##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549


Form 10-K

|   |  |                                                                                   
|-- |  | ----------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2002                                       
|  
|or
|  
|o  |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  |                                                                                   
|   |  | For the transition period from  ______________ to  ______________ .               

Commission file number: 0-33347

Ambassadors Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                                                        |  |                                               
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                                  |  | 91-1957010(I.R.S. Employer
Identification No.)
|                                                                                                       
|Dwight D. Eisenhower Building
110 S. Ferrall Street
Spokane, WA(Address of Principal Executive Offices) |  | 99202(Zip Code)                               

Registrants Telephone Number, Including Area Code: (509) 534-6200

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value(Title of Each Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

þ Yes
          o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

þ Yes
          o No

Indicate by check mark whether the registrant is an accelerated filer as
defined in the Securities and Exchange Act Rule 12b-2.

þ Yes
          o No

The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based upon the closing sales price of the
Common Stock on the Nasdaq Stock Market on June 28, 2002, was $95,547,563. The
number of shares of the registrants Common Stock outstanding as of February
28, 2003 was 9,883,938.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement relating to the
2003 Annual Meeting of Stockholders are incorporated by reference into Part
III.

---

---



---



##### Table of Contents



(This page intentionally left blank)





---

TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II          
|                  | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|                  | Item 14. Controls and Procedures                                                             
|                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES       
|CERTIFICATIONS   
|INDEX TO EXHIBITS
|EXHIBIT 23.1     
|EXHIBIT 99.1     



---



##### Table of Contents



TABLE OF CONTENTS

PART I

|               |                                                                                       |  |      |    | 
|-------------- | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|               |                                                                                       |  | Page
|               |                                                                                       |  |     
|Item 1.        | Business                                                                              |  |      | 3  | 
|Item 2.        | Properties                                                                            |  |      | 14 | 
|Item 3.        | Legal Proceedings                                                                     |  |      | 14 | 
|Item 4.        | Submission of Matters to a Vote of Security Holders                                   |  |      | 14 | 
|PART II       
|Item 5.        | Market for the Registrants Common Equity and Related Stockholder Matters             |  |      | 15 | 
|Item 6.        | Selected Financial Data                                                               |  |      | 16 | 
|Item 7.        | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 17 | 
|Item 7A.       | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 25 | 
|Item 8.        | Financial Statements and Supplementary Data                                           |  |      | 25 | 
|Item 9.        | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |      | 25 | 
|PART III      
|Item 10.       | Directors and Executive Officers of the Registrant                                    |  |      | 26 | 
|Item 11.       | Executive Compensation                                                                |  |      | 26 | 
|Item 12.       | Security Ownership of Certain Beneficial Owners and Management                        |  |      | 26 | 
|Item 13.       | Certain Relationships and Related Transactions                                        |  |      | 26 | 
|Item 14.       | Controls and Procedures                                                               |  |      | 26 | 
|Item 15.       | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |      | 27 | 
|SIGNATURES     |                                                                                       |  | 49   |   
|CERTIFICATIONS |                                                                                       |  | 50   |   

1



---



##### Table of Contents



(This page intentionally left blank)

2



---



##### Table of Contents



Forward-Looking Statements

Statements contained in this Annual Report on Form 10-K of Ambassadors
Group, Inc. (the Company), which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include,
without limitation, statements in Item 1., Business, and Item 7.,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, regarding intent, belief or current expectations of the Company or
its officers with respect to, among other things, trends in the travel
industry, the Companys business and growth strategies, the Companys use of
technology, the Companys ability to integrate acquired businesses, and
fluctuations in the Companys quarterly results of operations.

Forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include factors affecting the travel industry
generally, competition, the ability of the Company to successfully integrate
the operations of existing or acquired companies, and a variety of factors such
as war with Iraq, recession, weather conditions and concerns for passenger
safety that could cause a decline in travel demand, as well as the risk factors
set forth in Item 1. Business  Risk Factors, and other factors as may be
identified from time to time in the Companys filings with the Securities and
Exchange Commission or in the Companys press releases.




PART I




Item 1.Business

OVERVIEW

The business of Ambassadors Group, Inc. (the Company or Group) has
been active since Ambassadors International, Inc. (Ambassadors) was founded
in 1967. The Company consists of several specialized private-label travel
programs, including (i) the People to People Student Ambassador Programs
(Student Ambassador Programs), which provide opportunities for grade school,
junior high, and senior high students to visit domestic and foreign
destinations to learn about the history, government, economy and culture of
such countries, (ii) the People to People Sports Ambassador Programs (Sports
Ambassador Programs), which provide opportunities for junior high and senior
high school athletes to participate in domestic and international sports travel
programs, and (iii) the People to People Ambassador Programs (Professional
Ambassador Programs), which provide foreign travel experiences for
professionals, with emphasis on meetings and seminars between participants and
persons in similar professions abroad.

Since Ambassadors initial public offering in 1995, the Company has
expanded its operations primarily through internal growth and two acquisitions
of travel businesses. Since 1983, the Company has organized programs for more
than 209,000 students, adults and athletes in more than 35 countries on five
continents. The Companys educational travel programs feature visits to such
countries as Australia, China, France, Germany, Great Britain, Italy and New
Zealand. In 2002, more than 21,000 participants traveled on the Companys
programs.

The Company believes that its association with People to People
International (People to People) and its 36 years of continuous experience
and relationships arising from organizing travel programs have provided the
foundation for the Company to develop and maintain strong strategic alliances,
including but not limited to those with Yosemite National Institute, Off the
Beaten Path LLP, Full On (Europe) Limited, US Tennis Association, the Amateur
Athletic Union, USA Volleyball and Swimming, US Soccer, American Youth Soccer
Association, and Young American Bowling Alliance.

The Company intends to grow its business internally through marketing
enhancements, new programs and strategic alliances, and may make selective
acquisitions of and joint agreements with travel and travel-related businesses.

The principal offices of the Company are located in Spokane,
Washington.

3



---



##### Table of Contents



RELATIONSHIP WITH AMBASSADORS

Prior to February 28, 2002, Group was a wholly owned subsidiary of
Ambassadors. Effective February 28, 2002, Ambassadors completed the spin-off of
Group by virtue of a special stock dividend to Ambassadors stockholders of
all of the outstanding shares of Group that Ambassadors owned (the
Distribution). Beginning March 1, 2002, Group operated as an independent
stand-alone company. Trading of the common stock of Group on the Nasdaq
National Market began on March 1, 2002 under the symbol EPAX.

In connection with the spin-off, Group entered into agreements with
Ambassadors that separated the Companys business operations from Ambassadors.
The agreements between Group and Ambassadors also govern ongoing relationships.
All of the agreements separating the Companys business operations from
Ambassadors were made in the context of the parent-subsidiary relationship and
were negotiated in the overall context of the Companys separation from
Ambassadors. The terms of these agreements may be more or less favorable to
Group than if they had been negotiated with unaffiliated third parties. See
Risk Factors  Risks Relating to the Separation of Group from Ambassadors.

BUSINESS

The Company organizes and promotes educational travel programs for
students, professionals and athletes, principally using the People to People
name. People to People is a private, non-profit organization dedicated to the
promotion of world peace through cultural exchange. People to People was
founded by President Dwight D. Eisenhower in 1956 and was originally
administered by the U.S. State Department. Eight U.S. Presidents since
President Eisenhower have served as Honorary Chairman of People to People,
including President George W. Bush, who currently holds that position. Mary
Eisenhower, the Chief Executive Officer of People to People, also continues her
grandfathers legacy by serving the organization.

The Company has the exclusive right to develop and conduct student
programs for kindergarten through high school students using the People to
People name. The Company also has the non-exclusive right to develop, market
and operate programs for professionals, college age, and athletes using the
People to People name; however, at the present time, the Company is the only
entity that has been given this right by People to People. These rights have
been granted pursuant to agreements with People to People, which expire in 2010
and, at the election of the Company, may be extended through 2020.

Student Ambassador Programs

The Companys Student Ambassador Programs provide an opportunity for
students in the fifth through twelfth grades to travel domestically or visit
one or more foreign countries to learn about the history, government, economy
and culture of such countries. The Company markets its Student Ambassador
Programs through a combination of direct mail and local informational meetings
from August through February. Representatives of the Company review candidate
applications and conduct selection interviews throughout the country, after
which accepted applicants participate in orientation meetings to prepare for
their program.

Student Ambassador Program delegations depart during the summer months,
June through August, and generally travel for approximately 14 to 23 days,
during which time each delegation visits one or more foreign countries. Each
delegation generally consists of approximately 30 to 40 students and several
teachers, who act as the delegations leaders. Teachers and students comprising
a delegation generally come from the same locale. Local guides in each country
assist the delegations in their travels.

Programs are designed by the Companys staff of international planners and
researchers to provide an educational and entertaining travel experience by
exposing students to the history, government, economy and culture of the
country or countries visited. In each country, the Company contracts with
program coordinators to provide day-to-day oversight of the programs.
Additionally, a local guide trained by the Company accompanies the group
throughout the duration of its program. In many instances, the Company also
provides students with the opportunity for a homestay (a brief stay with a host
family) which gives students a glimpse of daily life in the visited country.

Students who complete certain written assignments and other projects can
receive high school and university credit for their participation in the
program. Universities recognizing academic credit include, but are not limited
to, Stanford University, the University of California, Los Angeles, and
Georgetown University. In addition, high school students who successfully
complete the program may be eligible to receive up to 40 Service Learning
Credits, which have become a graduation requirement in many curriculums
countrywide.

4



---



##### Table of Contents



Sports Ambassador Programs

The Companys Sports Ambassador Programs provide an opportunity for
athletes to explore the host countrys culture and to participate in
international tournaments with teams from across the world in up to 8 different
sports. Athletes ages range from 11 to 19 years. The Company markets its
Sports Ambassador Programs through a combination of direct mail and local
informational meetings. Interested athletes apply to the program and are
interviewed by representatives of the Company, after which the selected
athletes are accepted for the program.

Participants in the Sports Ambassador Programs depart during the summer
months, June through August, and travel for 9 to 14 days. Teams are formed
based on gender and age. Most teams are comprised of athletes from different
states. During a 3 to 4 day training camp, all athletes participate in an
individual skill assessment, after which rosters are formed to ensure balanced
and competitive teams. After the formation of rosters, the rest of the training
camp focuses on team practice and fundamentals in preparation for the ensuing
tournament competition. In each tournament, the Company contracts with overseas
tournament organizers to provide day-to-day oversight of the programs.
Additionally, athletes are exposed to international culture through
Company-arranged educational excursions.

Athletes in the sixth through twelfth grades who complete certain written
assignments and projects can receive high school and university credit for
their participation in the program. Universities recognizing academic credit
include, but are not limited to Stanford University, the University of
California, Los Angeles, and Georgetown University. All athletes who
successfully complete the program are eligible to receive up to 40 Service
Learning Credits, which have become a high school graduation requirement in
many curriculums countrywide.

Professional Ambassador Programs

The Companys Professional Ambassador Programs provide professionals with
common interests the opportunity to travel abroad to meet and exchange ideas
with foreign citizens who have similar backgrounds, interests or professions.
The Company markets its Professional Ambassador Programs through a direct mail
marketing effort throughout the year. Programs originate from the Companys
internal marketing and research staff, who identify potential delegation topics
and leaders. Professional programs have been conducted in such areas as
agriculture, economics, education, law, medicine and science.

The Company believes that its Professional Ambassador Programs provide
participants with enriching experiences and deeper understandings of foreign
cultures and people than visits arranged independently or through travel
agencies. Professional Ambassador Programs operate year-round and are generally
designed to provide a specialized adult educational experience. Professional
Ambassador Programs travel 10 to 14 days. Unlike travel programs provided by
travel agencies, these professional exchanges are intended largely as working
programs, with a significant amount of the participants time involved in
organized meetings, seminars and round-table discussions with their foreign
counterparts, inspection visits to major foreign facilities and institutions
and informal gatherings with foreign counterparts. Each program is led by a
delegation leader chosen by the Company based upon his or her recognition in
the field and expertise regarding the special focus of the particular program.
Participants in the professional programs may be eligible for Continuing
Education Credits as available within their profession.

Other Programs

The Companys Eisenhower Scholar Programs provide a unique international
travel experience specifically designed for university students with an
opportunity to study abroad during their semester or quarter breaks. The
curriculum-based programs focus on specific areas of study such as
international business, medicine, law, diplomacy, humanities, and leadership.
In addition, the Company also provides Conference Programs giving the
opportunity for motivated students with academic promise, leadership potential
and a desire to serve their communities to travel to either a domestic or
international location to exchange ideas with renowned speakers, field specific
experts, professional educators and their peers. This program is specifically
designed for students in the sixth through twelfth grades. In addition to the
academic coursework, participants engage in specially designed team-building
and leadership skills building exercises. Both the Eisenhower Scholar and
Conference Programs travel for approximately 7 to 18 days and include group
discussions, workshops, educational meetings and other social and recreational
activities.

The Company markets the Eisenhower Scholar and Conference Programs through
a direct mail marketing effort throughout the year. Programs originate from the
Companys internal marketing and research staff, who identify delegation
topics, speakers and leaders. Delegates traveling on these programs may
receive transferable high school or university credits as part of the academic
program. These programs currently do not generate significant revenues.

5



---



##### Table of Contents



The Company also travels participants on golf programs. People to People
golf programs build international understanding through the game of golf.
These programs provide opportunities to experience foreign cultures, delve into
history, explore beautiful landscapes, and play golf at some of the finest golf
courses in the world. The Company markets the golf programs through a direct
mail marketing effort throughout the year. These programs currently do not
generate significant revenues.

Strategic Alliances

The Company also operates certain specialty travel programs for domestic
travel markets. The Company has entered into an alliance with Yosemite National
Institutes, a non-profit organization with operations in Yosemite National
Park, Olympic National Park and Golden Gate National Recreation Area. The
Companys agreement with Yosemite National Institutes prescribes the nature,
scope and pricing of the travel services provided by Yosemite National
Institutes to the Companys customers. The agreement with Yosemite National
Institutes is exclusive, except that Yosemite National Institutes may conduct
its own programs. The Company also has agreements with the Amateur Athletic
Union, Young American Bowling Alliance, and American Youth Soccer Organization
to offer international travel for its players. These agreements currently do
not generate significant revenues.

The Company has entered into strategic alliances to further introduce
innovative, educational travel experiences both internationally and
domestically. Such strategic alliances include, but are not limited to, Off the
Beaten Path LLP, Students on Ice and Full On (Europe) Limited.

Service Marks

The Company and its subsidiaries have registered a variety of service and
trademarks, including the names Venture Into the World, Citizen Ambassador
Program, Initiative For Understanding, Travel with a Purpose, Student
Ambassador Program, Sports Ambassador, Eisenhower Scholar, American
Ambassador Program, and Youth Summit. In addition, the Company has the
right, subject to certain exceptions, to use People to Peoples name, service
mark and logo for use in marketing student, sports, and professional programs.
The Company believes that the strength of its service and trademarks is
valuable to its business and intends to continue to protect and promote its
marks as appropriate. However, the Company believes that its business is not
overly dependent upon any trademark or service mark.

Insurance

The Company maintains insurance coverage that it believes is adequate for
its business, including but not limited to, a total of $25 million in coverage
for professional and general liability insurance. The Company also maintains
insurance coverage on real property (for owned and, where required, leased
property) and personal property on a replacement cost basis. There is no
assurance that the insurance maintained by the Company will be adequate in the
event of a claim, or that such insurance will continue to be available in the
future.

Employees

On February 19, 2003, the Company employed 153 employees, of which 145
were full-time employees. Of the Companys full-time employees, 143 are located
in Spokane, Washington and 2 are located in Newport Beach, California. The
Company has 105 full-time employees engaged in selling and tour promotion and
40 full-time employees in general and administrative positions. The Company
also employs temporary labor on a seasonal basis to assist with its direct
marketing efforts in recognition of the fact that the Companys travel programs
are seasonal in nature. None of the Companys employees are subject to
collective bargaining agreements or are represented by a union. The Company
believes that its labor relations are good.

6



---



##### Table of Contents



BUSINESS STRATEGY

The Company believes that high quality programs and exceptional customer
service are and will remain key elements of the Companys success. The
Companys strategy is to maintain its quality standards while increasing its
volume of business. To grow its business, the Company intends to (i) expand the
marketing and tour volume of its existing student and sports travel programs,
(ii) introduce new student and sport travel programs and strategic alliances,
(iii) expand its professional travel programs, and (iv) pursue acquisition
opportunities.

Expand the Marketing and Tour Volume of Existing Student and Sports Travel Programs

U.S. Census data projects that there will be more than 42.2 million people
in the 10 to 19 year old age range by 2005. The Company believes that a large
number of qualified students in this age group are not aware of the Companys
youth travel programs. In light of these factors, the Company intends to
improve its marketing techniques by targeting additional age groups, making
greater use of referrals from teachers, parents and past student travelers, and
expanding and refining its extensive databases of potential participants.

Introduce New Student and Sports Travel Programs and Strategic Alliances

The Company continually seeks to develop and introduce additional
innovative, educational travel experiences. The Company intends to continue to
maintain its contacts with foreign governmental agencies and officials and
intends to continue to utilize these and other foreign contacts to organize
opportunities for its program participants that other travel programs do not
currently offer. In addition, the Company may develop new youth travel programs
organized around common extracurricular activities such as sports, science,
nature, and music.

Broaden Professional Travel Programs

According to U.S. Census data, the number of Americans 45 to 74 years old
is expected to grow substantially, increasing to more than 92.7 million people
in 2005 from 79.3 million people in 2000. This trend is expected to benefit the
Company, since this population segment historically has been the most likely to
participate in one of the Companys professional travel programs. In addition,
the Company believes that American adults increasingly seek the convenience and
unique experiences offered by prepackaged vacation tours. Consequently, the
Company believes that the opportunity exists to expand its professional
educational travel programs by continuing to improve the quality and number of
its specialty professional programs and by exploring new country destinations.
The Company also intends to develop alliances with partners that have strong
brand recognition and access to well defined customer segments.

Pursue Acquisition Opportunities

The Company considers the industries encompassed by its business to be
large and fragmented, which present attractive acquisition opportunities. The
Company believes that the industrys large size and fragmentation will
facilitate acquisitions of businesses that are either compatible with the
Companys current business or represent a developing specialty segment not
currently addressed by the Companys operations.

COMPETITION

The travel industry in general, and the educational segment of the travel
industry in particular, is highly competitive. The Companys student programs
compete with similar educational travel programs operated by other individuals
and organizations, as well as independent programs organized and sponsored by
local teachers with the assistance of local travel agents. The Companys sports
programs compete with independent organizations, which organize and travel
already intact teams for international competition. The Companys professional
programs compete with independent professional associations that sponsor and
organize their own travel programs through the assistance of local travel
agents, and other organizations that design travel programs for adults.

