital;

• wage and salary levels; or

• concerns about any of the foregoing.

     We believe that the commercial real estate industry is composed of many submarkets, each of which is influenced differently, and often in opposite ways, by various economic factors. We believe that commercial real estate submarkets can be differentiated based on factors such as geographic location, value of properties, whether properties are sold or leased, and other factors. Each such submarket may be affected differently by, among other things:

• economic slowdown or recession;

• changes in levels of rent or appreciation of asset values;

• changing interest rates;

• tax and accounting policies;

• the availability and cost of capital;

• costs of construction;

• increased unemployment;

• lower consumer confidence;

• lower wage and salary levels;

• war, terrorist attacks or natural disasters; or

• the public perception that any of these conditions may occur.

     For example, as of March 31, 2011, approximately 24% of our premium members were based in California and approximately 11% were based in Florida. Negative conditions in these or other significant commercial real estate submarkets could disproportionately affect our business as compared to competitors who have less or different geographic concentrations of their customers. Events such as a war or a significant terrorist attack are also likely to affect the general economy, and could cause a slowdown in the commercial real estate industry and therefore reduce utilization of our marketplace, which could reduce our revenue from premium members. The occurrence of any of the events listed above could increase our need to make significant expenditures to continue to attract customers to our marketplace.

Our business is largely based on a subscription model, and accordingly, any failure to increase the number of our customers or retain existing customers could cause our revenues to decline.

     Our customers include premium members of our LoopNet marketplace, LoopLink users, users of our BizBuySell, BizQuest, Cityfeet, LandsofAmerica and LandAndFarm marketplaces, Property Comps and Property Facts subscribers, REApplications users and advertising and lead generation customers. The majority of our current revenues are generated by subscription fees paid by our premium members. Our growth depends in large part on increasing the number of our free basic members and then converting them into paying premium members, as well as retaining existing premium members. Either category of members may decide not to continue to use our services in favor of alternate services or because of budgetary constraints or other reasons. Since the fourth quarter of 2007, our average monthly cancellation rate for premium members has exceeded our historical rate of three to five percent, although the cancellation rate in the fourth quarter of 2010 and the first quarter of 2011 was the lowest it has been in three years, falling within our expected range of 4.5% to 6.5%. We believe the higher cancellation rate is primarily the result of a significant slow-down in transaction activity in the commercial real estate industry that began in the fourth quarter of 2007, due to deteriorating economic conditions and due to the “credit crunch” impacting the availability and cost of debt capital for real estate transactions.

     If our existing members choose not to use our services, decrease their use of our services, or change from being premium members to basic members, or we are unable to attract new members, listings on our site could be reduced, search activity on our website could decline, the usefulness of our services could be diminished, and we could incur significant expenses and/or experience declining revenues.

     The value of our marketplaces to our customers is dependent on increasing the number of property listings provided by and searches conducted by our members. To grow our marketplaces, we must convince prospective members to use our services. Prospective members may not be familiar with our services and may be accustomed to using traditional methods of listing, searching, marketing and advertising commercial real estate. We cannot assure you that we will be successful in continuing to acquire more members, in continuing to convert free basic members into paying premium members or that our future sales efforts in general will be effective. Further, it is difficult to estimate the total number of active commercial real estate agents, property owners, landlords, buyers and tenants in the United States during any given period. As a result, we do not know the extent to which we have penetrated this market. If we reach the point at which we have attempted to sell our services to a significant majority of commercial real estate transaction participants in the United States, we will need to seek additional products and markets in order to maintain our rate of growth of revenues and profitability.

We rely on our marketing efforts to generate new registered members. If our marketing efforts are ineffective, we could fail to attract new registered members, which could reduce the attractiveness of our marketplace to current and potential customers and lead to a reduction in our revenues.

     We believe that the attractiveness of our services and products to our current and potential customers increases as we attract additional members who provide additional property listings or conduct searches on our marketplace. This is because an increase in the number of our members and the number of listings on our website increases the utility of our website and of its associated search, listing and marketing services. In order to attract new registered members, we rely on our marketing efforts, such as word-of-mouth referrals, direct marketing, online and traditional advertising, sponsoring and attending local industry association events, and attending and exhibiting at industry trade shows and conferences. There is no guarantee that our marketing efforts will be effective. Furthermore, our ability to develop and successfully market our new information products and services may also be important in attracting new registered members. If we are unable to effectively market our existing and new products and services to new customers, or convert existing basic members into premium members, and we are not able to offset any decline in our rate of conversion of basic members to premium members with higher average subscription prices, our revenues and operating results could decline as a result of current premium members failing to renew their premium memberships and potential premium members failing to become premium members.

If we are unable to obtain or retain listings from commercial real estate brokers, agents, and property owners, our marketplace could be less attractive to current or potential customers, which could result in a reduction in our revenues.

     Our success depends substantially on the number of commercial real estate property listings submitted by brokers, agents and property owners to our online marketplace. The number of listings on our marketplace has increased to 816,471 as of March 31, 2011, from 788,330 as of December 31, 2010 and 732,503 as of December 31, 2009. If agents marketing large numbers of property listings, such as large brokers in key real estate markets, choose not to continue their listings with us, or choose to list them with a competitor, our website would be less attractive to other real estate industry transaction participants, thus resulting in cancelled premium memberships, failure to attract and retain new members, or failure to attract advertising and lead generation revenues.

We may be unable to compete successfully with our current or future competitors.

