Unless the context indicates otherwise, references in this report to the "Company," the "registrant," "we," "our," and "us" mean The Advisory Board Company and its subsidiaries.

Our fiscal year ends on March 31. Fiscal 2013 is our fiscal year ending on March 31, 2013.

This management's discussion and analysis of financial condition and results of operations includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "will," "believes," "anticipates," "plans," "expects," "seeks," "estimates," or "intends" and similar expressions. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking statements, including the factors discussed under "Item 1A. Risk Factors" in our annual report on Form 10-K for the fiscal year ended March 31, 2012, or the "2012 Form 10-K," filed with the Securities and Exchange Commission, or "SEC." We undertake no obligation to update any forward-looking statements, whether as a result of circumstances or events that arise after the date the statements are made, new information, or otherwise.

Executive Overview

We provide best practices research and analysis, business intelligence and software tools, and management and advisory services to approximately 3,700 organizations, including hospitals, health systems, pharmaceutical and biotech companies, health care insurers, medical device companies, colleges, universities, and other educational institutions through discrete programs. Members of each program typically are charged a fixed fee and have access to an integrated set of services that may include best practice research studies, executive education seminars, customized research briefs, web-based access to the program's content database, and software tools.

Our three key areas of focus for fiscal 2013 are to continue to deliver world-class programs that drive significant returns for our members and ensure member loyalty through outstanding value delivery; to make select investments to capture the unique opportunities presented by current health care market conditions, through developing and launching new programs and acquiring products, services, and technologies that improve performance for our members; and to attract, develop, engage, and retain world-class talent across our organization. Success in all of these areas requires very strong execution across our business, and we have a heavy focus on setting each team up to manage against and attain high goals in each area of our operations.

Our membership business model allows us to create value for our members by providing proven solutions to common and complex problems as well as quality content on a broad set of relevant issues. Our growth has been driven by strong renewal rates, ongoing addition of new memberships in our existing programs, continued new program launches, acquisition activity, and continued annual price increases. We believe high renewal rates are a reflection of our members' recognition of the value they derive from participating in our programs. Our revenue grew 30.3% in the three months ended June 30, 2012 over the prior year period. Our contract value increased 25.8% to $411.6 million as of June 30, 2012 from $327.1 million as of June 30, 2011. We define contract value as the aggregate annualized revenue attributed to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement.

Our operating costs and expenses consist of cost of services, member relations and marketing, general and administrative expenses, and depreciation and amortization expenses. Cost of services includes the costs associated with the production and delivery of our products and services, consisting of compensation for research personnel, in-house faculty, software developers, and consultants; the organization and delivery of membership meetings, teleconferences, and other events; production of published materials; technology license fees; and costs of developing and supporting our web-based content and business intelligence and software tools. Member relations and marketing includes the costs of acquiring new members and the costs of account management, consisting of compensation, including sales incentives; travel and entertainment expenses; training of personnel; sales and marketing materials; and associated support services. General and administrative expenses include the costs of human resources and recruiting, finance and accounting, management information systems, facilities management, new program development, and other administrative functions. Depreciation and amortization expense includes the cost of depreciation of our property and equipment, amortization of costs associated with the development of software and tools that are offered as part of certain of our membership programs, and amortization of acquired developed technology. Included in our operating costs for each period presented are stock-based compensation expenses and expenses representing additional payroll taxes for compensation expense as a result of the taxable income employees recognized upon the exercise of common stock options and the vesting of restricted stock units.

Critical Accounting Policies

Our accounting policies, which are in compliance with U.S. generally accepted accounting principles, or "GAAP," require us to apply methodologies, estimates, and judgments that have a significant impact on the results we report in our financial statements. In our 2012 Form 10-K, we have discussed those material accounting policies that we believe are critical and require the use of complex judgment in their application. There have been no material changes to our policies since our last fiscal year ended March 31, 2012.

Non-GAAP Financial Presentation

This management's discussion and analysis presents supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These financial measures, which are considered "non-GAAP financial measures" under SEC rules, are referred to as adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. See "Non-GAAP Financial Measures" below for definitions of such non-GAAP financial measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Results of Operations

The following table shows statements of income data expressed as a percentage of
revenue for the periods indicated:



                                                                Three Months Ended
                                                                     June 30,
                                                               2012             2011

Revenue                                                          100.0 %         100.0 %
Costs and expenses:
Cost of services                                                  56.0 %          54.0 %
Member relations and marketing                                    18.4 %          22.4 %
General and administrative                                        12.9 %          13.5 %
Depreciation and amortization                                      4.0 %           3.7 %