The Company believes that the principal basis of competition in the
educational segment of the market is the quality and uniqueness of the
educational program offered, customer service, reputation and program cost. The
Company believes that its agreements with People to People, as well as its 36
years of experience organizing student and professional educational programs
and established relationships with public officials, organizations and
residents in countries in which it provides programs, allow the Company to
provide an educational opportunity that is not easily duplicated by
competitors programs.

7



---



##### Table of Contents



The Company believes that the barriers to entry are relatively low for any
future competitors. Certain organizations engaged in the travel business have
substantially greater financial, marketing and sales resources than the
Company. There can be no assurance that the Companys present or future
competitors will not exert significant competitive pressures on the Company.

RISK FACTORS

The following factors should be considered in addition to other
information included in this report. These factors include Risks Relating to
Groups Business, Risks Relating to the Separation of Group from Ambassadors,
and Risks Relating to the Securities Markets and Ownership of Group Common
Stock.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements that involve risks and
uncertainties and that should not be fully relied upon. The Company may use the
words such as anticipates, plans, expects, future, intends, may,
will, should, estimates, predicts, potential, continue, and similar
expressions to identify such forward-looking statements. This report also
contains forward-looking statements attributed to certain third parties
relating to their estimates regarding the growth of certain markets.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause the Companys actual results to
be materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors, include among others,
those identified under Risk Factors and elsewhere in this report.

Risks Relating to Groups Business

War with Iraq

The threat of and a possible war with Iraq has and will affect the travel
industry, the markets in which the Company operates, and the Companys
operations and profitability. The potential and long-term effects are
uncertain for the Companys customers, the market for the Companys common
stock, the markets for the Companys services, the strength of the U.S. dollar
and the U.S. economy. The Company has experienced increased cancellations for
its future travel programs and a weakened U.S. dollar. The negative effect of
a weakened U.S. dollar will cost the Company more to travel participants
abroad. The consequences of a possible war with Iraq are unpredictable and the
Company may not be able to foresee events that may have a material adverse
effect on the business, financial condition, cash flows and results of
operations of the Company.

Terrorism

Terrorist attacks, such as the attacks that occurred on September 11,
2001, the response by the United States and other acts of violence or war have
and will affect the travel industry generally, the markets in which the Company
operates, the Companys operations and profitability. Further terrorist attacks
against the United States or United States businesses at home and abroad may
occur. The September 11 attacks have had a very negative impact on domestic and
international air travel and the travel industry in general. As a result, the
Company experienced a significant decrease in profitability in 2002. The
potential near-term and long-term effects of these attacks are uncertain for
the Companys customers, the market for the Companys common stock, the markets
for our services and the U.S. economy. The consequences of any terrorist
attacks, or any armed conflicts including war which may result, are
unpredictable, and the Company may not be able to foresee events that could
have an adverse effect on its business or operations.

International Operations and Natural Occurrences; Travel Industry

The Companys operations are subject to special risks inherent in doing
business internationally, as substantially all of the Companys travel programs
are conducted outside the United States. Such risks include the adverse effects
on operations from war, international and domestic terrorism, civil
disturbances, political instability, governmental activities and deprivation of
contract rights. Periods of international and domestic unrest, such as those
caused by and following the attacks on September 11, 2001, have reduced demand
for the Companys travel programs and could have a material adverse effect on
the Companys business and results of operations. Examples of such past events
include the Gulf War in 1991, civil unrest in China in 1989 and the Chernobyl
disaster in 1986.

In the past, gross receipts from programs to Europe, the South Pacific
(Australia and New Zealand) and China have accounted for a majority of the
Companys gross receipts. The occurrence of any of the events described above
or other

8



---



##### Table of Contents



unforeseen developments in one or more of these regions would have a
material adverse effect on the Company. Demand for the Companys travel
programs also may be adversely affected by natural occurrences such as
hurricanes, earthquakes, epidemics and flooding in geographic regions in which
the Company conducts its travel programs.

The Companys results of operations will depend upon factors affecting the
travel industry in general. The Companys revenues and earnings are especially
sensitive to events that affect domestic and international air travel and the
level of hotel reservations. A number of factors, including those mentioned
above, a rise in fuel prices or other travel costs, excessive inflation,
currency fluctuations, extreme weather conditions and concerns about passenger
safety could result in a temporary or longer-term overall decline in demand for
the Companys travel programs. Demand for the Companys products and services
may be significantly affected by the general level of economic activity and
employment in the United States and key international markets. Therefore, any
significant economic downturn or recession in the United States or these other
markets could have a material adverse effect on the business, financial
condition, cash flows and results of operations of the Company.

Seasonality; Fluctuations in Quarterly Results

The Companys businesses are highly seasonal. The Company recognizes gross
program receipts, revenues and program pass-through expenses upon the departure
of its program participants. The majority of the Companys travel programs are
scheduled in June and July of each year, and the Company anticipates that this
trend will continue for the foreseeable future. Substantially all of the
Companys operating income is generated in this period, which historically has
offset the operating losses incurred during the rest of the year. The Companys
annual results would be adversely affected if the Companys revenues were to be
substantially below seasonal norms during the second and third quarters of the
year. The Companys operating results may fluctuate as a result of many
factors, including the mix of student, sports, and professional programs and
program destinations offered by the Company and its competitors, the
introduction and acceptance of new programs and program enhancements by the
Company and its competitors, timing of program completions, cancellation rates,
competitive conditions in the industry, marketing expenses, extreme weather
conditions, international or domestic conflicts, timing of and costs related to
acquisitions, changes in relationships with certain travel providers, economic
factors and other considerations affecting travel. In addition, the Company
records on a quarterly basis realized gains and losses on its forward foreign
exchange contracts that do not qualify as cash flow hedges under Statement of
Financial Accounting Standards No. 133. As a result of the foregoing, annual or
quarterly operating results may be below the expectations of public market
analysts and investors. In such event, the price of the common stock could be
materially and adversely affected. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Competition

The travel industry in general and the educational segment of the travel
industry is highly competitive and has relatively low barriers to entry. The
Company competes with other companies that provide similar educational travel
programs for students as well as independent programs organized and sponsored
by local teachers with the assistance of local travel agents. Under the terms
of the Companys agreement with People to People, People to People reserves the
right to offer programs to college students for studies abroad and to grant
other entities which compete with the Company, the right to use the People to
People name in connection with People to Peoples professional education and
sports programs. In general, the Companys professional travel programs compete
with independent professional organizations that sponsor and organize their own
travel programs through the assistance of local travel agents, and other
organizations that offer travel programs for adults. Some of the Companys
competitors are larger and have greater brand name recognition and financial
resources than the Company. There can be no assurance that the Company will be
able to compete successfully, and the failure to compete successfully may have
a material adverse effect on the business, financial condition, cash flows and
results of operations of the Company.

Dependence on People to People"

The Companys agreements with People to People give the Company the
exclusive right to develop and conduct programs for kindergarten through high
school students using the People to People name, and the non-exclusive right to
develop and conduct programs for professionals, college age, and athletes using
the People to People name. The Companys agreements with People to People,
however, allow People to People to continue to conduct college and professional
seminars and internship programs and to develop other sports and professional
programs. The People to People agreements expire in 2010 and, at the election
of the Company, may be further extended through 2020. The Company believes that
it derives benefit from its ability to market its programs using the People to
People name. If the Companys

9



---



##### Table of Contents



agreements with People to People were terminated
or if the Company was unable to use the People to People name to market new
programs or destinations, it could have a material adverse affect on the
Companys business, financial condition, cash flows and results of operations.

Dependence on Travel Suppliers

The Company is dependent upon travel suppliers for access to their
products and services. Travel suppliers include airlines, hotels, bus lines and
other participants in the travel industry. Consistent with industry practices,
the Company currently has no long-term agreements with its travel suppliers
that obligate such suppliers to sell services or products through the Company
on an ongoing basis. Therefore, the Companys travel suppliers generally can
cancel or modify their agreements with the Company upon relatively short
notice. In addition, any decline in the quality of travel products and services
provided by these suppliers, or a perception by travelers of such a decline,
could adversely affect the Companys reputation. The loss of contracts, changes
in the Companys pricing agreements, commission schedules or incentive override
commission arrangements, more restricted access to travel suppliers products
and services or less favorable public opinion of certain travel suppliers and
resulting low demand for the products and services of such travel suppliers
could have a material adverse effect on the business, financial condition, cash
flows and results of operations of the Company.

Dependence on Key Personnel

The Companys performance is substantially dependent on the continued
services and performances of its senior management and certain other key
personnel. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the Companys business,
financial condition and results of operations. The Company does not have
long-term employment agreements with any of its executive officers. The
Companys future success also depends on its ability to identify, attract,
hire, train, retain and motivate other highly skilled managerial, marketing and
customer service personnel. The failure to retain and attract necessary
managerial, marketing and customer service personnel could have a material
adverse effect on the Companys business, financial condition, cash flows and
results of operations.

Marketing

The Companys performance is substantially dependent on effectiveness of
its direct marketing efforts including but not limited to direct mail and local
informational meetings. Failure of its marketing effort could have a material
adverse effect on the Companys business, financial condition, cash flows and
results of operations.

Government Regulation and Taxation

Many travel suppliers, particularly airlines, are subject to extensive
regulation by federal, state and foreign governments. In addition, the travel
industry is subject to certain Seller of Travel Laws of certain states and
special taxes by federal, state, local and foreign governments, including hotel
bed taxes, car rental taxes, airline excise taxes and airport taxes and fees.
New or different regulatory schemes or changes in tax policy could have an
adverse impact on the travel industry in general and could have a material
adverse effect on the business, financial condition, cash flows and results of
operations of the Company.

Fluctuation of Currency Exchange Rates: Increased Costs

Many of the Companys arrangements with its foreign-based suppliers
require payment to be made in foreign currencies. Any decrease in the value of
the U.S. dollar in relation to foreign currencies has the effect of increasing
the cost of the services to be provided. Since late 1993, the Company generally
has purchased forward contracts with less than two years maturity to help
manage program costs and hedge against foreign currency valuation increases.
While the ability to utilize forward contracts for the delivery of foreign
currencies can mitigate the effect of increased program costs and foreign
currency exchange fluctuations, there can be no assurance that increased
program costs relating to such currency fluctuations will not be substantial in
future periods. There can also be no assurance the Companys hedging strategy
will mitigate longer term foreign exchange valuation trends. The Companys
contract with participants in its travel programs provides the Company the
option of passing along to participants any increase in program costs resulting
from currency fluctuations. Although the Company has exercised this option in
the past, there can be no assurance that the Company will be able to increase
program prices to offset any such cost increases in the future and any failure
to do so could have a material adverse effect on the Companys business,
financial condition, cash flows and results of operations. See Managements
Discussion and Analysis of Financial Condition and Results of Operations.

10



---



##### Table of Contents



Casualty Losses

Due to the nature of its business, the Company may be subject to liability
claims arising out of accidents or disasters causing injury to participants in
its programs, including claims for serious personal injury or death. The
Company believes that it has adequate liability insurance for risks arising in
the normal course of its business. Although there have been no claims the
Company has experienced for which it did not have adequate insurance coverage,
there can be no assurance that insurance coverage will be sufficient to cover
one or more large claims or that the applicable insurer will be solvent at the
time of any covered loss. Further, there can be no assurance that the Company
will be able to obtain insurance coverage at acceptable levels and cost in the
future. Successful assertion against the Company of one or a series of large
uninsured claims, or of one or a series of claims exceeding any insurance
coverage, could have a material adverse effect on the Companys business,
financial condition, cash flows and results of operations. See Business 
Insurance.

Growth; Acquisitions and Alliances

The Companys performance is dependent on ability to grow its business and
expand the marketing and tour volume of its student, sports and professional
travel programs. In addition, the Companys ability to grow is dependent on
ability to acquire or enter into strategic alliances. Failure of growth
strategies could have a material adverse effect on the Companys business,
financial condition, cash flows and results of operations.

Control of the Company by Certain Stockholders

As of February 28, 2003, John Ueberroth, Joseph Ueberroth and Peter
Ueberroth (all family members) beneficially own in the aggregate approximately
30% of the outstanding shares of the Companys common stock. Accordingly, they
have the ability to exercise effective voting control of the Company, and could
be able to elect all of the Companys directors and be able to determine the
outcome of any matter being voted upon by the Companys stockholders, including
any merger, sale of assets or other change in control of the Company. The
Ueberroths ownership position, together with the antitakeover effects of
certain provisions contained in the Companys Certificate of Incorporation and
Bylaws, may have the effect of delaying or preventing a change of control of
the Company.

Risks Relating to the Separation of Group from Ambassadors

Indemnification of Ambassadors for Tax Liabilities Incurred in Connection with the Distribution

In connection with the Distribution, the Company and Ambassadors entered
into a tax sharing agreement pursuant to which the Company agreed to indemnify
Ambassadors for certain taxes and similar obligations that it could incur if
the Distribution does not qualify for tax-free treatment due to any of the
following events:



| |  |  | the acquisition of a controlling interest in Group stock after the Distribution;
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | Groups failure to continue its business after the Distribution;                
|
| |  |  | a repurchase of Group stock; or                                                 
|
| |  |  | other acts or omissions by the Company.                                         

Internal Revenue Service regulations provide that if another person or
group acquires a 50% or greater interest in the Companys stock within two
years of the Distribution, a presumption will arise that the acquisition was
made in connection with the Distribution, causing the Distribution to become
taxable to Ambassadors. This presumption may deter other companies from
acquiring the Company for two years after the Distribution. In addition,
Ambassadors agreed to indemnify the Company for any tax liabilities the Company
incurs as a result of its operations and Ambassadors operations prior to the
Companys separation from Ambassadors. Nevertheless, the Company may be held
jointly and severally liable for such liabilities, and it cannot make any
assurances that it will be able to recover from Ambassadors any losses it may
suffer. If the Company takes any action or fails to take any action that would
cause Ambassadors distribution of the Companys common stock to be taxable to
Ambassadors, the Companys financial condition could be seriously harmed.

11



---



##### Table of Contents



Groups Historical Financial Information May Not Be Representative of Its
Results as a Separate Company

Groups financial statements, as of December 31, 2000, 2001 and for the
period January 1, 2002 through February 28, 2002, have been carved out from the
consolidated financial statements of Ambassadors using the historical operating
results and historical bases of the assets and liabilities of the Ambassadors
business that Group comprised. Accordingly, the historical financial
information of the Company does not necessarily reflect the Companys financial
position, operating results and cash flows as if the Company had been a
separate, stand-alone entity during the periods presented. The Companys costs
and expenses include allocations from Ambassadors for centralized corporate
services and infrastructure costs, including legal, accounting, insurance,
finance and information technology. See Notes to Consolidated Financial
Statements, Note 1.

These allocations were determined on bases that Ambassadors and the
Company consider to be reasonable reflections of the utilization of services
provided to or for the benefit received by the Company. The historical
financial information is not necessarily indicative of what the Companys
operating results, financial position and cash flows will be in the future.
While the Company has made certain adjustments to its historical financial
information, it has not made all of the necessary adjustments to its historical
financial information to reflect all significant changes that will occur in its
cost structure, funding and operations as a result of its separation from
Ambassadors, including increased costs associated with reduced economies of
scale, increased marketing expenses related to building a company brand
identity separate from Ambassadors and increased costs associated with being a
publicly-traded, stand-alone company.

Reliance on Ambassadors to Fund Future Capital Requirements; Availability of
Future Financing

In the past, Group has been able to satisfy its own capital requirements
without assistance from Ambassadors. In connection with the Distribution,
Ambassadors agreed to provide a credit facility to Group in the amount of $20
million through August 2003. In addition, allocations of cash at the time of
the Distribution were as follows: (i) Group retained the cash required to
operate travel programs for which it had received participant deposits or paid
vendor deposits and (ii) Group retained an amount equal to the cash required
for Groups post-separation operations. Ambassadors retained the remaining cash
not specifically allocated to Group pursuant to allocations as outlined in (i)
and (ii) above. The measurements or estimates for the preceding allocations
were made as of February 28, 2002. Following the Distribution, and except as
discussed below, Group no longer has the option of relying on Ambassadors to
finance its capital requirements.

The Company believes that its capital requirements will vary from quarter
to quarter, depending on, among other things, capital expenditures,
fluctuations in operating results, financing activities, acquisitions,
investments and receivables management. The Company believes that its future
cash flow from operations will be sufficient to satisfy its working capital,
capital expenditure and product development requirements for the foreseeable
future. However, the Company may require or choose to obtain additional debt or
equity financing in order to finance acquisitions or other investments in its
business. Future equity financings would be dilutive to the existing holders of
Group common stock. Future debt financings could involve restrictive covenants.
There can be no assurance that the Company will be able to obtain financing
with interest rates as favorable as those that Ambassadors could obtain or that
the Company will be able to obtain financing at all.

Ambassadors Inability to Fund the Credit Facility Could Have a Material
Adverse Effect on the Company

As part of the Distribution, Ambassadors agreed to provide a credit
facility in the amount of $20 million to the Company through August 2003.
Ambassadors ability to fund the credit facility could be impaired due to a
variety of factors including sudden capital expenditures, fluctuations in
operating results, financing activities and receivables management. To the
extent any one of these factors caused an impairment in Ambassadors ability to
fund all or part of the $20 million, the Company would be forced to seek and
obtain alternative financing in the form of debt or equity. There can be no
assurance that the Company would be successful in obtaining alternative
financing on favorable terms, or at all. The Companys failure to obtain such
financing or to obtain such financing on favorable terms could have a material
adverse effect on the Companys business, financial condition, cash flows and
results of operations.

12



---



##### Table of Contents



Companys Officers and Directors May Have Conflicts of Interest Due to Their
Ownership of Ambassadors Common Stock

Many of the Companys directors and executive officers own substantial
amounts of Ambassadors common stock and options to purchase Ambassadors common
stock. Ownership of Ambassadors common stock by the Companys directors and
officers may create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for Ambassadors and the Company.

Companys Directors May Have Conflicts of Interest Due to Their Dual Service
as Directors of Ambassadors International

All but one of the Companys directors also serves as directors (and in
one instance an executive officer) of Ambassadors. Whenever a director of the
Company serves as an executive officer or director of another entity such as
Ambassadors, there is the potential for a conflict of interest, i.e., that the
fiduciary obligations of an individual to Ambassadors conflict with the
fiduciary obligations to the Company and vice versa. Involvement by these same
individuals in the affairs of Ambassadors specifically creates demands on their
time and resources, which may be needed for the Company and its affairs. The
Companys directors resolve all conflicts in accordance with their fiduciary
duties and utilize an audit committee to approve all related party transactions
as required by Nasdaq Marketplace Rules.