     The market to provide property listing, searching, information services and analytical products, and marketing and transaction services to the commercial real estate industry is highly competitive and fragmented, with limited barriers to entry in certain segments. In the land-for-sale and businesses-for-sale sectors, we similarly compete with a broad array of online marketplaces, as well as local and regional multiple listing services. We face competition from a variety of sources with respect to our different product offerings. We may not be able to compete successfully against our competitors that focus on one type of product or service area with respect to that particular product or service. Additionally, our current or new competitors may adopt aspects of our business model, which could reduce our ability to differentiate our services. Furthermore, listings in the commercial real estate industry are not marketed exclusively through any single channel, and accordingly our competition could aggregate a set of listings similar to ours. If our current or potential customers choose to use these services rather than ours, demand for our services could decline. Increased competition could result in a reduction in our revenues or our rate of acquisition of new customers, or loss of existing customers or market share, any of which would harm our business, operating results and financial condition.

Our current focus on internal and external investments for long term growth may result in flat revenue growth rates and place downward pressure on our operating margin in the near future.

     As part of our initiative to increase our long term value and expand the breadth and depth of services we provide to our customers, we have increased the rate of investments in our business, including

internal investments in product development, data aggregation and information services, sales and marketing, and external investments such as acquisitions and investments in other companies, and expect to continue to do so. For example, as part of our investment in information services, we recently launched the Property Facts product. We also acquired LandsofAmerica. This investment strategy is intended to accelerate our revenue growth and market share gains in the future as activity in the commercial real estate industry shows signs of stabilizing and begins to recover. While we believe this strategy will enable us to capitalize on opportunities we see in our industry and extend our leadership position, we expect our operating margins to experience a downward pressure and our revenue growth rate to be flat in the short term as a result of our planned investments and economic environment. Furthermore, if the industry fails to stabilize or deteriorates further in 2011 and beyond, such investments may not have their intended effect. For instance, our external investments may lose value and as a result, we may incur an impairment charge with respect to such investment. If we are unable to successfully execute our investment strategy or fail to adequately anticipate potential problems, we may experience further decreases in our revenues and operating margins.

If we are unable to introduce new or upgraded services, products or enabling technologies that our customers recognize as valuable, we may fail to attract new customers or retain existing customers. Our efforts to develop new and upgraded products and services could require us to incur significant costs.

     To continue to attract new members to our online marketplace, we may need to continue to introduce new products or services or develop additional enabling technologies. We may choose to develop new products and services independently or choose to license or otherwise integrate content and data from third parties. Developing and delivering these new or upgraded services or products may impose costs and require the attention of our product and technology department and management. This process is costly, and we may experience difficulties in developing and delivering these new or upgraded services or products. In addition, successfully launching and selling a new service or product will require the use of our sales and marketing resources. Efforts to enhance and improve the ease of use, responsiveness, functionality and features of our existing products and services have inherent risks, and we may not be able to manage these product developments and enhancements successfully. If we are unable to continue to develop new or upgraded services or products or develop additional enabling technologies, then our customers may choose not to use our products or services.

The number of our registered members is higher than the number of actual members.

     The number of registered members in our network is higher than the number of actual members because some members have multiple registrations or others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of registered members as one of our key operating metrics and our measure of the size of our marketplace. Furthermore, although the number of our registered members, which includes both basic and premium members, has increased over the last several years, the number of premium members has decreased over the same period. If the number of our actual members does not continue to grow and those members do not convert to premium members, then our business may not grow as fast as we expect, which will harm our operating and financial results.

If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive position and operating results could be harmed.

     The success of our business depends in large part on our intellectual property, and our intellectual property rights, including existing and future trademarks, trade secrets, and copyrights, are and will continue to be valuable and important assets of our business. Our business could be significantly harmed if we are not able to protect the content of our databases and our other intellectual property.

     We have taken measures to protect our intellectual property, such as requiring our employees and consultants with access to our proprietary information to execute confidentiality agreements. We also have taken action, and in the future may take additional action, against competitors or other parties who we believe to be infringing our intellectual property. For example, on November 15, 2007 the Company filed a lawsuit against CoStar Group, Inc. and CoStar Realty Information, Inc. in the Superior Court for the State of California, County of Los Angeles, asserting claims for breach of contract and unfair business practices arising out of CoStar’s alleged unlawful use of data from the Company’s Web site for competitive purposes. All litigation with CoStar was settled in December 2009, although the Company incurred significant legal costs to protect its intellectual property. We may in the future find it necessary to assert claims regarding our intellectual property. These measures may not be sufficient or effective to protect our intellectual property. These measures could also be expensive and could significantly divert our management’s attention from other business concerns.

     We also rely on laws, including those regarding patents, copyrights, and trade secrets, to protect our intellectual property rights. Current laws may not adequately protect our intellectual property or our databases and the data contained in them. 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.

     Others may develop technologies that are similar or superior to our technology. Any significant impairment of our intellectual property rights could require us to develop alternative intellectual property, incur licensing or other expenses, or limit our product and service offerings.

We could face liability for information on our website or general litigation claims.

     We provide information on our website, including commercial real estate listings and broker listings that are submitted by our customers and third parties. We also allow third parties to advertise their products and services on our website and include links to third-party websites. We could be exposed to liability with respect to this information. Customers could assert that information concerning them on our website is misleading and contains errors or omissions. Third parties could seek damages for losses incurred if they rely upon incorrect information provided by our customers or advertisers. We could also be subject to claims that the persons posting information on our website do not have the right to post such information or are infringing the rights of third parties or do not have the qualifications or licenses they disclose. For example, in 1999, CoStar sued us, claiming that we had directly and indirectly infringed their copyrights in photographs by permitting our members to post those photographs on our website. Although the court issued rulings that were favorable to us in that litigation, other persons might assert similar or other claims in the future. In June 2009, CoStar filed a complaint against us alleging that we have infringed their copyrights and trademarks because photographs bearing CoStar’s logo that were posted by third parties allegedly appeared in our Property Comps product. All current litigation with CoStar was settled in December 2009. Among other things, we might be subject to claims that by directly or indirectly providing links to websites operated by third parties, we would be liable for wrongful actions by the third parties operating those websites. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims.

