UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form 10-K




ý
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended December 31, 2008Oro
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from
            
            to





Commission
file number: 0-33347





Ambassadors
Group, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
            
            91-1957010(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)Dwight
      D. Eisenhower Building
              2001
      South Flint Road
              Spokane,
      WA
            
            99224(Address
      of Principal Executive Offices)
            
            (Zip
      Code)Registrant’s
      telephone number, including area code: (509) 568-7800Securities
      registered pursuant to Section 12(b) of the Act:Common
      Stock, $.01 Par Value
            
            The
      NASDAQ Stock Market(Title
      of Class)
            
            (Name
      of each exchange on which registered)Securities
      registered pursuant to Section 12(g) of the Act:None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


oYesxNo










Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


oYesxNo







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.


ýYes


oNo





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.


o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer o
            
            Accelerated
      filer xNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


o
            Yesý
            No





The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the Common Stock on the NASDAQ
Stock Market on June 30, 2008, was $135.3 million. Shares of Common Stock held
by each executive officer and director, and by each individual and entity that
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.





The
number of shares of the registrant’s Common Stock, $0.01 par value, outstanding
as of February 17, 2009 was 18,822,563.




DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive Proxy Statement relating to the 2009 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K to the extent stated herein.










TABLE
OF CONTENTS


PagePART IItem 1.
            Business
            1Item 1A.
            RiskFactors
            9Item 1B.
            Unresolved
      Staff Comments
            13Item 2.
            Properties
            14Item 3.
            Legal
      Proceedings
            14Item 4.
            Submission of Matters to a Vote
      of Security Holders
            14PART IIItem 5.
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            15Item 6.
            Selected Financial
      Data
            18Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            19Item 7A.
            Quantitative and Qualitative
      Disclosures About Market Risk
            31Item 8.
            Financial Statements and
      Supplementary Data
            31Item 9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            32Item 9A.
            Controls and
      Procedures
            32Item
      9B.
            Other
      Information
            35PART IIIItem
      10.
            Directors,
      Executive Officers  and Corporate Governance
            35Item 11.
            Executive
      Compensation
            35Item 12.
            Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
            35Item 13.
            Certain Relationships and Related
      Transactions, and Director Independence
            35Item 14.
            Principal AccountingFees and
      Services
            35PART IVItem 15.
            Exhibits, Financial Statement
      Schedules
            36Signatures
            II-1










Forward-Looking
Statements




Statements
contained in this Annual Report on Form 10-K of Ambassadors Group, Inc., which
are not historical in nature, are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended (the “Act”) and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking
statements include, without limitation, statements that relate to expectations
concerning matters that are not historical facts.  Words such as
“projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and
similar words and expressions are intended to identify forward-looking
statements. These forward-looking statements reflect our beliefs or current
expectations with respect to, among other things, trends in the travel and
education industry, our business and growth strategies, our use of technology,
our ability to integrate acquired businesses, and fluctuations in our results of
operations.




Forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from anticipated results. These risks and
uncertainties include factors affecting the travel and education industry
generally, competition, dependence on key personnel and vendor relationships,
our ability to successfully integrate the operations of existing or acquired
companies, and a variety of factors such as conflict in Iraq and the Middle
East, periods of international unrest, the outbreak of disease, changes in the
direct-mail environment, protection of intellectual rights, unidentified
taxation exposure, recession, weather conditions and concerns for passenger
safety that could cause a decline in travel demand, as well as the risk factors
set forth in Item 1A and other factors as may be identified from time to time in
our filings with the Securities and Exchange Commission (the “SEC”) or in our
press releases. All forward-looking statements are expressly qualified in their
entirety by these factors and all related cautionary statements. We do not
undertake any obligation to update any forward-looking statements.




PART I




Item 1.Business




Ambassadors
Group, Inc. (“Ambassadors,” “Company,” “we,” “us” or “our”) is a leading
educational company that organizes and promotes international and domestic
travel programs for students, athletes and professionals, and provides over 8
million pages of online research content through www.bookrags.com. We were
founded in 1967, reincorporated in Delaware in 1995, and operated as Ambassadors
Education Group, a wholly owned subsidiary of Ambassadors International, Inc.
(“International”) until February 2002. Effective February 28, 2002,
Ambassadors spun off from International by virtue of a special stock dividend to
International’s shareholders of all of the outstanding shares of our Company
that International owned (the “Distribution”). Beginning March 1, 2002, we
began operating as an independent stand-alone company. Trading of our Common
Stock on the NASDAQ Stock Market began on March 1, 2002 under the symbol
“EPAX.” Our principal offices are located in Spokane, Washington,
USA.




Our
travel business consists of several specialized private-label educational travel
programs, including (i) the “People to People Student Ambassador Programs”
(“Student Ambassador Programs”), which provide opportunities for grade school,
middle school and high school 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 middle school and high
school athletes to participate in international sports challenges, (iii) the
“People to People Leadership Summit,” and “World Leadership Forum” (“Leadership
Programs”), which provide domestic travel experiences for grade school, middle
school and high school students emphasizing leadership, community involvement,
and government education, and (iv) the “People to People Citizen Ambassador
Programs” (“Citizen Ambassador Programs”), which provide foreign travel
experiences for professionals, with emphasis on meetings and seminars between
delegates and persons in similar professions abroad.




-1-


Since
1995, we have expanded our travel operations primarily through internal growth
and three acquisitions of educational or travel related businesses. Since 1963,
we have organized programs for nearly 481,000 students, adults and athletes. Our
educational travel programs feature visits abroad, including, but not limited
to, Antarctica, Australia, China, France, Germany, Great Britain, Italy, South
Africa, and New Zealand. In 2008, 41,929 delegates, including students from over
90 different countries, traveled on our programs to 49 countries on seven
continents.





We have
the exclusive right from People to People International (“People to People”) to
develop and conduct student programs for kindergarten through high school
students using the People to People name. We also have the non-exclusive right
to develop, market and operate programs for professionals, college students and
athletes using the People to People name. However, at the present time, we are
the only entity that has been given this right by People to People. These
rights, granted pursuant to agreements with People to People, expire in 2010
and, at our election, may be extended through 2020. 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 the honorary chairman of People to People.
Mary Eisenhower, the president and chief executive officer of People to People,
also continues her grandfather’s legacy by serving the
organization.





We
believe that our 42 years of continuous experience, relationships arising
from organizing travel programs, and our association with People to People have
provided the foundation for our Company. This foundation allows us to develop
and maintain strong strategic alliances and a competitive edge in the
educational and travel industries at a competitive program cost. This foundation
also allows us to provide high-quality and unique educational programs and
customer service. We intend to continue to grow our business internally through
marketing enhancements, new programs and strategic alliances, and may make
selective acquisitions of and/or joint agreements with travel, education, and
direct marketing related businesses.





On May 15, 2008, we acquired 100
percent of the stock in the educational website BookRags, Inc. (“BookRags”)
(www.bookrags.com). BookRags was founded in 1999. It
initially started as a source for online book summaries and notes, and has grown
to include a wide variety of content, including lesson plans, film summaries,
biographies, and literary criticisms. The BookRags’ demographic is similar in
nature to that of Ambassador Programs’ and although it is not travel related,
BookRags is a complementary fit to our business model in relation to marketing
opportunities, as well as the seasonality of our business. The results of
BookRags have been consolidated into our results of operations as of May 15,
2008.





Student
Ambassador Programs




Our
Student Ambassador Programs provide an educational opportunity for students in
grade school, middle school and high school to travel to one or more foreign
countries or domestically, and to learn about the history, government, economy
and culture of such countries. We market our Student Ambassador Programs through
a combination of direct mail and local informational meetings primarily from
August through February. Our representatives review candidate applications
and conduct selection interviews throughout the country. Accepted applicants
participate in orientation meetings to prepare for their educational travel
programs.




Our
Student Ambassador Program delegations depart primarily during the summer
months, June through August, and generally travel for approximately
fourteen to twenty-three days, during which time each delegation visits one
or more countries. Each delegation generally consists of approximately 30 to 40
students and is accompanied by several teachers and local guides in each country
who assist the delegations for the duration of each program. Teachers and
students comprising a delegation generally come from the same
locale.





-2-


Programs
are designed by our 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. We
have contracts with program coordinators to provide day-to-day coordination and
oversight of the programs. In many instances, we also provide students with the
opportunity for a brief stay with a host family, which gives students a glimpse
of daily life in the visited country.




Eligible
students who complete certain written assignments and other projects can receive
high school and university credit for their participation in the program.
Universities recognizing academic credit include, but are not limited to:
Stanford University; Princeton University; Yale University; the University of
California, Los Angeles; the University of Washington; MIT (Massachusetts
Institute of Technology); Brown University; Johns Hopkins University; Columbia
University; Cornell University; Dartmouth College and Georgetown University. In
addition, high school students who successfully complete the program may be
eligible to receive service-learning credits, which have become a high
school graduation requirement in many curricula countrywide.





Sports
Ambassador Programs




Our
Sports Ambassador Programs provide an opportunity for student athletes in middle
school and high school to explore the host country’s culture and most
participate in international tournaments with teams from across the world in up
to ten different sports. We market our Sports Ambassador Programs through a
combination of direct mail and local informational meetings during the months of
January to March. Interested athletes apply to the program and are interviewed
by our representatives, after which the selected athletes are accepted for the
program.




Delegates
in the Sports Ambassador Programs depart during the summer months,
June through August, and travel for approximately nine to
fourteen days. Teams are formed based on gender and age, and most teams
comprise athletes from several different states. During a three- to four-day
training camp, athletes competing in tournaments participate in an individual
skill assessment, after which rosters are formed to ensure balanced and
competitive teams. After the formation of rosters, the rest of the training camp
focuses on team practice and fundamentals in preparation for the ensuing
tournament competition. In each tournament, we have contracts with overseas
tournament organizers to provide day-to-day coordination and oversight of the
programs. Additionally, athletes participate in sports nutrition, psychology,
leadership, physical training and international cultural
excursions.




Eligible
athletes who complete certain written assignments and projects can receive
university credit for their participation in the program. Universities
recognizing academic credit include, but are not limited to: Stanford
University; Princeton University; Yale University; the University of California,
Los Angeles; the University of Washington; MIT (Massachusetts Institute of
Technology); Brown University; Johns Hopkins University; Columbia University;
Cornell University; Dartmouth College and Georgetown University.





Leadership
Programs





Our
Leadership Programs provide the opportunity for motivated students with academic
promise, leadership potential and a desire to serve their communities to travel
domestically and internationally to exchange ideas with renowned speakers, field
specific experts, professional educators and their peers. These programs are
specifically designed for students in grade school, middle school and high
school. In addition to the academic coursework, delegates engage in specially
designed team-building and leadership-building exercises.





We market
the Leadership Programs through a direct-mail marketing effort throughout the
year, and they travel throughout the year for approximately seven to ten days.
Leadership Programs include group discussions, workshops, educational meetings
and other social and recreational activities. Programs originate from our
internal marketing and research staff, who identify academic topics, speakers
and facilitators. During
2005, we began to organize and operate all activities of most of our Student
Leader Programs, including speakers, facilitators, events, accommodations and
transportation. Previously, these activities were provided by outside
vendors.


-3-





Delegates
traveling on our Leadership Summit programs, grades nine through twelve, may be
eligible to receive transferable high school or university credits as part of
the academic program. Universities recognizing academic credit include, but are
not limited to: Stanford University; Princeton University; Yale University; the
University of California, Los Angeles; the University of Washington; MIT
(Massachusetts Institute of Technology); Brown University; Johns Hopkins
University; Columbia University; Cornell University; Dartmouth College and
Georgetown University. In addition, students who successfully complete the
program may be eligible to receive service-learning credits, which have
become a high school graduation requirement in many curricula
countrywide.





Citizen
Ambassador Programs




Our
Citizen 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. Citizen Ambassador
Programs are developed and travel throughout the year. Direct-mail invitations
are sent to candidate delegates approximately six to eight months prior to the
travel period for the delegation. Each program is designed to meet the interests
of the individual delegates, and travels for eight to twelve days, with an
optional additional cultural exchange following each program. Programs originate
from our internal development and research staff, who identify potential
delegation topics and leaders. Professional programs have been conducted in such
areas as agriculture, economics, education, law, medicine and science. Many of
our professional programs provide continuing educational credit for the
delegates as part of the program experience. Continuing education credits are
granted through alliances with professional and academic institutions, including
the American College of Medical Quality, the University of Pittsburgh, the
American Bar Association, many state bar associations and other
professional


associations
and societies.





We
believe that our Citizen Ambassador Programs provide delegates with enriching
experiences and deeper understandings of foreign cultures and people than visits
arranged independently or through travel agencies. Unlike travel programs
provided by travel agencies, these professional exchanges are intended largely
as working programs, with a significant amount of the participant’s time
involved in organized meetings, seminars and round-table discussions with their
foreign counterparts; visits to significant foreign facilities and institutions;
and informal gatherings with foreign counterparts. Each program is led by a
delegation leader based upon his or her recognition in the field and expertise
regarding the special focus of the particular program.





BookRags





The
BookRags' website, www.bookrags.com, is
an educational website that attracts millions of users and advertisers each
month. Students and teachers are able to “research anything” through over 8
million pages of content, including BookRags-created material, licensed
material, user-generated content, and other third party content. BookRags
provides book summaries, critical essays, as well as online study guides,
biographies and references to encyclopedia articles. Due to the nature of this
business and the users of the website, most of BookRags’ revenues are earned
during the months of September through June.





Segment
Information





Historically,
our operations were organized into one operating segment, consisting of
educational travel services to students, professionals and athletes through
multiple itineraries within four educational and cultural program types
(collectively, the “Ambassador Programs”). The travel programs have been
aggregated as a single reporting segment based on the similarity of their
economic characteristics and services provided. Beginning May 15, 2008 with the
acquisition of BookRags, our operations were organized into two operating
segments, which have been determined to be two reporting segments. These two
reporting segments are (1) Ambassador Programs and Other and (2) BookRags, an
internet research site
housing content sales and advertising revenue. See Note 16, Segment Reporting, in our
Consolidated Financial Statements for further segment information.




