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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, 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,
	2001

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.     Yes o          No þ

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

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 March 5, 2002, was $87,625,740. The number
of shares of the registrants Common Stock outstanding as
of February 28, 2001 was 9,813,140.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
Proxy Statement relating to the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.



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|                                                                                   |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                            
|                                                                                   | Item 1. Business                                                                             
|BUSINESS                                                                          
|RISK FACTORS                                                                      
|                                                                                   | Item 2. Properties                                                                           
|                                                                                   | Item 3. Legal Proceedings                                                                    
|                                                                                   | Item 4. Submission of Matters to A Vote of Security Holders                                  
|PART II                                                                           
|                                                                                   | Item 5. Market for 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                      
|PART IV                                                                           
|AMBASSADORS GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME           
|AMBASSADORS GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|AMBASSADORS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|SIGNATURES                                                                        
|EXHIBIT 23.1                                                                      



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TABLE OF CONTENTS

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|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 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 27 | 
|SIGNATURES |  |                                                                                        | 49 |     

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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 Ambassadors 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 188,000 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
2001, approximately 25,800 participants traveled on the
Companys programs.

The Company believes that its association with
People to People International (People to People)
and its 35 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, U.S. Tennis Association, the
Amateur Athletic Union, USA Volleyball and Swimming, and
US Soccer.

The Company intends to grow the business
internally through marketing enhancements, new programs or
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.

RELATIONSHIP WITH AMBASSADORS

Prior to February 28, 2002 (the
Distribution), 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 its stockholders of all of the outstanding shares of
Group that Ambassadors owned. The trading of the common stock of
Group on the Nasdaq National Market began on March 1, 2002
under the symbol EPAX.

Group has entered into agreements with
Ambassadors that provide for the separation of the
Companys business operations from Ambassadors.

The agreements between Group and Ambassadors also
govern various interim and ongoing relationships. All of the
agreements providing for the Companys separation 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 Separating Group
from Ambassadors.

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BUSINESS

The Company organizes and promotes educational
travel programs for students, professionals and athletes,
principally using the People to People name. People to People
International (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 programs for kindergarten through college age
students using the People to People name. The Company also has
the non-exclusive right to develop, market and operate programs
for professionals 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
further extended through 2020.

The Companys Sports Ambassador Programs are
very similiar to the Companys Student Ambassador Programs.
Both programs are marketed through a combination of direct mail
invitations and follow-up information meetings. Both programs
also operate primarily in the summer months of June, July and
August. The Sports and Student Ambassador Programs visit a
similiar range and mix of international destinations and strive
to introduce American youth to other cultures for their own
personal growth as well as promoting the mission of world peace.

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, May 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
delegation 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 overseas 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 most instances, the Company also
arranges to provide students 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 Stanford University, University of
California, Los Angeles, and Georgetown University. All students
who successfully complete the program are eligible to receive up
to 40 Service Learning Credits, which has become a
graduation requirement in many curriculums countrywide.

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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
12 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 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 balance 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 Grades 6 through 12 who complete
certain written assignments and projects can receive high school
and university credit for their participation in the program.
All athletes who successfully complete the program are eligible
to receive up to 40 Service Learning Credits, which has become a
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, medicine and
science.

The Company believes that its Professional
Ambassador Programs provide participants with enriching
experiences and deeper understandings of foreign cultures and
peoples 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 trips, 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.

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 an
agreement with the Amateur Athletic Union to provide
international travel for its players. These programs have
included travel to Spain, Switzerland, Austria, and Italy for
athletes to play basketball games against the host
countrys national teams. The agreements with Yosemite
National Institutes and the Amateur Athletic Union currently do
not generate significant revenues.

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Servicemarks

The Company has registered a variety of service
and trademarks, including the names Venture into the
World, High School Student Ambassador Program,
Citizen Ambassador Program, Initiative for
Understanding, 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, athletic, and professional programs. The
Company also owns the exclusive right to the names
American People Ambassador Programs and
Missions in Understanding. 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 adequate for its business, including but not limited
to, a total of $25 million in coverage for professional and
general liability policy. The Company also maintains insurance
coverage on real property (for owned and, where required, leased
property) and personal property on a replacement cost basis. The
Company has not experienced difficulty in obtaining adequate
insurance coverage. 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 4, 2002, the Company employed
129 employees, of which 124 were full-time employees. Of the
Companys full-time employees, 122 are located in Spokane,
Washington; two are located in Winnebago, Illinois. The Company
has 39 full-time employees engaged in marketing and sales and 85
full-time employees in operations, administration and finance.
The Company also employs temporary labor on a seasonal basis to
assist it 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 is subject to
collective bargaining agreements or is represented by a union.
The Company believes that its labor relations are good.

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, sports, and professional 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 Sport Travel Programs

U.S. Census data projects that there will be more
than 41.6 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 Sport 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.

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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 90 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 the Group 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 are 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 35 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.

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.

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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 Separating Group from Ambassadors, Risks Relating to
Transitional Services, 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



| |                                                                   
| | ------------------------------------------------------------------
| | International Operations and Natural
	Occurrences; Travel Industry

Because substantially all of the Companys
travel programs are conducted outside the United States, the
Companys operations are subject to special risks inherent
in doing business internationally. 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 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 and results
of operations of the Company.

September 11
and Terrorism

Terrorist attacks, such as the attacks that
occurred on September 11, 2001, the response by the United
States since October 7, 2001 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

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industry generally. As a result, the Company has
experienced a significant reduction in registrations and
increased cancellations for its future travel programs. The
potential near-term and long-term effect these attacks may have
for the Companys customers, the market for the
Companys common stock, the markets for our services and
the U.S. economy are uncertain. The consequences of any
terrorist attacks, or any armed conflicts 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.


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, sport, 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 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 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 college age students
using the People to People name, and the non-exclusive right to
develop and conduct programs for professionals 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 student, sport 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. There can
be no assurance that, if the Companys agreements with

9



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People to People were terminated or if the
Company was unable to use the People to People name to market
new programs or destinations, the Companys business,
financial condition and results of operations would not be
materially or adversely affected.


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 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 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 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 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 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. The Companys contract with
participants in its travel programs provides the Company the
option, and historically the Company has attempted, to pass
along any increase in program costs resulting from currency
fluctuations to program participants. Nonetheless, 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 and results of
operations. See Managements Discussion and Analysis
of Financial Condition and Results of Operations.

10



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##### 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 and results of
operations. See Business  Insurance.



| |                                                          
| | ---------------------------------------------------------
| | Continued Control of the Company by Certain
	Stockholders

Upon completion of the Distribution, John
Ueberroth, Joseph Ueberroth and Peter Ueberroth (all family
members) will beneficially own in the aggregate approximately
30% of the outstanding shares of the Companys common
stock. Accordingly, they will likely be able to exercise
effective voting control of the Company, and would likely 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 Separating Group from
Ambassadors



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

The Company and Ambassadors have entered into a
tax sharing agreement pursuant to which the Company has 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 has 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 its common stock
to be taxable to Ambassadors, the Companys financial
condition could be seriously harmed.



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

Groups financial statements 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 comprises. Accordingly, the
historical financial information of the Company does not
necessarily reflect what the Companys financial position,
operating results and cash flows

11



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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 10.


These allocations have been determined on bases
that Ambassadors and the Company consider to be reasonable
reflections of the utilization of services provided to or 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.
Ambassadors has agreed to provide a credit facility to Group in
the amount of $20 million. In addition allocations of cash
at the time of the Distribution were as follows: (i) Group
keeps the cash required to operate travel programs for which it
has received participant deposits or paid vendor deposits and
(ii) Group keeps an amount equal to the cash required for
Groups post-separation operations. Ambassadors keeps the
remaining cash not specifically allocated to Group pursuant to
the formula. The measurements or estimates for the preceding
allocations were made at the end of the month in which the
Distribution was approved by Ambassadors Board of
Directors. Nevertheless, following the Distribution, 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 and
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. The Company
may not be able to obtain financing with interest rates as
favorable as those that Ambassadors could obtain or 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. 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 and
results of operations.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | 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 after the separation from Ambassadors
could create, or appear

12



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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

The Companys directors also serve as
directors (and executive officers in one instance) 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 will resolve all conflicts
in accordance with their fiduciary duties and will utilize an
audit committee to approve all related party transactions as
required by NASD Marketplace Rules.

Risks Relating to Transitional
Services

The Company and Ambassadors have agreed to
provide transitional services to each other, including services
related to finance and accounting. These transitional services
will not exceed a term of 12 months from the Distribution
Date unless extended by the Company and Ambassadors. The
services are primarily services of the Company being transferred
to Ambassadors, and are not expected to exceed the 12 month
term.

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



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Sales of Company Common Stock in Connection
	with the Distribution; Stock Price Decline

Ambassadors distributed all of the 9,813,140
shares of Group common stock it owned to its stockholders.
Substantially all of these shares are eligible for immediate
resale in the public market. The Company is unable to predict
whether a sufficient number of buyers or sellers are or will
continue to be available for its stock in the open market.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Companys Securities Have No Prior
	Market; Stock Price Decline After the Distribution

Prior to the Distribution there was not a public
market for the Companys common stock, and an active public
market for the Company common stock may not develop or be
sustained after the Distribution. The market price of the
Companys common stock could be subject to significant
fluctuations after the Distribution. 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; and                                                               
|
| |  | domestic and international economic factors
	unrelated to the Companys performance.         

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.