     The Digital Millennium Copyright Act, or DMCA, allows copyright owners to obtain subpoenas compelling disclosure by an Internet service provider of the names of customers of that Internet service provider. We have been served with such subpoenas in the past, and may in the future be served with additional such subpoenas. Compliance with subpoenas under the DMCA may divert our resources, including the attention of our management, which could impede our ability to operate our business.

     Our potential liability for information on our websites or distributed by us to others could require us to implement additional measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our online marketplace to users. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.

If we are unable to convince commercial real estate brokers and other commercial real estate professionals that our services and products are superior to traditional methods of listing, searching, and marketing commercial real estate, they could choose not to use our marketplace, which could reduce our revenues or increase our expenses.

     Our primary source of new customers is participants in the commercial real estate community. Many commercial real estate professionals are use to listing, searching and marketing real estate in traditional and off-line ways, such as through the distribution of print brochures, sharing of written lists, placing signs on properties, word-of-mouth, and newspaper advertisements. Commercial real estate and investment professionals may prefer to continue to use traditional methods or may be slow to adopt and accept our online products and services. If we are not able to continue to persuade commercial real estate participants of the efficacy of our online products and services, they may choose not to use our online marketplace, which could negatively impact our business.

Certain U.S. and foreign laws could subject us to claims or otherwise harm our business.

     We are subject to a variety of laws in the U.S. and abroad that may subject us to claims or other remedies. Our failure to comply with applicable laws may subject us to additional liabilities, which could adversely affect our business, financial condition and results of operations. Laws and regulations which are particularly relevant to our business address information security, content and the distribution of content, taxation, intellectual property rights, characteristics and quality of products and services, and online advertising and marketing, including email marketing and unsolicited commercial email.

     Many applicable laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues of the Internet. The laws that do reference the Internet are being interpreted by the courts, but their applicability and scope remain uncertain. For example, the laws relating to the liability of providers of online services are evolving. Claims have been either threatened or filed against us under both U.S. and foreign laws for defamation, libel, slander, invasion of privacy and other tort claims, unlawful activity, copyright and trademark infringement, or other theories based on the nature and content of the materials searched and the advertisements posted by our websites’ users, our products and services, or content generated by our users.

     Federal and state legislation regulating email communications and Internet advertising, such as privacy-related laws that restrict or prohibit unsolicited email (commonly known as “spam”) may adversely affect our ability to market our services to consumers in a cost-effective manner. Violation of such laws may result in monetary fines or penalties or damage to our reputation. The CAN-SPAM Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in connection with sending commercial email. Depending on how the law is interpreted and applied, CAN-SPAM may impose significant costs and burdens on our email marketing practices.

     Federal, state and local tax authorities may alter tax treatment of companies engaged in Internet commerce. New, revised or existing tax regulations, whether domestic or internationally, may subject us or our affiliates to additional state sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes, particularly sales taxes, could negatively affect the attractiveness of advertising and selling products and services over the Internet and increase our costs. These events, if they occur, could have an adverse effect on our business and results of operations.

If we fail to protect confidential information against security breaches, or if our members or potential members are reluctant to use our marketplace because of privacy concerns, we might face additional costs, and activity in our marketplace could decline.

     As part of our membership registration process, we collect, use and disclose personally identifiable information, including names, addresses, phone numbers, credit card numbers and email addresses. Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites. While we believe that our policies are appropriate and that we are in compliance with our

policies, we could be subject to legal claims, government action or harm to our reputation if actual practices fail to comply or are seen as failing to comply with our policies or with local, state or federal laws concerning personally identifiable information or if our policies are inadequate to protect the personally identifiable information that we collect.

     Concern among prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from using our marketplace. Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws could deter people from using the Internet or our website to conduct transactions that involve the transmission of confidential information, which could harm our business. Under California law and the laws of a number of other states, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could harm our reputation and business.

     In addition, another California law requires businesses that maintain personal information about California residents in electronic databases to implement reasonable measures to keep that information secure. Our practice is to encrypt all personal information, but we do not know whether our current practice will continue to be deemed sufficient under the California law. Other states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically. Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions.

     Another consequence of failure to comply is the possibility of adverse publicity and loss of consumer confidence were it known that we did not take adequate measures to assure the confidentiality of the personally identifiable information that our customers had given to us. This could result in a loss of customers and revenue that could jeopardize our success. While we intend to comply fully with all relevant laws and regulations, we cannot assure you that we will be successful in avoiding all potential liability or disruption of business in the event that we do not comply in every instance or in the event that the security of the customer data that we collect is compromised, regardless of whether our practices comply or not. If we were required to pay any significant amount of money in satisfaction of claims under these laws or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such laws, our business, operating results and financial condition could be adversely affected. Further, complying with the applicable notice requirements in the event of a security breach could result in significant costs.

Our services may infringe the intellectual property rights of others and we may be subject to claims of intellectual property rights infringement.

     We may be subject to claims against us alleging infringement of the intellectual property rights of others, including our competitors. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle and could significantly divert our management’s attention from other business concerns.

     Our technologies and content may not be able to withstand third-party claims of infringement. If we were unable to successfully defend against such claims, we might have to pay damages, stop using the technology or content found to be in violation of a third party’s rights, seek a license for the infringing technology or content, or develop alternative non-infringing technology or content. Licenses for the infringing technology or content may not be available on reasonable terms, if at all. In addition, developing alternative non-infringing technology or content could require significant effort and expense. If we cannot license or develop technology or content for any infringing aspects of our business, we may be forced to limit our service offerings. Any of these results could reduce our ability to compete effectively and harm our business.