-4-




Academic
Accreditation




Since
2004, we have been academically accredited through the Northwest Association of
Accredited Schools. We developed the Washington School of World Studies to
provide an opportunity for middle school, junior high and high school students
to earn academic credit through their participation in the Student Ambassador
Programs, Sports Ambassador Programs or Student Leader Programs. The courses
offered by the Washington School of World Studies emphasize the total learning
experience of the participant while preparing for and participating in the
selected program. In addition to elective academic credit, students are eligible
to earn service-learning credits on select programs after successfully
completing the course requirements. Since inception, the Washington School of
World Studies has granted approximately 166,000 academic and service-learning
credits.





Since
2007, we have been able to provide teacher leaders with continuing education
units from their study and work as leaders through the International Association
for Continuing Education and Training (“IACET”).  As an authorized
IACET provider, we have granted approximately 550 continuing education
units.





Our
delegates and teacher leaders are also able to earn academic credit through
Eastern Washington University’s Eisenhower Center (“EWU”). Student Ambassadors
in grades nine through twelve may enroll in EWU courses and earn up to 12
credits. In addition, Student Ambassadors in grades seven and eight are eligible
to earn one credit per course. Teacher leaders many enroll in EWU courses and
earn up to five credits. Between 1980 and 2008, Student Ambassadors transferred
more than 42,000 college credits from EWU to universities of their choice. Since
2006, teacher leaders have earned more than 1,800 college credits from
EWU.





Strategic
Alliances





Alliances
with Students on Ice, Inc. and Full On (Europe) Limited provide adventure and
quality for our Student and Citizen Ambassador Programs. These agreements
prescribe the nature, scope and pricing of the travel services provided to our
delegates. An alliance with Safe Passage Travel I, LLC, provides safety
awareness to support the education and support of safe travel
practices.





We have
also entered into alliances with the American College of Medical Quality, the
American Bar Association and the University of Pittsburgh to provide continuing
education credits for our Citizen Ambassador Programs.





Service
and Trademarks




We have
registered or applied for a variety of service and trademarks, including, but
not limited to, the names “People to People Ambassador Programs,” “Ambassador
Programs,” “Initiative for Understanding,” “People to People Student Ambassador
Programs,” “People to People Sports Ambassador Programs,” “World Leadership
Forum” and “BookRags.” In addition, we have the right, subject to certain
exceptions, to use People to People’s name, service mark and logo for use in our
marketing. We believe that the strength of our service and trademarks is
valuable to our business and intend to continue to protect and promote our marks
as appropriate. We believe that our business is not overly dependent upon any
one trademark or service mark.





Insurance





We
maintain insurance coverage that we believe is adequate for our business,
including, but not limited to, professional and general liability insurance. We
also maintain insurance coverage on our leased real property and personal
property on a replacement cost basis. There is no assurance that the insurance
maintained by us will be adequate in the event of a claim, or that such
insurance will continue to be available in the future.





-5-


Employees




On
December 31, 2008, we employed 275 employees, of which 267 were full-time
employees. Of our full-time employees, 254 are located in Spokane, Washington,
six are located in Seattle, Washington and seven are located in Washington, D.C.
We have 196 full-time employees engaged in selling and marketing and 71
full-time employees in general and administrative positions. We also employ a
temporary workforce on a seasonal basis to assist with our direct marketing
efforts in recognition of the fact that our travel programs are seasonal in
nature. None of our employees are subject to collective bargaining agreements or
are represented by a union. We believe that our labor relations are good. Due to
continuing deteriorating economic conditions and its impact on expected future
travelers, we reduced our overall workforce approximately 17% on January 23,
2009.  On January 31, 2009, we employed 228 employees.





Competition





The
travel industry and the educational segment within the travel industry are
highly competitive. Our Student Ambassador Programs, Sports Ambassador Programs,
and Leadership 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. Our Sports Ambassador Programs also compete with independent
organizations, which coordinate and travel already intact teams for
international competition. Citizen Ambassador Programs compete with independent
professional associations and educational institutions, which sponsor and
organize their own travel programs through the assistance of local travel
agents, and other organizations that design travel programs and continuing
professional education for adults.




We
believe that the principal basis of competition in the educational travel
segment of the market is the quality and uniqueness of the educational program
offered, customer service, safety, reputation and program cost. We believe that
our 42 years of experience organizing student and professional educational
programs and established relationships with public officials, organizations and
residents in countries where we provide programs, as well as our agreements with
People to People, allow us to provide an educational opportunity that is not
easily duplicated by competitors’ programs.




We
believe the barriers to entry are relatively low for any future competitors.
Certain organizations engaged in the travel business could have substantially
greater financial, marketing and sales resources than we do. There can be no
assurance that our present or future competitors will not exert significant
competitive pressures on us in the future.





In
addition to competition we face in the travel industry, we also face significant
competition from a wide variety of content and media Web properties with
companies throughout the world. Content and advertising on the internet are
intensely competitive and have been rapidly evolving with converging
technologies. We compete with many larger Web properties that have larger staff
dedicated towards selling and advertising and have more traffic to offer
potential advertisers. We anticipate that this competition will increase over
time as Internet usage continues to grow.We believe that the
internet still offers a more attractive and measurable advertising option than
traditional off-line media including television, radio, billboard, magazine, and
newspaper.





Available
Information





We are
subject to the informational requirements of the Exchange Act that require us to
file reports, proxy and information statements, and other information with the
SEC. The public may read and copy our filings at the SEC’s Public Reference
Room, 100 F. Street, N.E., Washington, D.C. 20549. The SEC maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
www.sec.gov. Similarly, we maintain a website at www.AmbassadorsGroup.com,
where we make available our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practical after, or on the same day as, such material is
electronically filed with or furnished to the SEC. We make these available free
of charge.





-6-


BUSINESS
STRATEGY




We
believe that high-quality programs and exceptional customer service are and will
remain key elements of our success. Our strategy is to maintain our high quality
and unique educational programs while increasing the volume of business. To grow
the business, we intend to (i) expand the marketing and travel volume of
existing educational travel programs, (ii) introduce new educational travel
programs independently and through strategic alliances, (iii) further develop
our internet presence, and (iv) pursue acquisition
opportunities.





Expand
the Marketing and Travel Volume




U.S.
Census data projects that there will be more than 41.1 million people in
the 10- to 19-year-old age range by 2015. We believe that a large number of
qualified students in this age group are not aware of our youth travel programs.
In light of these factors, we intend to further develop our marketing techniques
by targeting additional age groups, making greater use of referrals from
teachers, parents and past student travelers, and expanding and refining our
extensive databases of potential delegates.





According
to U.S. Census data, the number of Americans 45 to 74 years old is expected
to grow substantially, increasing to more than 110.0 million people in
2015, from 102.3 million people in 2010. We expect this trend to benefit
our program growth, as this population segment historically has been the most
likely to participate in one of our professional travel programs. In addition,
we believe that American adults interested in traveling abroad will increasingly
seek convenient and unique experiences. Consequently, we believe that the
opportunity exists to expand the professional educational travel programs by
continuing to increase the quality and number of specialty professional
programs, including professional education credit opportunities, and by
exploring new country destinations. We continue to look for alliances with
partners that have strong brand recognition and access to well-defined customer
segments.





Introduce
New Programs




We
continually seek to develop and introduce additional innovative and educational
experiences. We intend to continue maintaining our contacts with foreign
governmental agencies and officials and utilizing these and other foreign
contacts to organize opportunities for our program delegates that other travel
programs do not currently offer. In addition, we may develop new youth travel
programs organized around common extracurricular activities such as science,
nature and music.




Expand
Website Traffic





According
to the U.S. Census, there will be over 72 million people in the United States by
2015 between the ages of 14 and 24. Worldwide, there will be almost 1.2 trillion
people between the ages of 15 and 24. According to internetworldstats.com,
worldwide penetration of the Internet is below 24% at the end of 2008, but is
rapidly growing.  As we continue to add content, resources, tools and
functionality to the BookRags web property, we anticipate increasing our
penetration of these ages as well as additional penetration into other age
groups.




Pursue
Acquisition Opportunities
  We consider the travel and youth
education industries encompassed by our business to be large and fragmented,
which present attractive acquisition opportunities.


-7-


We believe acquisitions of businesses that are either compatible
with our current business or represent a developing specialty segment may be an
opportunity.
 -8-


Item 1A.Risk
Factors





The
following risk factors could materially and adversely affect our future
operating results and could cause actual results to differ materially from those
predicted in forward-looking statements we make about our business.





A
decline in the travel industry could adversely affect our results of
operations.





Our
results of operations will depend upon factors affecting the travel industry in
general. Our enrollments and resulting 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 within the global market, the strength of the dollar,
foreign taxation changes, extreme weather conditions and concerns about
passenger safety could result in a temporary or longer-term overall decline in
demand for our programs. Also, demand for our products and services may be
significantly affected by the general level of economic activity and employment
levels in the United States and key international markets. Therefore, the
economic downturn or a recession in the United States or these other markets
could have a material adverse effect on our business, financial condition, cash
flows and results of operations. Currently, the United States and other markets
are facing these conditions which has impacted the travel industry, the markets
in which we operate, our operations and profitability. We expect these
conditions will continue to impact our operations and
profitability.




Business
interruption due to adverse weather conditions or natural disasters,
international political climate, armed conflicts, terrorist and threats thereof,
and other world events or other incidents affecting the health, safety, security
and/or program satisfaction of individuals could have an adverse affect on our
profitability.




Demand
for our travel programs may be adversely affected by natural occurrences such as
hurricanes, earthquakes, epidemics or other disease outbreaks, and flooding in
geographic regions in which we conduct travel programs. 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 our business, financial
condition, cash flows, and results of operations.





Our
operations are subject to special risks inherent in doing business
internationally, as a substantial portion of our travel programs are conducted
outside the United States. In the past, gross program receipts from programs to
Europe, the South Pacific (Australia and New Zealand) and China have accounted
for a majority of our receipts. Risks inherent in doing business internationally
include potential adverse effects on operations from war, U.S. military
deployments, international and domestic terrorism, civil disturbances, political
instability, foreign currency exchange rates, governmental activities and
deprivation of contract rights.





The
continued U.S. military presence as a result of unrest in the Middle East has
affected and will continue to affect the travel industry, the markets in which
we operate, and our operations and profitability. The potential long-term
effects are uncertain for our customers, the market for our Common Stock, the
markets for our services, the strength of the U.S. dollar and the U.S. economy.
In the past, we have experienced increased cancellations for our travel
programs. We have also experienced a weakened U.S. dollar, the negative effect
of which will cost us more to travel delegates abroad.





Periods
of international and domestic unrest have reduced demand for our travel programs
and could have a material adverse effect on our business and results of
operations. Examples of such past events include, but are not limited, to the
terrorist attacks noted below, war in Iraq in 2003, the Gulf War in 1991, civil
unrest in China in 1989, and the Chernobyl disaster in 1986.





Terrorist
attacks, such as the attacks that occurred in India on November 26 through 29,
2008, London on July 7 and 21, 2005, and in the United States on September 11,
2001, the continued U.S. military response, and other acts of violence or war
have and will affect the travel industry generally, the markets in which we
operate, as well as our operations and profitability. Further terrorist attacks
against the United States or U.S. businesses and citizens at home and abroad may
occur.






-9-


The
September 11 attacks had a very negative impact on domestic and international
air travel and the travel industry in general. As a result, we experienced a
significant decrease in profitability in 2002. The potential long-term effects
of these attacks are uncertain for our customers, the market for our Common
Stock, the markets for our services and the U.S. economy. The consequences of
any terrorist attacks, or any armed conflicts including war which may result,
are unpredictable, and we may not be able to foresee events that could have an
adverse effect on our business or operations.





Our
financial results are subject to fluctuations due to the seasonality of our
business.





Our
business is highly seasonal. The majority of our travel programs are scheduled
in June and July of each year, mildly complemented by the majority of content
sales which occur during the school year, primarily September to June. We
anticipate that this trend will continue for the foreseeable future. We
recognize gross program receipts, revenues and program pass-through expenses
upon the departure of our program delegates for the majority of our programs.
Substantially all of our operating income is generated in the second and third
quarters, which historically has offset the operating losses incurred during the
rest of the year. Annual results would be adversely affected if our revenues
were to be substantially below seasonal norms during the second and third
quarters of the year. Furthermore, our operating results may fluctuate as a
result of many factors, including the mix of student, sports, leadership and
professional programs and program destinations offered by us and our
competitors, the introduction and acceptance of new programs and program
enhancements by us and our 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. 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 our Common Stock could be materially and adversely affected.





Competition
in the travel and education industries could impact our results of
operations.





The
travel industry in general and the educational segment of the travel industry
are highly competitive and have relatively low barriers to entry. We compete
with other companies that provide similar educational travel programs for
students and athletes, as well as independent programs organized and sponsored
by local teachers and coaches with the assistance of local travel agents. People
to People, under the terms of its agreement with us, reserves the right to offer
programs to college students for studies abroad and to grant to other
individuals or entities, the right to use the People to People name in
connection with People to People’s professional education and sports programs.
In general, our Citizen Ambassador 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 and continuing education credits for adults. Some of our
competitors are larger and have greater brand-name recognition and financial
resources than we do. In addition to competition we face in the travel industry,
we also face significant competition from a wide variety of content and media
Web properties with companies throughout the world. Content and advertising on
the internet are intensely competitive and have been rapidly evolving with
converging technologies. We compete with many larger Web properties that have
larger staff and more traffic to offer potential advertisers. There can be no
assurance that we will be able to compete successfully, and the failure to
compete successfully may have a material adverse effect on our business,
financial condition, cash flows and results of operations.





Our
inability to use the “People to People” name could significantly impact our
success in attracting future travelers.





Our
agreements with People to People give us the exclusive right to develop and
conduct programs for kindergarten through high school students using the People
to People name, and the non-exclusive right to develop and conduct programs for
professionals, college students and athletes using the People to People name.
Our agreements with People to People, however, allow People to People to
continue to conduct college and professional seminars and internship programs
and to develop other sports and professional programs. Our agreements with
People to People expire in 2010 and, at our election, may be further
extended through 2020. We believe that we derive benefit from our ability to
market our programs




-10-




using the
People to People name. If our agreements with People to People were terminated
or if we were unable to use the People to People name to market new programs or
destinations, this could have a material adverse effect on our business,
financial condition, cash flows and results of operations. Similarly, if our
relationship with People to People is disrupted or is adversely impacted because
People to People experiences interruption, delay or ceases operations in the
future for any reason, our business could be harmed and our stock price may
decline.





