TWST: Would you begin with a brief overview of the history and evolution of CoStar Group?

Mr. Florance: CoStar was founded in 1987. The mission of the company is to provide investment grade data to the commercial real estate community. We evolved in one city, providing information services to the commercial real estate community in Washington, and achieved profitability and successes there. Then over the past seven years, we have been rolling that business model out throughout the United States. We recently completed full national coverage and have proven out this model by reaching pro forma earnings and positive cash flow.

TWST: Could you expand on the exact lead products and services that you provide today?

Mr. Florance: We provide about 11 different products. The flagship product is CoStar Property_, which tracks several hundred thousand commercial buildings in the United States and leasing opportunities in those buildings. Prior to CoStar Property being out there, a commercial real estate broker that wanted to find office or industrial space for one of his customers would spend about two to three weeks researching the market to find out what buildings have the right space for that customer. Using CoStar Property, a broker can find space for his customer in a matter of minutes. Our database lists all the office space out there. So it's a tremendous timesaving tool for commercial real estate professionals. It also helps them produce presentation materials and marketing materials. A recent study published by the Wharton School at the University of Pennsylvania on behalf of the Educational Foundation of the Society of Industrial and Office Realtors' found that an averaged-sized brokerage firm in a major metropolitan area saves about $150,000 a year in research costs by using CoStar's service. Another major product we produce is CoStar COMPS'. With this product, what we do is research a commercial property sale ' whether it be office, industrial, flex, retail, hospitality or multifamily. We will research that comparable sale in a deep, detailed 60-some-step process. We'll find out not just the sale price but what its income and expenses are, what the financing was on the building, what cap rate was paid for the properties. CoStar COMPS shows not just that it sold, but why it sold. That information is invaluable to commercial appraisers trying to assign value to properties. Banks use it to understand the loan-to-value ratio of assets. It is used by basically anyone who disposes of, acquires or finances commercial properties. Another product is CoStar Tenant_. With Tenant, we track nearly 1 million users of commercial space in the country, listing their e-mail addresses, Web addresses, how much space they occupy, their lease terms, if they're paying above or below market rates, etc. And that information is useful to people marketing office space, industrial space, or for brokers looking for tenants that need representation in future moves. We also have another half a dozen or more products that are mission-critical to commercial real estate companies or anyone who is really involved in buildings, which would include telecommunications companies; government agencies, state, local, federal; vendors; building equipment manufacturers and the like.

TWST: Who would you describe as some of your main competition?

Mr. Florance: CoStar Group, in the course of the last 10 years, has seen some very stiff competition. CoStar has won out over such well-funded competitors as Dow Jones, Thomson Financial and other players because our products provide real value and cost savings for our customers. In addition, the business has some natural barriers to entry, in that the first in market has the advantage. You become a clearinghouse of sorts and you are able to build up a loyal customer base and a larger research base because of that status. So we have been able to stave off maybe 100 competitors in our space who invested nearly $0.5 billion in the last five years. Today, we are by far the dominant player in this space, with our second-largest competitor having about one-twentieth of our revenues, and no competitor really competing against us on a national level. So today we only have small, local, regional competitors.

TWST: What specific trends do you see emerging that are going to help steer the company's focus?

Mr. Florance: A couple of trends are noteworthy. One was the telecommunications downturn last year, which had a somewhat negative impact on our company. Now the company is largely independent of that revenue stream and is growing its revenue streams more into the commercial real estate market, where it's less cyclical. So the recovering economy in the commercial real estate markets and the fact the company is no longer really looking to the telecom industry as a core customer base are good overall trends for the company. Beyond that, it is largely technological trends that are benefiting the company right now. The ability to distribute greater volumes of data in a more diverse set of environments helps the company. For instance, being able to distribute all of our products in an integrated format on the Web creates a lot more value in our products, a lot more strength in our products, the ability to sell our products in smaller increments, in credit-card purchases to small users and eventually the ability to get our products in our customers' hands through high-speed wireless Internet access when they're actually at a building site touring the property or at customer sites.