Risks Relating to the Securities Markets and Ownership of Group Common Stock

Fluctuations in Stock Price

The market price of the Companys common stock could be subject to
significant fluctuations. Among the factors that could affect the Companys
stock price are:



| |  |  | quarterly variations in operating results;                                                  
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | changes in revenue or earnings estimates or publication of research reports by analysts;    
|
| |  |  | speculation in the press or investment community;                                           
|
| |  |  | strategic actions by the Company or its competitors, such as acquisitions or restructurings;
|
| |  |  | actions by institutional stockholders;                                                      
|
| |  |  | general market conditions;                                                                  
|
| |  |  | domestic and international economic factors unrelated to the Companys performance; and     
|
| |  |  | limited shares of common stock available for trading                                        

The stock markets have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of the Companys
common stock. In particular, the Company cannot make assurances that its stock
will sell at any particular price, or at all.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 that require the Company to file, most often
electronically, reports, proxy and information statements, and other
information with the Securities and Exchange Commission (SEC). The public may
read and copy the Companys filings at the SECs Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public can obtain information
on the operation of the Public Reference Room by calling 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC at www.sec.gov. Similarly, the Company maintains a website at
http://www.ambassadorsgroup.com/EPAX/default.htm. The Company makes available
free of charge on this website, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports as soon as reasonably practical after, and in any event on the same day
as, such material is electronically filed with or furnished to the SEC.

13



---



##### Table of Contents






Item 2.Properties

The principal executive offices of the Company, consisting of
approximately 48,000 square feet, are located in Spokane, Washington and are
occupied pursuant to a lease that expires December 31, 2004. The lease
currently provides for monthly rental payments of approximately $37,000. The
Company may cancel the lease without penalty (upon one years prior notice) and
also may extend the term of the lease for an additional five year period upon
providing written notice to the Lessor of its intention to exercise such option
at least six months prior to the end of the initial term in 2004. If the
Company elects to exercise the extension option, the monthly rental during the
renewal period will be the fair market rental value of the leased premises as
of the date the option is exercised (as determined based on market rentals of
similar properties in the Spokane, Washington area).

The Company also occupies additional office space totaling approximately
11,000 square feet in Spokane, Washington, pursuant to a lease dated October 2,
2000, which expires on December 31, 2004. The lease may be extended an
additional five years with 120 days advance notice to the landlord. Current
monthly rent approximates $4,300 per month, with increases specified in the
lease. If the lease option to extend is chosen, the lease payments will
increase pursuant to the lease terms.

Management believes that its existing facilities are sufficient to meet
its present needs and anticipated needs for the foreseeable future. However,
additional facilities may be required in connection with future business
acquisitions.




Item 3.Legal Proceedings

The Company is not a party to any material pending legal proceedings other
than ordinary routine litigation incidental to its business, the outcome of
which the Company believes will not have a material adverse effect on its
business, financial condition, cash flows or results of operations.




Item 4.Submission of Matters to a Vote of Security Holders

None.

14



---



##### Table of Contents






PART II




Item 5.Market for the Registrants Common Equity and Related Stockholder Matters

Stock Market and Other Information

The Companys Common Stock has been traded on the Nasdaq National Market
under the symbol EPAX since March 1, 2002. Prior to March 1, 2002, there was no
public trading market for the Companys equity securities. As of February 28,
2003, the last reported sale price of the Companys common stock was $12.25.
As of February 28, 2003, there were approximately 42 holders of record of the
Companys Common Stock. This number does not include beneficial owners holding
shares through nominee or street name.

The following table sets forth the high and low sale prices of a share of
the Companys Common Stock as reported on the Nasdaq National Market on a
quarterly basis for the Companys fiscal year ended December 31, 2002.

|                                 |  |      |       |     |  |   |       | 
|-------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                 |  | High |       | Low
|                                 |  |      |       |    
|Quarter ended March 31, 2002     |  | $    | 15.50 |     |  | $ | 11.50 | 
|Quarter ended June 30, 2002      |  | $    | 16.49 |     |  | $ | 13.02 | 
|Quarter ended September 30, 2002 |  | $    | 15.00 |     |  | $ | 10.72 | 
|Quarter ended December 31, 2002  |  | $    | 15.40 |     |  | $ | 12.17 | 

Dividend Policy

The Company declared and paid cash dividends to Ambassadors during the
first quarter of 2002, 2001, and 1998. The payment of dividends in the future
will be at the discretion of the Board of Directors and will be dependent upon
the Companys financial condition, results of operations, capital requirements
and such other factors as the Board of Directors, in its discretion, deems
relevant. The Company intends to continue to retain its earnings for use in
the operation and expansion of its business and, therefore, does not anticipate
declaring any cash dividends in the foreseeable future.

Transfer Agent and Registrar

Mellon Investor Services LLC serves as transfer agent and registrar of the
Companys Common Stock.

Equity Compensation Plan Information

|                                                           |       |                     |                      |            |                   |                          |                                     |       |  |  |         |         | 
|---------------------------------------------------------- | ----- | ------------------- | -------------------- | ---------- | ----------------- | ------------------------ | ----------------------------------- | ----- |  |  | ------- | ------- | 
|                                                           |       |                     | (a)                  |            | (b)               |                          | (c)                                
|                                                           |       |                     |                      |            |                   |                          |                                    
|                                                           |       |                     | Number of securities |            | Weighted-average  |                          | Number of securities remaining     
|                                                           |       |                     | to be issued upon    |            | exercise price of |                          | available for future issuance under
|                                                           |       |                     | exercise of          |            | outstanding       |                          | equity compensation plans          
|                                                           |       |                     | outstanding options, |            | options, warrants |                          | (excluding securities              
|Plan category                                              |       | warrants and rights |                      | and rights |                   | reflected in column (a))
|Equity compensation
plans approved by
security holders     |       |                     | 1,183,000            |            |                   | $                        | 10.28                               |       |  |  | 562,000 |        
|Equity compensation
plans not approved
by security holders |       |                     | N/A                  |            |                   |                          | N/A                                 |       |  |  | N/A     |        
|                                                           | Total |                     |                      | 1,183,000  |                   |                          | $                                   | 10.28 |  |  |         | 562,000 | 

Changes in Securities

In March 2002, the Company issued 2,000 shares of its common stock to the
owners of a golf travel company in exchange for certain assets of the golf
travel company. No commission or remuneration was paid to any person in
connection with the issuance of Company common stock. The issuance of stock was
exempt from the registration provisions of the Securities Act of 1933 pursuant
to Section 4(2) thereof.

15



---



##### Table of Contents






Item 6.Selected Financial Data

This section presents the Companys historical financial data which should
be read carefully with the financial statements included in this Form 10-K,
including the notes to the consolidated financial statements, and Managements
Discussion and Analysis of Financial Condition and Results of Operations. The
statement of operations data for each of the years in the three-year period
ended December 31, 2002, and the balance sheet data as of December 31, 2002 and
2001 have been derived from audited financial statements included elsewhere in
this Form 10-K. The statement of operations data for the year ending December
31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and
1998 has been derived from the audited financial statements, which are not
included in this Form 10-K. Historical results are not necessarily indicative
of future results.

|                                                              |  |                                       |        |          |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------- |  | ------------------------------------- | ------ | -------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                              |  | December 31,                         
|                                                              |  |                                      
|                                                              |  | 2002                                  |        | 2001 (B) |  | 2000 |        | 1999 |  | 1998
|                                                              |  |                                       |        |          |  |      |        |      |  |     
|                                                              |  | (in thousands, except per share data)
|Statement of Operations data:                                 |  |                                       |        |          |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net revenue (A)                                               |  | $                                     | 36,090 |          |  | $    | 43,414 |      |  | $    | 40,322 |  |  | $ | 26,533 |  |  | $ | 24,429 | 
|Selling and tour promotion expenses                           |  | $                                     | 15,259 |          |  | $    | 18,392 |      |  | $    | 19,868 |  |  | $ | 13,779 |  |  | $ | 11,194 | 
|General and administrative expenses                           |  | $                                     | 5,504  |          |  | $    | 6,531  |      |  | $    | 5,125  |  |  | $ | 3,536  |  |  | $ | 2,820  | 
|Write down of intangible assets                               |  | $                                     |       |          |  | $    | 5,937  |      |  | $    |       |  |  | $ |       |  |  | $ |       | 
|Operating income                                              |  | $                                     | 15,327 |          |  | $    | 12,554 |      |  | $    | 15,329 |  |  | $ | 9,218  |  |  | $ | 10,415 | 
|Cumulative effect of accounting change                        |  | $                                     |       |          |  | $    |       |      |  | $    |       |  |  | $ |       |  |  | $ | 128    | 
|Net income after tax                                          |  | $                                     | 10,798 |          |  | $    | 9,488  |      |  | $    | 11,056 |  |  | $ | 6,701  |  |  | $ | 7,470  | 
|Earnings per share  basic                                    |  | $                                     | 1.10   |          |  | $    | 0.97   |      |  | $    | 1.13   |  |  | $ | 0.68   |  |  | $ | 0.76   | 
|Earnings per share  diluted                                  |  | $                                     | 1.06   |          |  | $    | 0.97   |      |  | $    | 1.13   |  |  | $ | 0.68   |  |  | $ | 0.76   | 
|Balance sheet data:                                           |  |                                       |        |          |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents, and available for sale
securities (C) |  | $                                     | 51,399 |          |  | $    | 39,773 |      |  | $    | 71,543 |  |  | $ | 39,897 |  |  | $ | 23,335 | 
|Total assets                                                  |  | $                                     | 58,517 |          |  | $    | 46,123 |      |  | $    | 81,142 |  |  | $ | 49,398 |  |  | $ | 26,259 | 
|Total stockholders equity                                    |  | $                                     | 27,860 |          |  | $    | 24,839 |      |  | $    | 53,554 |  |  | $ | 34,634 |  |  | $ | 17,762 | 



---

|(A) |  | Net revenue is a function of gross program receipts less program pass
through expenses. Program pass through expenses include all direct costs
associated with the Companys programs, including costs related to
airfare, hotels, meals, ground transportation, guides, professional
exchanges and changes in currency exchange rates. Gross program receipts
during the years ended December 31, 2002, 2001, 2000, 1999, and 1998 were
$97.1 million, $116.3 million, $107.8 million, $71.6 million, and $67.4
million, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(B) |  | Excluding the effects of a write down of intangible assets during the
year ended December 31, 2001, operating income, net income after tax, and
basic and diluted earnings per share would have been $18.5 million, $13.2
million, and $1.35, respectively.                                                                                                                                                                                                                                                                            
|   
|   
|   
|   
|(C) |  | Cash and cash equivalents and available-for-sale securities include
restricted cash equivalents of a nominal amount for the period ended
December 31, 2002 and 2001 and the amount of $112,000 for the periods
ended December 31, 2000 and 1999. For the period ended December 31, 1998,
cash, cash equivalents, and available-for-sale securities include
restricted cash equivalents in the amount of $152,000.                                                                                                                      

16



---



##### Table of Contents






Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Companys
consolidated financial statements and the notes thereto in this Report.

General

The Company is a leading educational travel company that organizes and
promotes international and domestic programs for students, athletes, and
professionals. Youth programs provide the opportunities for grade school,
junior, and senior high school students to learn about the history, government,
economy and culture of the foreign and domestic destinations they visit as well
as for junior and senior high school athletes to participate in domestic and
international sports challenges. The Companys professional programs emphasize
meetings and seminars between participants and persons in similar professions
abroad.

The Company was founded in 1967 and was reincorporated in Delaware in
1995, when it was purchased and consolidated with Ambassadors. Since
Ambassadors initial public offering in August 1995, the Company has expanded
its operations primarily through internal growth and acquisitions of businesses
within the travel industry. These acquisitions included a February 1996
acquisition of certain assets of Marc L. Bright and Associates and a June 1999
acquisition of certain assets of Travel Dynamics, Inc. Both of these
acquisitions were accounted for under the purchase method of accounting.
Therefore, the results of operations of the acquired businesses are included in
the Companys results of operations since their respective dates of
acquisition. On February 28, 2002, the Company was spun-off to the stockholders
of Ambassadors (see Notes to Consolidated Financial Statements, Note 1).

The consolidated financial statements include the accounts of Ambassadors
Group, Inc., and its wholly owned subsidiaries, Ambassador Programs, Inc.,
Ambassadors Sports Group, Inc., Ambassadors Specialty Group, Inc., and
Ambassadors Unlimited, LLC. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The consolidated financial statements as of December 31, 2000, 2001 and
for the period January 1, 2002 through February 28, 2002, have been carved out
from the consolidated financial statements of Ambassadors using the historical
operating results and historical bases of the assets and liabilities of
Ambassadors business of which the Company was comprised. Accordingly, the
historical financial information presented herein does not necessarily reflect
what the Companys financial position, operating results and cash flows would
have been had the Company been a separate, stand-alone entity during the
periods presented (see Notes to Consolidated Financial Statements, Note 1).

The Company has a single operating segment consisting of the educational
travel and sports programs for students, athletes and professionals. These
programs have similar economic characteristics, offer comparable products to
participants, and utilize similar processes for program marketing.

Gross program receipts reflect total payments received by the Company.
Gross program receipts less program pass-through expenses constitute the
Companys revenues. Program pass-through expenses include all direct costs
associated with the Companys programs, including but not limited to, costs
related to airfare, hotels, meals, ground transportation, guides, professional
exchanges, and changes in currency exchange rates. The Company recognizes gross
program receipts, pass-through expenses and revenues upon the departure of the
program. Operating expenses, which are expensed by the Company as incurred, are
the costs related to the creation of programs, promotional materials and
marketing costs, salaries, rent, other general and administrative expenses and
all of the Companys ordinary expenses. The Companys policy is to obtain
payment for substantially all travel services prior to entering into
commitments for incurring expenses relating to such travel.

The Companys businesses are seasonal. The majority of the Companys
travel programs occur in June and July of each year. The Company has
historically earned more than ninety percent of its annual revenues in the
second and third quarters, which the Company anticipates will continue for the
foreseeable future. Historically, these seasonal revenues have more than offset
operating losses incurred during the rest of the year. The Companys annual
results would be adversely affected if the Companys revenues were to be
substantially below seasonal norms during these periods. The Companys
operating results may fluctuate as a result of many factors, including the mix
of student, sport, and professional programs, the mix of programs and program
destinations offered by the Company and its competitors, the introduction and
acceptance of new programs and program enhancements by the Company and its
competitors, timing of program completions, cancellation rates, competitive
conditions in the industry, marketing expenses, extreme weather conditions,
international conflicts,

17



---



##### Table of Contents



timing of and costs relating to acquisitions, changes
in relationships with certain travel providers, economic factors, fluctuations
of foreign currency exchange rates and other considerations affecting travel.

The substantial majority of the Companys programs take place outside the
United States and most foreign suppliers require payment in local currency
rather than in U.S. dollars. Accordingly, the Company is exposed to foreign
currency risks in certain countries as foreign currency exchange rates between
those currencies and the U.S. dollar fluctuate. To manage these risks, the
Company enters into forward foreign exchange contracts and forward contracts
with synthetic options.

These foreign exchange contracts are entered into to support normal
anticipated recurring purchases and, accordingly, are not entered into for
speculative purposes. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Market Risk.

Critical Accounting Policies

The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including cash and cash equivalents, available-for-sale securities, intangible
assets, income taxes, derivative financial instruments, and contingencies and
litigation.

Cash, cash equivalents, and available-for-sale securities are exposed to
concentrations of credit risk. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such balances may
be in excess of the federal depository insurance limit or may be on deposit at
institutions which are not covered by this insurance. If such institutions were
to become insolvent during which time it held the Companys cash, cash
equivalents, or available-for-sale securities in excess of the insurance limit,
it would be necessary for the Company to obtain credit financing to operate its
programs.

The Company values its goodwill and intangible assets using fair value on
the date of an acquisition. The Company periodically assesses the
recoverability of the recorded goodwill. As experienced during the fourth
quarter of 2001, impacts of international unrest, terrorism, and the resulting
economic downturn can influence the recoverability of the goodwill and
intangible assets carrying value. During the fourth quarter of 2001, the
Company recorded a charge related to managements conclusion that the goodwill
was impaired (see Note 2 in the Notes to the Consolidated Financial
Statements). The impact of external influences such as terrorism combined with
the effects to the Companys operations could result in future inability to
recover the carrying value of goodwill and certain intangible assets.

The asset and liability approach is used to account for income taxes by
recognizing deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. While the Company has considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, in the event the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made.

The Company uses foreign currency exchange contracts as part of an overall
risk-management strategy. These instruments are used as a means of mitigating
exposure to foreign currency risk connected to anticipated travel programs. In
entering into these contracts, the Company has assumed the risk which might
arise from the possible inability of counterparties to meet the terms of their
contracts. The Company does not expect any losses as a result of counterparty
defaults. However, if such defaults occurred, the necessity would arise to
locate alternative counterparties, or the Company would then consider alternate
means of settling its foreign exchange contractual obligations.

The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

18



---



##### Table of Contents



Results of Operations

The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to consolidated
revenues.

|                     |                                     |  |                         |    |          |  |      |    |      |  |      |    |  |  |     |    |  |  |     |    | 
|-------------------- | ----------------------------------- |  | ----------------------- | -- | -------- |  | ---- | -- | ---- |  | ---- | -- |  |  | --- | -- |  |  | --- | -- | 
|                     |                                     |  | Year Ended December 31,
|                     |                                     |  |                        
|                     |                                     |  | 2002                    |    | 2001 (A) |  | 2000 |    | 1999 |  | 1998
|                     |                                     |  |                         |    |          |  |      |    |      |  |     
|                     |                                     |  | (% of revenues)        
|Net revenue          |                                     |  | 100                     | %  |          |  | 100  | %  |      |  | 100  | %  |  |  | 100 | %  |  |  | 100 | % 
|                     | Selling and tour promotion expenses |  |                         | 42 |          |  |      | 42 |      |  |      | 49 |  |  |     | 52 |  |  |     | 45 | 
|                     | General and administrative expenses |  |                         | 15 |          |  |      | 15 |      |  |      | 13 |  |  |     | 13 |  |  |     | 12 | 
|                     | Write down of intangible assets     |  |                         |   |          |  |      | 14 |      |  |      |   |  |  |     |   |  |  |     |   | 
|Operating income     |                                     |  | 43                      |    |          |  | 29   |    |      |  | 38   |    |  |  | 35  |    |  |  | 43  |   
|Other income         |                                     |  | 3                       |    |          |  | 5    |    |      |  | 4    |    |  |  | 3   |    |  |  | 3   |   
|Income before tax    |                                     |  | 45                      |    |          |  | 34   |    |      |  | 42   |    |  |  | 38  |    |  |  | 45  |   
|Income tax provision |                                     |  | 15                      |    |          |  | 12   |    |      |  | 14   |    |  |  | 13  |    |  |  | 15  |   
|Net income           |                                     |  | 30                      | %  |          |  | 22   | %  |      |  | 27   | %  |  |  | 25  | %  |  |  | 31  | % 



---

|(A) |  | Excluding the effects of a write down of intangible assets during the
year ended December 31, 2001, the relative percentages of operating
income, income before tax, and net income to consolidated revenues would
have been 43%, 48%, and 31%, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

Gross program receipts decreased to $97.1 million in the year ended
December 31, 2002 from $116.3 million in the same period of 2001. The $19.2
million or 16 percent decrease is primarily the result of a decrease in
traveled participants. The Company traveled more than 21,000 participants
during 2002 as compared to more than 25,000 participants during 2001.