Our
dependence on travel suppliers could delay the delivery of our products and
services, which would impact our reputation and could reduce our
profitability.





We are
dependent upon travel suppliers for access to their products and services.
Travel suppliers include airlines, hotels, bus lines, overseas coordinators and
other participants in the travel industry. Consistent with industry practices,
we currently have no long-term agreements with travel suppliers that obligate
such suppliers to sell services or products through us on an ongoing basis.
Therefore, the travel suppliers generally can cancel or modify their agreements
with us upon relatively short notice. In addition, any decline in the quality of
travel products and services provided by these suppliers, or a perception by our
delegates of such a decline, could adversely affect our reputation. The loss of
contracts, changes in our 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, resulting in low demand for the products and services of such travel
suppliers and loss of deposits with travel suppliers that could go bankrupt
could all have a material adverse effect on our business, financial condition,
cash flows and results of operations.





We
depend on our ability to attract and retain our key personnel.





Our
performance is substantially dependent on the continued services and
performances of our senior management and certain other key personnel. The loss
of the services of any of our executive officers or other key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends on our 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 our business, financial condition, cash flows and
results of operations.





We
depend on the effectiveness of marketing to obtain individuals to travel on our
programs and to use our website.





Our
performance in our travel programs is substantially dependent on the
effectiveness of our direct marketing efforts, including but not limited to,
names sources used to identify potential participants for our programs, direct
mail and local informational meetings. Failure or underperformance of our
marketing efforts or changes in the direct-mail environment could have a
material adverse effect on our business, financial condition, cash flows and
results of operations. Such changes in the direct-mail environment could
include, but are not limited to, a threat of disease or bioterrorism within the
mail environment and new or different regulatory schemes or changes in costs or
services by the United States Postal Service. In addition, the performance of
our research segment is dependent on advertising rates. Changes affecting
advertising fees and reduced traffic could have an impact on
operations.





Government
regulation and taxation may adversely affect the travel industry and thus
increase our operating expenses.





Many
travel suppliers, particularly airlines, are subject to extensive regulation by
federal, state and foreign governments. In addition, the travel industry is
subject to certain seller of travel laws of certain states and special taxes by
federal, state, local and foreign governments, including but not limited to
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 our business, financial condition, cash
flows and results of operations.


-11-







Fluctuations
in foreign currency exchange rates could affect our results of
operations.





Many of
our arrangements with our 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, we generally have purchased forward contracts and
options with less than two years’ maturity to help manage program costs and
hedge against foreign currency valuation increases. While the ability to utilize
forward contracts for the delivery of foreign currencies can mitigate the effect
of increased program costs and foreign currency exchange fluctuations, there can
be no assurance that increased program costs relating to such currency
fluctuations will not be substantial in future periods. There can also be no
assurance our hedging strategy will mitigate longer-term foreign exchange
valuation trends. Depending on the strength of the U.S. dollar at the time the
forward contracts and options are entered into and its strength throughout the
contracted period, we could end up in an over-hedged position, which may result
in a gain or loss that must be recognized in our financial statements
immediately. Our contract with delegates in our travel programs provides us the
option of passing along to delegates any increase in program costs resulting
from currency fluctuations. Although we have exercised this option in the past,
there can be no assurance that we 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 our business, financial condition, cash flows and
results of operations.





Litigation
may subject us to significant litigation costs, judgments, fines and penalties
in excess of insurance coverage, and divert management attention from our
business.





Due to
the nature of our business, we may be subject to liability claims arising out of
accidents or disasters causing injury to delegates on our programs, including
claims for serious personal injury or death. We believe that we have adequate
liability insurance for risks arising in the normal course of business. Although
we have experienced no claims for which we 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 we will
be able to obtain insurance coverage at acceptable levels and cost in the
future. Successful assertion against us 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 our business, financial condition, cash flows
and results of operations.  See “Item 3: Legal Proceedings”, for a
description of the claims that have been made against us.





If
we are unable to successfully manage the growth in our business, our prospects
may be limited and our future profitability will be decreased.





Our
performance is dependent on our ability to grow our business and expand the
marketing and volume of our educational travel programs, increase the number of
website visitors and unique users, and develop our brands. In addition, our
ability to grow is dependent on our ability to acquire or enter into strategic
alliances. Failure of growth strategies could have a material adverse effect on
our business, financial condition, cash flows and results of
operations.





We
are exposed to concentration of credit risk that could affect our results of
operations.





Cash,
cash equivalents and available-for-sale securities are exposed to concentrations
of credit risk. We place our 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 our cash, cash equivalents or available-for-sale
securities in excess of the insurance limit, we could suffer losses or it could
be necessary to obtain credit financing to operate our travel
programs.





-12-


Our
short-term investments primarily consist of municipal bonds and some auction
rate securities. The credit markets are currently experiencing significant
uncertainty, however our investments are in high-quality, tax-exempt municipal
obligations and our auction rate securities are insignificant compared to our
total investment portfolio. See Note 6, Fair Value Measurement of Financial
Assetsand Liabilities,in our Consolidated Financial Statements for further
information.





If
we are unable to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.





Substantially
all of our publications are protected by copyright, held either in our name, in
the name of the author of the work, or in the name of the sponsoring
professional society. Such copyrights protect our exclusive right to publish the
work in the United States and in many countries abroad for specified periods.
Our ability to obtain and continue to obtain access to existing and new content,
as well as our ability to continue to achieve expected results depends, in part,
upon our ability to protect our intellectual property rights. Our results may be
adversely affected by lack of legal or technological protections for our
intellectual property in some jurisdictions and markets that we operate
in.





We
depend on our ability to successfully integrate key acquisitions.





One of
our growth strategies is to acquire businesses that complement our existing
businesses. Target acquisitions may have an impact on costs, revenues, cash
flows, and our financial position, such as the recent acquisition of BookRags,
on May 15, 2008. Acquisitions involve risks and uncertainties, including
difficulties in integrating acquired operations and in realizing expected
opportunities, diversions of management resources and loss of key employees,
challenges with respect to operating new businesses, and other unanticipated
risks and liabilities.





Our
revenues and results of operations may fluctuate unexpectedly from quarter to
quarter, which may cause our stock price to decline.





The
market price of our Common Stock could be subject to significant fluctuations.
Some of the factors that could affect our stock price include:





•
      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 us or our competitors, such as acquisitions or
      restructurings;


•
      Actions by institutional
shareholders;


•
      General market conditions;


•
      Change in key employees;


•
      Domestic or international social and economic factors unrelated to our
      performance;


•
      Terrorist activities, and


•
      Limited shares of Common Stock available for
  trading





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





Item 1B.Unresolved Staff
Comments





None.








-13-








Item 2.Properties





We own an
office building, approximating 132,000 square feet, in which our headquarters
are located in Spokane, Washington. Our facilities are well maintained, in good
operating condition and provide adequate capacity for our needs. We have the
ability to expand our capacity for growth if we should need to in the future. At
December 31, 2008, Ambassadors Group, Inc. is the occupant of this
property.





We also
occupy two additional office spaces. One which totals approximately 2,400 square
feet in Arlington, Virginia, pursuant to a lease which expires April 30, 2011
and is occupied by Ambassador Programs. Another which totals approximately 2,200
square feet in Seattle, Washington, pursuant to a lease which expires on
February 28, 2011 and is occupied by both Ambassador Programs and BookRags. Both
facilities are well maintained, in good operating condition and provide adequate
capacity for our needs.





Item 3.Legal
Proceedings




On
January 28, 2008, Allen Hill and Sheryl Hill brought an action against us in
the Fourth Judicial District of the District Court for the County of
Hennepin, State of Minnesota, entitled Allen Hill and Sheryl Hill, et al.
v. Ambassadors Group, et al.. The complaint alleges damages for alleged
wrongful death of a minor, breach of contract, invasion of privacy, violation of
certain enumerated Minnesota statutes, fraud, consumer fraud and false statement
in advertisement in connection with the death of a minor resulting from
complications from diabetes while participating in one of our student programs
during the summer of 2007. We tendered our defense and indemnity under
applicable insurance coverage, and defense counsel in Minneapolis, Minnesota has
been assigned to represent us. Defense counsel filed an answer on our behalf,
denying any liability and raising various appropriate affirmative defenses. We
have been informed that the plaintiffs intend to amend their complaint to add a
claim for punitive damages against us.  The plaintiffs’ application for
punitive damages is scheduled to be heard by the Court on April 23, 2009.
Written discovery and depositions have commenced and are continuing. All such
discovery must be completed by April 15, 2009. A jury trial has been scheduled
in Minneapolis for July 13, 2009. We intend to vigorously defend this lawsuit
and the plaintiffs’ motion to amend their complaint to add a claim for punitive
damages. We believe that the likelihood that our Company will ultimately incur a
loss in connection with this litigation is reasonably possible rather than
probable. We cannot estimate the possible loss to our Company, if any. We have
not accrued any loss related to this litigation. The actual cost to resolve this
case will depend upon many factors such as the outcome of mediation, pre-trial
motions, trial and any appeals. However, we believe any loss incurred will not
have a material adverse effect on our business, financial condition, cash flows
or results of operations.





We are
not a party to any other material pending legal proceedings other than ordinary
routine litigation incidental to our business; the outcome of which we believe
will not have a material adverse effect on our business, financial condition,
cash flows or results of operations. These matters are subject to inherent
uncertainties and management’s view of these matters may change in the future.
Adverse outcomes in some or all of the matters described in this section may
result in significant monetary damages or injunctive relief against us that
would adversely affect our operations.





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




No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal year 2008.




















-14-











PART
II




Item 5.Market for the
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities







Market
Information




Our
Common Stock has been traded on the NASDAQ Stock Market under the symbol “EPAX”
since March 1, 2002.




As of
February 17­­­­­­­, 2009, the last reported sale
price of our Common Stock was $7.63. The following table sets forth the high and
low sale prices of a share of our Common Stock as reported on the NASDAQ Stock
Market on a quarterly basis for our fiscal years ended December 31, 2008
and 2007.




High
            
            LowQuarter
      ended March 31, 2008
            
            $
            20.80
            
            $
            16.40Quarter
      ended June 30, 2008
            
            $
            20.42
            
            $
            14.90Quarter
      ended September 30, 2008
            
            $
            19.99
            
            $
            13.31Quarter
      ended December 31, 2008
            
            $
            16.35
            
            $
            7.42Quarter
      ended March 31, 2007
            
            $
            33.55
            
            $
            27.98Quarter
      ended June 30, 2007
            
            $
            35.53
            
            $
            32.51Quarter
      ended September 30, 2007
            
            $
            39.65
            
            $
            34.02Quarter
      ended December 31, 2007
            
            $
            40.99
            
            $
            17.09








Performance
Graph





The
following graph compares our cumulative total shareholder return with the NASDAQ
Stock Market Index and the Russell 2000 Index. The graph assumes that $100 was
invested on December 31, 2003 in our Common Stock and in each of the indexes
mentioned above and that all dividends were reinvested.

















-15-


The
performance graph is being furnished by us and shall not be deemed “filed” for
purposes of Section 18 of the Exchange Act, or otherwise subject to the
liabilities of that section, nor shall it be deemed to be incorporated by
reference in any filing under the Act, or the Exchange Act.





Holders
of Record





As of
February 17, 2009, there were approximately 84 holders of record of our
Common Stock, according to our registrar. This number does not include
beneficial owners holding shares through nominee or street name.





Dividends





In
November 2003, the Board of Directors initiated a dividend policy, payable
on a quarterly basis. Each quarter, our Board of Directors reviews the dividend
payment, assessing the amount, timing and alignment with its strategic
direction.





On August
12, 2005, our Board of Directors declared a two-for-one stock split of our
Common Stock in the form of a 100-percent common stock dividend, payable on
September 15, 2005, to shareholders of record on August 31, 2005.





During
2007 and 2008, and through February 2009, our Board of Directors declared the
following dividend payments:





Declaration
      Date
            Record
      Date
            Payment
      Date
            
            Dividend Per
      ShareFebruary
      15, 2007
            March
      1, 2007
            March
      15, 2007
            
            $
            0.115May
      2, 2007
            May
      17, 2007
            June
      1, 2007
            
            $
            0.115August
      10, 2007
            August
      24, 2007
            September
      7, 2007
            
            $
            0.115November
      8, 2007
            November
      22, 2007
            December
      6, 2007
            
            $
            0.115February
      13, 2008
            February
      27, 2008
            March
      12, 2008
            
            $
            0.115May
      8, 2008
            May
      22, 2008
            June
      5, 2008
            
            $
            0.115August
      26, 2008
            September
      9, 2008
            September
      23, 2008
            
            $
            0.115November
      13, 2008
            November
      26, 2008
            December
      10, 2008
            
            $
            0.115February
      26, 2009
            March
      12, 2009
            March
      26, 2009
            
            $
            0.06





Transfer
Agent and Registrar




BNY
Mellon Shareowner Services serves as transfer agent and registrar of our Common
Stock.







-16-


Equity
Compensation Plan Information





The
following tables provide information as of December 31, 2008 about our Common
Stock that may be issued upon the exercise of options, warrants and rights under
all of our existing equity compensation plans.