13



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##### Table of Contents






Item 2.     Properties

The principal executive offices of the Company,
consisting of approximately 45,000 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 ten 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 occupies office space totaling
approximately 10,850 square feet in Spokane, Washington,
pursuant to a lease dated October 2, 2000, which expires in
2004. The lease may be extended an additional five years with
120 days advance notice to the landlord. Current monthly rent
approximates $4,200 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.

The Company also leases approximately 900 square
feet of office space in Winnebago, Illinois for a monthly rental
of approximately $600 pursuant to a lease that expires in August
2002.

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

Prior to the Companys legal separation from
Ambassadors, the Companys sole stockholder, on
February 28, 2002, all stockholder approvals were taken by
Ambassadors by written consent. Such approvals included
approving the Companys 2001 Equity Participation Plan and
Amended and Restated Certificate of Incorporation.

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##### Table of Contents






PART II




Item 5.     Market
for 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. As of March 4, 2002, there were
approximately 46 holders of record of the Companys Common
Stock. This number does not include beneficial owners holding
shares through nominee or street name. Prior to March 1,
2002, there was no public trading market for the Companys
equity securities. The range of high and low sales prices for
the period from March 1, 2002 to March 20, 2002 is
$15.50 and $11.50, respectively.

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.

Transfer Agent and Registrar

ChaseMellon Shareholder Services of Los Angles,
California serves as transfer agent and registrar of the
Companys Common Stock.

15



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##### 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, 2001, and the balance sheet data as of
December 31, 2001 and 2000 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, 1998 and the balance sheet data as of
December 31, 1999 and 1998, has been derived from the
audited financial statements, which are not included in this
Form 10-K. The balance sheet and statement of operations
data as of and for the year ended December 31, 1997 have
been derived from unaudited financial statements not included in
this Form 10-K. The unaudited information has been
presented on the same basis as the audited financial statements
and has included all adjustments, consisting only of normal
occurring adjustments that are considered necessary for a fair
presentation of the Companys financial position and
operating results for these periods. Historical results are not
necessarily indicative of future results.

|                                                              |  |              |        |      |  |      |        |      |  |             |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ----------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                              |  |             
|                                                              |  | December 31,
|                                                              |  |             
|                                                              |  | 2001(C)      |        | 2000 |  | 1999 |        | 1998 |  | 1997       
|                                                              |  |              |        |      |  |      |        |      |  |            
|                                                              |  |              |        |      |  |      |        |      |  | (Unaudited)
|Statement of operations data(A):                              |  |              |        |      |  |      |        |      |  |             |        |  |  |   |        |  |  |   |        | 
|Net revenue(B)                                                |  | $            | 43,414 |      |  | $    | 40,322 |      |  | $           | 26,533 |  |  | $ | 24,429 |  |  | $ | 21,304 | 
|Selling and tour promotion expenses                           |  | $            | 15,253 |      |  | $    | 17,177 |      |  | $           | 11,358 |  |  | $ | 8,714  |  |  | $ | 7,700  | 
|General and administrative expenses                           |  | $            | 9,670  |      |  | $    | 7,816  |      |  | $           | 5,957  |  |  | $ | 5,300  |  |  | $ | 4,771  | 
|Write down of intangible assets                               |  | $            | 5,937  |      |  |      |       |      |  |             |       |  |  |   |       |  |  |   |       | 
|Operating income                                              |  | $            | 12,554 |      |  | $    | 15,329 |      |  | $           | 9,218  |  |  | $ | 10,415 |  |  | $ | 8,833  | 
|Cumulative affect of accounting change                        |  |              |       |      |  |      |       |      |  |             |       |  |  | $ | 128    |  |  |   |       | 
|Net income after tax                                          |  | $            | 9,488  |      |  | $    | 11,056 |      |  | $           | 6,701  |  |  | $ | 7,470  |  |  | $ | 5,743  | 
|Earnings per share  basic and diluted                        |  | $            | 0.97   |      |  | $    | 1.13   |      |  | $           | 0.68   |  |  | $ | 0.76   |  |  | $ | 0.59   | 
|Balance sheet data(D):                                        |  |              |        |      |  |      |        |      |  |             |        |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents, and available for sale
	securities(E) |  | $            | 39,773 |      |  | $    | 71,543 |      |  | $           | 39,897 |  |  | $ | 23,335 |  |  | $ | 17,931 | 
|Total assets                                                  |  | $            | 46,123 |      |  | $    | 81,142 |      |  | $           | 49,398 |  |  | $ | 26,259 |  |  | $ | 21,357 | 
|Total stockholders equity                                    |  | $            | 24,839 |      |  | $    | 53,554 |      |  | $           | 34,634 |  |  | $ | 17,762 |  |  | $ | 13,335 | 



---



|    |                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | In February 1996, the Company expanded its
	professional programs and in June 1999, the Company expanded its
	sports programs through the acquisitions of American People
	Ambassador Programs, Inc. and Travel Dynamics, Inc. These
	acquisitions are included in the Companys statement of
	operations since the dates of acquisition.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | 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, 2001, 2000,
	1999, 1998, and 1997 was $116.3 million,
	$107.8 million, $71.6 million, $67.4 million, and
	$60.2 million.
|   
|(C) | 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 $18.4 million,
	$13.3 million, and $1.35, respectively.                                                                                                                                                                                                                                                                  



|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(D) | All of the Companys acquisitions have been
	accounted for under the purchase method of accounting.
	Therefore, the balance sheet data includes the accounts of the
	acquired entities as of their respective dates of acquisition.



|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(E) | Cash and cash equivalents and available-for-sale
	securities include restricted cash equivalents of a nominal
	amount for the period ended December 31, 2001 and the
	amount of $112,000 for the periods

16



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| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ended December 31, 2000 and 1999. For the
	periods ended December 31, 1998 and 1997, cash, cash
	equivalents, and available-for-sale securities include
	restricted cash equivalents in the amounts of $152,000 and
	$125,000, respectively.




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. Certain
statements contained herein that are not related to historical
results, including, without limitation, statements regarding the
Companys business strategy and objectives, future
financial position, expectations about pending litigation and
estimated cost savings, are forward-looking statements within
the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as
amended, and involve risks and uncertainties. Actual results
could differ materially from those discussed in the
forward-looking statements.

General

The Company is engaged primarily in promoting and
organizing international educational travel programs for
students, athletes, and professionals. These programs provide
the opportunities for grade school, junior, and senior high
school students to visit foreign countries to learn about the
history, government, economy and culture of such countries, as
well as provide opportunities 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.

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 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 participant. 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
three-quarters 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, timing of
and costs relating to acquisitions, changes in relationships
with certain travel providers, economic factors and other
considerations affecting travel.

17



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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 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, investments, 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 owns minority investments in other
operating companies and joint ventures. Future adverse changes
in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover
the carrying value of the investments that may not be reflected
in an investments current carrying value.

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 based upon the expected undiscounted cash flows of the
business operations that generated the 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 12 in
the Consolidated Footnotes to the 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 the goodwill
and intangible assets that may not be reflected in the
assets carrying values.

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.

18



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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.

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,
|                     |                                 |                        
|                     |                                 | 2001(A)                 |     | 2000 |  | 1999 |     | 1998 |  | 1997
|                     |                                 |                         |     |      |  |      |     |      |  |     
|                     |                                 |                        
|                     |                                 | % of revenues          
|Net revenue          |                                 |                         | 100 | %    |  |      | 100 | %    |  |      | 100 | %  |  |  | 100 | %  |  |  | 100 | % 
|                     | Selling and tour                |                         |     | 35   |  |      |     | 43   |  |      |     | 43 |  |  |     | 36 |  |  |     | 36 | 
|                     | General administrative          |                         |     | 22   |  |      |     | 19   |  |      |     | 22 |  |  |     | 22 |  |  |     | 21 | 
|                     | Write down of intangible assets |                         |     | 14   |  |      |     |     |  |      |     |   |  |  |     |   |  |  |     |   | 
|Operating income     |                                 |                         | 29  | %    |  |      | 38  | %    |  |      | 35  | %  |  |  | 43  | %  |  |  | 41  | % 
|Other income         |                                 |                         | 5   |      |  |      | 4   |      |  |      | 3   |    |  |  | 3   |    |  |  | -1  |   
|Income before tax    |                                 |                         | 34  | %    |  |      | 42  | %    |  |      | 38  | %  |  |  | 45  | %  |  |  | 41  | % 
|Income tax provision |                                 |                         | 12  |      |  |      | 14  |      |  |      | 13  |    |  |  | 15  |    |  |  | 14  |   
|Net income           |                                 |                         | 22  | %    |  |      | 27  | %    |  |      | 25  | %  |  |  | 31  | %  |  |  | 27  | % 



---



|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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,
	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% increase is primarily the result of an
increase in traveled participants. The Company traveled over
25,800 participants during 2001 as compared to approximately
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 is the result primarily
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 consistent
during the years ended December 31, 2001 and 2000 at 37%.

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
$17.2 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,
causing in a delay of the expenses being incurred. The Company
also experienced a reduction in 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
$9.7 million in the year ended December 31, 2001 from
$7.8 million during the comparable period in 2000. The
$1.9 million increase is due to a number of factors,
included but not limited to professional fees and personnel
costs.

During the fourth quarter of 2001, the Company
incurred a $5.9 million impairment expense 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.

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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.

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.

The Company has recorded 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 has been
recorded based upon the estimated annual effective income tax
rate applied to the pre-tax income.