TWST: What else would you describe as the biggest near-term opportunity that CoStar would want to take advantage of?

Mr. Florance: The good news is that one of the best things that we're dealing with right now is that we have proven our business model and we can see its success on a national basis, but more importantly in some of our early-stage cities. As we look at the cities we have been in for five to 10 years, they typically are producing well over a 50% margin. The newer cities are just at the beginning of their profitability cycles because we have had less time to build up subscriptions in them. Also, we can measure penetration rates in our earlier cities and look at our penetration rates in our later-stage cities and see that we have tremendous upside in the marketplaces that we already control. That upside is over a relatively fixed cost base. At this point, new sales of product are at an 80% to 85% percent margin. So we have a tremendous untapped revenue base in our existing markets with our existing products. And that is really where any company would love to be. That is where we are focusing and that is our core opportunity, doing exactly what we have been doing with the same investment we have already made, without new investment costs.

TWST: Are you confident that the balance sheet is in place to take advantage not just of the opportunities that you foresee but some other ones that might arise?

Mr. Florance: I'm very confident. We have an outstanding balance sheet. We have no material debt in the company. We have growing cash balances with our profitability and we have more than $42 million in cash in the bank. So it is ideal. It couldn't be better.

TWST: How about growth strategy down the line? Are acquisitions going to play a part in that?

Mr. Florance: Yes. Our goal for the last five years was to take a successful local business and, leveraging our scalability, take it to a national offering and get additional marketing leverage from being national. We've achieved that and we will continue to reap the benefits and the profitability potential of that. However, there remain a number of different growth avenues that are attractive to us. We are one of the larger public companies in the real estate information space. And we are looking at entering into other product areas, such as multifamily, hospitality and/or retail. So we can expand the breadth of properties we track, basically tracking everything that is not a single-family residence. That presents a lot of growth opportunities for us. Also, the same void that was in the United States exists in other countries such as the United Kingdom, Canada and other international business destinations. There is no company of our size, magnitude or as far along in the development of the industry in other countries as we are in the United States. So that presents an opportunity to us over time. We're going to explore those opportunities, though, out of our cash flow and out of our profitability base. So we're not looking to jump into new growth opportunities at the expense of our profitability. We are fairly confident that with our growing profitability, we will be able to reinvest in the business and explore those very broad growth initiatives.

TWST: What are you expecting in the next couple of years as far as your rate of gain in sales and earnings?

Mr. Florance: I think I will defer that to various analyst reports that are out there that are readily available from such firms as CS First Boston, Needham & Co., Robertson Stephens & Co., and several others that are covering us. But basically what we are looking for in 2002 is an overall rate of growth that will be in the double digits and then accelerating as we move into 2003, 2004, as you see less reliance on the telecom revenues and the recovering commercial real estate markets.

TWST: What do you see as some of the more significant risk factors that you might face down the line, aside from, say, the state of the general economy? Are there some hurdles that you're keeping an eye out for?

Mr. Florance: We are always aware and conscious of competitive challenges. However, realistically, CoStar Group is unique in the strength of its market position. So that is probably not our greatest concern. I think that outside of competition and the economy, it gets a little tougher to foresee any major issue. We are fairly optimistic about our earnings potential. I think we are talking more about risk of not achieving as high a growth rate as we want, as opposed to something that really fundamentally turns the business around. So we are not eyeing any one particular significant risk factor out there right now for the next couple of years.

TWST: As far as the management team is concerned, are you confident the players are in place to make sure they execute the way they should?

Mr. Florance: Yes. We think we have done a very solid job in the last five years of adapting the management team to our rapid growth. As we have acquired and merged with various companies ' we have a lot of experience doing that ' we have been able to recruit and retain good experienced talent from some of those operations, including where we acquired another public company. We have integrated some of those people in our management team. We have also added a couple of key positions, such as Chief Operating Officer, Senior Vice President of Marketing, where we didn't have anyone internally who had operated at the scale that we are at now. These managers now have some tenure and experience with the business as well as bringing up to 20 to 25 years of industry experience into CoStar. So we have a stable and very solid management team that really puts us in place to double our revenues over the next several years.