Net revenue decreased to $36.1 million in the year ended December 31, 2002
from $43.4 million in the same period of 2001. This decrease is primarily the
result of a decrease in traveled participants. Gross margins (revenue as a
percentage of gross program receipts) remained comparable during the years
ended December 31, 2002 and 2001 at 37 percent.

The Companys policy is to expense all selling and tour promotion costs as
they are incurred. Selling and tour promotion expenses decreased to $15.3
million from $18.4 million comparing the years ended December 31, 2002 and
2001, respectively. The decrease of $3.1 million or 17 percent is primarily the
result of a series of personnel cost management controls implemented subsequent
to September 11, 2001, including decreased levels of staffing, ceased hiring
for majority of 2002, implemented a wage freeze, and cut some management wages.
In addition, other cost management controls included limiting marketing
efforts with certain programs.

General and administrative expenses decreased to $5.5 million in the year
ended December 31, 2002 from $6.5 million during the comparable period in 2001.
The decrease of $1.0 million or 16 percent is also primarily the result of a
series of personnel cost management controls implemented subsequent to
September 11, 2001 as discussed in the paragraph above. In addition, other
cost controls included limiting professional fees incurred by the Company.

During the fourth quarter of 2001, the Company incurred a $5.9 million
impairment charge for intangible assets, incurred primarily as a result of the
impact to operations of the terrorist acts that occurred on September 11, 2001,
the response by the United States since October 7, 2001, and the resulting
negative impact these events have had on domestic and international air travel,
and the travel industry in general.

In the year ended December 31, 2002, the Company earned operating income
of $15.3 million in comparison to the operating income of $12.6 million for the
comparable period of 2001. Excluding an impairment charge of $5.9 million
during 2001, operating income would have been $18.5 million. Changes in
operating income from 2001 to 2002 are the result of changes as described
above.

19



---



##### Table of Contents



Other income consisted primarily of interest income generated by cash,
cash equivalents, and available-for-sale securities. As a result of a 44%
decrease of the rate of return earned on investments, the Company realized
interest and dividend income of $1.1 million in the year ended December 31,
2002, compared to $2.1 million in the year ended December 31, 2001.

In the year ended December 31, 2002, income before income taxes was $16.4
million in comparison to income before income taxes of $14.7 million in the
comparable period of 2001. Excluding an impairment charge of $5.9 million
during 2001, income before income taxes would have been $20.6 million. Changes
in income before income taxes are the result of changes as described above.

The Company incurred an income tax provision of approximately $5.6 million
for the year ended December 31, 2002 in comparison to $5.2 million for the
comparable period in 2001. The income tax provision incurred was based upon the
estimated annual effective income tax rate applied to the pre-tax income. The
Companys effective tax rate of 34.1% for 2002 decreased from 35.5% for 2001
primarily as a result of a reduction in state income taxes.

Net income increased to $10.8 million in the year ended December 31, 2002
from $9.5 million in the comparable period of 2001. Excluding the impairment
charge of $5.9 million during 2001, net income would have been $13.2 million
during the year ended December 31, 2001. Changes in net income from 2002 to
2001 are the result of changes as described above.

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

Gross program receipts increased to $116.3 million in the year ended
December 31, 2001 from $107.8 million in the same period of 2000. The $8.5
million or 8 percent increase was primarily the result of an increase in
traveled participants. The Company traveled more than 25,800 participants
during 2001 as compared to more than 25,300 participants during 2000.

Net revenue increased to $43.4 million in the year ended December 31, 2001
from $40.3 million in the same period of 2000. This increase was primarily the
result of reductions in program pass through expenses, combined with the
effects of increased participants. Gross margins (revenue as a percentage of
gross program receipts) remained comparable during the years ended December 31,
2001 and 2000 at 37 percent.

The Companys policy is to expense all selling and tour promotion costs as
they are incurred. Selling and tour promotion expenses decreased to $18.4
million from $19.9 million when comparing the years ended December 31, 2001 and
2000, respectively. This decrease can be directly tied to the effects of the
Companys marketing emphasis after the terrorist attacks of September 11, 2001.
All marketing ceased for a time period post September 11, 2001 resulting in a
delay of the expenses being incurred. The Company also experienced a reduction
in work force during the fourth quarter of 2001 as a result of the downturn of
the travel industry, which produced cost savings.

General and administrative expenses increased to $6.5 million in the year
ended December 31, 2001 from $5.1 million during the comparable period in 2000.
The $1.4 million increase is due to a number of factors, including but not
limited to professional fees and personnel costs.

During the fourth quarter of 2001, the Company incurred a $5.9 million
impairment charge for intangible assets, incurred primarily as a result of the
impact to operations of the terrorist acts that occurred on September 11, 2001,
the response by the United States since October 7, 2001, and the resulting
negative impact these events had on domestic and international air travel, and
the travel industry in general.

During 2001, the Company earned operating income of $12.6 million in
comparison to the operating income of $15.3 million in 2000. Excluding the
impairment of intangibles charges during 2001, operating income would have been
$18.5 million. Changes in operating income from 2000 to 2001 are the result of
changes as described above.

Other income in 2001 consisted primarily of interest income generated by
cash, cash equivalents, and available-for-sale securities. During 2001, the
Company issued a dividend to its parent company in the amount of $37.5 million.
As of December 31, 2001, the Company had $39.8 million in cash, cash
equivalents and available-for-sale securities, a decrease of $31.8 million from
$71.5 million at December 31, 2000. As a result of decreased cash and lower
rates of return of investments, the Company realized interest and dividend
income of $2.1 million in the year ended December 31, 2001, compared to $3.1
million in the comparable period of 2000.

20



---



##### Table of Contents



Other income also included $1.6 million of unrealized losses on certain
foreign currency contracts during the year ended December 31, 2000. The Company
enters into forward foreign exchange contracts and foreign currency option
contracts to offset certain operational exposures from changes in foreign
currency exchange rates. These foreign exchange contracts and options are
entered into to support normal recurring purchases, and accordingly are not
entered into for speculative purposes. Forward foreign exchange contracts are
utilized to manage the risk associated with currency fluctuations on certain
purchase expectations. Certain of these contracts do not qualify for hedge
accounting and, therefore, unrealized gains and losses related to these
contracts are recorded in other income/expense.

In the year ended December 31, 2001, income before income taxes was $14.7
million in comparison to income before income taxes of $16.9 million in the
comparable period of 2000. Excluding an impairment charge of $5.9 million
during 2001, income before income taxes would have been $20.6 million. Changes
in income before income taxes are the result of changes as described above.

The Company incurred an income tax provision of approximately $5.2 million
for the year ended December 31, 2001 in comparison to $5.8 million for the
comparable period in 2000. The income tax provision incurred was based upon the
estimated annual effective income tax rate applied to the pre-tax income. The
Companys effective tax rate of 35.5% in 2001 increased from 34.4% in 2000
primarily due to an increase in state income taxes.

Net income decreased to $9.5 million in the year ended December 31, 2001
from $11.1 million in the comparable period of 2000. Excluding the impairment
charge of $5.9 million during 2001, net income would have been $13.2 million
during the year ended December 31, 2001 in comparison to $11.1 million during
the year ended December 31, 2000. Changes in net income from 2001 to 2000 are
the result of changes as described above.

Liquidity and Capital Resources

The Companys business is not capital intensive. However, the Company does
retain funds for operating purposes in order to conduct sales and marketing
efforts for future programs.

Net cash provided by operations for years ended December 31, 2002 and 2001
was approximately $21.4 million and $7.0 million, respectively. The increase of
$14.4 million in operating cash flows from the year ending December 31, 2001 to
the year ending December 31, 2002 primarily relates to increased participants
deposits for future travel programs.

Net cash provided by investing activities for the years ended December 31,
2002 and 2001 was $1.3 million and $16.7 million, respectively. The decrease of
$15.4 million from the year ending December 31, 2001 to the year ending
December 31, 2002 is primarily due to net activities with the sale or maturity
and purchase of available-for-sale securities.

Net cash used in financing activities for the year ended December 31, 2002
and 2001 was $9.7 million and $37.5 million, respectively. The decrease of
$27.8 million in cash used in the year ended December 31, 2002 in comparison to
the comparable period in 2001 is primarily due to activities between the
Company and Ambassadors. During 2002, concurrent with the spin-off in February
2002 and in accordance with the terms of the Master Separation and Distribution
Agreement, there was a calculation made which resulted in additional dividends
approximating $20.5 million being paid to Ambassadors and a capital
contribution to Group approximating $10.4 million from Ambassadors. During
2001, the Company paid a dividend of $37.5 million, representing past pre-tax
earnings, to Ambassadors.

The Company has a credit facility available with a large financial
institution, with a current limit of up to $50.0 million for foreign currency
purchases and foreign exchange forward contracts. This facility would be drawn
upon in the event the Company is unable to provide payment for such foreign
currency purchases and foreign exchange forward contracts upon their maturity,
and it cannot be used for operational or working capital purposes. This credit
facility is renewable annually and expires in March 2003. In connection with
the Distribution, Ambassadors agreed to provide a credit facility to the
Company up to $20 million for on-going operations and potential acquisition
needs through August 2003. Ambassadors ability to fund the credit facility
could be impaired due to a variety of factors including sudden capital
expenditures, fluctuations in operating results, financing activities and
receivables management. To the extent any one of these factors causes
Ambassadors to be unable to fund all or part of the $20 million, the Company
could be forced to seek and obtain alternative financing in the form of debt or
equity. There can be no assurance that the Company would be successful in
obtaining alternative financing on favorable terms, or at all. The Companys
failure to obtain such financing or to obtain such financing on favorable terms
could have a material adverse effect on the Companys business, financial
condition and results of operations.

21



---



##### Table of Contents



At December 31, 2002, the Company had approximately $51.4 million of cash,
cash equivalents including restricted cash, and available-for-sale securities,
which included program participant funds of approximately $25.9 million. At
December 31, 2001, the Company had approximately $39.8 million of cash and cash
equivalents including restricted cash, and available-for-sale securities, which
included program participant funds of $16.6 million. Under the Companys
cancellation policy, a program participant may be entitled to a refund of a
portion of his or her deposit, less certain fees, depending on the time of
cancellation. Should a greater number of participants cancel their travel in
comparison to that which is part of the Companys ongoing operations, due to
circumstances such as international or domestic unrest, terrorism, or general
economic downturn, the Companys cash balances could be significantly reduced.
Cash balances could also be reduced significantly if the financial
institutions, which held balances beyond that federally insured, were to become
insolvent.

The terrorist attacks that occurred on September 11, 2001, and the
response by the United States had a very negative impact on domestic and
international air travel and the travel industry in general. Furthermore, the
threat of and a possible war with Iraq has and will affect the travel industry,
as well as the markets in which the Company operates. The potential and
long-term effects of a possible war are uncertain for the Companys customers,
the market for the Companys common stock, the markets for the Companys
services, the strength of the U.S. dollar and the U.S. economy. The
consequences of a possible war with Iraq and or geopolitical unrest are
unpredictable and the Company is not able to determine whether the impact will
be material or highly material on the Companys business, financial condition,
cash flows and results of operations.

The Company is continuing to pursue further acquisitions of related travel
businesses that may require the use of cash and cash equivalents. No such
acquisitions are currently pending and no assurance can be given that
definitive agreements for any such acquisitions will be entered into, or, if
they are entered into, that they will be on terms favorable to the Company.

The Company used a significant amount of cash in 2002 toward its dividend
payment to Ambassadors prior to its spin-off. The Company also received a
capital contribution from Ambassadors concurrent with its spin-off. The Company
does not have any material capital expenditure commitments for 2003. Management
believes existing cash and cash equivalents and cash flows from operations,
combined with the Companys $20 million credit facility with Ambassadors, will
be sufficient to fund the Companys anticipated operating needs, capital
expenditures, and acquisitions through 2003.

Market Risk

The following table summarizes the financial instruments other than
derivative financial instruments held by the Company at December 31, 2002 and
2001, which are sensitive to changes in interest rates. This table presents
principal cash flows for available-for-sale securities by contractual maturity
date and the related average interest rate and fair value (in thousands):

|                                  |  |                   |        |                   |  |       |       |       |  |       |        |       |  |      |        |  |  |   |        |      |  |   |        | 
|--------------------------------- |  | ----------------- | ------ | ----------------- |  | ----- | ----- | ----- |  | ----- | ------ | ----- |  | ---- | ------ |  |  | - | ------ | ---- |  | - | ------ | 
|                                  |  | December 31, 2002 |        | December 31, 2001
|                                  |  |                   |        |                  
|                                  |  |                   |        |                   |  |       |       |       |  |       |        |       |  | Fair |        |  |  |   |        | Fair
|                                  |  | 2003              |        | 2004              |  | Total |       | Value |  | Total |        | Value
|                                  |  |                   |        |                   |  |       |       |       |  |       |        |      
|U.S. govt. and agency obligations |  | $                 | 19,483 |                   |  | $     | 2,413 |       |  | $     | 21,896 |       |  | $    | 21,896 |  |  | $ | 23,243 |      |  | $ | 23,243 | 
|Interest Rate                     |  |                   | 2.68   | %                 |  |       | 1.82  | %     |  |       | 2.59   | %     |  |      |       |  |  |   | 5.50   | %    |  |   |       | 

The substantial majority of the Companys travel programs take place
outside the United States and most foreign suppliers require payment in
currency other than the U.S. dollar. Accordingly, the Company is exposed to
foreign currency risk relative to changes in foreign currency exchange rates
between those currencies and the U.S. dollar. The Company has a program to
provide a hedge against certain of these foreign currency risks with less than
two years maturity. The Company uses forward contracts, which allow the Company
to acquire the foreign currency at a fixed price for a specified period of
time. Some of the Companys forward contracts include a synthetic component if
a pre-determined trigger occurs during the term of the contract.

The Company is exposed to credit risk under the foreign currency contracts
and options to the extent that the counterparty is unable to perform under the
agreement. The fair value of foreign currency exchange contracts is based on
quoted market prices and the spot rate of the foreign currencies subject to
contracts at year-end.

22



---



##### Table of Contents



The table below provides information about the Companys derivative
financial instruments that are sensitive to foreign currency exchange rates.
For foreign currency forward exchange agreements, the table presents the
notional amounts and weighted average exchange rates. All contracts held as of
December 31, 2002 mature in 2003. These notional amounts generally are used to
calculate the contractual payments to be exchanged under the contract. None of
these contracts is entered into for trading purposes.

At December 31, 2002 and 2001, the Company had outstanding forward
contracts as follows (in thousands):

|                                                                              |                    |  |          |       |               |  |             |      | 
|----------------------------------------------------------------------------- | ------------------ |  | -------- | ----- | ------------- |  | ----------- | ---- | 
|                                                                              |                    |  |          |       |               |  | U.S. Dollar
|                                                                              |                    |  |          |       |               |  | Average    
|                                                                              |                    |  | Notional |       | Contractual  
|                                                                              |                    |  | Amount   |       | Exchange Rate
|                                                                              |                    |  |          |       |              
|December 31, 2002                                                             |                    |  |          |       |               |  |             |     
|Forward contracts (pay $U.S./receive foreign currency):                       |                    |  |          |       |               |  |             |     
|                                                                              | Australian dollar  |  |          | 5,500 |               |  | $           | 0.53 | 
|                                                                              | Euro dollar        |  |          | 7,600 |               |  | $           | 0.98 | 
|                                                                              | New Zealand dollar |  |          | 2,500 |               |  | $           | 0.47 | 
|                                                                              |                    |  |          |       |               |  |             |     
|                                                                              |                    |  | 15,600   |       |               |  |             |     
|                                                                              |                    |  |          |       |               |  |             |     
|Forward contracts with synthetic option (pay $U.S./receive
foreign currency): |                    |  |          |       |               |  |             |     
|                                                                              | Australian dollar  |  |          | 8,750 |               |  | $           | 0.57 | 
|                                                                              | British pound      |  |          | 4,300 |               |  | $           | 1.48 | 
|                                                                              | Euro dollar        |  |          | 2,500 |               |  | $           | 0.97 | 
|                                                                              | New Zealand dollar |  |          | 2,600 |               |  | $           | 0.46 | 
|                                                                              |                    |  |          |       |               |  |             |     
|                                                                              |                    |  | 18,150   |       |               |  |             |     
|                                                                              |                    |  |          |       |               |  |             |     
|December 31, 2001                                                             |                    |  |          |       |               |  |             |     
|Forward contracts (pay $U.S./receive foreign currency):                       |                    |  |          |       |               |  |             |     
|                                                                              | Australian dollar  |  |          | 9,400 |               |  | $           | 0.54 | 
|                                                                              | British pound      |  |          | 1,250 |               |  | $           | 1.49 | 
|                                                                              | Euro dollar        |  |          | 3,460 |               |  | $           | 0.89 | 
|                                                                              |                    |  |          |       |               |  |             |     
|                                                                              |                    |  | 14,110   |       |               |  |             |     
|                                                                              |                    |  |          |       |               |  |             |     
|Forward contracts with synthetic option (pay $U.S./receive
foreign currency): |                    |  |          |       |               |  |             |     
|                                                                              | Australian dollar  |  |          | 2,100 |               |  | $           | 0.54 | 
|                                                                              | British pound      |  |          | 2,050 |               |  | $           | 1.53 | 
|                                                                              | New Zealand dollar |  |          | 5,150 |               |  | $           | 0.43 | 
|                                                                              |                    |  |          |       |               |  |             |     
|                                                                              |                    |  | 9,300    |       |               |  |             |     
|                                                                              |                    |  |          |       |               |  |             |     

At December 31, 2002 and 2001, the Company had unrealized foreign currency
gains (losses) associated with these financial instruments of approximately
$1.6 million, and $(0.5) million, respectively.

After the unexpected events of September 11, 2001 and the resulting down
turn in the travel industry, the Company took early exit of forward foreign
exchange contracts aggregating $5.7 million as it was anticipated that such
contracts would not be needed for the related travel season and the related
forecasted transactions were no longer probable of occurring. The Company
recorded a nominal gain as a result of the early termination of these
contracts.

23



---



##### Table of Contents



New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations (SFAS 141). SFAS 141 establishes new
standards for accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 141, use of the
pooling-of-interest method is prohibited. The Company adopted this statement
during the third quarter of fiscal 2001. The adoption of SFAS 141 did not have
a material impact on the Companys consolidated financial statements.

In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142,
among other things, establishes new standards for intangible assets acquired in
a business combination, eliminates amortization of goodwill and sets forth
requirements to periodically evaluate goodwill for impairment. The Company
adopted this statement during the first quarter of 2002 and thus goodwill and
certain intangibles with indefinite lives are no longer being amortized.
Accordingly, approximately $64,000 of previous annual amortization is no longer
being recorded.