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 write-down of
intangible assets expense during 2001, net income would have
been $13.6 million during the year ended December 31,
2001 in comparison to $11.1 million during the year ended
December 31, 2000. These fluctuations are the result of
changes as described above.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Comparison of Year Ended December 31,
	2000 to Year Ended December 31, 1999

The Companys gross program receipts
increased $36.3 million to $107.8 million during the year
ended December 31, 2000, from $71.6 million for the
year ended December 31, 1999, as a direct result of a 48%
increase in participants. During the year ended
December 31, 2000, approximately 25,300 participants
traveled with the Company in comparison to approximately 17,150
participants traveling during 1999.

Net revenue increased 52% to $40.3 million
for the year ended December 31, 2000 from
$26.5 million for the year ended December 31, 1999. A
substantial majority of the increase in net revenue is due to
the 48% increase in traveled participants. Gross margins
remained consistent at 37% between the years.

Selling and tour promotion expenses increased to
$17.2 million during the year ended December 31, 2000
from $11.4 million for the year ended December 31,
1999, an increase of $5.8 million. The majority of this
increase is attributable to increased professional program
marketing expenses supporting additional professional
participant volume, combined with a full year of sports selling
and marketing expenses during the year ended December 31,
2000 from Groups June 1999 acquisition.

General and administrative expenses increased
during the year ended December 31, 2000 to
$7.8 million from $6.0 million for the year ended
December 31, 1999, an increase of $1.9 million. This
increase is primarily the result of a full year of sports
administrative expenses during the year ended
December 31,2000 from Groups June 1999 acquisition
and increased administrative expenses to support increased
participant volume.

As a result of the foregoing, the Companys
operating income during the year ended December 31, 2000
increased to $15.3 million from $9.2 million for the
year ended December 31, 1999.

The Company reported $1.5 million of other
income for the year ended December 31, 2000 in comparison
to $0.8 million for the year ended December 31, 1999.
Other income during the year ended

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December 31, 2000 consisted primarily of
$3.1 million in interest income generated by cash, cash
equivalents and available-for-sale securities, netted with
$1.6 million in unrealized foreign exchange losses on
forward foreign exchange contracts and options. For the year
ended December 31, 1999, the Company realized interest and
dividend income of $0.8 million. The increase in interest
and dividend income of $2.3 million resulted from greater
cash balances combined with the Companys cash management
investment strategies into tax exempt securities. On
December 31, 2000, the Company had $71.5 million in
cash, cash equivalents and available-for-sale securities,
compared to $39.9 million on December 31, 1999.


The Companys effective income tax rate
increased to 34% during the year ended December 31, 2000
from 33% during the year ended December 31, 1999. This
increase is an effect of the Companys increased tax base,
combined with less of a tax benefit from tax exempt interest
income reducing the tax rate. The Company recorded an income tax
provision of $5.8 million for the year ended
December 31, 2000 compared to $3.3 million for the
year ended December 31, 1999.

Net income increased to $11.1 million for
the year ended December 31, 2000 from $6.7 million in
the year ended December 31, 1999. The $4.4 million
increase is 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, 2001 and 2000 was approximately
$7.0 million and $25.4 million, respectively. The net
$18.4 million decrease in operating cash flows from the year
ending December 31, 2000 to the year ending
December 31, 2001 primarily relates to decreased volume of
participants deposits for future travel programs,
compounded with an decrease in net income for the comparable
time periods.

Net cash provided by operations for the years
ended December 31, 2000 and 1999 was $25.4 million and
$9.7 million, respectively. The increase in cash flow from
operations between these two years is primarily due to enhanced
collections of participant deposits and an increase in net
income.

Net cash provided by (used in) investing
activities for the year ended December 31, 2001 and 2000
was $16.7 million and ($35.4) million, respectively. The
$52.1 million increase from the year ending
December 31, 2000 to the year ending December 31, 2001
is due to the proceeds received from the sale or maturity of
available-for-sale securities and the purchase of
available-for-sale securities. The net purchase of
available-for-sale securities of $34.4 million during the
year ended 2000 increased to a net receipt of $17.8 million
in proceeds from the sale or maturity of available-for-sale
securities during the year ended 2001.

Net cash used in investing activities for the
years ended December 31, 2000 and 1999 was
$35.4 million and $9.2 million, respectively. The
investing activities during 2000 and 1999 primarily related to
investing in available-for-sale securities.

Net cash provided by and (used in) financing
activities for the year ended December 31, 2001 and 2000
was ($37.5) million and $7.2, respectively. The
increase of $44.7 million in cash used in the year ended
December 31, 2001 in comparison to the year ended
December 31, 2000 is due to a $37.5 million dividend
payment, representing past pre-tax earnings, to Ambassadors.
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
$20.4 million paid to Ambassadors and a capital
contribution approximating $10.4 million from Ambassadors.
The Company will reflect the impact of the spin-off in its first
quarterly filing with the SEC in 2002, pursuant to the
Securities and Exchange Act of 1934.

The payment of dividends in the future will be at
the discretion of the Board of Directors and will be dependent
on the Companys financial condition, results of
operations, capital requirements and such other factors as the
Board of Directors, in its discretion, deems relevant.

21



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Net cash provided by financing activities for the
years ended December 31, 2000 and December 31, 1999
totaling $7.2 million and $9.4 million, respectively,
primarily relates to payments received as contributions from the
Companys parent.

The Company has a credit facility available with
Bank of America, 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 August 2002. Ambassadors has
also agreed to provide a credit facility to the Company up to
$20 million for on-going operations and potential
acquisition needs. 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.

At December 31, 2001, the Company had
approximately $39.8 million of cash, cash equivalents
including restricted cash, and available-for-sale securities,
which included program participant funds of approximately
$16.6 million. At December 31, 2000, the Company had
approximately $71.5 million of cash and cash equivalents
including restricted cash, and available-for-sale securities,
which included program participant funds of $22.8 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
on October 7, 2001 had a very negative impact on domestic
and international air travel and the travel industry in general.
As a result, the Company experienced a reduction in
registrations and increased cancellations during the period
October 1, 2001 to December 31, 2001, as compared to
the same period in 2000. In October 2001, the Company undertook
a reduction in force and enacted a pay reduction for senior
management of the Company. The Company also adjusted and revised
virtually all of its marketing plans for 2002. The Company
believes the adverse impact of these events will be experienced
in the summer of 2002 as a majority of its travel programs are
scheduled in June and July of each year. Given the magnitude of
these unprecedented events, the Company is not able to determine
whether the impact will be material or highly material to the
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 2002.
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 2002.

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Market Risk

The following table summarizes the financial
instruments other than derivative financial instruments held by
the Company at December 31, 2001 and 2000, 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 (amounts in thousands):

|                                  |  |                   |        |                   |  |      |       |       |  |       |   |       |  |       |        |   |  |   |        |  |  |   |        |   |  |   |        | 
|--------------------------------- |  | ----------------- | ------ | ----------------- |  | ---- | ----- | ----- |  | ----- | - | ----- |  | ----- | ------ | - |  | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                  |  |                   |        |                  
|                                  |  | December 31, 2001 |        | December 31, 2000
|                                  |  |                   |        |                  
|                                  |  |                   |        | After             |  |      |       | Fair  |  |       |   | Fair 
|                                  |  | 2002              |        | 2003              |  | 2006 |       | Total |  | Value |   | Total |  | Value
|                                  |  |                   |        |                   |  |      |       |       |  |       |   |       |  |      
|U.S. govt. and agency obligations |  | $                 | 14,921 |                   |  | $    | 8,322 |       |  | $     |  |       |  | $     | 23,243 |   |  | $ | 23,243 |  |  | $ | 41,128 |   |  | $ | 41,128 | 
|Interest rate                     |  |                   | 6.0    | %                 |  |      | 4.5   | %     |  |       |  |       |  |       | 5.5    | % |  |   |       |  |  |   | 6.2    | % |  |   |       | 

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. 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.

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 mature in 2002. 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.

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##### Table of Contents



At December 31, 2001 and 2000, the Company
had outstanding forward contracts as follows (amounts in
thousands):