(a)
            
            (b)
            
            
            (c)Plan
      category
            Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options,
              warrants
      and rights
            
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities
              reflected
      in column (a))Equity
      compensation plans approved by security holders
            1,845,459
            
            $
            10.96
            
            
            
            260,399Equity
      compensation plans not approved by security holders
            N/A
            
            
            N/A
            
            
            
            N/ATotal
            1,845,459
            
            $
            10.96
            
            
            
            260,399








Issuer
Purchases of Equity Securities




Between
May 2004 and December 2006, our Board of Directors authorized the repurchase of
up to $25.0 million of our Common Stock in the open market or through private
transactions. On November 8, 2007, our Board of Directors increased the
authorized Common Stock repurchase plan amounts to $45.0 million. On November
13, 2008, our Board of Directors, again, increased the authorized Common Stock
repurchase plan amounts to $55.0 million. There is no expiration date to
repurchase Common Stock. During the quarter ended December 31, 2008, we
repurchased 35,045 shares of our Common Stock for $0.3 million. Since inception
through December 31, 2008, we have repurchased approximately 1,829,400 shares of
our Common Stock, adjusted to reflect the effect of our two-for-one stock split
of our Common Stock, for an approximate total of $35.3 million. As of December
31, 2008, approximately $19.7 million remained available for repurchase under
the plan. Subsequent to December 31, 2008, no Common Stock has been
repurchased. The following is a summary of issuer purchases of equity
securities during the quarter ended December 31, 2008:


Period
            
            Total
      Number ofSharesPurchased
            
            
            Average
      PricePaid per
      Share
            
            
            Total
      Number ofSharesPurchased asPart of PubliclyAnnounced
      Plansor
      Programs
            
            
            Maximum Number (orApproximate Dollar Value) ofShares that MayYet Be PurchasedUnder the Plansor
ProgramAvailable
      for repurchase at September 30, 2008
            
            
            
            
            
            
            
            
            $
            10,000,003October 1
      – October 31, 2008
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            10,000,003November 1
      – November 30, 2008
            
            
            35,045
            
            
            $
            8.34
            
            
            
            35,045
            
            
            
            19,707,787December 1
      – December 31, 2008
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            19,707,78735,045
            
            
            $
            8.34
            
            
            
            35,045
            
            
            $
            19,707,787




Independent
of this share repurchase plan, during the first quarter of 2007, our Board of
Directors approved a single repurchase of 1.2 million shares of common stock for
approximately $33.0 million.











-17-




Recent
Sales of Unregistered Securities




During
the fiscal year ended December 31, 2008, we sold no equity securities that were
not registered under the Act.





Item 6.Selected Financial
Data




This
section presents our 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, 2008, and the consolidated balance sheet data as of
December 31, 2008 and 2007 have been derived from audited consolidated
financial statements included elsewhere in this Form 10-K. The consolidated
statement of operations data for the years ended December 31, 2005 and 2004
and the consolidated balance sheet data as of December 31, 2006, 2005 and
2004 have been derived from the audited consolidated financial statements, which
are not included in this Form 10-K. Historical results are not necessarily
indicative of future results.





December
      31,2008(C)(D)
            
            
            2007(C)
            
            
            2006(C)
            
            2005
            
            
            2004(in
      thousands, except per share data)Statement
      of Operations data:Net
      revenue, non-directly delivered programs (A)
            
            $
            65,656
            
            
            $
            84,512
            
            
            $
            69,554
            
            
            $
            64,321
            
            
            $
            51,824Gross
      revenue, directly delivered programs (A)
            
            $
            30,374
            
            
            $
            30,021
            
            
            $
            19,401
            
            
            $
            4,969
            
            
            $
            —Internet
      content and advertising revenue
            
            $
            1,897
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Total
      revenue
            
            $
            97,927
            
            
            $
            114,533
            
            
            $
            88,955
            
            
            $
            69,290
            
            
            $
            51,824Cost
      of sales, directly delivered programs
            
            $
            18,856
            
            
            $
            18,488
            
            
            $
            11,473
            
            
            $
            2,841
            
            
            $
            —Cost
      of sales, internet content and advertising
            
            $
            192
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Gross
      margin
            
            $
            78,879
            
            
            $
            96,045
            
            
            $
            77,482
            
            
            $
            66,449
            
            
            $
            51,824Selling
      and marketing expenses
            
            $
            40,842
            
            
            $
            38,943
            
            
            $
            31,638
            
            
            $
            27,574
            
            
            $
            22,616General
      and administrative expenses
            
            $
            12,568
            
            
            $
            15,274
            
            
            $
            11,721
            
            
            $
            8,185
            
            
            $
            6,537Operating
      income
            
            $
            25,469
            
            
            $
            41,828
            
            
            $
            34,123
            
            
            $
            30,690
            
            
            $
            22,671Operating
      margin
            
            
            32
            %
            
            
            44
            %
            
            
            44
            %
            
            
            46
            %
            
            
            44
            %Net
      income
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            22,410
            
            
            $
            15,647Earnings
      per share – basic (B)
            
            $
            0.99
            
            
            $
            1.60
            
            
            $
            1.30
            
            
            $
            1.10
            
            
            $
            0.78Earnings
      per share – diluted (B)
            
            $
            0.97
            
            
            $
            1.55
            
            
            $
            1.25
            
            
            $
            1.05
            
            
            $
            0.75Balance
      sheet data:Cash,
      cash equivalents and short-term available-for-sale
    securities
            
            $
            74,425
            
            
            $
            84,994
            
            
            $
            133,134
            
            
            $
            116,604
            
            
            $
            87,557Total
      assets
            
            $
            124,277
            
            
            $
            121,704
            
            
            $
            153,953
            
            
            $
            125,046
            
            
            $
            97,516Total
      stockholders’ equity
            
            $
            67,233
            
            
            $
            72,400
            
            
            $
            84,047
            
            
            $
            66,502
            
            
            $
            49,501Other
      key financial measures:Cash
      flow from operating activities (C)
            
            $
            24,732
            
            
            $
            16,436
            
            
            $
            37,207
            
            
            $
            37,792
            
            
            $
            27,906Cash
      flow provided by (used in) investing activities
            
            $
            (16,181
            )
            
            $
            9,677
            
            
            $
            (12,923
            )
            
            $
            (15,592
            )
            
            $
            (22,830
            )Cash
      flow used in financing activities (C)
            
            $
            (18,843
            )
            
            $
            (45,616
            )
            
            $
            (14,416
            )
            
            $
            (6,320
            )
            
            $
            (5,825
            )Cash
      dividends declared and paid
            
            $
            (8,801
            )
            
            $
            (8,940
            )
            
            $
            (7,655
            )
            
            $
            (5,729
            )
            
            $
            (4,630
            )Cash
      dividends declared and paid, per common share
            
            $
            0.46
            
            
            $
            0.46
            
            
            $
            0.37
            
            
            $
            0.28
            
            
            $
            0.23








-18-


(A)
            Net
      revenues are a function of gross program receipts from non-directly
      delivered programs, less program pass-through expenses from non-directly
      delivered programs. Program pass-through expenses include all direct costs
      associated with our programs, including, but not limited to, costs related
      to airfare, hotels, meals, ground transportation, guides, professional
      exchanges and changes in currency exchange rates. Gross revenues, directly
      delivered programs are a function of the gross program receipts for those
      programs we directly organize and operate, including all activities such
      as speakers, facilitators, events, accommodations and transportation.
      Gross receipts for both directly delivered programs, non-directly
      delivered programs and internet content and advertising revenue during the
      years ended December 31, 2008, 2007, 2006, 2005 and 2004 were $229.2
      million, $277.3 million, $219.5 million, $180.0 million, and
      $147.1 million, respectively. Gross margin as a percent of gross
      program receipts during the years ended December 31, 2008, 2007, 2006,
      2005, and 2004 were 34%, 35%, 35%, 37%, and 35%,
    respectively.





(B)
            During
      September 2005, we implemented a two-for-one stock split in the form of a
      100-percent stock dividend. The earnings per share calculations for all
      periods presented reflect the increase in the number of shares of Common
      Stock outstanding as a result of the stock
  split.





(C)
            
            We
      adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
      as of January 1, 2006. During 2008, 2007 and 2006, stock option
      expense was $0.9 million, $1.0 million, and $1.3 million. In addition to
      stock option expenses we recorded expense related to restricted stock
      grants in all years presented. Excess tax benefit from stock-based
      compensation is included in net cash provided by operating activities and
      net cash used in financing activities of $(0.1) million, $2.7 million, and
      $2.4 million for 2008, 2007, and 2006,
  respectively.





(D)
            
            We
      acquired BookRags on May 15, 2008, therefore our 2008 consolidated
      financial data includes BookRags’ results of operations since this
      date.




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




Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is designed to provide a reader of our consolidated financial
statements with a narrative from the perspective of our management on our
financial condition, results of operations, liquidity and certain other factors
that may affect our future results. Our MD&A is presented in ten
sections:





-
            Executive
      Overview


-
            Results
      of Operations


-
            Results
      of Operations by Segment


-
            Key
      Performance Non-GAAP Financial
Indicators


-
            Liquidity
      and Capital Resources


-
            Contractual
      Obligations


-
            Off-Balance-Sheet
      Arrangements


-
            Market
      Risk


-
            Critical
      Accounting Policies and Estimates


-
            Recent
      Accounting Pronouncements





Our
MD&A should be read in conjunction with the other sections of this annual
report on Form 10-K, including Part I, “Item 1A: Risk Factors”; Part II,
“Item 6: Selected
Financial Data”; and Part II, “Item 8: Financial Statements and
Supplementary Data.” The various sections of this MD&A contain a
number of forward-looking statements, all of which are based on our current
expectations and could be affected by the uncertainties and risk factors
described throughout this filing.











-19-





Executive
Overview




We are a leading educational company
that (1) organizes and promotes international and domestic travel programs for
students, athletes and professionals and (2) provides over 8 million pages of
online research content. Youth travel programs provide opportunities for grade
school, middle school and high school students to learn about the history,
government, economy and culture of the foreign and domestic destinations they
visit as well as for middle and high school athletes to participate in
international sports challenges. Our leadership programs provide educational
opportunities for middle school and high school students to learn leadership,
government, college admissions and community involvement skills at domestic
destinations. Our professional programs emphasize meetings and seminars between
delegates and persons in similar professions abroad. BookRags was acquired on
May 15, 2008. The BookRags website,www.bookrags.com, is an educational website that
attracts millions of users and advertisers each month. Students and teachers are
able to “research anything” through over 8 million pages of content, including
BookRags-created material, licensed material, user-generated content, and other
third party content. This acquisition aligns with our mission of bridging
cultural and political borders through education, is a thriving young business
and is a complementary revenue stream to the seasonal nature of the student
travel industry. It’s key website metrics, including but not limited to, monthly
page views, website visitors, and unique users, have had year on year double
digit growth rates.Thisacquisition was made for the purpose
of owning a business that attracts millions of similar customersandhas experienceand expertisein internet growth,yet we do not expect this business to
perform at the level of our travel programs. We expect BookRags to continue to
be profitable as it is still in the growth phase; however, we believe its
revenues and earnings will be negatively impacted by the current economic
conditions, but not to the extent of our educational travel
business.





The key
financial indicators that we use in managing our business and in evaluating our
financial condition and operating performance are: program operating results;
net operating income; deployable cash; free cash flow; return on adjusted
stockholders’ equity; net enrollments; various website metrics including monthly
page views, website visitors, and unique users; financial ratios; and leverage
as shown on our consolidated balance sheet. Deployable cash, free cash flow,
return on adjusted stockholders’ equity and net enrollments are non-GAAP
measurements we utilize and are defined and further described in the sections
captioned “Key Performance Non-GAAP Financial Indicators” below. The key
macro-economic factors and non-financial indicators that affect our financial
condition and operating performance are: military actions; terrorism; economic
stability; foreign currency fluctuations; and interest rates.





Our
operating results depend primarily on income from our travel programs, interest
level, conversion, and the retention of travelers. Additionally, the level of
expenses required to promote and operate our programs will impact our operating
results. The seasonality of our business is always a consideration. The majority
of our travel programs occur in June and July of each year,
complemented by the majority of content sales expected to occur during the
school year, primarily September to June. We have historically earned more than
90 percent of our annual revenues in the second and third quarters, which we
anticipate will continue for the foreseeable future. Historically, and similarly
in 2008, these seasonal revenues have more than offset operating losses incurred
during the rest of the year.





Our focus
in 2008 has been to enhance marketing and retention strategies, streamline our
program offerings for improved margin performance, manage expenses, develop our
system infrastructure, and integrate the acquisition of BookRags. Our
efforts  had a positive impact on operating results of the travel
segment by reducing the gap in enrollments originally projected at 30% in the
fall of 2007 to a decrease in travelers of 20% for the year ended
2008.  We will continue to seek opportunities to improve our
performance and add complementary revenue streams, such as the acquisition of
BookRags.





For 2009,
our focus will continue to include the following: increase net enrollments,
improve margin, develop our websites, improve brand recognition, investigate
growth opportunities, manage expenses, and increase efficiency through improved
business processes and automation. Please see “2009 Net Enrollments” below for
further discussion on our 2009 outlook on delegate registrations.





-20-





Results
of Operations




The
following table sets forth the consolidated financial results and change in
dollars and percentages for the periods indicated:





Comparison
of Year Ended December 31, 2008 to Year Ended December 31,
2007


Year
      Ended December 31,2008
            
            
            2007
            
            
            $
      Change
            
            
            %ChangeTotal
      revenue
            
            $
            97,927
            
            
            $
            114,533
            
            
            $
            (16,606
            )
            
            
            (14
            %)Cost
      of goods sold
            
            
            19,048
            
            
            
            18,488
            
            
            
            560
            
            
            
            3
            %Gross
      margin
            
            
            78,879
            
            
            
            96,045
            
            
            
            (17,166
            )
            
            
            (18
            %)Selling
      and marketing
            
            
            
            40,842
            
            
            
            38,943
            
            
            
            1,899
            
            
            
            5
            %General
      and administrative expenses
            
            
            
            12,568
            
            
            
            15,274
            
            
            
            (2,706
            )
            
            
            (18
            %)Operating
      income
            
            
            25,469
            
            
            
            41,828
            
            
            
            (16,359
            )
            
            
            (39
            %)Other
      income
            
            
            2,246
            
            
            
            4,172
            
            
            
            (1,926
            )
            
            
            (46
            %)Income
      before tax
            
            
            27,715
            
            
            
            46,000
            
            
            
            (18,285
            )
            
            
            (40
            %)Income
      tax provision
            
            
            9,169
            
            
            
            14,953
            
            
            
            (5,784
            )
            
            
            (39
            %)Net
      Income
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            (12,501
            )
            
            
            (40
            %)




In late
2007, our Company announced that 2008 results of operations would be down from
2007. Based on a 30 percent decline in net enrollments at that time, travelers
for 2008 were projected to be lower than 2007. This reduction was primarily
attributable to the underperformance of one name source and an uncertain
economic outlook across the nation. In response to these events, we increased
our marketing efforts to find new lead sources and increased our delegate
retention efforts, which resulted in reducing the year over year gap of 30
percent lower enrollments to 20 percent lower actual travelers.