The following table presents the impact of SFAS 142 on our net income and
our net income per share had the new standard been in effect for the years
ended December 31, 2001 and 2000 (in thousands, except per share amounts):

|                                          |  |       |       |      |  |   |        |  
|----------------------------------------- |  | ----- | ----- | ---- |  | - | ------ | -
|                                          |  | 2001* |       | 2000
|                                          |  |       |       |     
|Net income -as reported                   |  | $     | 9,488 |      |  | $ | 11,056 |  
|Adjustments:                              |  |       |       |      |  |   |        |  
|Amortization of goodwill                  |  |       | 64    |      |  |   | 363    |  
|Income tax effect                         |  |       | (24   | )    |  |   | (113   | )
|                                          |  |       |       |      |  |   |        |  
|Net adjustments                           |  |       | 40    |      |  |   | 250    |  
|                                          |  |       |       |      |  |   |        |  
|Net income- as adjusted                   |  |       | 9,528 |      |  |   | 11,306 |  
|                                          |  |       |       |      |  |   |        |  
|Basic net income per share-as reported    |  | $     | 0.97  |      |  | $ | 1.13   |  
|                                          |  |       |       |      |  |   |        |  
|Basic net income per share adjusted       |  | $     | 0.97  |      |  | $ | 1.15   |  
|                                          |  |       |       |      |  |   |        |  
|Diluted net income per share- as reported |  | $     | 0.97  |      |  | $ | 1.13   |  
|                                          |  |       |       |      |  |   |        |  
|Diluted net income per share- adjusted    |  | $     | 0.97  |      |  | $ | 1.15   |  
|                                          |  |       |       |      |  |   |        |  

*The Company incurred an impairment charge of intangibles of approximately
$5.9 million during the year ended December 31, 2001.

In August 2001, the FASB approved SFAS 143, Accounting for Asset
Retirement Obligations (SFAS 143), which will be effective for the fiscal year
beginning January 1, 2003. SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company does not
anticipate that the adoption of SFAS 143 will have a material impact on its
financial condition or results of operations.

In October 2001, the FASB approved SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121) and the accounting and reporting provisions of APB
30, Reporting the Results of Operations  Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the disposal of a segment of a business. SFAS 144
retains many of the fundamental provisions of SFAS 121, but resolves certain
implementation issues associated with that Statement. The Company adopted this
statement during the first quarter of fiscal 2002. The adoption of SFAS 144
did not have a material impact on its financial condition or results of
operations.

In April 2002, the FASB adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Considerations. This Statement eliminates the requirement that gains and losses
from the extinguishments of debt be aggregated and classified as an
extraordinary item, net of tax. SFAS 145 also provides clarification for the
accounting of sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Company adopted this Statement during the second quarter of fiscal 2002. The
adoption of SFAS No. 145 did not have a material impact on the Companys
consolidated financial statements.

24



---



##### Table of Contents



The FASB adopted SFAS No.146, Accounting for Costs Associated with Exit or
Disposal Activities, issued in June 2002, and is effective for activities
initiated after December 31, 2002. This Statement nullifies EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit or Disposal Activity (Including Certain Costs Incurred in a
Restructuring) and EITF 88-0, Costs Associated with a Lease Modification or
Termination. SFAS 146 establishes that the initial liability for costs
associated with exit and disposal activities be measured at fair value and
recognized when the liability is incurred. SFAS 146 prohibits the recognition
of a liability based solely on an entitys commitment to a plan for disposal.
SFAS 146 also provides an accounting model for one-time termination benefits
and guidance on accounting for costs to terminate operating leases. The Company
adopted SFAS 146 in the fourth quarter of 2002. The adoption of SFAS 146 did
not have a material impact on the Companys consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-
Based Compensation  Transition and Disclosure  an amendment of FASB Statement
No. 123 (FAS 148). This statement amends SFAS No. 123 Accounting for Stock
Based Compensation (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company currently discloses the
effects of stock-based employee compensation and is evaluating the alternative
methods of voluntarily transitioning to the fair value based method of
accounting for stock-based compensation.




Item 7A.Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated herein by reference
to the section entitled Market Risk in Managements Discussion and Analysis
of Results of Operations and Financial Condition (Part II, Item 7).




Item 8.Financial Statements and Supplementary Data

Consolidated Financial Statements: See Part III, Item 15 of this Form
10-K.




Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

25



---



##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

The information called for by this item is hereby incorporated by
reference from the Registrants definitive Proxy Statement for the fiscal year
ended December 31, 2002, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 14, 2003.




Item 11.Executive Compensation

The information called for by this item is hereby incorporated by
reference from the Registrants definitive Proxy Statement for the fiscal year
ended December 31, 2002, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 14, 2003.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information called for by this item is hereby incorporated by
reference from the Registrants definitive Proxy Statement for the fiscal year
ended December 31, 2002, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 14, 2003.




Item 13.Certain Relationships and Related Transactions

The information called for by this item is hereby incorporated by
reference from the Registrants definitive Proxy Statement for the fiscal year
ended December 31, 2002, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 14, 2003.




Item 14.Controls and Procedures

The Companys management, including the principal executive officer and
principal financial officer, conducted an evaluation of the Companys
disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this report. Based on their evaluation,
the Companys principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Companys
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph
above.

26



---



##### Table of Contents






Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

| |                                                              
| | -------------------------------------------------------------
| | (a) The following documents are filed as part of this Report:

| |                                       
| | --------------------------------------
| | (1) Consolidated Financial Statements:

|                                                                                                                |  |  |    | 
|--------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Accountants                                                                               |  |  | 28 | 
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                       |  |  | 29 | 
|Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000                      |  |  | 30 | 
|Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000            |  |  | 31 | 
|Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 2002, 2001 and 2000 |  |  | 32 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000                      |  |  | 33 | 
|Notes to Consolidated Financial Statements                                                                      |  |  | 34 | 

| |                                   
| | ----------------------------------
| | (2) Financial Statement Schedules:

| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No financial statement schedules are presented, as the required
information is either not applicable or is included in the Consolidated
Financial Statements or notes thereto.

| |             
| | ------------
| | (3) Exhibits

| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | The exhibits listed on the accompanying Exhibit Index are filed as
part of this Form 10-K.

| |                        
| | -----------------------
| | (b) Reports on Form 8-K

| |                                                                              
| | -----------------------------------------------------------------------------
| | No reports on Form 8-K were filed during the quarter ended December 31,
2002.

27



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
Ambassadors Group, Inc.
Spokane, Washington

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive income, of
changes in stockholders equity and of cash flows present fairly, in all
material respects, the financial position of Ambassadors Group, Inc. and its
subsidiaries (the Company) at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 2 to the Consolidated Financial Statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, during the year ended December 31, 2002.

/s/ PRICEWATERHOUSECOOPERS LLP

Portland, Oregon
February 5, 2003

28



---



##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |        |        | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ---------------- | ------ | ---- | ----- | ------ | ------ | 
|                                                                                          |                                                                                                                                                                                  |                                            |       | December 31,    
|                                                                                          |                                                                                                                                                                                  |                                            |       |                 
|                                                                                          |                                                                                                                                                                                  |                                            |       | 2002             |        | 2001
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |     
|                                                                                          |                                                                                                                                                                                  |                                            |       | (In thousands,  
|                                                                                          |                                                                                                                                                                                  |                                            |       | except share and
|                                                                                          |                                                                                                                                                                                  |                                            |       | per share data) 
|Assets                                                                                    |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Current Assets:                                                                           |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          | Cash and cash equivalents                                                                                                                                                        |                                            | $     | 29,491           |        |      | $     | 16,518 |       
|                                                                                          | Restricted cash equivalents                                                                                                                                                      |                                            |       | 12               |        |      |       | 12     |       
|                                                                                          | Available-for-sale securities                                                                                                                                                    |                                            |       | 21,896           |        |      |       | 23,243 |       
|                                                                                          | Foreign currency exchange contracts                                                                                                                                              |                                            |       | 1,642            |        |      |       |       |       
|                                                                                          | Accounts receivable                                                                                                                                                              |                                            |       | 91               |        |      |       | 143    |       
|                                                                                          | Prepaid program costs and expenses                                                                                                                                               |                                            |       | 1,516            |        |      |       | 1,501  |       
|                                                                                          | Deferred income taxes                                                                                                                                                            |                                            |       |                 |        |      |       | 301    |       
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          |                                                                                                                                                                                  | Total current assets                       |       |                  | 54,648 |      |       |        | 41,718 | 
|Property and equipment, net                                                               |                                                                                                                                                                                  |                                            | 1,914 |                  |        |      | 2,457 |       
|Deferred tax asset                                                                        |                                                                                                                                                                                  |                                            | 1,711 |                  |        |      | 1,878 |       
|Other long-term assets                                                                    |                                                                                                                                                                                  |                                            | 244   |                  |        |      | 70    |       
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          |                                                                                                                                                                                  | Total assets                               |       | $                | 58,517 |      |       | $      | 46,123 | 
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Liabilities                                                                               |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Current Liabilities:                                                                      |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          | Accounts payable                                                                                                                                                                 |                                            | $     | 2,181            |        |      | $     | 2,521  |       
|                                                                                          | Accrued expenses                                                                                                                                                                 |                                            |       | 2,060            |        |      |       | 1,709  |       
|                                                                                          | Participants deposits                                                                                                                                                           |                                            |       | 25,901           |        |      |       | 16,551 |       
|                                                                                          | Deferred tax liability                                                                                                                                                           |                                            |       | 515              |        |      |       |       |       
|                                                                                          | Foreign currency exchange contracts                                                                                                                                              |                                            |       |                 |        |      |       | 503    |       
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          |                                                                                                                                                                                  | Total current liabilities                  |       |                  | 30,657 |      |       |        | 21,284 | 
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Commitments and contingencies (Notes 3 and 8)                                             |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Stockholders Equity                                                                      |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|Preferred stock, $.01 par value; 2,000,000 shares authorized; none
issued and outstanding |                                                                                                                                                                                  |                                            |      |                  |        |      |      |       
|                                                                                          | Common stock, $.01 par value; authorized, 20,000,000 shares; issued and
outstanding, 9,877,702 and 9,813,140 shares for the years ended
December 31, 2002 and 2001, respectively |                                            |       | 99               |        |      |       | 98     |       
|                                                                                          | Additional paid-in capital                                                                                                                                                       |                                            |       | 15,808           |        |      |       | 15,630 |       
|                                                                                          | Retained earnings                                                                                                                                                                |                                            |       | 10,798           |        |      |       | 9,451  |       
|                                                                                          | Accumulated other comprehensive income (loss)                                                                                                                                    |                                            |       | 1,155            |        |      |       | (340   | )     
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          |                                                                                                                                                                                  | Total stockholders equity                 |       |                  | 27,860 |      |       |        | 24,839 | 
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       
|                                                                                          |                                                                                                                                                                                  | Total liabilities and stockholders equity |       | $                | 58,517 |      |       | $      | 46,123 | 
|                                                                                          |                                                                                                                                                                                  |                                            |       |                  |        |      |       |       

The accompanying notes are an integral part of the consolidated financial statements.

29



---



##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |        |  
|--------------------------------------- | ----------------------------------------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                                        |                                                                                           |   | Years Ended December 31,
|                                        |                                                                                           |   |                         
|                                        |                                                                                           |   | 2002                     |        | 2001 |   | 2000  
|                                        |                                                                                           |   |                          |        |      |   |       
|                                        |                                                                                           |   | (In thousands, except   
|                                        |                                                                                           |   | per share data)         
|Revenue                                 |                                                                                           | $ | 36,090                   |        |      | $ | 43,414 |        |  | $ | 40,322 |       
|Operating expenses:                     |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Selling and tour promotion                                                                |   |                          | 15,259 |      |   |        | 18,392 |  |   |        | 19,868 |  
|                                        | General and administrative                                                                |   |                          | 5,504  |      |   |        | 6,531  |  |   |        | 5,125  |  
|                                        | Write-down of intangible assets                                                           |   |                          |       |      |   |        | 5,937  |  |   |        |       |  
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        |                                                                                           |   | 20,763                   |        |      |   | 30,860 |        |  |   | 24,993 |       
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|Operating income                        |                                                                                           |   | 15,327                   |        |      |   | 12,554 |        |  |   | 15,329 |       
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|Other income (expense):                 |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Interest and dividend income                                                              |   |                          | 1,062  |      |   |        | 2,099  |  |   |        | 3,051  |  
|                                        | Realized and unrealized gain (loss) on foreign currency
exchange contracts and other, net |   |                          |       |      |   |        | 55     |  |   |        | (1,508 | )
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        |                                                                                           |   | 1,062                    |        |      |   | 2,154  |        |  |   | 1,543  |       
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|Income before income taxes              |                                                                                           |   | 16,389                   |        |      |   | 14,708 |        |  |   | 16,872 |       
|Income tax provision                    |                                                                                           |   | 5,591                    |        |      |   | 5,220  |        |  |   | 5,816  |       
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|Net income                              |                                                                                           | $ | 10,798                   |        |      | $ | 9,488  |        |  | $ | 11,056 |       
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|Earnings per share  basic and diluted: |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Net income per share  basic                                                              |   | $                        | 1.10   |      |   | $      | 0.97   |  |   | $      | 1.13   |  
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Weighted-average common shares outstanding  basic                                        |   |                          | 9,837  |      |   |        | 9,813  |  |   |        | 9,813  |  
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Net income per share  diluted                                                            |   | $                        | 1.06   |      |   | $      | 0.97   |  |   | $      | 1.13   |  
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                        | Weighted-average common shares outstanding  diluted                                      |   |                          | 10,207 |      |   |        | 9,813  |  |   |        | 9,813  |  
|                                        |                                                                                           |   |                          |        |      |   |        |        |  |   |        |       

The accompanying notes are an integral part of the consolidated financial statements.

30



---



##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

|                                                                                                                                 |  |                          |        |      |  |      |       |   |  |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- | - |  | - | ------ | 
|                                                                                                                                 |  | Years Ended December 31,
|                                                                                                                                 |  |                         
|                                                                                                                                 |  | 2002                     |        | 2001 |  | 2000
|                                                                                                                                 |  |                          |        |      |  |     
|                                                                                                                                 |  | (In thousands)          
|Net income                                                                                                                       |  | $                        | 10,798 |      |  | $    | 9,488 |   |  | $ | 11,056 | 
|Unrealized gain (loss) on foreign currency exchange
contracts, net of income tax (provision) benefit of
$(784), $435, and $(372) |  |                          | 1,424  |      |  |      | (741  | ) |  |   | 633    | 
|Unrealized gain on available-for-sale securities,
net of income tax provision of $41                                             |  |                          | 71     |      |  |      |      |   |  |   |       | 
|                                                                                                                                 |  |                          |        |      |  |      |       |   |  |   |        | 
|Comprehensive income                                                                                                             |  | $                        | 12,293 |      |  | $    | 8,747 |   |  | $ | 11,689 | 
|                                                                                                                                 |  |                          |        |      |  |      |       |   |  |   |        | 

The accompanying notes are an integral part of the consolidated financial statements.

31



---



##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   |             |       |   |   |        |         |  
|--------------------------- | ----------------------------------------------------- |  | -------------- | -- | ---------- | - | -------- | - | ------------- | - | ------------- | ------- | ----- | - | ------ | ------- | - | - | ----------- | ----- | - | - | ------ | ------- | -
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   | Accumulated |       |   |   |       
|                            |                                                       |  | Common Stock   |    | Additional |   |          |   |               |   | Other         |         |       |   |       
|                            |                                                       |  |                |    | Paid-In    |   | Retained |   | Comprehensive |   |               |         |      
|                            |                                                       |  | Shares         |    | Amount     |   | Capital  |   | Earnings      |   | Income (Loss) |         | Total
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |      
|                            |                                                       |  | (In thousands)
|Balances, December 31, 1999 |                                                       |  | 9,813          |    |            | $ | 98       |   |               | $ | 18,868        |         |       | $ | 15,900 |         |   | $ | (232        | )     |   | $ | 34,634 |        
|                            | Net income                                            |  |                |   |            |   |          |  |               |   |               |        |       |   |        | 11,056  |   |   |             |      |   |   |        | 11,056  |  
|                            | Contribution from parent company                      |  |                |   |            |   |          |  |               |   |               | 7,231   |       |   |        |        |   |   |             |      |   |   |        | 7,231   |  
|                            | Other comprehensive income,
net of income taxes       |  |                |   |            |   |          |  |               |   |               |        |       |   |        |        |   |   |             | 633   |   |   |        | 633     |  
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   |             |       |   |   |        |        
|Balances, December 31, 2000 |                                                       |  | 9,813          |    |            |   | 98       |   |               |   | 26,099        |         |       |   | 26,956 |         |   |   | 401         |       |   |   | 53,554 |        
|                            | Net income                                            |  |                |   |            |   |          |  |               |   |               |        |       |   |        | 9,488   |   |   |             |      |   |   |        | 9,488   |  
|                            | Distribution to parent company                        |  |                |   |            |   |          |  |               |   |               | (10,469 | )     |   |        |        |   |   |             |      |   |   |        | (10,469 | )
|                            | Dividend to parent company                            |  |                |   |            |   |          |  |               |   |               |        |       |   |        | (26,993 | ) |   |             |      |   |   |        | (26,993 | )
|                            | Other comprehensive loss,
net of income taxes         |  |                |   |            |   |          |  |               |   |               |        |       |   |        |        |   |   |             | (741  | ) |   |        | (741    | )
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   |             |       |   |   |        |        
|Balances, December 31, 2001 |                                                       |  | 9,813          |    |            |   | 98       |   |               |   | 15,630        |         |       |   | 9,451  |         |   |   | (340        | )     |   |   | 24,839 |        
|                            | Net income                                            |  |                |   |            |   |          |  |               |   |               |        |       |   |        | 10,798  |   |   |             |      |   |   |        | 10,798  |  
|                            | Stock issued                                          |  |                | 10 |            |   |          |  |               |   |               | 77      |       |   |        |        |   |   |             |      |   |   |        | 77      |  
|                            | Stock options exercised                               |  |                | 55 |            |   |          | 1 |               |   |               | 424     |       |   |        |        |   |   |             |      |   |   |        | 425     |  
|                            | Tax benefit associated with exercise of stock
options |  |                |   |            |   |          |  |               |   |               | 128     |       |   |        |        |   |   |             |      |   |   |        | 128     |  
|                            | Dividend to parent company                            |  |                |   |            |   |          |  |               |   |               | (10,851 | )     |   |        | (9,451  | ) |   |             |      |   |   |        | (20,302 | )
|                            | Contribution from parent company                      |  |                |   |            |   |          |  |               |   |               | 10,400  |       |   |        |        |   |   |             |      |   |   |        | 10,400  |  
|                            | Other comprehensive income,
net of income taxes       |  |                |   |            |   |          |  |               |   |               |        |       |   |        |        |   |   |             | 1,495 |   |   |        | 1,495   |  
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   |             |       |   |   |        |        
|Balances, December 31, 2002 |                                                       |  | 9,878          |    |            | $ | 99       |   |               | $ | 15,808        |         |       | $ | 10,798 |         |   | $ | 1,155       |       |   | $ | 27,860 |        
|                            |                                                       |  |                |    |            |   |          |   |               |   |               |         |       |   |        |         |   |   |             |       |   |   |        |        

The accompanying notes are an integral part of the consolidated financial statements.