Total costs and expenses                                          91.3 %          93.6 %

Operating income                                                   8.7 %           6.4 %
Other income, net                                                  0.6 %           1.0 %

Income from continuing operations before provision for
income taxes and equity in loss of unconsolidated entity           9.3 %           7.4 %
Provision for income taxes                                        (3.6 )%         (2.8 )%
Equity in loss of unconsolidated entity                           (2.0 )%           -  %

Net income from continuing operations                              3.7 %           4.6 %
Discontinued operations:
Net income from discontinued operations                             -  %           0.2 %

Net income                                                         3.7 %           4.8 %

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

Overview. Net income decreased to $3.8 million in the three months ended June 30, 2012 from $3.9 million in the three months ended June 30, 2011. The decrease in net income was primarily attributable to an increase of $15.2 million in cost of services incurred for new and growing programs. The decrease also reflected the impact of, increases of $1.3 million in marketing and member relations due to increased sales teams, increases of $2.7 million in general and administrative expenses related to increases in finance, information technology, and human resources expense incurred to support our growing employee base, an increase of $1.1 million in depreciation and amortization, and our $2.1 million proportionate share of the net loss of Evolent Health, or "Evolent," which we established in the second quarter of fiscal 2012. The effect of these factors was partially offset by a 30.3% increase in revenues during the quarter.

Adjusted Net Income and Adjusted EBITDA. Adjusted net income increased 34.4% to $11.1 million in the three months ended June 30, 2012 from $8.2 million in the three months ended June 30, 2011, and adjusted EBITDA increased 42.8% to $20.2 million in the three months ended June 30, 2012 from $14.1 million in the three months ended June 30, 2011. The increases in adjusted net income and adjusted EBITDA were due to increased revenue, the effect of which was partially offset by the costs of new and growing programs, increased investment in our general and administrative infrastructure to support our growing employee base, and an increase in the number of new sales teams.

Revenue. Total revenue increased 30.3% to $104.1 million in the three months ended June 30, 2012 from $79.9 million in the three months ended June 30, 2011, while contract value increased 25.8% to $411.6 million as of June 30, 2012 from $327.1 million as of June 30, 2011. The increases in revenue and contract value were primarily attributable to the introduction and expansion of new programs, including our August 1, 2011 acquisition of PivotHealth, LLC, or "PivotHealth," our cross-selling of existing programs to existing members, and, to a lesser degree, price increases. We offered 54 membership programs as of June 30, 2012 and 50 membership programs as of June 30, 2011.

Cost of services. Cost of services increased to $58.4 million in the three months ended June 30, 2012 from $43.2 million in the three months ended June 30, 2011. As a percentage of revenue, cost of services was 56.0% for the three months ended June 30, 2012 and 54.0% for the three months ended June 30, 2011. The increase of $15.2 million in cost of services for the three months ended June 30, 2012 was primarily due to growth and expansion of our Crimson and Southwind programs, including our 2011 acquisition of PivotHealth. Also affecting costs of services were costs associated with the delivery of program content and tools to our expanded membership base, including increased staffing, licensing fees, and other costs.

Member relations and marketing. Member relations and marketing expense increased 6.9% to $19.1 million in the three months ended June 30, 2012 from $17.9 million in the three months ended June 30, 2011. As a percentage of revenue, member relations and marketing expense in the three months ended June 30, 2012 and 2011 was 18.4% and 22.4%, respectively. The increases in member relations and marketing expense were primarily attributable to an increase in sales staff and related travel and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base. During the three months ended June 30, 2012 and 2011, we had an average of 162 and 145 new business development teams, respectively.

General and administrative. General and administrative expense increased to $13.5 million in the three months ended June 30, 2012 from $10.8 million in the three months ended June 30, 2011. As a percentage of revenue, general and administrative expense decreased to 12.9% in the three months ended June 30, 2012 from 13.5% in the three months ended June 30, 2011. The increase of $2.7 million in general and administrative costs for the three months ended June 30, 2012 was primarily attributable to an increase in share-based compensation of $0.5 million and increased costs incurred to improve our finance, human resources, information technology, and facility operations infrastructure to support our growing employee base and number of office locations.

Depreciation and amortization. Depreciation expense increased to $4.1 million, or 4.0% of revenue, in the three months ended June 30, 2012, from $2.9 million, or 3.7% of revenue, in the three months ended June 30, 2011. The increase in depreciation and amortization was primarily due to increased amortization expense from developed capitalized internal-use software tools, the PivotHealth acquisition, and to a lesser extent, depreciation on our newly renovated Austin, Texas office and on an expansion floor of our Washington, D.C. headquarters.