     Our trademarks are important to our business. Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of trademarks. If we were unable to use our trademarks, we would need to devote substantial resources toward developing different brand identities.

Unless we develop, maintain and protect our brand identity, our business may not grow and our financial results may suffer.

     In an effort to obtain additional registered members and increase use of our online marketplace by commercial real estate transaction participants, we intend to continue to pursue a strategy of enhancing our brand both through online advertising and through traditional print media. These efforts can involve significant expense and may not have a material positive impact on our brand identity. In addition, maintaining our brand will depend on our ability to provide products and services that are perceived as being high-value, which we may not be able to implement successfully. If we are unable to maintain and enhance our brand, our ability to attract and retain customers or successfully expand our operations will be harmed.

Changes in or interpretations of accounting rules and regulations could result in unfavorable accounting charges or adversely affect our reported financial results.

     Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions contemplated before the announcement of the change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by United States issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

If our website or our other services experience system failures, our customers may be dissatisfied and our operations could be impaired.

     Our business depends upon the satisfactory performance, reliability and availability of our website. Problems with our website could result in reduced demand for our services. Furthermore, the software underlying our services is complex and may contain undetected errors. Despite testing, we cannot be certain that errors will not be found in our software. Any errors could result in adverse publicity, impaired use of our services, loss of revenues, cost increases or legal claims by customers.

     Additionally, our services substantially depend on systems provided by third parties, over whom we have little control. Interruptions in our services could result from the failure of data providers, telecommunications providers, or other third parties. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend on Internet service providers that provide access to our services. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could harm our business.

Our internal network infrastructure could be disrupted or penetrated, which could materially impact our ability to provide our services and our customers’ confidence in our services.

     Our operations depend upon our ability to maintain and protect our computer systems, most of which are located in redundant and independent systems in Los Angeles, California and San Francisco, California. In addition, we utilize data centers in Virginia, Texas, Colorado and New York for specific services. While we believe that our systems are adequate to support our operations, our systems may be vulnerable to damage from break-ins, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires,

floods, and general business interruptions, the amount of coverage may not be adequate in any particular case. Furthermore, any damage or disruption could materially impair or prohibit our ability to provide our services, which could significantly impact our business.

     Experienced computer programmers, or hackers, may attempt to penetrate our network security from time to time. Although we maintain a firewall, and will continue to enhance and review our databases to prevent unauthorized and unlawful intrusions, a hacker who penetrates our network security could misappropriate proprietary information or cause interruptions in our services. We might be required to expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. We also may not have a timely remedy against a hacker who is able to penetrate our network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation or to a material risk of loss. Any of these incidents could materially impact our ability to provide our services as well as materially impact the confidence of our customers in our services, either of which could significantly impact our business.

We may not be able to successfully halt the operations of websites that aggregate our data, as well as data from other companies, such as copycat websites that may misappropriate our data.

     Third parties may misappropriate our data through website scraping, robots or other means and aggregate this data on their websites with data from other companies. In addition, “copycat” websites may misappropriate data on our website and attempt to imitate our brand or the functionality of our website. We may not be able to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to stop their operations. In some cases, particularly in the case of websites operating outside of the United States, our available remedies may not be adequate to protect us against such websites. Regardless of whether we can successfully enforce our rights against these websites, any measures that we may take could require us to expend significant financial or other resources.

EX-99.3

Exhibit 99.3

Unaudited pro forma condensed combined financial
data of the Company and LoopNet

The following unaudited pro forma condensed combined financial statements are based upon the historical consolidated financial data of CoStar and LoopNet after giving effect to the acquisition, and after applying the assumptions, reclassifications and adjustments described in the accompanying notes based on current intentions and expectations relating to the combined business.

The unaudited pro forma condensed combined statements of income combine the historical consolidated statements of income of CoStar and LoopNet, giving effect to the acquisition, as if it had occurred on January 1, 2010. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of CoStar and LoopNet, giving effect to the acquisition as if it had occurred on March 31, 2011. The historical consolidated financial data have been adjusted in the unaudited pro forma condensed financial data to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the statement of income, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial data should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial data. In addition, the unaudited pro forma condensed combined financial data were based on and should be read in conjunction with the:

•  separate historical financial statements of CoStar for the year ended December 31, 2010 and as of and for the quarterly period ended March 31, 2011 and the related notes included in CoStar’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and CoStar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, respectively, each of which is incorporated by reference into this prospectus supplement, and

•  separate historical financial statements of LoopNet for the year ended December 31, 2010 and as of and for the quarterly period ended March 31, 2011 and the related notes included in our Current Report on Form 8-K filed May 23, 2011, which is incorporated by reference into this prospectus supplement.