32



---



##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |         |         |  
|------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------ | - | ------------------------ | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                      |                                                                                   |                                                        |   | Years Ended December 31,
|                                      |                                                                                   |                                                        |   |                         
|                                      |                                                                                   |                                                        |   | 2002                     |        | 2001 |   | 2000   
|                                      |                                                                                   |                                                        |   |                          |        |      |   |        
|                                      |                                                                                   |                                                        |   | (In thousands)          
|Cash flows from operating activities: |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      | Net income                                                                        |                                                        | $ | 10,798                   |        |      | $ | 9,488   |         |   | $ | 11,056  |        
|                                      | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                        |   |                          |        |      |   |         |         |   |   |         |        
|                                      |                                                                                   | Depreciation and amortization                          |   |                          | 775    |      |   |         | 926     |   |   |         | 1,226   |  
|                                      |                                                                                   | Deferred income tax provision (benefit)                |   |                          | 157    |      |   |         | (1,465  | ) |   |         | (599    | )
|                                      |                                                                                   | Write-down of intangible assets                        |   |                          |       |      |   |         | 5,607   |   |   |         |        |  
|                                      |                                                                                   | Write-down of investments                              |   |                          |       |      |   |         | 330     |   |   |         |        |  
|                                      |                                                                                   | Loss (gain) on foreign currency exchange contracts     |   |                          |       |      |   |         | (36     | ) |   |         | 1,565   |  
|                                      |                                                                                   | Unrealized gain on foreign currency exchange contracts |   |                          |       |      |   |         | (1,565  | ) |   |         |        |  
|                                      |                                                                                   | Other, net                                             |   |                          |       |      |   |         |        |   |   |         | 12      |  
|                                      | Change in assets and liabilities, net of effects of purchase of subsidiary:       |                                                        |   |                          |        |      |   |         |         |   |   |         |        
|                                      |                                                                                   | Restricted cash equivalents                            |   |                          |       |      |   |         | 100     |   |   |         |        |  
|                                      |                                                                                   | Accounts receivable                                    |   |                          | 52     |      |   |         | (95     | ) |   |         | 94      |  
|                                      |                                                                                   | Prepaid program costs and expenses                     |   |                          | (15    | )    |   |         | (495    | ) |   |         | (300    | )
|                                      |                                                                                   | Accounts payable and accrued expenses                  |   |                          | 265    |      |   |         | 411     |   |   |         | 1,576   |  
|                                      |                                                                                   | Participants deposits                                 |   |                          | 9,350  |      |   |         | (6,212  | ) |   |         | 10,756  |  
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      |                                                                                   | Net cash provided by operating activities              |   |                          | 21,382 |      |   |         | 6,994   |   |   |         | 25,386  |  
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|Cash flows from investing activities: |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      | Proceeds from sale of available-for-sale securities                               |                                                        |   | 32,516                   |        |      |   | 37,885  |         |   |   | 14,521  |        
|                                      | Purchase of available-for-sale securities                                         |                                                        |   | (31,057                  | )      |      |   | (20,000 | )       |   |   | (48,949 | )      
|                                      | Purchase of property and equipment                                                |                                                        |   | (198                     | )      |      |   | (882    | )       |   |   | (981    | )      
|                                      | Purchase of other investments                                                     |                                                        |   | (2                       | )      |      |   | (320    | )       |   |   |        |        
|                                      | Change in other assets                                                            |                                                        |   |                         |        |      |   |        |         |   |   | 10      |        
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      |                                                                                   | Net cash provided by (used in) investing activities    |   |                          | 1,259  |      |   |         | 16,683  |   |   |         | (35,399 | )
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|Cash flows from financing activities: |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      | Contribution from parent company                                                  |                                                        |   | 10,400                   |        |      |   |        |         |   |   | 7,231   |        
|                                      | Dividend to parent company                                                        |                                                        |   | (20,493                  | )      |      |   | (37,462 | )       |   |   |        |        
|                                      | Proceeds from exercise of stock options                                           |                                                        |   | 425                      |        |      |   |        |         |   |   |        |        
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      |                                                                                   | Net cash provided by (used in) financing activities    |   |                          | (9,668 | )    |   |         | (37,462 | ) |   |         | 7,231   |  
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      |                                                                                   | Net increase (decrease) in cash and cash equivalents   |   |                          | 12,973 |      |   |         | (13,785 | ) |   |         | (2,782  | )
|                                      | Cash and cash equivalents, beginning of period                                    |                                                        |   | 16,518                   |        |      |   | 30,303  |         |   |   | 33,085  |        
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        
|                                      | Cash and cash equivalents, end of period                                          |                                                        | $ | 29,491                   |        |      | $ | 16,518  |         |   | $ | 30,303  |        
|                                      |                                                                                   |                                                        |   |                          |        |      |   |         |         |   |   |        

See Note 7 for Supplemental Disclosures of Consolidated Statements of Cash Flows.

The accompanying notes are an integral part of the consolidated financial statements.

33



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  The Company

Ambassadors Group, Inc. (the Company or Group) is a leading educational
travel company that organizes and promotes international and domestic
educational travel and sports programs for students, athletes and
professionals.

Beginning March 1, 2002, Group operated as an independent stand-alone
company. Prior to February 28, 2002, Group was a wholly owned subsidiary of
Ambassadors International, Inc. (Ambassadors).

On January 25, 2002 the Board of Directors of Ambassadors approved the
distribution of all of the Companys common stock to Ambassadors stockholders
(the spin-off). The Ambassadors Board of Directors declared a dividend of the
Companys common stock to the Ambassadors stockholders of record on February
4, 2002. The dividend was distributed after the close of business on February
28, 2002, in the amount of one share of the Companys common stock for each
outstanding share of Ambassadors common stock. The distribution of common stock
was intended to be tax-free to the Company and to its stockholders, and
Ambassadors received a favorable Internal Revenue Service private letter ruling
to that effect. The trading of the common stock of the Company on the Nasdaq
National Market began on March 1, 2002 under the ticker symbol EPAX. Prior
to February 28, 2002 the Company comprised the operations of the former
Education Group segment of its parent, Ambassadors International, Inc.

In anticipation of the spin-off transaction, the Companys common stock
was split in April 2001 and February 2002 and 9,813,140 shares became issued
and outstanding. Shares outstanding for the years ended December 31, 2001 and
2000 and as of December 31, 2001 have been retroactively adjusted for the stock
split.

Prior to the spin-off from Ambassadors, the Company transferred cash to
Ambassadors as a dividend. The dividends per share were $2.78 in 2001.
Additionally, prior to the spin-off, Ambassadors funded business acquisitions
and certain working capital requirements of the Company and has not charged any
interest on these advances. These transactions have been recorded as
contributions from the parent company. In connection with the spin-off, Group
entered into agreements with Ambassadors that separated the Companys business
operations from Ambassadors. These agreements also govern ongoing
relationships. During 2002, prior to its spin-off from Ambassadors and pursuant
to the Master Separation and Distribution Agreement, the Company paid to
Ambassadors a cash dividend approximating $2.08 per outstanding share.
Ambassadors also contributed to the Company a capital contribution
approximating $10.4 million.

The consolidated financial statements include the accounts of Ambassadors
Group, Inc. and its wholly owned subsidiaries, Ambassador Programs, Inc.,
Ambassadors Sports Group, Inc. (Sports Group), Ambassadors Specialty Group,
Inc., and Ambassadors Unlimited, LLC. All significant inter-company accounts
and transactions are eliminated in consolidation. For the periods prior to the
spin-off, the consolidated financial statements have been carved out from the
consolidated financial statements of its parent, Ambassadors International,
Inc. using the historical operating results and historical bases of the assets
and liabilities of its parents business that the Company comprised.
Accordingly, the historical financial information presented herein does not
necessarily reflect what the Companys financial position, operating results
and cash flows would have been had Group been a separate, stand-alone entity
during the periods presented.

For the periods prior to the spin-off, the consolidated financial
statements include certain costs incurred by Ambassadors, which were allocated
to the Company. These costs are primarily corporate personnel, finance, travel,
marketing and other general and administrative costs. The costs were allocated
to the Company primarily based on headcount or revenues of the Company relative
to the total consolidated headcount or revenues of Ambassadors. Management
believes the cost allocations are reasonable within the consolidated parent
company. If the Company operated as a separate entity without Ambassadors,
however, management believes that these expenses would have increased due to
increased costs associated with being a stand-alone public company and the
additional personnel costs, marketing costs, and other general administrative
costs associated therewith. Management believes that these expenses would have
increased by the following proforma amounts (unaudited):

|                        |  |   |           | 
|----------------------- |  | - | --------- | 
|Year Ended December 31, |  |   |           | 
|2002 *                  |  | $ | 171,000   | 
|2001                    |  |   | 1,242,000 | 
|2000                    |  |   | 1,169,000 | 



---

|* |  | This represents only the two months ended February 28, 2002.
|- |  | ------------------------------------------------------------

34



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The Company has a single operating segment consisting of the educational
travel and sports programs for students, athletes and professionals. These
programs have similar economic characteristics, offer comparable products to
participants and utilize similar processes for program marketing. All of the
Companys assets are located in the United States. The Companys revenues as a
percentage of total revenues were derived from travel programs conducted in the
following geographic areas:

|                                                    |  |              |    |      |  |      |    |   |  |  |    |  
|--------------------------------------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                    |  | Years Ended 
|                                                    |  | December 31,
|                                                    |  |             
|                                                    |  | 2002         |    | 2001 |  | 2000
|                                                    |  |              |    |      |  |     
|South Pacific (primarily Australia and New
Zealand) |  |              | 55 | %    |  |      | 34 | % |  |  | 31 | %
|Europe                                              |  |              | 31 | %    |  |      | 46 | % |  |  | 42 | %
|Asia (primarily China)                              |  |              | 5  | %    |  |      | 7  | % |  |  | 12 | %
|United States                                       |  |              | 5  | %    |  |      | 7  | % |  |  | 8  | %
|Other                                               |  |              | 4  | %    |  |      | 6  | % |  |  | 7  | %

2.Summary of Significant Accounting Policies

Credit Risk

The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, certain investments
and trade accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such balances may
be in excess of the federal depository insurance limit or may be on deposit at
institutions, which are not covered by this insurance. The Company believes
that its primary trade accounts receivable credit risk exposure is limited as
travel program participants are required to pay for their entire program costs
prior to the program departure.

The Company uses foreign currency exchange contracts as part of an overall
risk-management strategy. These instruments are used as a means of mitigating
exposure to foreign currency risk connected to anticipated travel programs. In
entering into these contracts, the Company has assumed the risk, which might
arise from the possible inability of counterparties to meet the terms of their
contracts. The Company does not expect any losses as a result of counterparty
defaults.

Cash and Cash Equivalents

The Company invests cash in excess of operating requirements in short-term
time deposits, money market instruments, government mutual bond funds and other
investments. The Company considers investments with remaining maturities at
date of purchase of three months or less to be cash equivalents.

The Companys restricted cash equivalents represent certificates of
deposit issued in the Companys name and held by one airline company as
collateral for airfare purchase agreements. Additionally, the Company has a
$2.0 million revolving credit facility for the purpose of issuing letters of
credit to several airlines. The facility allows for letters of credit to be
issued through March 2003 and must expire no later than March 2004. At December
31, 2002 and 2001, the Company had letters of credit outstanding of
approximately $1.3 million and $0.3 million, respectively, under this facility.
Management anticipates renewal of the facilities.

35



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Derivative Financial Instruments

In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities was
issued. The Company implemented the Statement on July 1, 1998. The Statement
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
depending on the type of hedge transaction. For qualifying cash flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a forecasted transaction, changes in the fair value of the
derivative instrument are reported in other comprehensive income. The gains and
losses on the derivative instruments that are reported in other comprehensive
income are reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges is recognized in the statements of operations
as other income (expense). Unrealized gains and losses on foreign currency
exchange contracts that are not qualifying cash flow hedges as defined by SFAS
133 are recognized in the statements of operations as other income (expense).
All of the Companys outstanding foreign currency exchange contracts at
December 31, 2002 and 2001 are qualifying cash flow hedges.

Investments

The Company classifies its marketable debt investments as
available-for-sale securities, which are carried at fair value. Unrealized
gains and losses on available-for-sale securities are excluded from operations
and reported as accumulated other comprehensive income, net of deferred income
taxes. Realized gains and losses on the sale of available-for-sale securities
are recognized on a specific identification basis in the statement of
operations in the period the investments are sold.

During January 2001, the Company purchased a minority interest in Off the
Beaten Path LLP. Off the Beaten Path provides unique adventure travel
experiences to a sophisticated clientele throughout the Rocky Mountains,
American Southwest, Alaska and Patagonia. This investment is reported at the
lower of cost or estimated net realizable value. During the year ended December
31, 2001, the Company recorded a loss of $0.3 million representing what the
Companys management believes to be other than temporary decline in the fair
value of this investment.

Property and Equipment

Property and equipment are stated at cost. Cost of maintenance and repairs
that do not improve or extend the lives of the respective assets are expensed
currently. Major additions and betterments are capitalized. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
respective assets or the lease term (including extensions), using the
straight-line method, generally 5 to 7 years.

The Company performs reviews for the impairment of property and equipment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. When property and equipment are sold or
retired, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in the statement of income.

Goodwill and Covenant-Not-to-Compete

Prior to January 1, 2002, goodwill was being amortized using the
straight-line method over 30 years. The cost of the covenant-not-to-compete is
amortized using the straight-line method over 5 years, the term of the
agreement. Both goodwill and the covenant-not-to-compete are classified as
other long-term assets on the balance sheet. Principally as a result of the
impact of the terrorist acts that occurred on September 11, 2001, the response
by the United States since October 7, 2001, and the resulting negative impact
these events have had on domestic and international air travel, and the travel
industry in general, the Company reviewed the carrying value of long-lived
assets associated with certain of its acquisitions and recorded a non-cash
charge of $5.9 million in the fourth quarter of 2001, which represented the
impairment of goodwill and other related intangible assets. This charge is
based on the amount by which the book value exceeded the current estimated fair
market value of the goodwill. The current estimated fair market value was
determined primarily using the anticipated cash flows of the operations of the
related acquired companies. The impairment charge fully eliminated the
remaining carrying value of the goodwill associated with the acquisition of a
company primarily engaged in providing youth sports travel programs (see also
New Accounting Pronouncement in this Note 2 below).

36



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Revenue Recognition

The Company bills travel participants in advance, which are recorded as
participants deposits. The Company pays for certain direct program costs
including but not limited to airfare, hotel, rail passes and other program
costs in advance of travel, which are recorded as prepaid program costs and
expenses. The Company recognizes travel revenue and related costs when travel
convenes.

Selling and Tour Promotion Expenses

The Company expenses all selling and tour promotion expenses as incurred.

Income Taxes

The asset and liability approach is used to account for income taxes by
recognizing deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. For the period from January 1, 2002 through
February 28, 2002 and for the years ended December 31, 2001 and 2000, the
Company was included in the consolidated income tax return of Ambassadors.
Therefore, the income tax provision recorded in these financial statements was
computed on a separate return basis.

Earnings Per Share

Earnings per share  basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Earnings per share  diluted is computed by increasing the weighted-average
number of common shares outstanding by the additional common shares that would
have been outstanding if the potentially dilutive common shares had been
issued.

In connection with the spin-off transaction, approximately 839,000 options
originally granted under Ambassadors were converted to options of the Company
on February 28, 2002 (see Note 9). The dilutive effect of these converted stock
options are excluded from the Companys earnings per share calculation for the
years ended December 31, 2001 and 2000, as they were not options of the
Company. The dilutive effect to Ambassadors of these options was less than 8%
for 2001 and 2000. However, this is not necessarily indicative of the impact on
diluted earnings per share to the Company.

Comprehensive Income

Other comprehensive income refers to revenues, expenses, gains and losses
that under accounting principles generally accepted in the United States are
included in comprehensive income but are excluded from net income as these
amounts are recorded directly as an adjustment to stockholders equity, net of
tax. The Companys other comprehensive income is composed of unrealized gains
and losses on foreign currency exchange contracts and available-for-sale
securities.

Accounting for Stock Options

As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation, the Company has chosen to
measure compensation cost for stock-based employee compensation plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and to provide the
disclosure only requirements of SFAS 123.

No stock options of the Company were outstanding as of December 31, 2001.
However, in conjunction with the spin-off and during 2002, the Company granted
stock options to its employees (see Note 9).

37



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The Company has adopted the disclosure-only provisions of SFAS No. 123 and
as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure. Accordingly, no compensation expense has been recognized in
2002 for unexercised options related to the stock option plan. Had
compensation cost for the Companys stock option plan been determined based on
fair value at the grant dates under the plan consistent with the method of SFAS
No. 123, the Companys net income and net income per share amounts for the year
ended December 31, 2002, would have been changed to the pro forma amounts
indicated below (in thousands except per share data):

|                                                                                                                                    |  |   |        | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
|Net income as reported                                                                                                              |  | $ | 10,798 | 
|Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects |  | $ | 724    | 
|                                                                                                                                    |  |   |        | 
|Pro forma net income                                                                                                                |  | $ | 10,074 | 
|                                                                                                                                    |  |   |        | 
|Pro forma net income per share  basic                                                                                              |  | $ | 1.02   | 
|                                                                                                                                    |  |   |        | 
|Pro forma net income per share  diluted                                                                                            |  | $ | 0.99   | 
|                                                                                                                                    |  |   |        | 

Estimates

The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including investments, intangible assets, income taxes, derivative financial
instruments, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Reclassifications

Certain operating expenses for 2001 and 2000 have been reclassified to
conform to 2002 financial statement presentation. Such reclassifications had
no impact on net income.

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations (SFAS 141). SFAS 141 establishes new
standards for accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 141, use of the
pooling-of-interest method is prohibited. The Company adopted this statement
during the third quarter of fiscal 2001. The adoption of SFAS 141 did not have
a material impact on the Companys consolidated financial statements.

In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142,
among other things, establishes new standards for intangible assets acquired in
a business combination, eliminates amortization of goodwill and sets forth
requirements to periodically evaluate goodwill for impairment. The Company
adopted this statement during the first quarter of 2002 and goodwill and
certain intangibles with indefinite lives are no longer being amortized.
Accordingly, approximately $64,000 of previous annual amortization is no longer
being recorded (see Goodwillin this Note 2 above).