During
2008, we traveled 41,929 delegates compared to 52,661 delegates in 2007. In
2008, total revenue decreased 14 percent to $97.9 million from $114.5 million
and gross margin decreased 18 percent, to $78.9 million from $96.0 million,
respectively. The $16.6 million total revenue and $17.2 million gross margin
decreases are primarily due to the 20 percent decrease in delegates traveled
during the year, which was partially offset by the change in delegate mix of
more Student Leaders and fewer Student Ambassadors. Additionally, international
air costs increased during the summer of 2008 in comparison to the previous
year, which reduced gross margin. Gross receipts and gross margin in 2008
include $1.9 million and $1.7 million from BookRags, respectively, which we
acquired in May 2008.




Selling
and marketing expenses were $40.8 million and $38.9 million for the years
ended December 31, 2008 and 2007, respectively. The $1.9 million increase
is primarily the net result of $1.0 million increase of marketing and retention
efforts, combined with $0.7 million in additional namelist purchases for 2009
travel programs, $0.9 million increase in personnel expenses related to
strategic new hires in product development, sales, and safety, and $0.7 million
decrease of operating expenses as a result of expense management measures
implemented throughout 2008. As a percent of gross margin, selling and marketing
expenses were 52 percent and 41 percent during 2008 and 2007, respectively. The
11 percent increase is predominantly related to our response to the reduction in
expected travelers.




General
and administrative expenses decreased to $12.6 million for the year ended
December 31, 2008 from $15.3 million for the year ended December 31,
2007. The $2.7 million decrease is primarily the result of $1.6 million decrease
in personnel incentive pay and reduction of employee headcount, $0.3 million of
reduced travel and conference expenses, and $0.8 million of overhead savings as
a result of expense management measures implemented throughout 2008. As a
percent of gross margin, general and administrative expenses were consistently
16 percent in 2008 and 2007.




-21-


During
the year ended December 31, 2008, our operating income decreased to
$25.5 million from $41.8 million for the year ended
December 31, 2007. Operating income as a percent of gross margin was 32
percent and 44 percent for 2008 and 2007, respectively.




Other income consisted primarily of
interest income generated by our cash, cash equivalents and available-for-sale
securities and foreign currency losses. We realized interest and dividend income
of $3.1 million in the year ended December 31, 2008, compared to $4.4
million in the year ended December 31, 2007. The decrease in interest and
dividend income is due to lower interest rates on lower average cash and
investment balances, which are primarily the result of Common Stock repurchases
approximating $10.2 million, dividends paid to shareholders of $8.8 million and
the $9.4 million acquisition of BookRags during 2008. In 2008 and 2007, the
average rate of return was3.3 percent and 3.6 percent,
respectively. In addition, we realized a $0.8 million foreign currency loss in
2008 due to being over-hedged in our foreign currency contracts. At the end of
every year, it is our policy to be 80 to 100 percent hedged for our forecasted
cash flow for the following year. As of December 31, 2008, we
were approximately 20 percent over-hedged, primarily in euro, British
pound, and Australian dollar on foreign currency contracts, purchased in the
spring and summer of 2008 for 2009 travel expenditures. The over-hedged
position and the resulting foreign currency loss is due to the decline in
net enrollments for 2009 travel programs combined with lower than expected
program costs and the strengthening of the U.S. dollar at the end of 2008 in
comparison to foreign currency contracted rates. We will continue to assess our
position and plan to exit foreign currency contracts to bring the
hedge position down to 100 percent as necessary. As of February 17, 2009, we
have incurred an additional $1.0 million loss to eliminate the over-hedged
position that will be recognized in our consolidated statement of operations
during the first quarter of 2009.





We
recorded an income tax provision of approximately $9.2 million for the year
ended December 31, 2008, in comparison to $15.0 million for the year
ended December 31, 2007. The decrease is due to lower pre-tax income. Our
effective tax rate was 33.0 percent and 32.5 percent for the years ended
December 31, 2008 and 2007, respectively. Our effective tax rate is lower than
the statutory tax rate due to tax-exempt interest income.





Comparison
of Year Ended December 31, 2007 to Year Ended December 31,
2006




Year
      Ended December 31,2007
            
            
            2006
            
            
            $
      Change
            
            
            % ChangeTotal
      revenue
            
            $
            114,533
            
            
            $
            88,955
            
            
            $
            25,578
            
            
            
            29
            %Cost
      of goods sold
            
            
            18,488
            
            
            
            11,473
            
            
            
            7,015
            
            
            
            61
            %Gross
      margin
            
            
            96,045
            
            
            
            77,482
            
            
            
            18,563
            
            
            
            24
            %Selling
      and marketing
            
            
            38,943
            
            
            
            31,638
            
            
            
            7,305
            
            
            
            23
            %General
      and administrative expenses
            
            
            15,274
            
            
            
            11,721
            
            
            
            3,553
            
            
            
            30
            %Operating
      income
            
            
            41,828
            
            
            
            34,123
            
            
            
            7,705
            
            
            
            23
            %Other
      income
            
            
            4,172
            
            
            
            4,755
            
            
            
            (583
            )
            
            
            (12
            %)Income
      before tax
            
            
            46,000
            
            
            
            38,878
            
            
            
            7,122
            
            
            
            18
            %Income
      tax provision
            
            
            14,953
            
            
            
            12,186
            
            
            
            2,767
            
            
            
            23
            %Net
      Income
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            4,355
            
            
            
            16
            %




During
2007, we traveled 52,661 delegates compared to approximately 43,075 delegates in
2006. In 2007, total revenue increased 29 percent to $114.5 million from $89.0
million, and gross margin increased 24 percent, to $96.0 million from
$77.5 million. The $25.6 million total revenue and $18.6 million gross
margin increases are primarily due to the 22 percent increase in delegates
traveled during the year.




Selling
and marketing expenses were $38.9 million and $31.6 million for the years
ended December 31, 2007 and 2006, respectively. The $7.3 million increase
is primarily the result of $2.0 million additional personnel costs in selling
and marketing support functions to support the larger volume of delegates, $3.6
million increased marketing efforts toward 2008 travel programs, and $0.8
million increased depreciation year over year associated with our new facility
which was completed in 2007. As a percent of gross margin, selling and marketing
expenses were consistently 41 percent during 2007 and 2006.




-22-


General
and administrative expenses increased to $15.3 million for the year ended
December 31, 2007 from $11.7 million for the year ended December 31,
2006. The $3.6 million increase is primarily the result of $1.4 million of
additional personnel costs supporting our additional delegate base, combined
with $0.6 million associated with technology initiatives and operational
strategy support services and $0.3 million in expenses related to the
termination of our prior leased facility. As a percent of gross margin, general
and administrative expenses increased slightly to 16 percent in 2007 from 15
percent in 2006.




Other
income consisted primarily of interest income generated by our cash, cash
equivalents and available-for-sale securities. We realized interest and dividend
income of $4.4 million in the year ended December 31, 2007, compared to
$4.7 million in the year ended December 31, 2006. The decrease in interest
and dividend income is related to lower cash balances held during 2007,
primarily the result of Common Stock repurchases approximating $41.2 million
during 2007 pursuant to our stock repurchase plan in comparison to $10.7 million
of Common Stock repurchases during 2006 and the use of cash to build a new
office facility during 2007. In 2007 and 2006, the average rate of return
was3.6 percent and
3.3 percent, respectively.





We
recorded an income tax provision of approximately $15.0 million for the year
ended December 31, 2007, in comparison to $12.2 million for the year
ended December 31, 2006. Our effective tax rate was 32.5 percent and 31.3
percent for the years ended December 31, 2007 and 2006, respectively. The
increase in the effective tax rate from 2006 was primarily the result of lower
interest earned from tax-exempt securities.





Results
of Operations by Segment





With the
acquisition of BookRags on May 15, 2008, we changed from having one reporting
segment to having two reporting segments, consisting of (1) Ambassador Programs
and Other, which provides educational travel services to students, professionals
and athletes through multiple itineraries within four educational and cultural
program types, and (2) BookRags, an internet research site housing content sales
and advertising revenue.





Ambassador
Programs’ gross margin is comprised of gross receipts less direct program costs,
including accommodation, transportation, speakers, facilitators, and event
costs. BookRags’ gross margin is comprised of content, subscription, and
advertising revenues via www.bookrags.com,
less commissions and amortization of intangible assets directly associated with
sales.





BookRags’
results of operations in 2007 and prior to May 15, 2008 were immaterial in
comparison to our consolidated results of operations as reported. Therefore, pro
forma financial information is not disclosed. BookRags results of operations
since May 15, 2008 are included in our consolidated financial
statements.








-23-




Segment
      results of operations for the year ended December 31, 2008 are as follows
      (in thousands):December
      31, 2008Ambassador
      Programs & Other
            
            
            BookRags
            
            
            TotalTotal
      revenue
            
            $
            96,030
            
            
            $
            1,897
            
            
            $
            97,927Cost
      of goods sold
            
            
            18,856
            
            
            
            192
            
            
            
            19,048Gross
      margin
            
            
            77,174
            
            
            
            1,705
            
            
            
            78,879Selling
      and marketing
            
            
            40,404
            
            
            
            438
            
            
            
            40,842General
      and administrative expenses
            
            
            12,443
            
            
            
            125
            
            
            
            12,568Operating
      income
            
            
            24,327
            
            
            
            1,142
            
            
            
            25,469Other
      income
            
            
            2,227
            
            
            
            19
            
            
            
            2,246Income
      before tax
            
            
            26,554
            
            
            
            1,161
            
            
            
            27,715Income
      tax provision
            
            
            8,784
            
            
            
            385
            
            
            
            9,169Net
      income
            
            $
            17,770
            
            
            $
            776
            
            
            $
            18,546





See
“Results of Operations” above for a discussion of year over year variances for
Ambassador Programs and details regarding the portion that was contributed by
BookRags. Since BookRags was acquired in 2008, no prior year amounts are
available to compare to the current year.





Any
intercompany sales or services provided that exist, which are rare, are
eliminated. Intercompany expenses paid for by Ambassador Programs on behalf of
BookRags are recorded as intercompany receivables and payables and eliminated
upon consolidation.





Key
Performance Non-GAAP Financial Indicators





We
analyze our performance on a net income, cash flow and liquidity basis in
accordance with generally accepted accounting principles (“GAAP”) as well as on
a non-GAAP operating, cash flow and liquidity basis referred to below as
“non-GAAP operating results” or “non-GAAP cash flows and liquidity measures.”
These measures and related discussions are presented as supplementary
information in this analysis to enhance the readers’ understanding of, and
highlight trends in, our core financial results. Any non-GAAP financial measure
used by us should not be considered in isolation or as a substitute for measures
of performance or liquidity prepared in accordance with GAAP.





2009
Net Enrollments





Net
enrollments consist of all individuals traveled year to date plus those actively
enrolled for future travel. As of February 1, 2009, we had 36,474 net enrolled
participants for our 2009 travel programs, compared to 45,634net enrolled participants
as of the same date last year for our 2008 travel programs. We believe the
decrease in net enrollments for our 2009 programs, which we believe is primarily
caused by the decline in consumer confidence and increase in the unemployment
rate, will negatively impact 2009 earnings. We have taken, and will continue to
take, measures to mitigate these negative impacts, including but not limited to
increased marketing and retention efforts toward 2009 travel, and continued
expense management, which included a reduction in workforce of approximately 17
percent in January of 2009. However, there can be no assurances that any of
these measures will have any success, and if so, to what extent.





Deployable
Cash





Deployable
cash is a non-GAAP liquidity measure. Deployable cash is calculated as the sum
of cash, cash equivalents, short-term available-for-sale securities and prepaid
program costs and expenses less the sum of accounts payable, accrued expenses
and other short-term liabilities (excluding deferred taxes), participant
deposits and the current portion of long-term capital lease. We believe the
deployable cash measurement is useful in understanding cash available to deploy
for current and future business opportunities. The decrease in deployable cash
over the three previous years is primarily due to dividends distributed to
shareholders in 2008 and 2007, share repurchases, the acquisition of BookRags in
2008 and the construction of our new headquarters in 2006 and 2007. See the
“Liquidity” section
below for explanations of cash sources and uses.





-24-


Deployable
      Cash Reconciliation (in thousands)December
      31,2008
            
            
            2007
            
            
            2006Cash,
      cash equivalents and short-term available-for-sale
    securities
            
            $
            74,425
            
            
            $
            84,994
            
            
            $
            133,134Prepaid
      program cost and expenses
            
            
            4,160
            
            
            
            3,624
            
            
            
            3,786Less:
      Participants’ deposits
            
            
            (44,166
            )
            
            
            (42,723
            )
            
            
            (60,651
            )Less:
      Accounts payable/accruals/other liabilities
            
            
            (4,473
            )
            
            
            (5,474
            )
            
            
            (8,322
            )Deployable
      cash
            
            $
            29,946
            
            
            $
            40,421
            
            
            $
            67,947








Free
Cash Flow





Free cash
flow is a non-GAAP cash flow measure. Free cash flow is calculated as cash flow
from operations less purchase of property and equipment. Management believes
this non-GAAP measure is useful to investors in understanding the cash generated
within a calendar year for future use in operations. Free cash flow per share is
calculated as free cash flow divided by weighted average shares outstanding at
year end.





Free Cash Flow Reconciliation (in
thousands except per share data)


December
      31,2008
              
              
              2007
              
              
              2006Cash
      flow from operations as reported
              $
              24,732
              
              
              $
              16,436
              
              
              $
              37,207Purchase
      of property and equipment
              
              (5,042
              )
              
              (19,271
              )
              
              (6,455)Free
      cash flow
              $
              19,690
              
              
              $
              (2,835
              )
              
              $
              30,752Weighted
      average shares outstanding at year end
              
              19,210
              
              
              
              20,094
              
              
              
              21,393Free
      cash flow per share
              $
              1.03
              
              
              $
              (0.14)
              
              
              $
              1.44






Return
on Adjusted Stockholders’ Equity





Return on
adjusted stockholders’ equity is a non-GAAP operating result. Average adjusted
stockholders’ equity is calculated as the average of stockholders’ equity at
January 1 less other comprehensive income at January 1 and
stockholders’ equity at December 31 less other comprehensive income at
December 31. Other comprehensive income is excluded from the calculation as
it represents the fair value of foreign exchange contracts designated as cash
flow hedges and unrealized gains and losses from available-for-sale securities.
As management fully intends to use the foreign exchange contracts for their
stated purpose, the amounts related to the market valuation of these cash flow
hedges do not reflect the equity generated from past performance, which has been
reinvested in our Company. We believe this non-GAAP measure is useful to
investors in understanding the performance of equity maintained in the business
from past earnings net of any dividends distributed to stockholders and share
repurchases.