The unaudited pro forma condensed combined financial data have been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the acquisition been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial data do not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial data have been prepared using the acquisition method of accounting under existing U.S. generally accepted accounting principles, or GAAP standards, which are subject to change and interpretation. The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial data. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial data and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial data do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisition or the costs to integrate the operations of CoStar and LoopNet or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

Unaudited pro forma condensed combined balance sheet
as of March 31, 2011

	Historical			Historical			Pro forma			Pro forma
(in thousands)	CoStar			LoopNet			adjustments			combined
ASSETS
Current assets:
Cash and cash equivalents	$	292,252		$	93,805		$	(344,192	)(a)	$	41,865
Short-term investments		3,657			3,530			(7,187	)(a)		–
Accounts receivable, net		16,240			1,744			–			17,984
Deferred income taxes, net		5,494			1,315			–			6,809
Income tax receivable		4,940			–			–			4,940
Prepaid expenses and other current assets		4,179			1,111			–			5,290
Total current assets		326,762			101,505			(351,379	)		76,888
Long-term investments		29,114			–			–			29,114
Deferred income taxes, net		12,652			16,432			(29,084	)(e)		–
Property and equipment, net		36,886			2,556			–			39,442
Goodwill		80,488			41,507			600,569	(b)		722,564
Intangibles and other assets, net		17,898			8,299			192,998	(c)		219,195
Deposits and other assets		2,679			6,526			6,138	(d)		15,343
Total assets	$	506,479		$	176,825		$	419,242		$	1,102,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,351		$	820		$	–		$	4,171
Accrued wages and commissions		7,581			2,531			–			10,112
Accrued expenses		17,712			3,167			–			20,879
Deferred gain on the sale of building		2,523			–			–			2,523
Income taxes payable		14,831			–			–			14,831
Deferred revenue		18,845			9,443			(6,556	)(f)		21,732
Current portion of long-term debt		–			–			1,750	(d)		1,750
Total current liabilities		64,843			15,961			(4,806	)		75,998
Long-term debt		–			–			173,250	(d)		173,250
Deferred gain on the sale of building		33,225			–			–			33,225
Deferred rent and other long-term liabilities		17,216			2,644			–			19,860
Deferred income taxes, net		–			–			54,057	(e)		54,057
Income taxes payable		1,797			–			–			1,797
Series A convertible preferred stock		–			48,631			(48,631	)(g)		–
Stockholders’ equity:
Common stock		208			40			17	(h)		265
Additional paid in capital		377,320			135,172			245,732	(h)		758,224
Other comprehensive loss		(7,681	)		(383	)		383	(h)		(7,681	)
Treasury stock		–			(86,227	)		86,227	(h)		–
Retained earnings (accumulated deficit)		19,551			60,987			(86,987	)(h)		(6,449	)
Total stockholders’ equity		389,398			109,589			245,372			744,359
Total liabilities and stockholders’ equity	$	506,479		$	176,825		$	419,242		$	1,102,546

Unaudited pro forma condensed combined statement of operations
for year ended December 31, 2010

	Historical		Historical			Pro forma			Pro forma
(in thousands, except per share data)	CoStar		LoopNet			adjustments			combined
Revenues	$	226,260	$	78,002		$	–		$	304,262
Cost of revenues		83,599		12,562			–			96,161
Gross margin		142,661		65,440			–			208,101
Operating expenses:
Selling and marketing		52,455		16,785			–			69,240
Software development		17,350		12,231			–			29,581
General and administrative		47,776		15,693			–			63,469
Purchase amortization		2,305		2,083			36,238	(c)		40,626
		119,886		46,792			36,238			202,916
Income (loss) from operations		22,775		18,648			(36,238	)		5,185
Interest and other income (expense), net		735		(2,461	)		(10,572	)(d)		(12,298	)
Income (loss) before income taxes		23,510		16,187			(46,810	)		(7,113	)
Income tax expense (benefit), net		10,221		461			(18,724	)(e)		(8,042	)
Net income (loss)		13,289		15,726			(28,086	)		929
Convertible preferred stock accretion of discount		–		(339	)		339	(g)		–
Net income (loss) applicable to common stockholders	$	13,289	$	15,387		$	(27,747	)	$	929
Net income per share—basic	$	0.65							$	0.04
Net income per share—diluted	$	0.64							$	0.04
Weighted average outstanding shares—basic		20,330					5,724	(h)		26,054
Weighted average outstanding shares—diluted		20,707					5,724	(h)		26,431

Unaudited pro forma condensed combined statement of operations
for the three months ended March 31, 2011

	Historical		Historical			Pro forma			Pro forma
(in thousands, except per share data)	CoStar		LoopNet			adjustments			combined
Revenues	$	59,618	$	20,713		$	–		$	80,331
Cost of revenues		22,566		3,157			–			25,723
Gross margin		37,052		17,556			–			54,608
Operating expenses:
Selling and marketing		13,246		5,134			–			18,380
Software development		5,268		3,659			–			8,927
General and administrative		10,899		4,924			–			15,823
Purchase amortization		543		641			8,939	(c)		10,123
		29,956		14,358			8,939			53,253
Income (loss) from operations		7,096		3,198			(8,939	)		1,355
Interest and other income (expense), net		202		(317	)		(2,642	)(d)		(2,757	)
Income (loss) before income taxes		7,298		2,881			(11,581	)		(1,402	)
Income tax expense (benefit), net		2,766		1,038			(4,632	)(e)		(828	)
Net income (loss)		4,532		1,843			(6,949	)		(574	)
Convertible preferred stock accretion of discount		–		(85	)		85	(g)		–
Net income (loss) applicable to common stockholders	$	4,532	$	1,758		$	(6,864	)	$	(574	)
Net income (loss) per share—basic	$	0.22							$	(0.02	)
Net income (loss) per share—diluted	$	0.22							$	(0.02	)
Weighted average outstanding shares—basic		20,531					5,724	(h)		26,255
Weighted average outstanding shares—diluted		20,965					5,290	(h)		26,255

1.  Description of transaction

On April 27, 2011, CoStar, LoopNet and Lonestar Acquisition Sub, Inc., a Delaware corporation (“merger sub”), entered into an agreement setting forth the proposed terms of the acquisition, which we refer to in this prospectus supplement as the “merger agreement.” Pursuant to the merger agreement, and subject to the terms and conditions set forth therein, merger sub will be merged with and into LoopNet, with LoopNet continuing as the surviving corporation in the acquisition and a wholly-owned subsidiary of CoStar.