38



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The following table presents the impact of SFAS 142 on our net income and
our net income per share had the new standard been in effect for the years
ended December 31, 2001 and 2000 (in thousands, except per share amounts):

|                                          |  |       |       |      |  |   |        |  
|----------------------------------------- |  | ----- | ----- | ---- |  | - | ------ | -
|                                          |  | 2001* |       | 2000
|                                          |  |       |       |     
|Net income -as reported                   |  | $     | 9,488 |      |  | $ | 11,056 |  
|Adjustments:                              |  |       |       |      |  |   |        |  
|Amortization of goodwill                  |  |       | 64    |      |  |   | 363    |  
|Income tax effect                         |  |       | (24   | )    |  |   | (113   | )
|                                          |  |       |       |      |  |   |        |  
|Net adjustments                           |  |       | 40    |      |  |   | 250    |  
|                                          |  |       |       |      |  |   |        |  
|Net income- as adjusted                   |  |       | 9,528 |      |  |   | 11,306 |  
|                                          |  |       |       |      |  |   |        |  
|Basic net income per share-as reported    |  | $     | 0.97  |      |  | $ | 1.13   |  
|                                          |  |       |       |      |  |   |        |  
|Basic net income per share adjusted       |  | $     | 0.97  |      |  | $ | 1.15   |  
|                                          |  |       |       |      |  |   |        |  
|Diluted net income per share- as reported |  | $     | 0.97  |      |  | $ | 1.13   |  
|                                          |  |       |       |      |  |   |        |  
|Diluted net income per share- adjusted    |  | $     | 0.97  |      |  | $ | 1.15   |  
|                                          |  |       |       |      |  |   |        |  

*The Company incurred an impairment charge of intangibles of approximately
$5.9 million during the year ended December 31, 2001.

In August 2001, the FASB approved SFAS 143, Accounting for Asset
Retirement Obligations (SFAS 143), which will be effective for the fiscal year
beginning January 1, 2003. SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company does not
anticipate that the adoption of SFAS 143 will have a material impact on its
financial condition or results of operations.

In October 2001, the FASB approved SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121) and the accounting and reporting provisions of APB
30, Reporting the Results of Operations  Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the disposal of a segment of a business. SFAS 144
retains many of the fundamental provisions of SFAS 121, but resolves certain
implementation issues associated with that Statement. The Company adopted this
statement during the first quarter of fiscal 2002. The adoption of SFAS 144
did not have a material impact on its financial condition or results of
operations.

In April 2002, the FASB adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Considerations. This Statement eliminates the requirement that gains and losses
from the extinguishments of debt be aggregated and classified as an
extraordinary item, net of tax. SFAS 145 also provides clarification for the
accounting of sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Company adopted this Statement during the second quarter of fiscal 2002. The
adoption of SFAS No. 145 did not have a material impact on the Companys
consolidated financial statements.

The FASB adopted SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, issued in June 2002, and is effective for activities
initiated after December 31, 2002. This Statement nullifies EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit or Disposal Activity (Including Certain Costs Incurred in a
Restructuring) and EITF 88-0, Costs Associated with a Lease Modification or
Termination. SFAS 146 establishes that the initial liability for costs
associated with exit and disposal activities be measured at fair value and
recognized when the liability is incurred. SFAS 146 prohibits the recognition
of a liability based solely on an entitys commitment to a plan for disposal.
SFAS 146 also provides an accounting model for one-time termination benefits
and guidance on accounting for costs to terminate operating leases. The
Company adopted SFAS 146 in the fourth quarter of 2002. The adoption of SFAS
146 did not have a material impact on the Companys consolidated financial
statements.

39



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement
No. 123 (FAS 148). This statement amends SFAS No. 123 Accounting for Stock
Based Compensation (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company currently discloses the
effects of stock-based employee compensation and is evaluating the alternative
methods of voluntarily transitioning to the fair value based method of
accounting for stock-based compensation.

3.  Derivative Financial Instruments

The substantial majority of the Companys travel programs take place
outside of the United States and most foreign suppliers require payment in
currency other than the U.S. dollar. Accordingly, the Company is exposed to
foreign currency risk relative to changes in foreign currency exchange rates
between those currencies and the U.S. dollar. The Company has a program to
provide a hedge against certain of these foreign currency risks. The Company
uses forward contracts that allow the Company to acquire the foreign currency
at a fixed price for a specified period of time. Some of the Companys forward
contracts include a synthetic component if a pre-determined trigger occurs
during the term of the contract. All of the Companys derivatives are cash flow
hedges of forecasted transactions. The Company has a $50.0 million credit
facility with a large financial institution through March 2003 to support
foreign currency purchases and foreign exchange forward contracts.

At December 31, 2002, the Company had outstanding forward contracts as
follows (in thousands):

|                                         |                    |  |          |       |         |  |  |                      | 
|---------------------------------------- | ------------------ |  | -------- | ----- | ------- |  |  | -------------------- | 
|                                         |                    |  | Notional |       |         |  | 
|                                         |                    |  | Amount   |       | Matures
|                                         |                    |  |          |       |        
|Forward contracts:                       |                    |  |          |       |         |  |  |                     
|                                         | Australian dollar  |  |          | 5,500 |         |  |  | May - June 2003      | 
|                                         | Euro dollar        |  |          | 7,600 |         |  |  | April - June 2003    | 
|                                         | New Zealand dollar |  |          | 2,500 |         |  |  | May - July 2003      | 
|                                         |                    |  |          |       |         |  |  |                     
|                                         |                    |  | 15,600   |       |         |  |  |                     
|                                         |                    |  |          |       |         |  |  |                     
|Forward contracts with
synthetic option: |                    |  |          |       |         |  |  |                     
|                                         | Australian dollar  |  |          | 8,750 |         |  |  | January - July 2003  | 
|                                         | British pound      |  |          | 4,300 |         |  |  | February - July 2003 | 
|                                         | Euro dollar        |  |          | 2,500 |         |  |  | February - July 2003 | 
|                                         | New Zealand dollar |  |          | 2,600 |         |  |  | May - July 2003      | 
|                                         |                    |  |          |       |         |  |  |                     
|                                         |                    |  | 18,150   |       |         |  |  |                     
|                                         |                    |  |          |       |         |  |  |                     

40



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

At December 31, 2001, the Company had outstanding forward contracts as
follows (in thousands):

|                                         |                    |  |          |       |         |  |  |                     | 
|---------------------------------------- | ------------------ |  | -------- | ----- | ------- |  |  | ------------------- | 
|                                         |                    |  | Notional |       |         |  | 
|                                         |                    |  | Amount   |       | Matures
|                                         |                    |  |          |       |        
|Forward contracts:                       |                    |  |          |       |         |  |  |                    
|                                         | Australian dollar  |  |          | 9,400 |         |  |  | April - June 2002   | 
|                                         | British pound      |  |          | 1,250 |         |  |  | June - July 2002    | 
|                                         | Euro dollar        |  |          | 3,460 |         |  |  | May - July 2002     | 
|                                         |                    |  |          |       |         |  |  |                    
|                                         |                    |  | 14,110   |       |         |  |  |                    
|                                         |                    |  |          |       |         |  |  |                    
|Forward contracts with synthetic option: |                    |  |          |       |         |  |  |                    
|                                         | Australian dollar  |  |          | 2,100 |         |  |  | January - July 2002 | 
|                                         | British pound      |  |          | 2,050 |         |  |  | March - June 2002   | 
|                                         | New Zealand dollar |  |          | 5,150 |         |  |  | May - July 2002     | 
|                                         |                    |  |          |       |         |  |  |                    
|                                         |                    |  | 9,300    |       |         |  |  |                    
|                                         |                    |  |          |       |         |  |  |                    

At December 31, 2002 and 2001, associated with these financial
instruments, the Company had a net unrealized gain of approximately $1.6
million and a net unrealized loss of approximately $0.5 million, respectively.
Unrealized gains on forward contracts recorded in other comprehensive income
and expected to be reclassified to revenue during the year ending December 31,
2003 are approximately $1.1 million.

Unrealized gains or losses associated with these transactions that qualify
as cash flow hedges under SFAS 133 are reported in other comprehensive income.
Any realized gains or losses associated with these transactions are recognized
in the Companys operations in the period the contracts are closed. The net
unrealized gain (loss) reclassified to revenue from other accumulated
comprehensive income for the years ended December 31, 2002 and 2001 was
approximately $(340,000) and $60,000, respectively. Income tax (benefit) on the
unrealized gain (loss) reclassified in 2002 and 2001 was approximately
$(200,000) and $36,000, respectively. The Company assesses hedge
ineffectiveness on a quarterly basis and records the gain or loss related to
the ineffective portion in the statements of income. During the years ended
December 31, 2002 and 2001, there were no significant amounts recognized in
income due to hedge ineffectiveness.

After the unexpected events of September 11, 2001 and the resulting down
turn in the travel industry, the Company took early exit of forward foreign
exchange contracts aggregating $5.7 million as it was
anticipated that such
contracts would not be needed for the related travel season and the related
forecasted transactions were no longer probable of occurring. The Company
recorded a nominal gain as a result of the early termination of these
contracts.

41



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  Investments

At December 31, 2002 and December 31, 2001, the cost and estimated fair
values of the Companys investments in U.S. government and agency obligations
were as follows (in thousands):

|                  |  |      |        |      |  |            |     |            |  |             |   |  |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | ---------- | --- | ---------- |  | ----------- | - |  |  | - | ------ | 
|                  |  |      |        |      |  | Gross      |     | Gross      |  | Fair Value/
|                  |  |      |        |      |  | Unrealized |     | Unrealized |  | Carrying   
|                  |  | Cost |        | Gain |  | Losses     |     | Value     
|                  |  |      |        |      |  |            |     |           
|December 31, 2002 |  | $    | 21,784 |      |  | $          | 112 |            |  | $           |  |  |  | $ | 21,896 | 
|                  |  |      |        |      |  |            |     |            |  |             |   |  |  |   |        | 
|December 31, 2001 |  | $    | 23,243 |      |  | $          |    |            |  | $           |  |  |  | $ | 23,243 | 
|                  |  |      |        |      |  |            |     |            |  |             |   |  |  |   |        | 

At December 31, 2002, the amortized cost and fair value of the
available-for-sale securities, by contractual maturity were as follows (in
thousands):

|                                 |  |           |        |       |  |   |        | 
|-------------------------------- |  | --------- | ------ | ----- |  | - | ------ | 
|                                 |  | Amortized |        | Fair 
|                                 |  | Cost      |        | Value
|                                 |  |           |        |      
|One year or less                 |  | $         | 19,385 |       |  | $ | 19,483 | 
|After one year through two years |  |           | 2,399  |       |  |   | 2,413  | 
|                                 |  |           |        |       |  |   |        | 
|                                 |  | $         | 21,784 |       |  | $ | 21,896 | 
|                                 |  |           |        |       |  |   |        | 

Expected maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

5.  Property and Equipment

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

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|Office furniture, fixtures and equipment       |  | $            | 2,639  |      |  | $ | 2,574  |  
|Computer equipment and software                |  |              | 3,800  |      |  |   | 3,676  |  
|Leasehold improvements                         |  |              | 905    |      |  |   | 897    |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 7,344  |      |  |   | 7,147  |  
|Less accumulated depreciation and amortization |  |              | (5,430 | )    |  |   | (4,690 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 1,914  |      |  | $ | 2,457  |  
|                                               |  |              |        |      |  |   |        |  

Depreciation and amortization expense on property and equipment of
approximately $740,000, $668,000, and $862,000, for the years ended December
31, 2002, 2001, and 2000, respectively, was included in the determination of
net income.

42



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

6.  Income Taxes

The provision for income taxes consisted of the following (in thousands):

|         |         |   |                          |       |      |   |        |       |  |   |       |       | 
|-------- | ------- | - | ------------------------ | ----- | ---- | - | ------ | ----- |  | - | ----- | ----- | 
|         |         |   | Years Ended December 31,
|         |         |   |                         
|         |         |   | 2002                     |       | 2001 |   | 2000  
|         |         |   |                          |       |      |   |       
|Current: |         |   |                          |       |      |   |        |       |  |   |       |      
|         | Federal |   | $                        | 5,429 |      |   | $      | 6,135 |  |   | $     | 6,403 | 
|         | State   |   |                          | 5     |      |   |        | 550   |  |   |       | 12    | 
|Deferred |         |   | 157                      |       |      |   | (1,465 | )     |  |   | (599  | )    
|         |         |   |                          |       |      |   |        |       |  |   |       |      
|         |         | $ | 5,591                    |       |      | $ | 5,220  |       |  | $ | 5,816 |      
|         |         |   |                          |       |      |   |        |       |  |   |       |      

Components of the net deferred tax assets and liabilities are as follows
(in thousands):

|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|------------------------------------------------------ |  | ----------------- | ----- | ----------- |  | ----- | ---- | - |  | - | ----- | -
|                                                       |  | December 31, 2002
|                                                       |  |                  
|                                                       |  | Assets            |       | Liabilities |  | Total
|                                                       |  |                   |       |             |  |      
|Amortization of goodwill and non-compete agreement     |  | $                 | 1,771 |             |  | $     |     |   |  | $ | 1,771 |  
|Accrued vacation and compensation                      |  |                   | 85    |             |  |       |     |   |  |   | 85    |  
|Unrealized gain on foreign currency exchange contracts |  |                   |      |             |  |       | (559 | ) |  |   | (559  | )
|Unrealized gain on available-for-sale securities       |  |                   |      |             |  |       | (41  | ) |  |   | (41   | )
|Depreciation                                           |  |                   |      |             |  |       | (60  | ) |  |   | (60   | )
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|Total temporary differences                            |  | $                 | 1,856 |             |  | $     | (660 | ) |  | $ | 1,196 |  
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  

|                                                       |  |                   |       |             |  |       |     |   |  |   |       |  
|------------------------------------------------------ |  | ----------------- | ----- | ----------- |  | ----- | --- | - |  | - | ----- | -
|                                                       |  | December 31, 2001
|                                                       |  |                  
|                                                       |  | Assets            |       | Liabilities |  | Total
|                                                       |  |                   |       |             |  |      
|Amortization of goodwill and non-compete agreement     |  | $                 | 1,970 |             |  | $     |    |   |  | $ | 1,970 |  
|Accrued vacation                                       |  |                   | 75    |             |  |       |    |   |  |   | 75    |  
|Unrealized loss on foreign currency exchange contracts |  |                   | 226   |             |  |       |    |   |  |   | 226   |  
|Depreciation                                           |  |                   |      |             |  |       | (92 | ) |  |   | (92   | )
|                                                       |  |                   |       |             |  |       |     |   |  |   |       |  
|Total temporary differences                            |  | $                 | 2,271 |             |  | $     | (92 | ) |  | $ | 2,179 |  
|                                                       |  |                   |       |             |  |       |     |   |  |   |       |  

The income tax provision differs from that computed using the federal
statutory rate applied to income before income taxes as follows (in thousands):

|                                         |  |                          |       |   |  |        |      |      |  |        |       |   |  |      |      |   |  |   |       |   |  |  |      |  
|---------------------------------------- |  | ------------------------ | ----- | - |  | ------ | ---- | ---- |  | ------ | ----- | - |  | ---- | ---- | - |  | - | ----- | - |  |  | ---- | -
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |       |   |  |        |      | 2001 |  |        |       |   |  | 2000 |      |   |  |  
|                                         |  | Amount                   |       | % |  | Amount |      | %    |  | Amount |       | %
|                                         |  |                          |       |   |  |        |      |      |  |        |       |  
|Provision at the federal statutory rate  |  | $                        | 5,736 |   |  |        | 35.0 | %    |  | $      | 5,146 |   |  |      | 35.0 | % |  | $ | 5,905 |   |  |  | 35.0 | %
|Tax exempt interest                      |  |                          | (221  | ) |  |        | (1.3 | )    |  |        | (54   | ) |  |      | (0.4 | ) |  |   | (76   | ) |  |  | (0.5 | )
|State income tax, net of federal benefit |  |                          | 3     |   |  |        |     |      |  |        | 358   |   |  |      | 2.4  |   |  |   | 8     |   |  |  |     |  
|Other                                    |  |                          | 73    |   |  |        | 0.4  |      |  |        | (230  | ) |  |      | (1.5 | ) |  |   | (21   | ) |  |  | (0.1 | )
|                                         |  |                          |       |   |  |        |      |      |  |        |       |   |  |      |      |   |  |   |       |   |  |  |      |  
|                                         |  | $                        | 5,591 |   |  |        | 34.1 | %    |  | $      | 5,220 |   |  |      | 35.5 | % |  | $ | 5,816 |   |  |  | 34.4 | %
|                                         |  |                          |       |   |  |        |      |      |  |        |       |   |  |      |      |   |  |   |       |   |  |  |      |  

43



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  Supplemental Disclosures of Consolidated Statements of Cash Flows

Cash paid by the Company for taxes during 2002 was approximately $5.7
million. Prior to the Companys spin-off from Ambassadors, all taxes were paid
by Ambassadors.

Non-cash investing and financing activities of the Company during the
years ended December 31, 2002, 2001 and 2000 are as follows:

|                                                              |  |      |       |      |  |      |        |   |  |  |       | 
|------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  |  | ----- | 
|                                                              |  | 2002 |       | 2001 |  | 2000
|                                                              |  |      |       |      |  |     
|Unrealized gain (loss) on foreign currency exchange contracts |  |      | 2,145 |      |  |      | (1,176 | ) |  |  | 1,006 | 
|Unrealized gain on available-for-sale securities              |  |      | 112   |      |  |      |       |   |  |  |      | 
|Tax benefit from stock options exercised                      |  |      | 128   |      |  |      |       |   |  |  |      | 

8.  Commitments and Contingencies

The Company leases office facilities and office equipment under
non-cancelable operating leases. At December 31, 2002, future non-cancelable
lease commitments for the years ended December 31, 2003 and 2004 is
approximately $681,000 and $588,000, respectively.

Total rent expense for the years ended December 31, 2002, 2001, and 2000
was approximately $699,000, $600,000, and $635,000, respectively. The Company
may cancel the lease on the corporate office without penalty (upon one years
prior notice) and also may extend the term of the lease for an additional
five-year period upon providing written notice to the lessor at least six
months prior to the end of the initial lease term in 2004.

The Company is subject to claims, suits and complaints, which have arisen,
in the ordinary course of business. In the opinion of management and its legal
counsel, all matters are adequately covered by insurance or, if not covered,
are without merit or are of such a nature, or involve such amounts as would not
have a material effect on the financial position, cash flows or results of
operations of the Company.

9.  Stock Plans

Effective November 2001 the Company adopted the 2001 Equity Participation
Plan (the Plan). The Plan provides for the grant of stock options, awards of
restricted stock, performance or other awards or stock appreciation rights to
directors, key employees and consultants of the Company. The maximum number of
shares, which may be awarded under the Plan, is 1.8 million shares.

Under the terms of the Plan, options to purchase shares of the Companys
common stock are granted at a price set by the Compensation Committee of the
Board of Directors, not to be less than the par value of a share of common
stock and if granted as performance-based compensation or as incentive stock
options, no less than the fair market value of the stock on the date of grant.
The Compensation Committee establishes the vesting period of the awards, which
is generally set at 25 percent per year for four years. The options may be
exercised any time after they are fully vested for a period up to 10 years from
the grant date.