-25-


Return
on Adjusted Stockholders’ Equity Reconciliation (in thousands except return
percentages)


December
      31,2008
              
              2007
              
              2006Stockholders’
      equity at January 1, as reported
              
              $
              72,400
              
              $
              84,047
              
              $
              66,502Less:
      other comprehensive income (loss) at January 1
              
              $
              2,417
              
              $
              1,636
              
              $
              (1,396)Plus:
      stockholders’ equity at December 31, as reported
              
              $
              67,233
              
              $
              72,400
              
              $
              84,047Less:
      other comprehensive income (loss) at December 31
              
              $
              (4,664)
              
              $
              2,417
              
              $
              1,636Average
      adjusted stockholders’ equity (the sum of the above divided by
      two)
              
              $
              70,940
              
              $
              76,197
              
              $
              75,155Net
      income
              
              $
              18,546
              
              $
              31,047
              
              $
              26,692Return
      on adjusted stockholders’ equity
              
              
              26%
              
              
              41%
              
              
              36%


Liquidity
and Capital Resources





Liquidity





At
December 31, 2008, we had approximately $74.4 million of cash, cash
equivalents, and short-term available-for-sale securities, which included
program participant funds of approximately $44.2 million. At
December 31, 2007, we had approximately $85.0 million of cash and cash
equivalents and available-for-sale securities, which included program
participant funds of $42.7 million. In addition to our cash and short-term
investments, at December 31, 2008, we had $2.1 million of auction rate
securities which have been classified as long-term investments. At December 31,
2007, these auction rate securities were classified as short-term
available-for-sale securities.





Net cash
provided by operations for the years ended December 31, 2008 and 2007 was
approximately $24.7 million and $16.4 million, respectively. The $8.3
million increase in operating cash flows between the years ending
December 31, 2008 and 2007 primarily results from a $12.5 million decrease
in earnings offset by $19.4 million increased cash flows for participant
deposits year over year.




Net cash
used in investing was $16.2 million for the year ended December 31, 2008 and
cash provided by investing activities was $9.7 million for the year ended
December 31, 2007. This $25.9 million fluctuation was due to $9.4 million
of cash used for the acquisition of BookRags during the year ended December 31,
2008 and the $16.3 million net use of cash for short-term investment purchases
and construction of a new facility in 2007.




Net cash
used in financing activities was $18.8 million in the year ending December 31,
2008 and $45.6 million during the year ending December 31, 2007. The net change
in financing activities was a result of two factors: a $31.0 million decrease in
cash used for the repurchase of our Common Stock; and a $2.8 million decrease in
tax benefits from stock-based compensation. During 2008, we paid $8.8 million in
cash dividends and used $10.2 million for stock repurchases.





In light
of the current economic conditions, we have taken steps to ensure our liquidity
remains a strong aspect of our Company. We have taken measures to implement an
expense management plan, which included a reduction in incentive pay, negotiated
vendor costs and workforce (which is further discussed in Note 18, Subsequent Events, of the
Consolidated Financial Statements in this Form 10-K). See ‘Deployable Cash’ and
‘Free Cash Flow’ above for further information on our liquidity.





Capital
Resources




Our
business is not capital intensive. However, we do retain funds for operating
purposes in order to conduct sales and marketing efforts for future
programs.





During
2008, we had an unused line of credit in the amount of $20.0 million. The line
of credit covenants include a current ratio greater than 1.5, deployable cash
greater than zero,




-26-




tangible
net worth greater than $40.0 million and net income after taxes greater than
$4.0 million. At December 31, 2008, we were in compliance with all covenants and
do not expect to be out of compliance through any additional financial
undertakings. Additionally, we have no plans to draw any of these funds in the
immediate future.





We
continue to consider acquisitions of educational, travel and youth 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 us.





We do not
have any material capital expenditure commitments for 2009, not already
presented within our December 31, 2008 financial statements. We believe that
existing cash and cash equivalents and cash flows from operations will be
sufficient to fund our anticipated operating needs and capital expenditures
through 2009. For a more complete discussion of these and other contractual
factors, please refer to our consolidated financial statements and the notes
thereto included in this Annual Report.





Contractual
Obligations





Other
than capital leases, we have no long-term debt or purchase obligations as of
December 31, 2008. The following table presents the maturities of our
contractual cash obligations as of December 31, 2008 (in thousands),
excluding normal accounts payable and accrued expenses:




Payments
      due by periodContractual
      Obligations
            
            Total
            
            
            Less
              than
              1
      year
            
            
            1
      – 3
              yearsOperating
      leases
            
            $
            217
            
            
            $
            104
            
            
            $
            113Capital
      lease
            
            
            11
            
            
            
            11
            
            
            
            —Total
            
            $
            228
            
            
            $
            115
            
            
            $
            113





Off-Balance
Sheet Arrangements





As of
December 31, 2008, we had no off-balance sheet arrangements, as defined in Item
303(a)(4) of Regulation S-K promulgated by the SEC.


Market
Risk





Interest
Rate Risk





At
December 31, 2008 and 2007, we held $69.5 million and $67.7 million,
respectively, of short-term and long-term available-for-sale securities,
consisting primarily of municipal bonds, variable rate demand notes (“VRDN”),
and auction rate securities (“ARS”).  Of the total balance, $67.4
million and $58.8 at December 31, 2008 and 2007, respectively, were in
high-quality, tax-exempt municipal obligations. The remaining $2.1 million and
$8.9 million were in ARS. The credit markets are experiencing significant
uncertainty, and some of this uncertainty has impacted and may continue to
impact the markets where our auction rate securities would be offered. During
2008, we experienced three failed ARS auctions, representing principal of $2.1
million, and exited all other ARS and VRDN holdings. Due to the longer term
nature of the next auctions and the continued uncertainty in the financial
markets, these ARS values have been classified as long-term assets.





In
determining whether the current financial crisis will have an impact on the fair
value of these investments, we considered the individual ratings of each bond
and ARS held. With regards to bonds we considered the following: the underlying
rating of the issuer irrespective of the insurance; the performance of the
issuer; the term of the bond; the quality of bond insurance provided by the
rating of the bond insurer; and the fair value as of each reporting date. With
regards to ARS, we considered the underlying credit quality of student loan
portfolios and federal government backing of its collateral as a basis of its
valuation. Based on these considerations, we determined that there was not any
other than temporary impairment
of these investments at the reporting dates. At the reporting dates and into the
future we recognize that these investments are subject to general credit,
liquidity, market and interest rate risks, which have been accentuated by the
current global financial crisis. The fair value of these investments accordingly
will continue to change, and we will continue to evaluate their carrying
values.





See Note
5, Available-for-Sale
Securities and Note 6, Fair Value Measurement of Financial
Assets and Liabilities, to the Consolidated Financial Statements in this
Form 10-K.





-27-


Foreign
Currency Exchange Rate Risk





The
majority of our travel programs take place outside of the United States and most
foreign suppliers require payment in currency other than the U.S. dollar.
Accordingly, we are exposed to foreign currency risk relative to changes in
foreign currency exchange rates between those currencies and the U.S. dollar.
Our processes include a program to provide a hedge against certain of these
foreign currency risks, and we use forward contracts that allow us to acquire
the foreign currency at a fixed price for a specified period of time. All of the
derivatives are cash flow hedges and the majority of the contracts qualify for
cash flow hedge accounting under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”).





The table
below provides information about our derivative financial instruments that are
sensitive to foreign currency exchange rates. For foreign currency forward
exchange agreements, the table presents the notional amounts and weighted
average exchange rates. All contracts held as of December 31, 2008 mature
in 2009 or 2010. These notional amounts generally are used to calculate the
contractual payments to be exchanged under the contract. None of these contracts
is entered into for trading purposes.





At
December 31, 2008, we recorded a net loss of approximately $8.4 million on
forward contracts in accumulated other comprehensive income. The unrealized loss
is expected to be reclassified to net revenue during the years ending December
31, 2009 and 2010, at approximately $5.8 million and $1.8 million, respectively.
During the year ended December 31, 2008, due to a reduction in enrolled delegate
expected to travel, and a reduction in negotiated vendor costs, we determined
that we were over-hedged for some of our 2009 expected foreign currency
requirements. Therefore, we de-designated some of our forward contracts as they
no longer met the requirements of SFAS 133 for hedge accounting treatment.
Accordingly, a loss of $0.8 million was realized in the consolidated statement
of operations as other expense for the year ended December 31,
2008.





At
December 31, 2008 and 2007, we had outstanding forward contracts as follows
(in thousands):


U.S.
      DollarAverageNotional
            
            
            
            ContractualDecember 31,
      2008
            
            
            Amount
            
            
            
            Exchange
      RateForward
      contracts (pay $U.S./receive foreign currency):Australian
      dollar
            
            
            16,650
            
            
            $
            0.85British
      pound
            
            
            6,350
            
            
            $
            1.84Euro
            
            
            16,995
            
            
            $
            1.44Japanese
      yen
            
            
            495,000
            
            
            $
            0.01New
      Zealand dollar
            
            
            1,550
            
            
            $
            0.71Forward
      contracts with variable option (pay $U.S./receive foreign
      currency):Australian
      dollar
            
            
            10,500
            
            
            $
            0.81British
      pound
            
            
            5,400
            
            
            $
            1.80Euro
            
            
            33,300
            
            
            $
            1.45New
      Zealand dollar
            
            
            3,710
            
            
            $
            0.70




-28-


U.S
      DollarAverageNotional
            
            
            ContracturalDecember 31,
      2007
            Amount
            
            
            Exchange
      RateForward
      contracts (pay $U.S./receive foreign currency):Australian
      dollar
            4,800
            
            $
            0.81British
      pound
            1,095
            
            $
            1.99Canadian
      dollar
            400
            
            $
            0.93Euro
            12,450
            
            $
            1.37Japanese
      yen
            217,000
            
            $
            0.01New
      Zealand dollar
            1,760
            
            $
            0.72Forward
      contracts with variable option (pay $U.S./receive foreign
      currency):Australian
      dollar
            11,520
            
            $
            0.83British
      pound
            6,520
            
            $
            2.11Canadian
      dollar
            375
            
            $
            0.96Euro
            26,630
            
            $
            1.37Japanese
      yen
            66,000
            
            $
            0.01New
      Zealand dollar
            3,075
            
            $
            0.73





See Note
4, Derivative Financial
InstrumentsandNote 6, Fair Value Measurement of Financial
Assets and Liabilities, to the Consolidated Financial Statements in this
Form 10-K.





Critical
Accounting Policies and Estimates





The
preparation of consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. We
consider our policies associated with cash and investments, valuation of
goodwill and intangible assets, income taxes, foreign currency, revenue
recognition, stock-based compensation and contingencies and litigation to be the
most critical in understanding the judgments that are involved in preparing our
consolidated financial statements.





Cash
and Investments





Cash,
cash equivalents, and available-for-sale securities are initially recorded at
cost, which includes any premiums and discounts. We determine the appropriate
classification of investment securities at the time of purchase.
Held-to-maturity securities are those securities that we have the positive
intent and ability to hold to maturity and are recorded at amortized cost.
Available-for-sale securities are those securities that would be available to be
sold in the future in response to our liquidity needs. Available-for-sale
securities are reported at fair value, with unrealized holding gains and losses
reported in shareholders’ equity as a separate component of other comprehensive
income, net of applicable deferred income taxes.





Management
evaluates investment securities for other-than-temporary declines in fair value
on a quarterly basis. If the fair value of investment securities falls below
their amortized cost and the decline is deemed to be other-than-temporary, the
securities will be written down to current market value, resulting in a loss
recorded in the income statement. There were no investment securities that
management identified to be other-than-temporarily impaired during the year
ended December 31, 2008, because the decline in fair value was attributable to
changes in interest rates and not credit quality, and because we have the
ability and intent to hold these investments until a recovery in market price
occurs, or until maturity. Realized losses could occur in future periods due to
a change in management’s intent to hold the investments to maturity, a change in
management’s assessment of credit risk, or a change in regulatory or accounting
requirements.





Intangible
Assets and Goodwill





Intangible
assets include goodwill, trademark, contract license agreements, content
copyrights, plagiarism software, non-compete agreements, and advertising
relationships. Goodwill, which is equal to the


-29-


excess of
costs over the fair value of acquired assets, has been recorded at the reporting
segment level in conjunction with the acquisition of BookRags. During 2008,
intangible assets other than trademark were
amortized on a straight-line basis over a weighted average life of 12 years.
Goodwill and intangible assets are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, (“SFAS 142”). Under SFAS 142, goodwill and intangible assets
deemed to have an indefinite life are not amortized and are subject to
impairment tests, at least annually, which compare the carrying amount of the
reporting unit to the fair value of the reporting unit. Under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, (“SFAS 144”), intangible assets with
definite lives are subject to impairment tests whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. An
impairment loss is recognized if the carrying amount of the intangible asset is
not recoverable and exceeds its fair value. The impairment tests performed in
2008 supported the carrying value of goodwill and intangible assets, and as
such, no write-downs in the carrying value were recorded.





Income
Taxes





In
accordance with SFAS No. 109, Accounting for Income Taxes,
(“SFAS 109”), 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 basis of assets and liabilities. We have considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for a valuation allowance. In the event we were to determine that we would not
be able to realize all or part of our 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.





Foreign
Currency




We use
foreign currency exchange contracts and options 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, we have assumed the risk that might arise from
the possible inability of counterparties to meet the terms of their contracts.
We do not expect any losses as a result of counterparty defaults. However, if
such defaults occurred, the necessity would arise to locate alternative
counterparties, or we would then consider alternate means of settling our
foreign exchange contractual obligations.




We
account for these foreign exchange contracts and options in accordance with the
provisions of SFAS  133. The statement requires that
all derivative instruments qualifying for hedge accounting 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 we are hedging the variability of cash
flows related to a forecasted transaction, changes in the fair value of the
derivative instrument are reported in other comprehensive income. The gains and
losses on the derivative instruments that are reported in other comprehensive
income are reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges is recognized in 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 statement
of operations.