|                                                                               |                    |                 |        |               |  |  |   |      | 
|------------------------------------------------------------------------------ | ------------------ | --------------- | ------ | ------------- |  |  | - | ---- | 
|                                                                               |                    |                 |        | U.S. Dollar  
|                                                                               |                    |                 |        | Average      
|                                                                               |                    | U.S. Dollar     |        | Contractual  
|                                                                               |                    | Contract Amount |        | Exchange Rate
|                                                                               |                    |                 |        |              
|December 31, 2001                                                              |                    |                 |        |               |  |  |   |     
|Forward contracts (pay $U.S./receive foreign
	currency):                       |                    |                 |        |               |  |  |   |     
|                                                                               | Australian dollar  |                 | $      | 9,400         |  |  | $ | 0.54 | 
|                                                                               | Euro dollar        |                 |        | 3,460         |  |  | $ | 0.89 | 
|                                                                               | British pound      |                 |        | 1,250         |  |  | $ | 1.49 | 
|                                                                               |                    |                 |        |               |  |  |   |     
|                                                                               |                    | $               | 14,110 |               |  |  |   |     
|                                                                               |                    |                 |        |               |  |  |   |     
|Forward contracts with synthetic option (pay
	$U.S./receive foreign currency): |                    |                 |        |               |  |  |   |     
|                                                                               | British pound      |                 | $      | 2,050         |  |  | $ | 1.53 | 
|                                                                               | Australian dollar  |                 |        | 2,100         |  |  | $ | 0.54 | 
|                                                                               | New Zealand dollar |                 |        | 5,150         |  |  | $ | 0.43 | 
|                                                                               |                    |                 |        |               |  |  |   |     
|                                                                               |                    | $               | 9,300  |               |  |  |   |     
|                                                                               |                    |                 |        |               |  |  |   |     
|December 31, 2000                                                              |                    |                 |        |               |  |  |   |     
|Forward contracts (pay $U.S./receive foreign
	currency):                       |                    |                 |        |               |  |  |   |     
|                                                                               | Australian dollar  |                 | $      | 12,400        |  |  | $ | 0.55 | 
|                                                                               | New Zealand dollar |                 |        | 4,000         |  |  | $ | 0.48 | 
|                                                                               | Euro dollar        |                 |        | 3,460         |  |  | $ | 0.89 | 
|                                                                               | British pound      |                 |        | 1,250         |  |  | $ | 1.49 | 
|                                                                               |                    |                 |        |               |  |  |   |     
|                                                                               |                    | $               | 21,110 |               |  |  |   |     
|                                                                               |                    |                 |        |               |  |  |   |     
|Forward contracts with synthetic option (pay
	$U.S./receive foreign currency): |                    |                 |        |               |  |  |   |     
|                                                                               | Euro dollar        |                 | $      | 9,660         |  |  | $ | 0.97 | 
|                                                                               | British pound      |                 |        | 6,250         |  |  | $ | 1.59 | 
|                                                                               | Australian dollar  |                 |        | 6,000         |  |  | $ | 0.64 | 
|                                                                               | New Zealand dollar |                 |        | 3,750         |  |  | $ | 0.43 | 
|                                                                               |                    |                 |        |               |  |  |   |     
|                                                                               |                    | $               | 25,660 |               |  |  |   |     
|                                                                               |                    |                 |        |               |  |  |   |     

At December 31, 2001 and 2000, the Company
had unrealized foreign currency losses associated with these
financial instruments of approximately $0.5 million, and
$0.9 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 the 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.

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

24



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##### Table of Contents



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.


On July 20, 2001, the FASB issued Statement
No. 142 (SFAS 142), Goodwill and Other Intangible Assets.
SFAS 142 changes the accounting for goodwill and certain other
intangible assets from an amortization method to an
impairment-only approach. Upon adoption of SFAS 142, goodwill
and certain other intangible assets will be tested at the
reporting unit annually and whenever events or circumstances
occur indicating that goodwill and certain other intangible
assets might be impaired. Amortization of goodwill and certain
other intangible assets, including goodwill recorded in past
business combinations, will cease. The Company expects that the
adoption of SFAS No. 142 will result in a pre-tax increase
to net earnings of a nominal amount for the fiscal year 2002
from the cessation of amortization of previously recorded
goodwill and does not expect to recognize any impairments. The
Company has nominal identifiable intangible assets as of
December 31, 2001.

In August 2001, the FASB approved SFAS
No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143), which will be
effective for the fiscal year beginning January 1, 2003.
SFAS No. 143 addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. In October 2001, the FASB approved SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which supercedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS No. 121) and the accounting and
reporting provisions of APB. No. 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 No. 144 retains
many of the fundamental provisions of SFAS No. 121, but
resolves certain implementation issues associates with that
Statement. SFAS No. 144 will be effective for the fiscal
year beginning January 1, 2002. The Company does not
anticipate that the adoption of SFAS No. 143 and SFAS
No. 144 will have a material impact on its financial
condition or results of operations.




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 IV, Item 14 of this Form 10-K.




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

None.

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##### 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,
2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16,
2002.




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,
2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16,
2002.




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,
2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16,
2002.

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,
2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16,
2002.

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##### Table of Contents






PART IV

Item 14.     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,
	2001 and 2000                                                        |  | 29     
|Consolidated Statements of Operations for the
	years ended December 31, 2001, 2000 and 1999                       |  | 30     
|Consolidated Statements of Comprehensive Income
	for the years ended December 31, 2001, 2000, and 1999            |  | 31     
|Consolidated Statements of Changes in
	Stockholders Equity for the years ended December 31,
	2001, 2000 and 1999 |  | 32     
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001, 2000, and 1999                      |  | 33     
|Notes to Consolidated Financial Statements                                                                        |  | 34 - 47



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Financial Statement Schedules:                                                                                                                                          
|
| | No financial statement schedules are presented as
	the required information is either not applicable or 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, 2001.

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##### 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
stockholders 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, 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.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP

Portland, Oregon

February 7, 2002, except for Note 9, which
is as of February 28, 2002.


28



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##### Table of Contents



AMBASSADORS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |        |        | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | ------ |  | ----- | ------ | ------ | 
|                                                                                           |                                                                                                         |                                           
|                                                                                           |                                                                                                         | December 31,                              
|                                                                                           |                                                                                                         |                                           
|                                                                                           |                                                                                                         | 2001                                       |       | 2000  
|                                                                                           |                                                                                                         |                                            |       |       
|                                                                                           |                                                                                                         |                                           
|                                                                                           |                                                                                                         | (In thousands,                            
|                                                                                           |                                                                                                         | except share and                          
|                                                                                           |                                                                                                         | per share data)                           
|Assets                                                                                     |                                                                                                         |                                            |       |        |        |  |       |       
|Current assets:                                                                            |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           | Cash and cash equivalents                                                                               |                                            | $     | 16,518 |        |  | $     | 30,303 |       
|                                                                                           | Restricted cash equivalents                                                                             |                                            |       | 12     |        |  |       | 112    |       
|                                                                                           | Available-for-sale securities                                                                           |                                            |       | 23,243 |        |  |       | 41,128 |       
|                                                                                           | Accounts receivable                                                                                     |                                            |       | 143    |        |  |       | 48     |       
|                                                                                           | Prepaid program costs and expenses                                                                      |                                            |       | 1,501  |        |  |       | 1,006  |       
|                                                                                           | Deferred income taxes                                                                                   |                                            |       | 301    |        |  |       | 357    |       
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total current assets                       |       |        | 41,718 |  |       |        | 72,954 | 
|Property and equipment, net                                                                |                                                                                                         |                                            | 2,457 |        |        |  | 2,242 |       
|Goodwill and covenant not-to-compete, net of $330
	and $899 of accumulated amortization    |                                                                                                         |                                            | 70    |        |        |  | 5,946 |       
|Deferred tax asset                                                                         |                                                                                                         |                                            | 1,878 |        |        |  |      |       
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total assets                               |       | $      | 46,123 |  |       | $      | 81,142 | 
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|Liabilities                                                                                |                                                                                                         |                                            |       |        |        |  |       |       
|Current liabilities:                                                                       |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           | Accounts payable                                                                                        |                                            | $     | 2,521  |        |  | $     | 2,076  |       
|                                                                                           | Accrued expenses                                                                                        |                                            |       | 1,709  |        |  |       | 1,743  |       
|                                                                                           | Participants deposits                                                                                  |                                            |       | 16,551 |        |  |       | 22,763 |       
|                                                                                           | Foreign currency exchange contracts                                                                     |                                            |       | 503    |        |  |       | 928    |       
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total current liabilities                  |       |        | 21,284 |  |       |        | 27,510 | 
|Deferred income taxes                                                                      |                                                                                                         |                                            |      |        |        |  | 78    |       
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total liabilities                          |       |        | 21,284 |  |       |        | 27,588 | 
|Commitments and contingencies (Notes 2, 6,
	and 12)                                        |                                                                                                         |                                            |       |        |        |  |       |       
|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,
	9,813,140 shares |                                            |       | 98     |        |  |       | 98     |       
|                                                                                           | Additional paid-in capital                                                                              |                                            |       | 15,630 |        |  |       | 26,099 |       
|                                                                                           | Retained earnings                                                                                       |                                            |       | 9,451  |        |  |       | 26,956 |       
|                                                                                           | Accumulated other comprehensive income (loss)                                                           |                                            |       | (340   | )      |  |       | 401    |       
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total stockholders equity                 |       |        | 24,839 |  |       |        | 53,554 | 
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       
|                                                                                           |                                                                                                         | Total liabilities and stockholders equity |       | $      | 46,123 |  |       | $      | 81,142 | 
|                                                                                           |                                                                                                         |                                            |       |        |        |  |       |       