Other income, net. Other income, net decreased to $0.6 million in the three months ended June 30, 2012 from $0.8 million in the three months ended June 30, 2011. Other income, net consists of interest income and foreign exchange rate gains and losses. Higher average cash and investment balances contributed to an increase in interest income to $0.8 million in the three months ended June 30, 2012 from $0.6 million in the three months ended June 30, 2011. We recognized foreign exchange losses of $0.2 million and foreign exchange gains of $0.2 million during the three months ended June 30, 2012 and 2011, respectively, as a result of the effect of fluctuating currency rates on our receivable balances denominated in foreign currencies.

Provision for income taxes. Our provision for income taxes was $3.7 million and $2.2 million in the three months ended June 30, 2012 and 2011, respectively. Our effective tax rate in the three months ended June 30, 2012 was 38.3% compared to 37.5% in the three months ended June 30, 2011. The increase in our effective tax rate for the three months ended June 30, 2012 was primarily due to the effect that higher estimated net income for fiscal year 2013, compared to our net income for fiscal year 2012, has on our effective rate when compared to the fixed nature of our Washington, D.C. tax credits that we receive under the New E-conomy Transformation Act of 2000.

Equity in loss of unconsolidated entity. Our proportionate share of the losses of Evolent during the three months ended June 30, 2012 was $2.1 million. We did not recognize a comparable loss in the prior year period, as Evolent was formed on August 31, 2011.

Income from discontinued operations, net of tax. On January 20, 2012, we sold substantially all of the assets of OptiLink. As a result, the net income generated by OptiLink in the three months ended June 30, 2011 has been presented as discontinued operations.

Stock-based compensation expense. We recognized the following stock-based compensation expense in the consolidated statements of income line items for stock options and restricted stock units issued under our stock incentive plans for the three months ended June 30, 2012 (in thousands, except per share amounts):

                                                         Three Months Ended
                                                              June 30,
                                                         2012           2011
       Stock-based compensation expense included in:
       Costs and expenses:
       Cost of services                                $   1,004      $    843
       Member relations and marketing                        678           501
       General and administrative                          1,824         1,371
       Depreciation and amortization                          -             -

       Total costs and expenses                        $   3,506      $  2,715

       Operating income                                $  (3,506 )    $ (2,715 )

       Net income                                      $  (2,163 )    $ (1,697 )

       Impact on diluted earnings per share            $   (0.06 )    $  (0.05 )

There are no stock-based compensation costs capitalized as part of the cost of an asset.

As of June 30, 2012, $34.0 million of total unrecognized compensation cost related to stock-based compensation was expected to be recognized over a weighted average period of 1.6 years.

Non-GAAP Financial Measures

The tables below present information for the periods indicated about our adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. We define "adjusted EBITDA" as net income before equity in loss of unconsolidated entity; provision for income taxes from continuing operations; discontinued operations, net of tax; other income, net, which includes interest income and foreign currency losses and gains; depreciation and amortization; acquisition and similar transaction charges; fair value adjustments to acquisition-related earn-out liabilities; and share-based compensation expense. We define "adjusted net income" as net income excluding the net of tax effect of equity in loss of unconsolidated entity; discontinued operations; amortization of acquisition-related intangibles; acquisition and similar transaction charges; fair value adjustments to acquisition-related earn-out liabilities; and share-based compensation expense. We define "non-GAAP earnings per diluted share" as net income per share excluding the net of tax effect of equity in loss of unconsolidated entity; discontinued operations; amortization of acquisition-related intangibles; acquisition and similar transaction charges; fair value adjustments made to our acquisition-related earn-out liabilities; and share-based compensation expense. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Presentation" in our 2012 Form 10-K for our reasons for including these financial measures in this report and for a description of material limitations with respect to the usefulness of such measures.

A reconciliation of adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share to the most directly comparable GAAP financial measures is provided below (in thousands, except per share data).

                                                                  Three Months Ended
                                                                       June 30,
                                                                2012              2011

Net income                                                    $   3,841         $  3,871
Equity in loss of unconsolidated entity                           2,124               -
Provision for income taxes from continuing operations             3,702            2,224
Discontinued operations, net of tax                                  -              (165 )
Other income, net                                                  (576 )           (797 )
Depreciation and amortization                                     4,086            2,947
Acquisition and similar transaction charges                          -               144
Fair value adjustments to acquisition-related earn-out
liabilities                                                       3,500            3,200
Share-based compensation expense                                  3,506            2,715

Adjusted EBITDA                                               $  20,183         $ 14,138

                                                                  Three Months Ended
                                                                       June 30,
                                                                 2012             2011