As a result of the acquisition, each outstanding share of LoopNet common stock, other than shares owned by CoStar, merger sub or LoopNet (which will be cancelled and retired) and other than those shares with respect to which appraisal rights are properly exercised and not withdrawn, will be converted into a unit consisting of (i) $16.50 in cash (the “cash consideration”), without interest and (ii) 0.03702 shares of CoStar common stock (the “stock consideration”). Each outstanding share of Series A Preferred Stock will be converted into a unit consisting of (i) the product of 148.80952 multiplied by the cash consideration and (ii) the product of 148.80952 multiplied by the stock consideration.

The acquisition is subject to customary closing conditions, including approval by the stockholders of LoopNet and antitrust clearance. The acquisition is not subject to a financing condition. In certain circumstances set forth in the merger agreement, if the acquisition is not consummated or the merger agreement is terminated, LoopNet may be obligated to pay CoStar a termination fee of $25.8 million. Similarly, in certain circumstances set forth in the merger agreement, if the acquisition is not consummated or the merger agreement is terminated, CoStar may be obligated to pay LoopNet a termination fee of $51.6 million.

LoopNet options and RSUs outstanding pursuant to its equity plans, other than one-third of the performance-based RSUs and one-third of the performance-based stock options will be canceled in exchange for the product of the acquisition consideration, less the exercise price per share in the case of stock options, multiplied by the number of options or RSUs subject to the applicable award. The remaining one-third of the performance-based RSUs and one-third of the performance-based stock options will be canceled in exchange for the same consideration as the other options and RSUs, except that portions payable in cash will be paid instead in a number of shares of CoStar common stock calculated based on the volume weighted average price per share of CoStar common stock on Nasdaq for the ten consecutive trading days ending two days prior to closing. If, as a result of the foregoing treatment of LoopNet’s performance-based RSUs and stock options, the number of shares of CoStar common stock issued under the merger agreement would exceed 2,250,000 shares of CoStar common stock, CoStar may choose to pay to the holders of the applicable performance-based RSUs and stock options the amount in excess of 2,250,000 shares of CoStar common stock in cash. In addition, stock options with an exercise price equal to or greater than the per share value of the acquisition consideration (with the stock component of such consideration being valued based on the volume weighted average price per share of CoStar common stock on Nasdaq for the ten consecutive trading days ending two days prior to closing) will be canceled without any payment.

2.  Basis of presentation

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting, under existing U.S. GAAP standards, which are subject to change and interpretation, and were based on the historical financial statements of CoStar and LoopNet.

These standards require, among other things, that most assets acquired and liabilities assumed be recognized at their fair value as of the acquisition. These standards also require that consideration transferred be measured at the closing date of the acquisition at the then-current market price; this particular requirement will likely result in a per share equity component that is different from the amount assumed in these unaudited pro forma condensed combined financial statements.

The accounting standards define the term “fair value” and set forth the valuation requirements for any asset or liability measured at fair value and specify a hierarchy of valuation techniques based on the inputs used to develop the fair value measures. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurements date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result, CoStar may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect CoStar’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the acquisition method of accounting, the assets acquired and liabilities assumed will be recorded as of the completion of the acquisition, primarily at their respective fair values and added to those of CoStar. Financial statements and reported results of operations of CoStar issued after completion of the acquisition will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of LoopNet.

Acquisition-related transaction costs (i.e. advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges impacting the target company are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Total advisory, legal, regulatory and valuation costs expected to be incurred by CoStar are estimated to be approximately $26.0 million and are reflected in these unaudited pro forma condensed combined financial statements as a reduction to cash and retained earnings.

3.  Accounting policies

Upon consummation of the acquisition, CoStar will review LoopNet’s accounting policies. As a result of that review, CoStar may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements. At this time, CoStar is not aware of any differences that would have a material impact on the combined financial statements. The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies.

4.  Estimate of consideration expected to be transferred

The following is a preliminary estimate of consideration expected to be transferred to effect the acquisition (in thousands, except per share data):

							Estimated
	Estimated fair value						CoStar
					CoStar		shares to
	Conversion				common		be issued @
(in thousands, except per share data)	calculation		Cash		stock		$68.58
Number of shares of LoopNet common stock outstanding as of May 18, 2011		32,519.2
Multiplied by CoStar’s stock price as of May 18, 2011 multiplied by the exchange ratio of 0.03702 ($68.58x0.03702)	$	2.54			$	82,561		1,204
Number of shares of LoopNet common stock outstanding as of May 18, 2011		32,519.2
Multiplied by cash consideration per common share outstanding	$	16.50	$	536,567
Number of shares of LoopNet common stock into which LoopNet Series A Convertible Preferred Stock outstanding at May 18, 2011 is convertible (50,000 actual shares x 148.81)		7,440.5
Multiplied by CoStar’s stock price as of May 18, 2011 multiplied by the exchange ratio of 0.03702 ($68.58x0.03702)	$	2.54			$	18,890		276
Number of shares of LoopNet common stock into which LoopNet Series A Convertible Preferred Stock outstanding at May 18, 2011 is convertible (50,000 actual shares x 148.81)		7,440.5
Multiplied by cash consideration per common share outstanding	$	16.50	$	122,768
Number of shares of LoopNet stock options vested and unvested, including performance options, as of May 18, 2011 expected to be canceled and exchanged for purchase consideration		9,506.2
Multiplied by the difference between the per share value of the acquisition consideration as of May 18, 2011 and the weighted-average option exercise price of in-the-money options	$	9.12	$	60,244	$	26,411		385
Number of outstanding restricted stock units, including performance share unit awards, as of May 18, 2011, expected to be canceled		1,458.1
Multiplied by the per share value of the acquisition consideration as of May 18, 2011	$	19.04	$	20,264	$	7,497		109
			$	739,843	$	135,359		1,974
Estimate of consideration expected to be transferred					$	875,202
Common stock, par value $0.01					$	20
Additional paid-in capital						135,339
Total stock consideration					$	135,359

Certain amounts may reflect rounding adjustments.