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

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AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |           | 
|--------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------- | --------- | --------- |  | ---- | -------- | --------- | - |  | --------- | --------- | 
|                                        |                                                                                            |                                
|                                        |                                                                                            | Years Ended December 31,       
|                                        |                                                                                            |                                
|                                        |                                                                                            | 2001                            |           | 2000      |  | 1999
|                                        |                                                                                            |                                 |           |           |  |     
|                                        |                                                                                            |                                
|                                        |                                                                                            | (In thousands, except share and
|                                        |                                                                                            | per share data                 
|Revenue                                 |                                                                                            |                                 | $ 43,414  |           |  |      | $ 40,322 |           |   |  | $ 26,533  |          
|Operating expenses:                     |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        | Selling and tour promotion                                                                 |                                 |           | 15,253    |  |      |          | 17,177    |   |  |           | 11,358    | 
|                                        | General and administrative                                                                 |                                 |           | 9,670     |  |      |          | 7,816     |   |  |           | 5,957     | 
|                                        | Write-down of intangible assets                                                            |                                 |           | 5,937     |  |      |          |          |   |  |           |          | 
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        |                                                                                            |                                 | 30,860    |           |  |      | 24,993   |           |   |  | 17,315    |          
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|Operating income                        |                                                                                            |                                 | 12,554    |           |  |      | 15,329   |           |   |  | 9,218     |          
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|Other income (expense):                 |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        | Interest and dividend income                                                               |                                 |           | 2,099     |  |      |          | 3,051     |   |  |           | 773       | 
|                                        | Realized and unrealized gain (loss) on foreign
	currency exchange contracts and other, net |                                 |           | 55        |  |      |          | (1,508    | ) |  |           | 42        | 
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        |                                                                                            |                                 | 2,154     |           |  |      | 1,543    |           |   |  | 815       |          
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|Income before income taxes              |                                                                                            |                                 | 14,708    |           |  |      | 16,872   |           |   |  | 10,033    |          
|Income tax provision                    |                                                                                            |                                 | 5,220     |           |  |      | 5,816    |           |   |  | 3,332     |          
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|Net income                              |                                                                                            |                                 | $   9,488 |           |  |      | $ 11,056 |           |   |  | $   6,701 |          
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|Earnings per share  basic and diluted: |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        | Net income per share  basic and diluted                                                   |                                 |           | $    0.97 |  |      |          | $    1.13 |   |  |           | $    0.68 | 
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          
|                                        | Weighted-average common shares
	outstanding  basic and diluted                            |                                 |           | 9,813,140 |  |      |          | 9,813,140 |   |  |           | 9,813,140 | 
|                                        |                                                                                            |                                 |           |           |  |      |          |           |   |  |           |          

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

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AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                                                                                                                               |  |                          |       |      |  |      |        |  |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ------ |  |  | - | ----- | -
|                                                                                                                               |  |                         
|                                                                                                                               |  | Years Ended December 31,
|                                                                                                                               |  |                         
|                                                                                                                               |  | 2001                     |       | 2000 |  | 1999
|                                                                                                                               |  |                          |       |      |  |     
|                                                                                                                               |  |                         
|                                                                                                                               |  | (In thousands)          
|Net income                                                                                                                     |  | $                        | 9,488 |      |  | $    | 11,056 |  |  | $ | 6,701 |  
|Unrealized gain (loss) on foreign currency
	exchange contracts, net of income tax (provision) benefit
	of $435, $(372) and $29 |  |                          | (741  | )    |  |      | 633    |  |  |   | (50   | )
|                                                                                                                               |  |                          |       |      |  |      |        |  |  |   |       |  
|Comprehensive income                                                                                                           |  | $                        | 8,747 |      |  | $    | 11,689 |  |  | $ | 6,651 |  
|                                                                                                                               |  |                          |       |      |  |      |        |  |  |   |       |  

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

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AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |        |        | 
|----------------------------------------------- | ------------------------------------------------------- | -------------------------- | - | ------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                |                                                         |                           
|                                                |                                                         | Years Ended December 31,  
|                                                |                                                         |                           
|                                                |                                                         | 2001                       |   | 2000    |        | 1999
|                                                |                                                         |                            |   |         |        |     
|                                                |                                                         |                           
|                                                |                                                         | (In thousands)            
|Common stock:                                   |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, beginning of period                            |                            | $ | 98      |        |      | $ | 98     |        |  | $ | 98     |       
|                                                | Balance, end of period                                  |                            |   | 98      |        |      |   | 98     |        |  |   | 98     |       
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|Additional-paid-in-capital:                     |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, beginning of period                            |                            |   | 26,099  |        |      |   | 18,868 |        |  |   | 8,648  |       
|                                                | Contribution from parent company                        |                            |   |        |        |      |   | 7,231  |        |  |   | 10,220 |       
|                                                | Distribution to parent company                          |                            |   | (10,469 | )      |      |   |       |        |  |   |       |       
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, end of period                                  |                            |   | 15,630  |        |      |   | 26,099 |        |  |   | 18,868 |       
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|Retained earnings:                              |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, beginning of period                            |                            |   | 26,956  |        |      |   | 15,900 |        |  |   | 9,199  |       
|                                                | Net income                                              |                            |   | 9,488   |        |      |   | 11,056 |        |  |   | 6,701  |       
|                                                | Dividend to parent company                              |                            |   | (26,993 | )      |      |   |       |        |  |   |       |       
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, end of period                                  |                            |   | 9,451   |        |      |   | 26,956 |        |  |   | 15,900 |       
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|Accumulated other comprehensive income
	(loss): |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, beginning of period                            |                            |   | 401     |        |      |   | (232   | )      |  |   | (182   | )     
|                                                | Other comprehensive income (loss), net of income
	taxes |                            |   | (741    | )      |      |   | 633    |        |  |   | (50    | )     
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                | Balance, end of period                                  |                            |   | (340    | )      |      |   | 401    |        |  |   | (232   | )     
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       
|                                                |                                                         | Total stockholders equity |   | $       | 24,839 |      |   | $      | 53,554 |  |   | $      | 34,634 | 
|                                                |                                                         |                            |   |         |        |      |   |        |        |  |   |       

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

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AMBASSADORS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |         |       |        |  
|-------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ----- | ------ | -
|                                       |                                                                                    |                                                        
|                                       |                                                                                    | Years Ended December 31,                               
|                                       |                                                                                    |                                                        
|                                       |                                                                                    | 2001                                                    |                                                       | 2000    |        | 1999   
|                                       |                                                                                    |                                                         |                                                       |         |        |        
|                                       |                                                                                    |                                                        
|                                       |                                                                                    | (In thousands)                                         
|Cash flows from operating
	activities: |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       | Net income                                                                         |                                                         | $                                                     | 9,488   |        |         | $     | 11,056  |        |         | $     | 6,701   |      
|                                       | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                         |                                                       |         |        |         |       |         |        |         |       |         |      
|                                       |                                                                                    | Depreciation and amortization                           |                                                       |         | 926    |         |       |         | 1,226  |         |       |         | 817   |       
|                                       |                                                                                    | Write-down of intangible assets                         |                                                       |         | 5,607  |         |       |         |       |         |       |         |      |       
|                                       |                                                                                    | Write-down of investments                               |                                                       |         | 330    |         |       |         |       |         |       |         |      |       
|                                       |                                                                                    | Deferred income tax benefit                             |                                                       |         | (1,465 | )       |       |         | (599   | )       |       |         | (15   | )     
|                                       |                                                                                    | Loss (gain) on foreign currency exchange
	contracts     |                                                       |         | (36    | )       |       |         | 1,565  |         |       |         | (42   | )     
|                                       |                                                                                    | 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    |         |       |         |       |         |       |         | 40    |       
|                                       |                                                                                    | Accounts receivable                                     |                                                       |         | (95    | )       |       |         | 94     |         |       |         | 1,198 |       
|                                       |                                                                                    | Prepaid program costs and expenses                      |                                                       |         | (495   | )       |       |         | (300   | )       |       |         | 553   |       
|                                       |                                                                                    | Accounts payable and accrued expenses                   |                                                       |         | 411    |         |       |         | 1,576  |         |       |         | 192   |       
|                                       |                                                                                    | Participants deposits                                  |                                                       |         | (6,212 | )       |       |         | 10,756 |         |       |         | 252   |       
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       |                                                                                    |                                                         | Net cash provided by (used in) operating
	activities  |         |        | 6,994   |       |         |        | 25,386  |       |         |       | 9,696  |  
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|Cash flows from investing
	activities: |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       | Purchase of property and equipment                                                 |                                                         |                                                       | (882    | )      |         |       | (981    | )      |         |       | (788    | )    
|                                       | Proceeds from sale of available-for-sale
	securities                               |                                                         |                                                       | 37,885  |        |         |       | 14,521  |        |         |       | 9,837   |      
|                                       | Purchase of available-for-sale securities                                          |                                                         |                                                       | (20,000 | )      |         |       | (48,949 | )      |         |       | (16,537 | )    
|                                       | Purchase of other investments                                                      |                                                         |                                                       | (320    | )      |         |       |        |        |         |       |        |      
|                                       | Cash paid for acquisition of subsidiary, net of
	cash received                     |                                                         |                                                       |        |        |         |       | (3      | )      |         |       | (1,690  | )    
|                                       | Payment for covenant-not-to-compete agreement                                      |                                                         |                                                       |        |        |         |       | (38     | )      |         |       | (38     | )    
|                                       | Change in other assets                                                             |                                                         |                                                       |        |        |         |       | 51      |        |         |       | 1       |      
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       |                                                                                    |                                                         | Net cash provided by (used in) investing
	activities  |         |        | 16,683  |       |         |        | (35,399 | )     |         |       | (9,215 | )
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|Cash flows from financing
	activities: |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|Contribution from parent company       |                                                                                    |                                                         |                                                      |         |        |         | 7,231 |         |        |         | 9,421 |        
|                                       | Dividend to parent company                                                         |                                                         |                                                       | (37,462 | )      |         |       |        |        |         |       |        |      
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       |                                                                                    |                                                         | Net cash provided by (used in) financing
	activities  |         |        | (37,462 | )     |         |        | 7,231   |       |         |       | 9,421  |  
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       |                                                                                    |                                                         | Net increase (decrease) in cash and cash
	equivalents |         |        | (13,785 | )     |         |        | (2,782  | )     |         |       | 9,902  |  
|                                       | Cash and cash equivalents, beginning of period                                     |                                                         |                                                       | 30,303  |        |         |       | 33,085  |        |         |       | 23,183  |      
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        
|                                       | Cash and cash equivalents, end of period                                           |                                                         | $                                                     | 16,518  |        |         | $     | 30,303  |        |         | $     | 33,085  |      
|                                       |                                                                                    |                                                         |                                                       |         |        |         |       |         |        |         |       |        

See Note 7 for non-cash investing and financing
activities.

