The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange act"). Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 12, 2012. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Introduction

Ambassadors Group, Inc. is a socially conscious education company primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer revenue model. We operate student travel programs primarily using the People to People brand under a long-term exclusive license agreement. We have been traveling students on People to People programs for over 50 years and with over 500,000 alumni. We believe that our association with that brand and our own 45 years of experience in the educational travel industry give us both a stong awareness in the market and a high level of credibility.

Our core program offering is an international destination trip for U.S. students in the 11 to 17 year old age group ("Student Ambassadors Program"). We also offer domestic destination travel programs for U.S. students and international students from over 60 countries focused on leadership and education ("Student Leadership Program"). During 2011, we began to expand our in-bound travel programs by establishing a Beijing office traveling Chinese students on U.S. destination trips ("People to People - China").

In addition to our People to People student programs, we operate professional travel programs for adults under the People to People brand ("Citizen Ambassadors Program") and a student travel operation under the Discovery Student Adventures brand ("DSA"). Our DSA program is associated with Discovery Student Education and operates through a teacher recruited revenue model. Lastly, we operate BookRags (www.bookrags.com), an education oriented research website which provides study guides, lesson plans and other educational resources to students and teachers. The site attracts students and teachers each month to its millions of pages of content, which includes internally developed material, licensed material, and user-generated content.

As further discussed below, our operating results depend on the number of travelers that attend our programs ("travelers" or "delegates"), the fees we are able to charge for each traveler ("gross revenue"), and the direct costs associated with the traveler's itinerary including airfare, hotel charges, meal costs, event and location fees, chaperone costs, tour manager fees, and the cost of in-country travel ("cost of sales"). Our business is highly seasonal and the second quarter is typically our highest period for gross revenue and cost of sales activity. The majority of sales and marketing expenses are incurred in the third and fourth quarters of the year to attract delegates, while the associated revenue is generally recognized in the second and third quarter of the following fiscal year.

Executive Summary

Our strategy is to maintain our high quality and unique out-of-classroom educational experiences while increasing our volume of business. In order to grow the business our operating plans include: introducing new marketing channels while expanding and refining existing channels; building and preserving high quality customer relationships; and introducing new educational travel programs and experiences independently and through strategic alliances. As we complete the peak 2012 travel season and head into the 2013 selling and marketing campaign season, we continue to focus on growing customer relationships. We are focused on early and frequent engagement with current and target delegates and their families. We have engaged our customers earlier than in previous travel campaigns, which has generated over 1,000 enrollments for the 2013 travel season in advance of our peak season that begins in mid-August and runs through late November. We are focused on maintaining a successful, cost effective direct marketing campaign while strengthening other lead generation and revenue channels to broaden our presence in social media and drive growth in enrollments going forward. We believe our strategy will improve the productivity of our marketing efforts and ultimately improve our costs to acquire delegates.

Results of Operations

Consolidated financial results for the three and six months ended June 30, 2012
and 2011 were as follows (in thousands):

                                            Three Months Ended June 30,
                              2012               2011              $ Change         % Change
Total revenue           $         31,806   $          36,056   $        (4,250)         -12%
Cost of goods sold                 2,146               3,208            (1,062)         -33%
Gross margin                      29,660              32,848            (3,188)         -10%
  Selling and                      6,483               9,439            (2,956)         -31%
marketing expenses
General and
administrative expenses            4,384               4,120                264           6%
Operating income                  18,793              19,289              (496)          -3%
Other income                         613                 406                207          51%
Income before income              19,406              19,695              (289)          -1%
tax provision
Income tax provision             (5,208)             (6,264)              1,056         -17%
Net income              $         14,198   $          13,431   $            767           6%



                                             Six Months Ended June 30,
                              2012               2011              $ Change         % Change
Total revenue           $         34,271   $          37,718   $        (3,447)          -9%
Cost of goods sold                 3,202               3,827              (625)         -16%
Gross margin                      31,069              33,891            (2,822)          -8%
  Selling and                     15,170              19,534            (4,364)         -22%
marketing expenses
General and
administrative expenses            8,591               8,503                 88           1%
Operating income                   7,308               5,854              1,454          25%
Other income                         856                 922               (66)          -7%
Income before income               8,164               6,776              1,388          20%
tax provision
Income tax provision             (1,872)             (2,074)                202         -10%
Net income              $          6,292   $           4,702   $          1,590          34%

During the three months ended June 30, 2012, we traveled 12,042 delegates compared to 13,262 during the second quarter of 2011. During the six months ended June 30, 2012, we traveled 12,789 delegates compared to 13,582 delegates traveled during the same period in 2011. Overall, our gross revenue decreased during the three and six months ended June 30, 2012 compared to the same periods in 2011, due to the decrease in delegates traveled from our core Student Ambassadors Program as well as from declines in two of our non-core programs, Student Leadership and Citizens. This expected decline in travel revenue was partially offset by an increase in revenue from BookRags reflecting increased content sales.

Associated with the decrease in delegates traveled, gross margin decreased $3.2 million and $2.8 million, respectively, during the second quarter and first six months of 2012 compared to 2011. Gross margin as a percentage of gross revenues declined to 36.5 percent during the second quarter of 2012 compared to 37.7 percent during the second quarter of 2011, primarily due to higher airfare expense associated with rising fuel costs and higher foreign exchange rates year-over-year increasing our land vendor payments. For those same reasons, gross margin as a percentage of gross revenue during the first six months of 2012 was 37 percent compared to 38.1 percent during the first six months of 2011.

The continuation of several cutting initiatives reduced operating expenses by $2.7 million and $4.3 million, respectively, during the second quarter and first six months of 2012 compared to those same periods in 2011. In line with our strategy to reduce overall operating expenses to maximize profitability, these reductions consisted mainly of lower marketing expenses related to travel campaigns and reduced personnel costs associated with a reduction in staffing. These savings were offset by increased legal and professional expenses primarily related to the previously disclosed proxy contest.

Other income during the second quarter of 2012 increased $0.2 million compared to the second quarter of 2011 due primarily to realized gains from the sale of municipal bonds during the quarter. During the first six months of 2012 compared to the same period in 2011, other income decreased $0.1 million. The prior year six-month period included a $0.2 million gain as a result of the de-designation of derivative contracts after exiting foreign currency positions following the tsunami in Japan.

We record income tax provisions using an effective income tax rate applied to pre-tax income for the three and six months ended June 30, 2012 and 2011, respectively. The difference from our statutory rate of 34 percent and the decrease in the effective tax rate on a year-over-year basis is primarily due to the impact of tax exempt interest income earned during the periods in relation to net income.

In spite of the decline in delegate counts, our cost cutting initiatives discussed above helped increase profitability in the second quarter and first six months of 2012 compared to the same period in 2011. As a result, net income increased $0.8 million and $1.6 million, respectively, in the three and six months ended June 30, 2012, compared to the same periods in 2011.