The estimated consideration expected to be transferred reflected in these unaudited pro forma condensed combined financial statements does not purport to represent what the actual consideration transferred will be when the acquisition is consummated. The fair value of equity securities issued as part of the consideration transferred will be measured on the closing date of the acquisition at the then-current market price. This requirement will likely result in a per share equity component different from the $2.54 assumed in these unaudited pro forma condensed combined financial statements and that difference may be material. CoStar believes that an increase or decrease by as much as 20% in the CoStar common stock price on the closing date of the acquisition from the common stock price assumed in these unaudited pro forma condensed combined financial statements is reasonably possible based upon the historic volatility of CoStar’s common stock price and the time it may take to complete the acquisition. A change of this magnitude would increase or decrease the consideration expected to be transferred by about $26.0 million, which would be reflected in these unaudited pro forma condensed combined financial statements as an increase or decrease to goodwill.

5.  Estimate of assets to be acquired and liabilities to be assumed

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by CoStar in the acquisition, reconciled to the estimate of consideration expected to be transferred (in thousands):

Book value of net assets acquired as March 31, 2011	$	158,220
Adjusted for:
Elimination of existing goodwill and intangible assets		(49,806	)
Adjusted book value of net assets acquired		108,414
Adjustments to:
Identifiable intangible assets(i)		201,297
Deferred revenue(ii)		6,556
Taxes (iii)		(83,141	)
Goodwill(iv)		642,076
Total estimated consideration	$	875,202

(i) As of the effective time of the acquisition, identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that all assets will be used and that all assets will be used in a manner that represents the highest and best use of those assets, but it is not assumed that any market participant synergies will be achieved. The consideration of synergies has been excluded because they are not considered to be factually supportable, which is a required condition for these pro forma adjustments.

The fair value of identifiable intangible assets is determined primarily using the “income method,” which starts with a forecast of all expected future net cash flows. Under the HSR Act and other relevant laws and regulations, there are significant limitations regarding what CoStar can learn about the specifics of the LoopNet intangible assets prior to the consummation of the transaction and any such process will take time to complete.

At this time, CoStar does not have sufficient information as to the amount, timing and risk of cash flows of these intangible assets. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development costs, sales and marketing expenses, and working capital/contributory asset charges); the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, as well as other factors. However, for purposes of these unaudited

pro forma condensed combined financial statements and using publicly available information, the fair value of the identifiable intangible assets and their weighted-average useful lives have been estimated as follows (in thousands):

	Estimated fair		Estimated
	value		useful life
Customer relationships	$	52,512		5 years
Database technology		61,264		4 years
Trade names		87,521		7 years
Total	$	201,297

These preliminary estimates of fair value and useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. Once CoStar has full access to the specifics of the LoopNet intangible assets, additional insight will be gained that could impact (a) the estimated total value assigned to intangible assets, (b) the estimated allocation of value between assets and/or (c) the estimated useful life of each category of intangible assets. The estimated intangible asset values and their useful lives could be impacted by a variety of factors that may become known to us only upon access to additional information and/or by changes in such factors that may occur prior to the effective time of the acquisition. These factors include but are not limited to the regulatory, legislative, legal, technological and competitive environments. Increased knowledge about these and/or other elements could result in a change to the estimated fair value of the LoopNet intangible assets and/or to the estimated useful lives from what we have assumed in these unaudited pro forma condensed combined financial statements. The combined effect of any such changes could then also result in a significant increase or decrease to our estimate of associated amortization expense.

(ii)	Reflects the preliminary fair value adjustment to deferred revenues acquired from LoopNet. The preliminary fair value represents an amount equivalent to the estimated cost plus an appropriate profit margin to perform services based on deferred revenue balances of LoopNet as of March 31, 2011. The preliminary estimate of the cost and appropriate margin may be different from the final acquisition accounting and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
(iii)	Reflects CoStar’s estimated income tax rate of 40% applied to the estimated fair value of identifiable intangible assets to be acquired of $201.3 million and the estimated deferred revenue adjustment of $6.6 million.
(iv)	Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized.

Other than the preliminary estimated adjustments identified above, the accompanying unaudited pro forma condensed combined financial statements assume that the book value of the assets acquired and liabilities assumed by CoStar in the acquisition is representative of their fair value. This preliminary estimate of the fair value of assets acquired and liabilities assumed may be different from the final acquisition accounting and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

6.  Pro forma adjustments

This note should be read in conjunction with Note 1. Description of Transaction; Note 2. Basis of Presentation; Note 4. Estimate of Consideration Expected to be Transferred; and Note 5. Estimate of Assets to be Acquired and Liabilities to be Assumed. Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

(a) Reflects a combination of debt and common stock offering proceeds in addition to the existing cash and cash equivalents and short-term investments to fund the acqusition. CoStar has received a commitment letter from JPMorgan Chase Bank, N.A. for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million is committed, to fund the acquisition and our ongoing working capital needs following the acquisition. However, for purposes of preparing the pro forma condensed combined financial statements, we have assumed that we consummate the acquisition using the net proceeds of this offering, and have correspondingly reduced the estimated borrowings under the term loan to $175.0 million. For purposes of preparing the pro forma condensed combined financial statements, net offering proceeds assume an offering of 3.75 million common shares at $68.58 per share, which was the closing price per share of

CoStar common stock on May 18, 2011. Proceeds are net of the applicable underwriting discount and other fees.