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

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##### Table of Contents



AMBASSADORS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Company
Business and Summary of Significant Accounting
Policies

Organization
and Basis of Consolidation

Ambassadors Group, Inc. (the Company or the
Group) is an educational travel company that organizes and
promotes international educational travel and sports programs
for students, athletes and professionals. The Company was
founded in 1967 and was reincorporated in Delaware as
Ambassadors Education Group, Inc. in 1995. The Company comprises
the operations of the former Education Group segment of its
parent, Ambassadors International, Inc. and changed its name to
Ambassadors Group, Inc. during 2001 in anticipation of its spin
off from its parent company (See Note 9).

The consolidated financial statements include the
accounts of Ambassadors Group, Inc. and its wholly-owned
subsidiaries, Ambassador Programs, Inc. and Ambassadors Sports
Group, Inc. (Sports Group). The consolidated financial
statements have been carved out from the consolidated financial
statements of its parent using the historical operating results
and historical bases of the assets and liabilities of its
parents business that Group comprises. 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.
(See also Note 10.) Sports Group commenced operations in
June 1999 with the acquisition of a company engaged in providing
youth sports travel programs. All significant intercompany
accounts and transactions are eliminated in consolidation.

The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 131 Disclosures about
Segments of an Enterprise and Related Information
effective for fiscal years beginning after December 31,
1997. SFAS No. 131 establishes a framework for segment
reporting of selected information. The Company has determined
that it has a single operating segment consisting of the
educational travel and sports programs for students, athletes
and professionals. These programs have similar economic
characteristics are similar in the nature of products offered
and participants, as well as utilize similar processes for the
marketing of the programs and providing of travel and
educational services.

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,
|                                                     |  |             
|                                                     |  | 2001         |    | 2000 |  | 1999
|                                                     |  |              |    |      |  |     
|Europe                                               |  |              | 46 | %    |  |      | 42 | % |  |  | 49 | %
|South Pacific (primarily Australia and New
	Zealand) |  |              | 34 | %    |  |      | 31 | % |  |  | 33 | %
|United States                                        |  |              | 7  | %    |  |      | 8  | % |  |  | 9  | %
|Asia (primarily China)                               |  |              | 7  | %    |  |      | 12 | % |  |  | 6  | %
|Other                                                |  |              | 6  | %    |  |      | 7  | % |  |  | 3  | %

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

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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
$3.0 million revolving credit facility for the purpose of
issuing letters of credit to several airlines. The facility
expires in August 2002, but allows for letters of credit to be
issued through August 2004. At December 31, 2001 and 2000,
the Company had letters of credit outstanding of approximately
$260,000 and $216,000 under this facility.

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
are recognized in current period earnings. Unrealized gains and
losses on foreign currency exchange contracts that are not
qualifying cash flow hedges as defined by SFAS 133 are recorded
in the statements of operations.

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
$330,000 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 which 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

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

Goodwill is 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. The Company
periodically assesses the recoverability of the recorded
goodwill based upon the expected undiscounted cash flows of the
business operations that generated the goodwill. During the
fourth quarter of 2001, the Company recorded a charge related to
managements conclusion that the goodwill was impaired (see
Note 12).

Revenue
Recognition

The Company bills travel participants in advance,
which are recorded as participants deposits. The Company
pays for certain direct program costs such as 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. The Company is included in the
consolidated income tax return of its parent company,
Ambassadors International, Inc. The income tax provision
recorded in these financial statements is computed on a separate
return basis for the years ended December 31, 2001, 2000
and 1999.

Earnings Per
Share

Earnings per share  basic is computed
by dividing net income (loss) 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 and
subsequent to December 31, 2001, there were approximately
1,243,000 stock options granted to employees and directors
of the Company. As of the date of grant, approximately
425,000 options were exercisable. The exercise price of
options granted had an exercise price ranging from $4.83 per
share to $17.12 per share. Of the approximate
1,243,000 options granted to employees and directors,
830,000 options were converted from options originally
granted under the parent company. These converted stock options
granted to employees of the Company are intended to provide the
employees with a benefit similar as they had with the parent.
The dilutive effect of stock options to the parent was less than
8% for all periods presented. However, this is not necessarily
indicative of the impact on diluted earnings per share to the
Company.

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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.

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 are outstanding
as of December 31, 2001 or 2000. However, subsequent to
December 31, 2001 and in conjunction with the spin-off, the
Company granted stock options to its employees (see Note 7).

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.

New
Accounting Pronouncements

On July 20, 2001, the FASB issued SFAS
No. 141, Business Combinations. 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. Use of the pooling-of-interest method will
be 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.

On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued FASB Statement 142
(SFAS 142), Goodwill and Other Intangible Assets.
SFAS 142 changes the accounting for goodwill and certain
other intangible assets from an amortization method to an
impairment-only approach. Upon Adoption of SFAS 142,
goodwill and certain other intangible assets will be tested at
the reporting unit annually and whenever events or circumstances
occur indicating that goodwill and certain other intangible
assets might be impaired. Amortization of goodwill and certain
other intangible assets, including goodwill recorded in past
business combinations, will cease. The adoption date for the
Company was January 1, 2002. The Company expects that the
adoption of SFAS 142 will result in a pre-tax increase to
net earnings of a nominal amount for the fiscal year 2002 from
the cessation of amortization of previously recorded goodwill
and does not expect to recognize any impairments.

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

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. 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. SFAS 144 will be effective
for the fiscal year beginning January 1, 2002. The Company
does not anticipate that the adoption of SFAS 143 and
SFAS 144 will have a material impact on its financial
condition or results of operations.

2.     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 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.
All of the Companys derivatives are cash flow hedges of
forecasted transactions. The Company has a $50,000,000 credit
facility with a large financial institution through August 2002
to support foreign currency purchases and foreign exchange
forward contracts.

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

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

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


At December 31, 2000, the Company had
outstanding forward contracts as follows (in thousands):

|                                         |                    |          |        |         |  |  |  |                      | 
|---------------------------------------- | ------------------ | -------- | ------ | ------- |  |  |  | -------------------- | 
|                                         |                    | Notional |        |        
|Currency                                 |                    | Amount   |        | Matures
|                                         |                    |          |        |        
|Forward contracts:                       |                    |          |        |         |  |  |  |                     
|                                         | Australian dollar  |          | $      | 3,000   |  |  |  | January - April 2001 | 
|                                         | Australian dollar  |          |        | 9,400   |  |  |  | April - June 2002    | 
|                                         | New Zealand dollar |          |        | 4,000   |  |  |  | May - July 2001      | 
|                                         | Euro dollar        |          |        | 3,460   |  |  |  | May - July 2002      | 
|                                         | British pound      |          |        | 1,250   |  |  |  | June - July 2002     | 
|                                         |                    |          |        |         |  |  |  |                     
|                                         |                    | $        | 21,110 |         |  |  |  |                     
|                                         |                    |          |        |         |  |  |  |                     
|Forward contracts with synthetic option: |                    |          |        |         |  |  |  |                     
|                                         | Euro dollar        |          | $      | 6,200   |  |  |  | April 2001           | 
|                                         | Euro dollar        |          |        | 3,460   |  |  |  | March - May 2002     | 
|                                         | British pound      |          |        | 5,000   |  |  |  | May 2001             | 
|                                         | British pound      |          |        | 1,250   |  |  |  | March - June 2002    | 
|                                         | Australian dollar  |          |        | 6,000   |  |  |  | May - July 2001      | 
|                                         | New Zealand dollar |          |        | 3,750   |  |  |  | May - June 2002      | 
|                                         |                    |          |        |         |  |  |  |                     
|                                         |                    | $        | 25,660 |         |  |  |  |                     
|                                         |                    |          |        |         |  |  |  |                     

At December 31, 2001 and 2000, the Company
had net unrealized losses associated with these financial
instruments of approximately $503,000 and $928,000,
respectively. Unrealized losses on forward contracts recorded in
other comprehensive income and expected to be reclassified to
revenue during the year ending December 31, 2002 are
approximately $340,000.

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, 2001 and 2000 was approximately
$60,000 and $(232,000), respectively. Income tax
(benefit) on the unrealized gain (loss) reclassified
in 2001 and 2000 was approximately $36,000 and $(137,000),
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, 2001 and 2000, 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 the 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.

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


3.     Investments

At December 31, 2001 and December 31,
2000, 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 |        | Gains      |  | Losses     |   | Value     
|                  |  |      |        |            |  |            |   |           
|December 31, 2001 |  | $    | 23,243 |            |  | $          |  |            |  | $ |  |  |  | $ | 23,243 | 
|                  |  |      |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|December 31, 2000 |  | $    | 41,128 |            |  | $          |  |            |  | $ |  |  |  | $ | 41,128 | 
|                  |  |      |        |            |  |            |   |            |  |   |   |  |  |   |        | 

At December 31, 2001, 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                  |  | $         | 14,922 |       |  | $ | 14,922 | 
|After one year through five years |  |           | 8,321  |       |  |   | 8,321  | 
|                                  |  |           |        |       |  |   |        | 
|                                  |  | $         | 23,243 |       |  | $ | 23,243 | 
|                                  |  |           |        |       |  |   |        | 

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.