Net income                                                    $    3,481        $  3,871
Equity in loss of unconsolidated entity                            2,124              -
Discontinued operations, net of tax                                   -             (165 )
Amortization of acquisition-related intangibles, net of
tax                                                                  790             750
Acquisition and similar transaction charges, net of tax               -               90
Fair value adjustments to acquisition-related earn-out
liabilities, net of tax                                            2,160           2,000
Share-based compensation, net of tax                               2,163           1,697

Adjusted net income                                           $   11,078        $  8,242

                                                                  Three Months Ended
                                                                       June 30,
                                                                 2012             2011

GAAP earnings per diluted share                               $     0.11        $   0.11
Equity in loss of unconsolidated entity                             0.06              -
Discontinued operations, net of tax                                   -            (0.01 )
Amortization of acquisition-related intangibles, net of
tax                                                                 0.02            0.02
Acquisition and similar transaction charges, net of tax               -             0.01
Fair value adjustments to acquisition-related earn-out
liabilities, net of tax                                             0.06            0.06
Share-based compensation, net of tax                                0.06            0.05

Non-GAAP earnings per diluted share                           $     0.31        $   0.24

Liquidity and Capital Resources

Cash flows generated from operating activities are our primary source of liquidity. We believe that existing cash, cash equivalents, and marketable securities balances and operating cash flows will be sufficient to support operating and capital expenditures, as well as share repurchases, during at least the next 12 months. We had cash, cash equivalents, and marketable securities balances of $189.0 million and $188.1 million as of June 30, 2012 and March 31, 2012, respectively. We expended $3.0 million and $2.3 million in cash to purchase shares of our common stock through our share repurchase program during the three months ended June 30, 2012 and 2011, respectively. We have no long-term indebtedness.

Cash flows from operating activities. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in operating activities that generate cash flows in excess of net income on an annual basis. Cash flows from operating activities fluctuate from quarter to quarter based on the timing of new and renewal contracts as well as certain expenses, and the first quarter of our fiscal year typically provides the lowest quarterly cash flows from operations. Net cash flows used in operating activities were $1.6 million in the three months ended June 30, 2012, compared to net cash flows provided by operating activities of $4.7 million in the three months ended June 30, 2011. The decrease in net cash flows provided by operating activities during the current period was primarily due to larger annual employee bonus payments made during the three months ended June 30, 2012 resulting from strong fiscal 2012 performance as well as the accelerated timing of member payments between the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013.

Cash flows from investing activities. Our cash management and investment strategy and capital expenditure programs affect investing cash flows. Net cash flows used in investing activities were $35.9 million and $2.7 million in the three months ended June 30, 2012 and 2011, respectively. Investing activities during the three months ended June 30, 2012 consisted of the net purchases of marketable securities of $26.6 million, capital expenditures of $8.5 million, and acquisition-related earn-out payments of $0.8 million. Investing activities during the three months ended June 30, 2011 consisted primarily of capital expenditures of $6.7 million, partially offset by proceeds on the redemption and sales of marketable securities of $4.0 million.

Cash flows from financing activities. We had net cash flows provided by financing activities of $11.8 million and $2.8 million in the three months ended June 30, 2012 and 2011, respectively. Financing activities during the three months ended June 30, 2012 primarily consisted of $10.7 million from the issuance of common stock upon the exercise of stock options and $7.9 million in additional tax benefits related to share-based compensation arrangements, offset in part by the repurchase of shares under our

repurchase program. Financing activities during the three months ended June 30, 2011 primarily consisted of $5.4 million from the issuance of common stock upon the exercise of stock options, offset in part by share repurchase activity. We repurchased 62,837 shares at a total cost of approximately $3.0 million and 88,072 shares at a total cost of approximately $2.3 million in the three months ended June 30, 2012 and 2011, respectively, pursuant to our share repurchase program. In the three months ended June 30, 2012 and 2011, we withheld $3.8 million and $1.3 million in shares, respectively, to satisfy the minimum employee tax withholding for certain vested restricted stock units.

Revolving credit facility. On July 30, 2012, we obtained a $150.0 million five-year senior secured revolving credit facility under a credit agreement, dated as of July 30, 2012, with the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto.

Under the revolving credit facility, up to $150.0 million principal amount of borrowings and other credit extensions may be outstanding at any time. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility and will mature and be payable in full on July 30, 2017. At our election, and upon our satisfaction of specified conditions, the maximum principal amount available under the credit agreement may be increased by up to an additional $50.0 million in minimum increments of $10.0 million, which may be made available by increasing the revolving loan commitments or by . . .