Upon the Companys spin-off effective February 28, 2002, the Company
granted approximately 1.2 million stock options to Company employees and
directors pursuant to this Plan. The total grant of approximately 1.2 million
stock options resulted from approximately 0.8 million converted options
originally granted under Ambassadors and approximately 0.4 million additional
options granted by the Company in conjunction with the spin-off. The stock
options and other awards, as converted or adjusted, have the same vesting
provisions, option periods, and other terms and conditions as Ambassadors
options. The number of shares and exercise price of each stock option were
adjusted so that each option has the same ratio of the exercise price per share
to the market value per share, and the same economic value. In order for the
economic value to remain constant, the aggregate difference between market
value and exercise price prior to and immediately after the spin-off had to be
the same. No new measurement date occurred upon conversion of the stock
options.

44



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The following table presents information about the options as of December
31, 2002:

|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |     | 
|--------------------- | ------------------- |  | --------- | --------- | -------------- | - | ------------- | ------------ | ------------ | - | ---------------- | ----- |  |  | --- | --- | 
|                      |                     |  |           |           |                |   |               |              |              |   | Weighted-Average
|                      |                     |  |           |           |                |   |               |              |              |   |                 
|                      |                     |  | Number of |           | Range of       |   | Exercise      |              | Remaining   
|                      |                     |  | Shares    |           | Exercise Price |   | Price         |              | Life (years)
|                      |                     |  |           |           |                |   |               |              |             
|Exercisable options   |                     |  | 33,100    |           |                | $ | 3.42 - 5.13   |              |              | $ | 4.88             |       |  |  | 2.8 |    
|Exercisable options   |                     |  | 126,624   |           |                |   | 5.14 - 6.84   |              |              |   | 6.10             |       |  |  | 4.4 |    
|Exercisable options   |                     |  | 117,822   |           |                |   | 6.85 - 8.56   |              |              |   | 7.88             |       |  |  | 7.1 |    
|Exercisable options   |                     |  | 119,711   |           |                |   | 8.57 - 10.27  |              |              |   | 8.93             |       |  |  | 5.5 |    
|Exercisable options   |                     |  | 13,739    |           |                |   | 10.28 - 11.98 |              |              |   | 11.92            |       |  |  | 4.3 |    
|Exercisable options   |                     |  | 45,297    |           |                |   | 11.99 - 13.69 |              |              |   | 12.67            |       |  |  | 8.9 |    
|Exercisable options   |                     |  | 22,382    |           |                |   | 13.70 - 15.40 |              |              |   | 15.34            |       |  |  | 7.6 |    
|Exercisable options   |                     |  | 14,697    |           |                |   | 15.41 - 17.12 |              |              |   | 17.12            |       |  |  | 5.4 |    
|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |    
|                      | Total exercisable   |  |           | 493,372   |                |   |               | 3.42 - 17.12 |              |   |                  | 8.64  |  |  |     |     | 
|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |    
|Unexercisable options |                     |  |          |           |                | $ | 3.42 - 5.13   |              |              | $ | 4.88             |       |  |  | 2.8 |    
|Unexercisable options |                     |  | 11,648    |           |                |   | 5.14 - 6.84   |              |              |   | 6.11             |       |  |  | 4.4 |    
|Unexercisable options |                     |  | 101,602   |           |                |   | 6.85 - 8.56   |              |              |   | 7.86             |       |  |  | 7.1 |    
|Unexercisable options |                     |  | 16,028    |           |                |   | 8.57 - 10.27  |              |              |   | 9.04             |       |  |  | 5.5 |    
|Unexercisable options |                     |  | 321       |           |                |   | 10.28 - 11.98 |              |              |   | 11.89            |       |  |  | 4.3 |    
|Unexercisable options |                     |  | 538,400   |           |                |   | 11.99 - 13.69 |              |              |   | 12.21            |       |  |  | 8.9 |    
|Unexercisable options |                     |  | 21,756    |           |                |   | 13.70 - 15.40 |              |              |   | 15.02            |       |  |  | 7.6 |    
|Unexercisable options |                     |  |          |           |                |   | 15.41 - 17.12 |              |              |   | 17.12            |       |  |  | 5.4 |    
|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |    
|                      | Total unexercisable |  |           | 689,755   |                |   |               | 3.42 - 17.12 |              |   |                  | 10.28 |  |  |     |     | 
|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |    
|                      | Total all options   |  |           | 1,183,127 |                |   | $             | 3.42 - 17.12 |              |   | $                | 10.28 |  |  |     | 7.4 | 
|                      |                     |  |           |           |                |   |               |              |              |   |                  |       |  |  |     |    

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002:

|                                |  |            |       |  
|------------------------------- |  | ---------- | ----- | -
|Expected dividend yield         |  |            | 0.00  | %
|Expected stock price volatility |  |            | 41.94 | %
|Risk-free interest rate         |  |            | 3.14  | %
|Expected life of options        |  | 5.03 years

The weighted average fair value of options granted during 2002 was $5.01

Stock option transactions during 2002 were as follows:

|                                     |  |           |           |                  |  |   |       | 
|------------------------------------ |  | --------- | --------- | ---------------- |  | - | ----- | 
|                                     |  | Number of |           | Weighted Average
|                                     |  | Shares    |           | Exercise Price  
|                                     |  |           |           |                 
|Converted upon spin-off (see Note 1) |  |           | 839,084   |                  |  | $ | 9.14  | 
|Granted                              |  |           | 430,150   |                  |  |   | 12.12 | 
|Forfeited                            |  |           | (31,308   | )                |  |   | 9.87  | 
|Exercised                            |  |           | (54,799   | )                |  |   | 7.52  | 
|                                     |  |           |           |                  |  |   |       | 
|Balance December 31, 2002            |  |           | 1,183,127 |                  |  | $ | 10.28 | 
|                                     |  |           |           |                  |  |   |       | 

45



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

10.  Employee Benefit Plan

Effective March 2002, the Company established a 401(k) Profit Sharing Plan
for the employees of the Company. All Plan assets associated with the employees
of the Company were transferred from Ambassadors Plan to the new Plan
established by the Company during April 2002. Prior to March 2002, the
Companys employees participated in Ambassadors 401(k) Profit Sharing Plan.

The Companys employees participate in Ambassadors Group, Inc. 401(k)
Profit Sharing Plan (the Plan). Employees are eligible to participate in the
Plan upon six months of service and 18 years of age. Employees may contribute
up to 50% of their salary, subject to the maximum contribution allowed by the
Internal Revenue Service. The Companys matching contribution is discretionary
based upon approval by management. Employees are 100% vested in their
contributions and vest in Company matching contributions equally over four
years. During the years ended December 31, 2002, 2001, and 2000, the Company
contributed approximately $34,000, $45,000, and $36,000, to the Plan,
respectively.

11.  Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments. The estimated fair value amounts have been determined
using available market information and appropriate valuation methodologies.

However, considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale and/or
settlement have not been taken into consideration.

Cash and Cash Equivalents The carrying value of cash and cash
equivalents approximates fair value due to the nature of the cash investments.

Derivatives The fair value of the Companys investments in foreign
currency forward contracts is based on quoted market prices and the spot rate
of the foreign currencies subject to contracts at period end.

Available-for-Sale Securities The fair value of the Companys investment
in debt securities is based on quoted market prices.

46



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The estimated fair values of the financial instruments as of the dates
indicated are as follows (in thousands):

|                  |                               |  |                   |        |                   |  |          |        |       |  |   |        |   |  |   |        |  
|----------------- | ----------------------------- |  | ----------------- | ------ | ----------------- |  | -------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                  |                               |  | December 31, 2002 |        | December 31, 2001
|                  |                               |  |                   |        |                  
|                  |                               |  | Carrying          |        | Fair              |  | Carrying |        | Fair 
|                  |                               |  | Amount            |        | Value             |  | Amount   |        | Value
|                  |                               |  |                   |        |                   |  |          |        |      
|Financial Assets: |                               |  |                   |        |                   |  |          |        |       |  |   |        |   |  |   |       
|                  | Cash and cash equivalents     |  | $                 | 29,491 |                   |  | $        | 29,491 |       |  | $ | 16,518 |   |  | $ | 16,518 |  
|                  | Derivatives                   |  |                   | 1,642  |                   |  |          | 1,642  |       |  |   | (503   | ) |  |   | (503   | )
|                  | Available-for-sale securities |  |                   | 21,896 |                   |  |          | 21,896 |       |  |   | 23,243 |   |  |   | 23,243 |  

Limitations The fair value estimates are made at a discrete point in
time based on relevant market information and information about the financial
instruments. Fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates. Accordingly, the estimates presented herein are not necessarily
indicative of what the Company could realize in a current market exchange.

12.  Earnings Per Share

The following table presents a reconciliation of basic and diluted
earnings per share (EPS) computations (in thousands, except per
share data):

|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |        | 
|----------------------------- | --------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  | - | ------ | 
|                              |                                                     |  | Years Ended December 31,
|                              |                                                     |  |                         
|                              |                                                     |  | 2002                     |        | 2001 |  | 2000
|                              |                                                     |  |                          |        |      |  |     
|Numerator:                    |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|                              | Net income for basic and diluted earnings
per share |  | $                        | 10,798 |      |  | $    | 9,488 |  |  | $ | 11,056 | 
|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|Denominator:                  |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|                              | Weighted-average shares outstanding  basic         |  |                          | 9,837  |      |  |      | 9,813 |  |  |   | 9,813  | 
|                              | Effect of dilutive common stock options             |  |                          | 370    |      |  |      |      |  |  |   |       | 
|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|                              | Weighted-average shares outstanding  diluted       |  |                          | 10,207 |      |  |      | 9,813 |  |  |   | 9,813  | 
|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|Earnings per share  basic:   |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|                              | Net income per share  basic                        |  | $                        | 1.10   |      |  | $    | 0.97  |  |  | $ | 1.13   | 
|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|Earnings per share  diluted: |                                                     |  |                          |        |      |  |      |       |  |  |   |       
|                              | Net income per share  diluted                      |  | $                        | 1.06   |      |  | $    | 0.97  |  |  | $ | 1.13   | 
|                              |                                                     |  |                          |        |      |  |      |       |  |  |   |       

47



---



##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.  Quarterly Financial Data

Summarized quarterly financial data for 2002, 2001, and 2000 is as follows
(unaudited, and in thousands except per share data):

|                                  |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|--------------------------------- |  | -------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | -
|                                  |  | Quarters Ended
|                                  |  |               
|                                  |  | March 31       |        | June 30 |  | September 30 |        | December 31
|                                  |  |                |        |         |  |              |        |            
|2002                              |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|Net Revenues                      |  | $              | 667    |         |  | $            | 17,367 |             |  | $ | 16,284 |  |  | $ | 1,772  |  
|Income (loss) before taxes        |  |                | (2,633 | )       |  |              | 13,278 |             |  |   | 10,279 |  |  |   | (4,535 | )
|Net income (loss)                 |  |                | (1,765 | )       |  |              | 8,843  |             |  |   | 6,731  |  |  |   | (3,011 | )
|Earnings (loss) per share-basic   |  |                | (0.18  | )       |  |              | 0.90   |             |  |   | 0.68   |  |  |   | (0.31  | )
|Earnings (loss) per
share-diluted |  |                | (0.18  | )       |  |              | 0.88   |             |  |   | 0.67   |  |  |   | (0.31  | )

Gross program receipts totaled $2.4 million, $49.5 million, $41 million
and $4.3 million for the quarters ended March 31, June 30, September 30, and
December 31, 2002, respectively.

|                                  |  |                |        |         |  |              |        |             |  |   |        |  |  |   |         |  
|--------------------------------- |  | -------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------- | -
|                                  |  | Quarters Ended
|                                  |  |               
|                                  |  | March 31       |        | June 30 |  | September 30 |        | December 31
|                                  |  |                |        |         |  |              |        |            
|2001                              |  |                |        |         |  |              |        |             |  |   |        |  |  |   |         |  
|Net Revenues                      |  | $              | 1,939  |         |  | $            | 20,500 |             |  | $ | 19,338 |  |  | $ | 1,637   |  
|Income (loss) before taxes        |  |                | (2,542 | )       |  |              | 15,886 |             |  |   | 12,444 |  |  |   | (11,080 | )
|Net income (loss)                 |  |                | (1,677 | )       |  |              | 10,485 |             |  |   | 8,212  |  |  |   | (7,532  | )
|Earnings (loss) per share-basic   |  |                | (0.17  | )       |  |              | 1.07   |             |  |   | 0.84   |  |  |   | (0.77   | )
|Earnings (loss) per
share-diluted |  |                | (0.17  | )       |  |              | 1.07   |             |  |   | 0.84   |  |  |   | (0.77   | )

Gross program receipts totaled $5.0 million, $58.7 million, $48.5 million,
and $4.1 million for the quarters ended March 31, June 30, September 30,
and December 31, 2001, respectively. Excluding the effect of a write down of
intangible assets, loss before taxes, net loss, and loss per basic and diluted
shares were $5.1 million, $3.7 million, and $0.38, respectively, for the quarter
ended December 31, 2001.

|                                  |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|--------------------------------- |  | -------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | -
|                                  |  | Quarters Ended
|                                  |  |               
|                                  |  | March 31       |        | June 30 |  | September 30 |        | December 31
|                                  |  |                |        |         |  |              |        |            
|2000                              |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|Net Revenues                      |  | $              | 181    |         |  | $            | 15,470 |             |  | $ | 19,114 |  |  | $ | 5,557  |  
|Income (loss) before taxes        |  |                | (3,829 | )       |  |              | 10,949 |             |  |   | 11,921 |  |  |   | (2,169 | )
|Net income (loss)                 |  |                | (2,509 | )       |  |              | 7,175  |             |  |   | 7,901  |  |  |   | (1,511 | )
|Earnings (loss) per share-basic   |  |                | (0.26  | )       |  |              | 0.73   |             |  |   | 0.81   |  |  |   | (0.15  | )
|Earnings (loss) per
share-diluted |  |                | (0.26  | )       |  |              | 0.73   |             |  |   | 0.81   |  |  |   | (0.15  | )

Gross program receipts totaled $0.2 million, $44.1 million, $51.3 million,
and $12.2 million for the quarters ended March 31, June 30, September 30, and
December 31, 2000, respectively.

48



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |                                           |                        
| | ----------------------------------------- | -----------------------
| | AMBASSADORS GROUP, INC.(Registrant)      
|
| | By:                                       | /s/   JEFFREY D. THOMAS
| |                                          
| | Jeffrey D. Thomas,Chief Executive Officer

Date: March 21, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                                 |  |                                                                                                               |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                                                         |  | Date          
|                                                 |  |                                                                                                               |  |               
|                                                
|/s/   JEFFREY D. THOMASJeffrey D. Thomas         |  | President, Chief Executive
Officer and Director
(Principal Executive Officer)                                 |  | March 21, 2003
|                                                
|/s/   JOHN A. UEBERROTHJohn A. Ueberroth         |  | Chairman of the Board of Directors                                                                            |  | March 21, 2003
|                                                
|/s/   MARGARET M. SESTEROMargaret M. Sestero     |  | Executive Vice-President,
Chief Financial Officer,
and Secretary
(Principal Financial and
Accounting Officer) |  | March 21, 2003
|                                                
|/s/   BRIGITTE M. BRENBrigitte M. Bren           |  | Director                                                                                                      |  | March 21, 2003
|                                                
|/s/   JAMES L. EASTONJames L. Easton             |  | Director                                                                                                      |  | March 21, 2003
|                                                
|/s/   RAFER L. JOHNSONRafer L. Johnson           |  | Director                                                                                                      |  | March 21, 2003
|                                                
|/s/   JOHN C. SPENCEJohn C. Spence               |  | Director                                                                                                      |  | March 21, 2003
|                                                
|/s/   JOSEPH J. UEBERROTHJoseph J. Ueberroth     |  | Director                                                                                                      |  | March 21, 2003
|                                                
|/s/   RICHARD D. C. WHILDENRichard D. C. Whilden |  | Director                                                                                                      |  | March 21, 2003

49



---



##### Table of Contents






CERTIFICATIONS

I, Jeffrey D. Thomas, certify that:

1. I have reviewed this annual report on Form 10-K of Ambassadors Group, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



| | /s/   Jeffrey D. ThomasJeffrey D. Thomas
Chief Executive Officer
 
Date: March 21, 2003
| | ---------------------------------------------------------------------------------------

50



---



##### Table of Contents



I, Margaret M. Sestero, certify that:

1. I have reviewed this annual report on Form 10-K of Ambassadors Group, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



| | /s/   Margaret M. SesteroMargaret M. Sestero
Chief Financial Officer
 
Date: March 21, 2003
| | -------------------------------------------------------------------------------------------

51



---



##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                 
|2.1     |  | Master Separation and Distribution Agreement between Ambassadors
International, Inc. and the Registrant incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.   
|2.2     |  | Indemnification and Insurance Matters Agreement between Ambassadors
International, Inc. and the Registrant incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.
|2.3     |  | Master Transitional Services Agreement between Ambassadors
International, Inc. and the Registrant incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.         
|2.4     |  | Employee Matters Agreement between Ambassadors International, Inc. and
the Registrant incorporated by reference to the Registrants
Registration Statement on Form 10 initially filed on November 15, 2001.                     
|2.5     |  | Tax Sharing Agreement between Ambassadors International, Inc. and the
Registrant incorporated by reference to the Registrants Registration
Statement on Form 10 initially filed on November 15, 2001.                          
|2.6     |  | Master Confidential Disclosure Agreement between Ambassadors
International, Inc. and the Registrant incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.       
|2.7     |  | Credit Facility Agreement between Ambassadors International, Inc. and
the Registrant incorporated by reference to the Registrants
Registration Statement on Form 10 initially filed on November 15, 2001.                      
|3.1     |  | Amended and Restated Certificate of Incorporation of the Registrant
incorporated by reference to the Registrants Registration Statement on
Form 10 initially filed on November 15, 2001.                                       
|3.2     |  | Bylaws of the Registrant incorporated by reference to the Registrants
Registration Statement on Form 10 initially filed on November 15, 2001.                                                                                  
|4.1     |  | Form of Common Stock certificate of the Registrant incorporated by
reference to the Registrants Registration Statement on Form 10
initially filed on November 15, 2001.                                                        
|10.1    |  | 2001 Equity Participation Plan incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.                                                                            
|10.2    |  | Form of 2001 Equity participation Plan Agreements incorporated by
reference to the Registrants Registration Statement on Form 10
initially filed on November 15, 2001.                                                         
|10.3    |  | Form of Indemnification Agreement between the Registrant and each of
its executive officers and directors incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001. 
|10.4    |  | Commercial Lease Agreement, as amended (Ferrall Street) incorporated by
reference to the Registrants Registration Statement on Form 10
initially filed on November 15, 2001.                                                   
|21.1    |  | Subsidiaries of the Registrant incorporated by reference to the
Registrants Registration Statement on Form 10 initially filed on
November 15, 2001.                                                                            
|23.1    |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                          
|99.1    |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.