4.     Property and
Equipment

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

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |        | 2000
|                                               |  |              |        |     
|Office furniture, fixtures and equipment       |  | $            | 2,574  |      |  | $ | 2,244  |  
|Computer equipment and software                |  |              | 3,676  |      |  |   | 3,327  |  
|Leasehold improvements                         |  |              | 897    |      |  |   | 694    |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 7,147  |      |  |   | 6,265  |  
|Less accumulated depreciation and amortization |  |              | (4,690 | )    |  |   | (4,023 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 2,457  |      |  | $ | 2,242  |  
|                                               |  |              |        |      |  |   |        |  

Depreciation and amortization expense on property
and equipment of approximately $668,000, $862,000 and $527,000,
for the years ended December 31, 2001, 2000, and 1999,
respectively, was included in the determination of net income.

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AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


5.     Income
Taxes

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

|         |         |                          |        |       |  |      |       |       |  |   |       |       | 
|-------- | ------- | ------------------------ | ------ | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|         |         |                         
|         |         | Years Ended December 31,
|         |         |                         
|         |         | 2001                     |        | 2000  |  | 1999
|         |         |                          |        |       |  |     
|Current: |         |                          |        |       |  |      |       |       |  |   |       |      
|         | Federal |                          | $      | 6,135 |  |      | $     | 6,403 |  |   | $     | 3,331 | 
|         | State   |                          |        | 550   |  |      |       | 12    |  |   |       | 16    | 
|Deferred |         |                          | (1,465 | )     |  |      | (599  | )     |  |   | (15   | )    
|         |         |                          |        |       |  |      |       |       |  |   |       |      
|         |         | $                        | 5,220  |       |  | $    | 5,816 |       |  | $ | 3,332 |      
|         |         |                          |        |       |  |      |       |       |  |   |       |      

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

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

|                                                        |  |                   |     |             |  |       |     |   |  |   |     |  
|------------------------------------------------------- |  | ----------------- | --- | ----------- |  | ----- | --- | - |  | - | --- | -
|                                                        |  |                  
|                                                        |  | December 31, 2000
|                                                        |  |                  
|                                                        |  | Assets            |     | Liabilities |  | Total
|                                                        |  |                   |     |             |  |      
|Accrued vacation                                        |  | $                 | 45  |             |  | $     |    |   |  | $ | 45  |  
|Depreciation                                            |  |                   |    |             |  |       | (91 | ) |  |   | (91 | )
|Unrealized loss on foreign currency exchange
	contracts |  |                   | 312 |             |  |       |    |   |  |   | 312 |  
|Amortization of goodwill and non-compete agreement      |  |                   | 13  |             |  |       |    |   |  |   | 13  |  
|                                                        |  |                   |     |             |  |       |     |   |  |   |     |  
|Total temporary differences                             |  | $                 | 370 |             |  | $     | (91 | ) |  | $ | 279 |  
|                                                        |  |                   |     |             |  |       |     |   |  |   |     |  

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,
|                                         |  |                         
|                                         |  | 2001                     |       |   |  | 2000   |      |   |  | 1999   |       |  
|                                         |  | Amount                   |       | % |  | Amount |      | % |  | Amount |       | %
|                                         |  |                          |       |   |  |        |      |   |  |        |       |  
|Provision at the federal statutory rate  |  | $                        | 5,146 |   |  |        | 35.0 | % |  | $      | 5,905 |   |  |  | 35.0 | % |  | $ | 3,512 |   |  |  | 35.0 | %
|State income tax, net of federal benefit |  |                          | 358   |   |  |        | 2.4  |   |  |        | 8     |   |  |  | 0.0  |   |  |   | 10    |   |  |  | 0.1  |  
|Tax exempt interest                      |  |                          | (54   | ) |  |        | (0.4 | ) |  |        | (76   | ) |  |  | (0.5 | ) |  |   | (112  | ) |  |  | (1.1 | )
|Other                                    |  |                          | (230  | ) |  |        | (1.5 | ) |  |        | (21   | ) |  |  | (0.1 | ) |  |   | (78   | ) |  |  | (0.8 | )
|                                         |  |                          |       |   |  |        |      |   |  |        |       |   |  |  |      |   |  |   |       |   |  |  |      |  
|                                         |  | $                        | 5,220 |   |  |        | 35.5 | % |  | $      | 5,816 |   |  |  | 34.4 | % |  | $ | 3,332 |   |  |  | 33.2 | %
|                                         |  |                          |       |   |  |        |      |   |  |        |       |   |  |  |      |   |  |   |       |   |  |  |      |  

41



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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     Commitments
and Contingencies

The Company leases office facilities and office
equipment under non-cancelable operating leases. At
December 31, 2000, future non-cancelable lease commitments
are as follows (in thousands):

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31, |  |  
|                         |  |  
|2002                     |  | $ | 683   | 
|2003                     |  |   | 664   | 
|2004                     |  |   | 577   | 
|2005                     |  |   | 115   | 
|                         |  |   |       | 
|                         |  | $ | 2,039 | 
|                         |  |   |       | 

Total rent expense for the years ended
December 31, 2001, 2000, and 1999 was approximately
$600,000, $635,000 and $580,000, 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 ten-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.

7.     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. Upon the Companys spin-off
effective February 28, 2002, the Company granted
approximately 1,243,000 stock options to Company employees
and directors pursuant to this Plan (see Note 1).

The stock options and other awards, as converted
or adjusted, have the same vesting provisions, option periods,
and other terms and conditions as the Ambassadors International,
Inc. 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 aggregate difference between market value
and exercise price as the Ambassadors International, Inc. stock
options prior to the adjustments. No new measurement date
occurred upon conversion of the stock options.

42



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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table presents information about
the options as of March 1, 2002:

|                      |                     |           |         |                |  |                  |               |              |  |   |       |       |  |  |     |     | 
|--------------------- | ------------------- | --------- | ------- | -------------- |  | ---------------- | ------------- | ------------ |  | - | ----- | ----- |  |  | --- | --- | 
|                      |                     |           |         |                |  |                 
|                      |                     |           |         |                |  | Weighted-Average
|                      |                     |           |         |                |  |                 
|                      |                     | Number of |         | Range of       |  |                  |               | Remaining   
|                      |                     | Shares    |         | Exercise Price |  | Exercise Price   |               | Life (Years)
|                      |                     |           |         |                |  |                  |               |             
|Exercisable options   |                     |           | 33,100  |                |  | $                | 4.83 - 5.14   |              |  | $ | 4.88  |       |  |  | 3.7 |    
|Exercisable options   |                     |           | 138,589 |                |  |                  | 5.14 - 6.84   |              |  |   | 6.08  |       |  |  | 5.3 |    
|Exercisable options   |                     |           | 92,847  |                |  |                  | 6.85 - 8.55   |              |  |   | 7.79  |       |  |  | 8.0 |    
|Exercisable options   |                     |           | 114,454 |                |  |                  | 8.56 - 10.26  |              |  |   | 8.88  |       |  |  | 6.4 |    
|Exercisable options   |                     |           | 17,414  |                |  |                  | 10.27 - 11.98 |              |  |   | 11.92 |       |  |  | 6.0 |    
|Exercisable options   |                     |           | 17,552  |                |  |                  | 13.70 - 15.40 |              |  |   | 15.37 |       |  |  | 6.8 |    
|Exercisable options   |                     |           | 11,019  |                |  |                  | 15.41 - 17.12 |              |  |   | 17.12 |       |  |  | 6.2 |    
|                      |                     |           |         |                |  |                  |               |              |  |   |       |       |  |  |     |    
|                      | Total exercisable   |           |         | 424,975        |  |                  |               | 4.83 - 17.12 |  |   |       | 8.03  |  |  |     |     | 
|                     
|Unexercisable options |                     |           | 26,274  |                |  | $                | 5.14 - 6.84   |              |  | $ | 6.11  |       |  |  | 5.3 |    
|Unexercisable options |                     |           | 154,089 |                |  |                  | 6.85 - 8.55   |              |  |   | 7.86  |       |  |  | 8.0 |    
|Unexercisable options |                     |           | 31,794  |                |  |                  | 8.56 - 10.26  |              |  |   | 9.07  |       |  |  | 6.4 |    
|Unexercisable options |                     |           | 321     |                |  |                  | 10.27 - 11.98 |              |  |   | 11.90 |       |  |  | 6.0 |    
|Unexercisable options |                     |           | 592,417 |                |  |                  | 11.99 - 13.69 |              |  |   | 12.21 |       |  |  | 9.8 |    
|Unexercisable options |                     |           | 9,365   |                |  |                  | 13.70 - 15.40 |              |  |   | 15.27 |       |  |  | 6.8 |    
|Unexercisable options |                     |           | 3,678   |                |  |                  | 15.41 - 17.12 |              |  |   | 17.12 |       |  |  | 6.2 |    
|                      |                     |           |         |                |  |                  |               |              |  |   |       |       |  |  |     |    
|                      | Total unexercisable |           |         | 817,938        |  |                  |               | 5.14 - 17.12 |  |   |       | 10.09 |  |  |     |     | 
|                     
|                      | Total all options   |           |         | 1,242,913      |  |                  | $             | 4.83 - 17.12 |  |   | $     | 10.09 |  |  |     | 8.1 | 
|                      |                     |           |         |                |  |                  |               |              |  |   |       |       |  |  |     |    

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. The options may be exercised any
time after they are fully vested for a period up to
10 years from the grant date.

8. Recapitalization of the Company

In April 2001 and February 2002, the
Companys common stock was split and 9,813,140 shares
became issued and outstanding. Therefore, shares outstanding for
all periods presented have been retroactively adjusted for the
stock split.