Estimated sources and uses of cash (in thousands):

Sources:
Net proceeds from common stock offering	$	245,602
Proceeds from issuance of debt instruments		175,000
Short-term investments		7,187
		427,789
Uses:
Cash portion of acquisition consideration		(739,843	)
Acquisition related transaction costs		(26,000	)
Fees related to debt issuance		(6,138	)
		(771,981	)
	$	(344,192	)

(b) To adjust goodwill to an estimate of acquisition-date goodwill, as follows (in thousands):

Eliminate LoopNet historical goodwill	$	(41,507	)
Estimated transaction goodwill		642,076
Total	$	600,569

(c) To adjust intangible assets to an estimate of fair value, as follows (in thousands):

Eliminate LoopNet historical intangible assets	$	(8,299	)
Estimated fair value of intangible assets acquired		201,297
Total	$	192,998

To adjust related amortization expense for the periods presented, as follows (in thousands):

				For the three
	For the year ended			months ended
	December 31, 2010			March 31, 2011
Eliminate LoopNet amortization of intangible assets	$	(2,083	)	$	(641	)
Estimated amortization of acquired intangible assets		38,321			9,580
Total	$	36,238		$	8,939

(d) CoStar has received a commitment letter from JPMorgan Chase Bank, N.A. with respect to the proposed credit facilities. JPMorgan Chase Bank, N.A. has the right to make certain changes to the terms of the proposed credit facilities in connection with achieving a successful syndication of the term loan portion of the proposed credit facilities, including, among other things, by increasing the interest rate margins on such term loan portion (which increase could result in an increase of the issuance costs payable at the closing of the acquisition) and by including a financial maintenance covenant for such term loan portion.

Estimated origination and issuance costs of $6.1 million will be amortized to interest expense over the term of the proposed credit facilities. Amortization of debt issuance costs

are estimated to be $867,000 and $220,000 for the year ended December 31, 2010, and the quarterly period ended March 31, 2011, respectively.

The term loan is expected to have a seven year maturity with 27 quarterly payments of interest and principal payments of 1% per annum of the original principal amount of the term loan and a final payment of all outstanding principal and interest due and payable on the seventh anniversary of the closing date of the acquisition. CoStar expects to have the option to prepay all or any portion of the term loan at any time without penalty other than LIBOR breakage costs.

CoStar expects the term loan to carry an initial interest rate equal to LIBOR plus 3.5% with a LIBOR floor of 1.25%. CoStar anticipates entering into an interest rate swap in order to effectively fix the interest rate on half of the term loan, or $87.5 million, at 5.5%. For purposes of the pro forma financial statements, the resulting blended effective interest rate on the term loan, including the amortization of issuance costs, is approximately 5.46%

The pro forma adjustments to interest and other income (expense), net are as follows (in thousands):

	For the year			For the three
	ended			months ended
	December 31, 2010			March 31, 2011
Eliminate CoStar interest income to reflect change in cash and investment balances	$	(735	)	$	(202	)
Estimated interest expense on the proposed credit facilities		(9,837	)		(2,440	)
	$	(10,572	)	$	(2,642	)

CoStar’s historical interest income for the periods presented has been eliminated in these pro forma statements of operations because they assume that the short-term investments which generated those returns will be liquidated.

(e) The pro forma adjustment to the deferred income tax liability is as follows (in thousands):

	As of
	March 31, 2011
Estimated fair value of intangible assets to be acquired	$	201,297
Estimated fair value of adjustment to deferred revenue		6,556
		207,853
Tax rate		40%
Deferred tax liability, gross		83,141
Reclassified CoStar and LoopNet historical net deferred tax assets		(29,084	)
Deferred tax liability, net	$	54,057

The pro forma adjustment to income tax expense represents the estimated income tax impact of the pro forma adjustments at a tax rate of 40%.

(f) Reflects the preliminary fair value adjustment to deferred revenues acquired from LoopNet. The preliminary fair value represents an amount equivalent to the estimated cost

plus an appropriate profit margin to perform services based on deferred revenue balances of LoopNet as of March 31, 2011.

(g) Pro forma adjustment to eliminate LoopNet’s convertible preferred stock and related accretion expense which will be redeemed in the acquisition.

(h) To record the issuance of additional CoStar common stock in this offering and the stock portion of the acquisition consideration and to eliminate LoopNet’s stockholders’ equity, as follows (in thousands):

				Additional			Other				Retained earnings
	Common			paid in			comprehensive		Treasury		(accumulated
	stock			capital			loss		stock		deficit)
Eliminate LoopNet, Inc. stockholders’ equity	$	(40	)	$	(135,172	)	$	383	$	86,227	$	(60,987	)
Estimated deal costs		–			–			–		–		(26,000	)
Estimated CoStar common shares issued to the public in this offering		37			245,565			–		–		–
Estimated CoStar common shares issued to LoopNet shareholders		20			135,339			–		–		–
	$	17		$	245,732		$	383	$	86,227	$	(86,987	)

The unaudited pro forma combined and diluted earnings per share for the periods presented are based on the combined and diluted weighted-average shares. The historical basic and diluted weighted average shares of LoopNet were assumed to be replaced by the shares expected to be issued by CoStar as the stock portion of the acquisition consideration and to raise additional capital in this offering of 1.97 million and 3.75 million shares, respectively. Where the pro forma adjustments result in net losses per share any anti-dilutive effects have been eliminated.