TWST: Where do you find yourself focusing most of your attention lately as CEO?

Mr. Florance: I think three areas. Being the survivor in an industry that had a lot of players, acquisitions present a lot of opportunities for us. We have a chance to be very selective. Another area is product development ' bringing out the next generation of products that bring more value to our customers and more pricing leverage opportunity to us. And then, customer relations and customer development, basically working both with our sales force and with our major customers to make sure we have good, solid relationships with those people. So those are the three areas that I'm able to focus on now with a strong management team under us.

TWST: For potential long-term investors who are taking a look at your financial report, what would you want them to focus on primarily?

Mr. Florance: I would want them to focus first and foremost on the proven profitability in the business model. When you look at our established markets ' markets that we have been in for from three to five years ' you see tremendous profitability; again, 50% to 70% margins, fully loaded margins. The overall business model in the long term should be able to achieve 35% margins based on that fact, leaving room for reinvestment and growth in the business. I would like to focus the long-term investor on management's ability to deliver stated goals. We told our investors for two years that we would reach profitability in the fourth quarter of 2001, and we did, on schedule. In fact, we reached it slightly ahead of schedule. And while the company made a number of decisions to close some minor cities that were not profitable, which slightly impacted the top-line growth, the company has a five-year track record of very high growth rates. Fundamentally, this is a high-growth company that is proving its profitability in an enormous market segment. Over the long term, the thing to focus on is achieving those very high margins in all of our markets, which then translates to a national level along with the historical 20% to 30% ongoing growth rates, even in those oldest markets.

TWST: You mentioned that the woes in the telecom industry were felt at CoStar. What are some of the other prime factors that have either helped or hurt your operating margin of late?

Mr. Florance: I think one of the things that has helped our margins of late is efficiencies we have gained in being able to consolidate acquisitions we have made. Through technology and software development, we have merged together different research groups and have been able to reduce redundant research and duplicative research efforts in different divisions. We have been able to cut our workload and reduce our operating expenses by 15% to 20% in the preceding year. That has helped us a lot. I think one of the challenges we faced is that over the last two quarters, we have gone through the worst downturn in commercial real estate in more than a decade. A number of our core customers saw their revenues topple in some cases by as much as 25%. However, it has been very encouraging that we have continued to grow right through that bad economy. We proved that we are generally not a cyclical company. We turned in good, solid growth rates right through the worst market conditions we have seen in about a decade.

TWST: Do you get a sense that the folks in the investment community have a pretty solid understanding of what CoStar has been able to accomplish and its game plan? And if so, is that reflected in the stock valuation?

Mr. Florance: We are very pleased. We have a very solid investor base, many of which have been with us since we went public in 1998. And we have not had a lot of turnover of institutional investors in the base. I do think that with the company transitioning from an investing and hyper-growth mode into a profitability and earnings mode, a number of investors may be underestimating the long-term growth prospects of the company. There appears to be something of a misconception about where we are in the life cycle of this industry. I think we're at the very beginning. The downturn in the commercial real estate economy and the company's focus on transitioning to earnings should not be read as a long-term reduction of growth or potential. It is simply not the case. I think there has been some volatility in our stock in the last couple of weeks as we went into earnings, because of some of those factors.

TWST: What top two or three reasons would you give a long-term investor to buy today?

Mr. Florance: I think the stock is absolutely at a value point with our company. It is not pricey today compared to what it has been and what the long-term earnings potential is. This is a company that has proven high growth rates, proven profitability, proven scalability and proven very high barriers to competitive entry. So CoStar is a company with probably an unusually solid, long-term earnings growth prospect. And I generally think that is built in the stock price right now.

TWST: Thank you. (AAM)

ANDREW C. FLORANCE President, CEO and Director CoStar Group, Inc. 2 Bethesda Metro Center 10th Floor Bethesda, MD 20814 (301) 215-8300 (301) 718-2444 - FAX

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