9.     Ambassadors
Group Spin-off

On January 25, 2002, Ambassadors Board
of Directors formally approved the spin-off plan. The Board of
Directors also declared a dividend of Ambassador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 has received a favorable
Internal Revenue Service private letter ruling to that effect.
Ambassadors distributed all of the Companys common stock
to its stockholders.

43



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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The Company has entered into agreements with
Ambassadors that provide for the separation of the
Companys business operations from Ambassadors. These
agreements also govern various interim and 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 trading of the common
stock of Group on the Nasdaq National Market began on
March 1, 2002 under the ticker symbol EPAX. The
Company intends to report the effects of the spin-off on assets
and earnings in its next quarterly filing under the Securities
Exchange Act of 1934.

10.     Allocated
Costs

The consolidated financial statements include
certain costs incurred by Ambassadors which have been allocated
to the Company. These costs are primarily corporate personnel,
finance, travel, marketing and other general and administrative
costs. The costs have been allocated to the Company primarily
based on headcount or revenues of the Company relative to the
total consolidated headcount or revenues of Ambassadors
International, Inc. 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, |  |  
|                        |  |  
|2001                    |  | $ | 1,242,000 | 
|2000                    |  |   | 1,169,000 | 
|1999                    |  |   | 839,000   | 

11.     Employee
Benefit Plan

The Companys employees participate in the
parent companys 401(k) Profit Sharing Plan (the Plan).
Employees are eligible to participate in the Plan upon six
months of service and 21 years of age. Employees may
contribute up to 15% 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, 2001,
2000, and 1999, the Company contributed approximately $45,000,
$36,000, and $32,000 to the Plan, respectively.

The Company established a separate 401(k) Profit
Sharing Plan for the employees of the Company, effective
March 2002. All Plan assets associated with the employees
of the Company will be transferred from the parent
companys Plan to the new Plan established by the Company.

12.     Business
Acquisition

In June 1999, the Company acquired certain assets
of a company primarily engaged in providing youth sports travel
programs. The total purchase price for the acquisition was
$2.5 million plus the issuance of 69,405 shares of
Ambassadors International restricted common stock, and certain
contingent consideration. Total assets acquired and liabilities
assumed in this acquisition was approximately $2.8 million
and $5.7 million, respectively. Assets acquired consisted
primarily of cash, accounts receivables and prepaid expenses.
Liabilities consisted primarily of accounts payable and
participant deposits. The common stock issued to effect the
transaction was recorded at its estimated fair value based upon
quoted market price adjusted for trading

44



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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


restrictions of $800,000. Until the adoption of
FAS 142 on January 1, 2002 (see Note 1), goodwill
related to this acquisition of approximately $6.1 million
was being amortized over 30 years.

The acquisition has been accounted for using the
purchase method of accounting. The results of operations of the
company has been included in the consolidated statements of
operations since its date of acquisition. The following
unaudited pro forma summary presents the consolidated results of
operations of the Company as if the 1999 acquisitions had
occurred at January 1, 1999 (in thousands except per share
data):

|                                         |  |      |        | 
|---------------------------------------- |  | ---- | ------ | 
|                                         |  | 1999
|                                         |  |     
|Revenue                                  |  | $    | 26,548 | 
|                                         |  |      |        | 
|Net income                               |  | $    | 5,973  | 
|                                         |  |      |        | 
|Net income per share  basic and diluted |  | $    | 0.61   | 
|                                         |  |      |        | 

The above amounts are based upon certain
assumptions and estimates which the Company believes are
reasonable and do not reflect any benefit from economies which
might be achieved from combined operations. The pro forma
results do not necessarily represent results which would have
occurred if the acquisitions had taken place on the bases
assumed above, nor are they indicative of the results of future
combined operations.

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 the company
primarily engaged in providing youth sports travel programs.

13.     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.

45



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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

Other
Investments The fair value
of other investments is not readily determinable.

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

|                  |                               |                   |   |                   |   |          |   |        |   |  |   |        |   |  |   |        |  
|----------------- | ----------------------------- | ----------------- | - | ----------------- | - | -------- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                  |                               |                   |   |                  
|                  |                               | December 31, 2001 |   | December 31, 2000
|                  |                               |                   |   |                  
|                  |                               | Carrying          |   | Fair              |   | Carrying |   | Fair  
|                  |                               | Amount            |   | Value             |   | Amount   |   | Value 
|                  |                               |                   |   |                   |   |          |   |       
|Financial assets: |                               |                   |   |                   |   |          |   |        |   |  |   |        |   |  |   |       
|                  | Cash and cash equivalents     |                   | $ | 16,518            |   |          | $ | 16,518 |   |  | $ | 30,303 |   |  | $ | 30,303 |  
|                  | Derivatives                   |                   |   | (503              | ) |          |   | (503   | ) |  |   | (928   | ) |  |   | (928   | )
|                  | Available-for-sale securities |                   |   | 23,243            |   |          |   | 23,243 |   |  |   | 41,128 |   |  |   | 41,128 |  

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.

14.     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,                
|                                        |                                                          |                                         
|                                        |                                                          | 2001                                     |   | 2000  |      | 1999
|                                        |                                                          |                                          |   |       |      |     
|Numerator:                              |                                                          |                                          |   |       |      |      |   |        |      |  |   |      
|                                        | Net income for basic and diluted earnings per
	share     |                                          | $ | 9,488 |      |      | $ | 11,056 |      |  | $ | 6,701 |     
|                                        |                                                          |                                          |   |       |      |      |   |        |      |  |   |      
|Denominator:                            |                                                          |                                          |   |       |      |      |   |        |      |  |   |      
|                                        | Weighted-average shares outstanding 
	basic and diluted |                                          |   | 9,813 |      |      |   | 9,813  |      |  |   | 9,813 |     
|                                        |                                                          |                                          |   |       |      |      |   |        |      |  |   |      
|Earnings per share  basic and diluted: |                                                          |                                          |   |       |      |      |   |        |      |  |   |      
|                                        |                                                          | Net income per share  basic and diluted |   | $     | 0.97 |      |   | $      | 1.13 |  |   | $     | 0.68 | 
|                                        |                                                          |                                          |   |       |      |      |   |        |      |  |   |      

15.     Related Party
Transactions

Periodically, the Company transfers excess cash
to its parent company as a dividend. The dividends per share
were $2.78 and $0.68 in 2001 and 1998, respectively. During
2002, and before the spin-off from its parent, the Company
transferred $2.08 per share of excess cash to its parent
company. Additionally, the parent company has 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.

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##### Table of Contents



AMBASSADORS GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


16.     Quarterly
Financial Data

Summarized quarterly financial data for 2001,
2000, and 1999 is as follows (unaudited, and in thousands except
per share data):

|                           |  |                |        |         |  |              |        |             |  |   |        |  |  |   |         |  
|-------------------------- |  | -------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------- | -
|                           |  |               
|                           |  | 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  |  |                | (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, and
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 share
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  |  |                | (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 quarters ended March 31, June 30,
September 30, and December 31, 2000, respectively.

|                           |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|-------------------------- |  | -------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | -
|                           |  |               
|                           |  | Quarters Ended
|                           |  |               
|                           |  | March 31       |        | June 30 |  | September 30 |        | December 31
|                           |  |                |        |         |  |              |        |            
|1999                       |  |                |        |         |  |              |        |             |  |   |        |  |  |   |        |  
|Net revenues               |  | $              | 259    |         |  | $            | 11,983 |             |  | $ | 12,935 |  |  | $ | 1,356  |  
|Income (loss) before taxes |  |                | (3,039 | )       |  |              | 8,964  |             |  |   | 7,438  |  |  |   | (3,330 | )
|Net income (loss)          |  |                | (2,030 | )       |  |              | 5,987  |             |  |   | 4,968  |  |  |   | (2,224 | )
|Earnings (loss) per share  |  |                | (0.21  | )       |  |              | 0.61   |             |  |   | 0.51   |  |  |   | (0.23  | )

Gross program receipts totaled $0.7 million,
$32.9 million, $33.7 million, and $4.3 million
for quarters ended March 31, June 30,
September 30, and December 31, 1999, respectively.

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48



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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 27, 2002

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 27, 2002 | 
|                                              
|/s/ JOHN A. UEBERROTHJohn A. Ueberroth         |  | Chairman of the Board of Directors                                                                                |  |      | March 27, 2002 | 
|                                              
|/s/ MARGARET M. SESTEROMargaret M. Sestero     |  | Executive Vice-President,
	Chief Financial Officer,
	and Secretary
	(Principal Financial and
	Accounting Officer) |  |      | March 27, 2002 | 
|                                              
|/s/ JAMES L. EASTONJames L. Easton             |  | Director                                                                                                          |  |      | March 27, 2002 | 
|                                              
|/s/ RAFER L. JOHNSONRafer L. Johnson           |  | Director                                                                                                          |  |      | March 27, 2002 | 
|                                              
|/s/ JOHN C. SPENCEJohn C. Spence               |  | Director                                                                                                          |  |      | March 27, 2002 | 
|                                              
|/s/ RICHARD D. C. WHILDENRichard D. C. Whilden |  | Director                                                                                                          |  |      | March 27, 2002 | 
|                                              
|/s/ JOSEPH J. UEBERROTHJoseph J. Ueberroth     |  | Director                                                                                                          |  |      | March 27, 2002 | 
|                                              
|/s/ BRIGITTE M. BRENBrigitte M. Bren           |  | Director                                                                                                          |  |      | March 27, 2002 | 

49



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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.