Revenue
Recognition





For
non-directly delivered programs, we do not actively manage the operations of
each program, and our remaining performance obligation for these programs after
they convene is perfunctory. Therefore, revenue from these programs is presented
as net revenues and recognized as the program convenes. For directly delivered
programs, however, we organize and operate all activities including speakers,
facilitators, events, accommodations and transportation. As such, we recognize
the gross revenue and cost of sales of these directly delivered programs over
the period the programs are operated.




-30-


We bill
delegates in advance of travel, payments of which are recorded as participants’
deposits. We also pay for certain program costs in advance of travel, including,
but not limited to, airfare, hotel, rail passes and other program costs, which
are recorded as prepaid program costs and expenses. Under our cancellation
policy, a program delegate may be entitled to a refund of a portion of his or
her payments, less certain fees, depending on the time of cancellation. We
recognize cancellation fees concurrent with the revenue recognition from the
related programs.





Internet
content and advertising revenues are recognized at the point of sale and
corresponding to an advertisement being viewed on the BookRags site,
respectively. Revenue from annual subscriptions for content access to the
website is deferred and recognized monthly over the term of the subscription.
Cost of internet content sales include amortization of intangible assets and
licensing agreement costs.





Accounting
for Stock Options and Restricted Grants





We
maintain an Equity Participation Plan under which we have granted non-qualified
stock options and restricted stock to employees, non-employee directors and
consultants. Effective January 1, 2006, we adopted SFAS No. 123(R), Share Based Payment, (“SFAS
123(R)”) using the modified prospective method, and the fair value recognition
provisions of the “Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards”(“FSP 123(R)-3”),
using the alternative transition method. We elected to adopt the alternative
transition method provided in FSP 123(R)-3 for calculating the tax
effects of stock-based compensation. The alternative transition method includes
simplified methods to establish the beginning balance of the
additional-paid-in-capital pool (“APIC pool”) related to the tax effects of
stock-based compensation, and for determining the subsequent impact on the APIC
pool and consolidated statements of cash flows of the tax effects of stock-based
compensation awards that are outstanding upon adoption of SFAS
123(R).





Contingencies





We are
subject to the possibility of various loss contingencies including claims, suits
and complaints, arising in the ordinary course of business. We consider the
likelihood of loss or impairment of an asset or the incurrence of a liability,
as well as our ability to reasonably estimate the amount of loss in determining
loss contingencies. An estimated loss contingency is accrued when it is probable
that an asset has been impaired or a liability has been incurred and the amount
of loss can be reasonably estimated. We regularly evaluate current information
available to us to determine whether such accruals should be adjusted and
whether new accruals are required.





Recent
Accounting Pronouncements





See Note
2, Summary of Significant
Accounting Policies, to the Consolidated Financial Statements in this
Form 10-K.





Item 7A.Quantitative and Qualitative
Disclosures About Market Risk




The
information contained in Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations –Market Risk”
is incorporated by reference into Item 7A.





Item 8.
Financial Statements and
Supplementary Data




Reference
is made to the Index to Consolidated Financial Statements that appears on page
F-1 to this Annual Report. The Report of Independent Registered Public
Accounting Firm, the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements listed in the Index to Consolidated Financial
Statements, which appear beginning on page F-2 of this Annual Report, are
incorporated by reference into this Item 8.





-31-





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




None.




Item 9A.Controls and
Procedures




Evaluation
of Disclosure Controls and Procedures




As of
December 31, 2008, the end of the period covered by this Annual Report, our
chief executive officer and chief financial officer reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)), which are designed to
ensure  information required to be disclosed in our Annual Report
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported on a timely basis, and have concluded, based on that evaluation, that
as of such date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed in our reports that we file or submit
under the Exchange Act is accumulated and communicated to our chief executive
officer and chief financial officer as appropriate to allow timely decisions
regarding required disclosure.





Management’s
Report on Financial Statements and Practices





Our management is responsible for the
preparation and fair presentation of the financial statements included in this
Annual Report. The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and reflect our management’s judgments and estimates
concerning effects of events and transactions that are accounted for or
disclosed.




Management’s
Report on Internal Control over Financial Reporting




We are responsible for establishing and
maintaining adequate
internal control over financial reporting. Our internal control over financial
reporting includes the policies and procedures that pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the registrant; to recording
transactions as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles; to making receipts and
expenditures only in accordance with authorizations of management and directors
of our company; and for prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements. We recognize that because of its
inherent limitation, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Accordingly, even effective internal
control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation.




We conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2008. This evaluation was based on the framework in “Internal Control –
Integrated Framework” published by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our management concluded that we maintained effective internal
control over financial reporting as of December 31, 2008.




BDO
Seidman, LLP, an Independent Registered Public Accounting Firm, has issued an
attestation report on the effectiveness of our Company’s internal controls over
financial reporting as of December 31, 2008, pursuant to Item 308 of Regulation
S-K.




-32-


Changes
in Internal Control over Financial Reporting




For the
quarter ended December 31, 2008, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




-33-


Report
of Independent Registered Public Accounting Firm




Board of
Directors and Shareholders


Ambassadors
Group, Inc.


Spokane,
Washington




We have
audited Ambassadors Group Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Ambassadors Group, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying “Item 9A, Controls and Procedures”. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, Ambassadors Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Ambassadors
Group, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2008 and our
report dated March 11, 2009 expressed an unqualified opinion
thereon.







BDO
Seidman, LLP


Spokane,
Washington


March 11,
2009


-34-




Item
9B.  Other
Information




None.




PART
III




Item 10.
            Directors,  Executive
      Officersand
      Corporate Governance




The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2008, to
be filed with the SEC on or about April 6, 2009.




Item 11.
            Executive
      Compensation




The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2008, to
be filed with the SEC on or about April 6, 2009.




Item 12.
            Security Ownership of Certain
      Beneficial Owners and Managementand Related Stockholder
      Matters




The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2008, to
be filed with the SEC on or about April 6, 2009.





Item 13.
            Certain Relationships and
      Related Transactions, and Director
      Independence




The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2008, to
be filed with the SEC on or about April 6, 2009.




Item 14.
            Principal Accounting Fees and
      Services




The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2008, to
be filed with the SEC on or about April 6, 2009.








-35-


PART
IV





Item 15.
      Exhibits, Financial
      Statement Schedules




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




(1)Financial Statements.See the accompanying Index to Consolidated Financial Statements, which
appears on page F-1 of the Annual Report. The Report of Independent Registered
Public Accounting Firm, the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements listed in the Index to Consolidated Financial
Statements, which appear beginning on page F-2 of this report, are incorporated
by reference into Item 8 above.





(2) Financial Statement
Schedules. Financial Statement Schedules have been omitted because the
information required to be set forth therein is either not applicable or is
included in the Consolidated Financial Statements or the notes
thereto.




(3) Exhibits.  See Item
15(b) below.




(b) Exhibits.  The
exhibits listed on the accompanying Exhibit Index immediately following the signature
page are filed as part of, or are incorporated by reference into, this Annual
Report on Form
10-K.




(c) Financial Statement
Schedules.  Reference is made to Item 15(a)(2)
above.





-36-


AMBASSADORS GROUP, INC.




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
            
            F-2Consolidated Balance
      Sheets
            
            F-3Consolidated Statements of
      Operations
            
            F-4Consolidated
      Statements of Comprehensive Income
            
            F-5Consolidated Statements of
      Changes in Stockholders’ Equity
            
            F-6Consolidated Statements of Cash
      Flows
            
            F-7Notes to Consolidated Financial
      Statements
            
            F-8




F-1




Report of Independent Registered Public
Accounting Firm




Board of
Directors and Stockholders


Ambassadors
Group, Inc.


Spokane,
Washington




We have
audited the accompanying consolidated balance sheets of Ambassadors Group, Inc.
as of December 31, 2008 and 2007 and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ambassadors Group, Inc. at
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Ambassadors Group, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 11, 2009 expressed an
unqualified opinion thereon.







BDO
Seidman, LLP


Spokane,
Washington


March 11,
2009




F-2





AMBASSADORS
GROUP, INC.





CONSOLIDATED BALANCE SHEETS


December
      31,2008
            
            
            2007(in
      thousands, except share and per share data)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            6,989
            
            
            $
            17,281Available-for-sale
      securities
            
            
            67,436
            
            
            
            67,713Foreign
      currency exchange contracts
            
            
            —
            
            
            
            3,461Prepaid
      program cost and expenses
            
            
            4,160
            
            
            
            3,624Accounts
      receivable
            
            
            1,966
            
            
            
            641Deferred
      tax asset
            
            
            2,780
            
            
            
            —Total
      current assets
            
            
            83,331
            
            
            
            92,720Property,
      plant and equipment, net
            
            
            29,148
            
            
            
            27,454Available-for-sale
      securities
            
            
            2,100
            
            
            
            —Deferred
      tax asset
            
            
            241
            
            
            
            1,338Intangibles
            
            
            2,404
            
            
            
            —Goodwill
      and other long-term assets
            
            
            7,053
            
            
            
            192Total
      assets
            
            $
            124,277
            
            
            $
            121,704LiabilitiesCurrent
      liabilities:Accounts
      payable
            
            $
            2,818
            
            
            $
            2,425Accrued
      expenses
            
            
            1,524
            
            
            
            2,862Foreign
      currency exchange contracts
            
            
            6,641
            
            
            
            —Participants’
      deposits
            
            
            44,166
            
            
            
            42,723Deferred
      tax liability
            
            
            —
            
            
            
            1,096Other
      liabilities
            
            
            131
            
            
            
            187Total
      current liabilities
            
            
            55,280
            
            
            
            49,293Foreign
      currency exchange contracts
            
            
            1,764
            
            
            
            —Long-term
      capital lease
            
            
            —
            
            
            
            11Total
      liabilities
            
            
            57,044
            
            
            
            49,304Commitments
      and contingencies (notes 3, 4, 11, and 18)Stockholders'
      EquityPreferred
      stock, $.01 par value; 2,000,000 shares authorized; none issued and
      outstanding
            
            
            —
            
            
            
            —Common
      stock, $.01 par value; 50,000,000 shares authorized; 18,822,563 and
      19,345,924 shares issued and outstanding at December 31, 2008 and 2007,
      respectively
            
            
            186
            
            
            
            192Additional
      paid-in capital
            
            
            6
            
            
            
            1,082Retained
      earnings
            
            
            71,705
            
            
            
            68,709Accumulated
      other comprehensive income (loss)
            
            
            (4,664
            )
            
            
            2,417Stockholders’
      equity
            
            
            67,233
            
            
            
            72,400Total
      liabilities and stockholders’ equity
            
            $
            124,277
            
            
            $
            121,704





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






F-3




AMBASSADORS
GROUP, INC.





CONSOLIDATED
STATEMENTS OF OPERATIONS








Years
      Ended December 31,2008
            
            2007
            
            2006(in
      thousands, except per share data)Net
      revenue, non-directly delivered programs
            
            $
            65,656
            
            
            $
            84,512
            
            
            $
            69,554Gross
      revenue, directly delivered programs
            
            
            30,374
            
            
            
            30,021
            
            
            
            19,401Internet
      content and advertising revenue
            
            
            1,897
            
            
            
            —
            
            
            
            —Total
      revenue
            
            
            97,927
            
            
            
            114,533
            
            
            
            88,955Cost
      of sales, directly delivered programs
            
            
            18,856
            
            
            
            18,488
            
            
            
            11,473Cost
      of sales, internet content and advertising
            
            
            192
            
            
            
            —
            
            
            
            —Gross
      margin
            
            
            78,879
            
            
            
            96,045
            
            
            
            77,482Operating
      expenses:Selling
      and marketing
            
            
            40,842
            
            
            
            38,943
            
            
            
            31,638General
      and administrative
            
            
            12,568
            
            
            
            15,274
            
            
            
            11,72153,410
            
            
            
            54,217
            
            
            
            43,359Operating
      income
            
            
            25,469
            
            
            
            41,828
            
            
            
            34,123Other
      income (expense):Interest
      and dividend income
            
            
            3,057
            
            
            
            4,355
            
            
            
            4,674Foreign
      currency and other expense
            
            
            (811
            )
            
            
            (183
            )
            
            
            812,246
            
            
            
            4,172
            
            
            
            4,755Income
      before income taxes
            
            
            27,715
            
            
            
            46,000
            
            
            
            38,878Income
      tax provision
            
            
            9,169
            
            
            
            14,953
            
            
            
            12,186Net
      income
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            26,692Earnings
      per share — basic and diluted:Net
      income per share – basic
            
            $
            0.99
            
            
            $
            1.60
            
            
            $
            1.30Weighted-average
      common shares outstanding — basic
            
            
            18,745
            
            
            
            19,385
            
            
            
            20,554Net
      income per share – diluted
            
            $
            0.97
            
            
            $
            1.55
            
            
            $
            1.25Weighted-average
      common shares outstanding — diluted
            
            
            19,210
            
            
            
            20,094
            
            
            
            21,393




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








F-4


AMBASSADORS GROUP,
INC.





CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME







Years
      Ended December 31,2008
            
            
            2007
            
            
            2006(in
      thousands)Net
      income
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            26,692Unrealized
      gain (loss) on foreign currency exchange contracts, net of income tax
      (provision) benefit of $3,887, ($311), and ($1,563)
            
            
            (7,220
            )
            
            
            579
            
            
            
            2,904Unrealized
      gain on available-for-sale securities, net of income tax provision of $73,
      $109, and $66
            
            
            139
            
            
            
            202
            
            
            
            128Comprehensive
      income
            
            $
            11,465
            
            
            $
            31,828
            
            
            $
            29,724




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







F-5


AMBASSADORS
GROUP, INC.





CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY





AccumulatedAdditional
            
            
            
            
            
            OtherCommon
      Stock
            
            
            Paid-In
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
      (Loss)
            
            
            Total(in
      thousands)Balances,
      December 31, 2005
            
            
            20,657
            
            
            $
            206
            
            
            $
            20,142
            
            
            $
            47,550
            
            
            $
            (1,396
            )
            
            $
            66,502Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            26,692
            
            
            
            —
            
            
            
            26,692Stock
      options exercised
            
            
            307
            
            
            
            3
            
            
            
            1,750
            
            
            
            —
            
            
            
            —
            
            
            
            1,753Stock–based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            2,057
            
            
            
            —
            
            
            
            —
            
            
            
            2,057Excess
      tax benefit from stock-based compensation
            
            
            —
            
            
            
            —
            
            
            
            2,376
            
            
            
            —
            
            
            
            —
            
            
            
            2,376Stock
      redemptions
            
            
            (400
            )
            
            
            (4
            )
            
            
            (10,706
            )
            
            
            —
            
            
            
            —
            
            
            
            (10,710
            )Restricted
      stock grant
            
            
            35
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Dividend
      to shareholders ($0.37 per share)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,655
            )
            
            
            —
            
            
            
            (7,655
            )Other
      comprehensive income, net of income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,032
            
            
            
            3,032Balances,
      December 31, 2006
            
            
            20,
      599
            
            
            $
            205
            
            
            $
            15,619
            
            
            $
            66,587
            
            
            $
            1,636
            
            
            $
            84,047Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            31,047
            
            
            
            —
            
            
            
            31,047Stock
      options exercised
            
            
            289
            
            
            
            3
            
            
            
            1,966
            
            
            
            —
            
            
            
            —
            
            
            
            1,969Stock–based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            1,952
            
            
            
            —
            
            
            
            —
            
            
            
            1,952Excess
      tax benefit from stock-based compensation
            
            
            —
            
            
            
            —
            
            
            
            2,707
            
            
            
            —
            
            
            
            —
            
            
            
            2,707Stock
      redemptions
            
            
            (1,598
            )
            
            
            (16
            )
            
            
            (21,162
            )
            
            
            (19,985
            )
            
            
            —
            
            
            
            (41,163
            )Restricted
      stock grant
            
            
            56
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Dividend
      to shareholders ($0.46 per share)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8,940
            )
            
            
            —
            
            
            
            (8,940
            )Other
      comprehensive income, net of income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            781
            
            
            
            781Balances,
      December 31, 2007
            
            
            19,346
            
            
            $
            192
            
            
            $
            1,082
            
            
            $
            68,709
            
            
            $
            2,417
            
            
            $
            72,400Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18,546
            
            
            
            —
            
            
            
            18,546Stock
      options exercised
            
            
            46
            
            
            
            —
            
            
            
            398
            
            
            
            —
            
            
            
            —
            
            
            
            398Stock–based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            2,061
            
            
            
            —
            
            
            
            —
            
            
            
            2,061(Shortfall)
      tax benefit from stock-based compensation
            
            
            —
            
            
            
            —
            
            
            
            (134
            )
            
            
            —
            
            
            
            —
            
            
            
            (134
            )Stock
      redemptions
            
            
            (645
            )
            
            
            (6
            )
            
            
            (3,401
            )
            
            
            (6,749
            )
            
            
            —
            
            
            
            (10,156
            )Restricted
      stock grant
            
            
            76
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Dividend
      to shareholders ($0.46  per share)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8,801
            )
            
            
            —
            
            
            
            (8,801
            )Other
      comprehensive loss, net of income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,081
            )
            
            
            (7,081
            )Balances,
      December 31, 2008
            
            
            18,823
            
            
            $
            186
            
            
            $
            6
            
            
            $
            71,705
            
            
            $
            (4,664
            )
            
            $
            67,233





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




F-6


AMBASSADORS GROUP,
INC.





CONSOLIDATED STATEMENTS OF CASH
FLOWS




Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(in
      thousands)Cash
      flows from operating activities:Net
      income
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            26,692Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            3,426
            
            
            
            2,532
            
            
            
            1,447Deferred
      income tax provision (benefit)
            
            
            1,034
            
            
            
            (71
            )
            
            
            (748
            )Stock-based
      compensation expense
            
            
            2,061
            
            
            
            1,952
            
            
            
            2,057Short-fall
      (excess) tax benefit from stock-based compensation
            
            
            134
            
            
            
            (2,707
            )
            
            
            (2,376
            )(Gain)
      loss on sale or write-down of property and equipment
            
            
            (25
            )
            
            
            155
            
            
            
            —Loss
      on foreign currency contracts
            
            
            759
            
            
            
            —
            
            
            
            —Equity
      in earnings on investment
            
            
            —
            
            
            
            —
            
            
            
            (25
            )Change
      in assets and liabilities, net of business acquisition:Accounts
      receivable and other current assets
            
            
            (1,147
            )
            
            
            34
            
            
            
            (608
            )Prepaid
      program costs and expenses
            
            
            (533
            )
            
            
            162
            
            
            
            (2,190
            )Accounts
      payable, accrued expenses, and other liabilities
            
            
            (966
            )
            
            
            1,260
            
            
            
            (230
            )Participants’
      deposits
            
            
            1,443
            
            
            
            (17,928
            )
            
            
            13,188Net
      cash provided by operating activities
            
            
            24,732
            
            
            
            16,436
            
            
            
            37,207Cash
      flows from investing activities:Net
      purchase and construction of property and equipment
            
            
            (4,991
            )
            
            
            (19,271
            )
            
            
            (6,455
            )Purchase
      of intangibles
            
            
            (207
            )
            
            
            —
            
            
            
            —Net
      cash paid for acquisition
            
            
            (9,373
            )
            
            
            —
            
            
            
            —Net
      proceeds from (purchase of) available-for-sale securities
            
            
            (1,610
            )
            
            
            28,948
            
            
            
            (6,468
            )Net
      cash provided by (used in) investing activities
            
            
            (16,181
            )
            
            
            9,677
            
            
            
            (12,923
            )Cash
      flows from financing activities:Dividend
      payment to shareholders
            
            
            (8,801
            )
            
            
            (8,940
            )
            
            
            (7,655
            )Repurchase
      of common stock
            
            
            (10,156
            )
            
            
            (41,163
            )
            
            
            (10,710
            )Proceeds
      from exercise of stock options
            
            
            398
            
            
            
            1,969
            
            
            
            1,753Short-fall
      (excess) tax benefit from stock-based compensation
            
            
            (134
            )
            
            
            2,707
            
            
            
            2,376Capital
      lease payments
            
            
            (150
            )
            
            
            (189
            )
            
            
            (180
            )Net
      cash used in financing activities
            
            
            (18,843
            )
            
            
            (45,616
            )
            
            
            (14,416
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (10,292
            )
            
            
            (19,503
            )
            
            
            9,868Cash
      and cash equivalents, beginning of year
            
            
            17,281
            
            
            
            36,784
            
            
            
            26,916Cash
      and cash equivalents, end of year
            
            $
            6,989
            
            
            $
            17,281
            
            
            $
            36,784




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




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







F-7


AMBASSADORS
GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




1.
            The
      Company




Ambassadors
Group, Inc. is a leading educational company that organizes and promotes
international and domestic educational travel and sports programs for youth,
athletes and professionals.  In addition, with the acquisition of
BookRags, Inc. (“BookRags”) in 2008, we provide over 8 million pages of online
research content through www.BookRags.com. These consolidated financial
statements include the accounts of Ambassadors Group, Inc. and our wholly owned
subsidiaries, Ambassador Programs, Inc., BookRags, Inc., Ambassadors Specialty
Group, Inc., Ambassadors Unlimited, LLC and Marketing Production Systems, LLC.
All significant intercompany accounts and transactions, which are of a normal
recurring nature, are eliminated in consolidation.





Our
operations are organized in two reporting segments, 1) Ambassador Programs and
Other, which provides services to students, professionals, and athletes through
multiple itineraries within four educational and cultural program types, and 2)
BookRags, which provides online research capabilities through book summaries,
critical essays, online study guides, biographies, and references to
encyclopedia articles.




All of
our assets are located in the United States. Revenues from our directly
delivered travel programs and our internet content and advertising are derived
from activity in the United States. Revenue from our non-directly delivered
programs is conducted internationally in the following geographic areas for the
years ended December 31, 2008, 2007, and 2006:


Years
      Ended
              December 31,2008
            
            
            2007
            
            
            2006Europe
            
            
            61
            %
            
            
            57
            %
            
            
            49
            %South
      Pacific (primarily Australia and New Zealand)
            
            
            16
            %
            
            
            24
            %
            
            
            29
            %Asia
      (primarily China)
            
            
            17
            %
            
            
            14
            %
            
            
            14
            %Other
            
            
            6
            %
            
            
            5
            %
            
            
            8
            %








2.
            Summary
      of Significant Accounting Policies




Credit
Risk




Our
financial instruments that are exposed to concentrations of credit risk consist
primarily of cash and cash equivalents, investments and trade accounts
receivable. We place our 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. We believe that our primary trade accounts receivable
credit risk exposure is limited as delegates are required to pay for their
entire program tuition prior to the program departure.




We use
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, we have assumed the risk that might arise from the possible
inability of counterparties to meet the terms of their contracts, but we do not
expect any losses as a result of counterparty defaults, as they are with a high
quality institution.










F-8








AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Cash
and Cash Equivalents




We invest
cash in excess of operating requirements in short-term time deposits, money
market instruments, government mutual bond funds and other investments. We
consider investments with original maturities at date of purchase of three
months or less to be cash equivalents.





Derivative
Financial Instruments




We value
all derivative instruments on our 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 we hedge the variability of
cash flows related to a forecasted transaction, changes in the fair value of
derivative instruments are reported in accumulated other comprehensive income,
net of deferred income taxes. The gains and losses on the derivative instruments
that are reported in accumulated other comprehensive income, net of deferred
income taxes, are reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges is recognized in the statements of operations
as other income (expense). Unrealized gains and losses on foreign currency
exchange contracts that are not qualifying cash flow hedges as defined by
Statement of Financial Accounting Standards (“SFAS”) No. 133 are recognized in
the statements of operations as other income (expense). At December 31,
2008 the majority of our outstanding foreign currency exchange contracts
qualified for cash flow hedge accounting under SFAS 133, while at December 31,
2007 all of our outstanding contracts qualified for cash flow hedge
accounting.




Available-for-Sale
Securities




We
classify our 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 consolidated statement of operations in the period
the investments are sold.





Management
evaluates investment securities for other-than-temporary declines in fair value
on a quarterly basis. If the fair value of investment securities falls below
their amortized cost and the decline is deemed to be other-than-temporary, the
securities will be written down to current market value, resulting in a loss
recorded in the statement of operations. There were no investment securities
that management identified to be other-than-temporarily impaired during the
years ended December 31, 2008, 2007 and 2006, because any decline in fair value
was attributable to changes in interest rates and we have the ability and intent
to hold these investments until a recovery in market price occurs, or untilmaturity. Realized
losses could occur in future periods due to a change in management’s intent to
hold the investments to maturity, a change in management’s assessment of credit
risk, or a change in regulatory or accounting requirements.





At
December 31, 2008 and 2007, we held $69.5 million and $67.7 million of
short-term and long-term investments, consisting primarily of municipal bonds,
variable rate municipal demand notes and various auction rate securities
(“ARS”). The credit markets are currently experiencing significant uncertainty,
and some of this uncertainty has impacted and may continue to impact the markets
where our auction rate securities would be offered. During 2008, we experienced
three failed ARS auctions, representing principal of $2.1 million. Due to the
longer term nature of the next auctions and the continued uncertainty in the
financial markets, these ARS values have been classified as long-term assets.
Our investments are in high-quality, tax-exempt municipal obligations. Some of
these investments are wrapped with insurance by various monoline bond insurers,
and the underlying rating of all the municipalities represented in the portfolio
is investment grade. As of December 31, 2008 and 2007, we had $42.5 million
and $51.2 million of municipal investments backed by various monoline bond
insurers, respectively. As of December 31, 2008, we do not have any direct
exposure to collateralized debt obligations (“CDO”) or other similar structured
securities.


F-9


AMBASSADORS
GROUP, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Other
Investments





In 2003,
we purchased a minority interest in a company, Full-on (Europe) Ltd. This
company provides a one-day development activity for our delegates traveling in
Europe and Australia. This investment is reported using the equity method.
Additionally, during August 2005, we made an investment in a safety awareness
firm to support the education of and support of safe travel practices, Safe
Passage Travel I, LLC. This investment is reported using the cost method. These
investments are included in other long-term assets on the consolidated balance
sheet.




Property,
Plant and Equipment




Property,
plant and equipment are stated at cost. Cost of maintenance and repairs that do
not improve or extend the lives of the respective assets are expensed currently.
Major additions and betterments are capitalized. Depreciation and amortization
are provided over the lesser of the estimated useful lives of the respective
assets or the lease term (excluding extensions), using the straight-line method,
generally three to seven years for office furniture and computer equipment,
and thirty-nine years for the building.





We
perform reviews for the impairment of property, plant and equipment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When property, plant 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 operations.




Intangible
Assets and Goodwill





Intangible
assets include goodwill, trademark, contract license agreements, content
copyrights, plagiarism software, non-compete agreements, and advertising
relationships. The majority of these assets were recorded in conjunction with
the acquisition of BookRags in May 2008. During 2008, intangible assets other
than trademark were amortized on a straight-line basis over a weighted average
life of 12 years. Goodwill and intangible assets are accounted for in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, (“SFAS 142”) and Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, (“SFAS 144”). Under SFAS
142, goodwill and intangible assets are not subject to amortization and are
subject to impairment tests, at least annually. The impairment test compares the
carrying amount of the reporting unit to the fair value of each reporting unit.
The impairment tests performed in 2008 supported the carrying value of goodwill
and intangible assets, and as such, no write-downs in the carrying value were
recorded.





Revenue
Recognition




For
non-directly delivered programs, we do not actively manage the operations of
each program, and our remaining performance obligation for these programs after
they convene is perfunctory. Therefore, revenue from these programs is presented
net of direct program costs, including accommodations and transportation, and
recognized when the program convenes. For directly delivered programs,
however,





F-10


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





we organize
and operate all activities including speakers, facilitators, events,
accommodations and transportation. As such, we recognize the gross revenue and
cost of sales of these directly delivered programs over the period the programs
are operating.





We
invoice delegates in advance of travel, payments of which are recorded as
participants’ deposits. We also pay for certain direct program costs in advance
of travel, including but not limited to airfare, hotel, rail passes and other
program costs, which are recorded as prepaid program costs and expenses. Under
our withdrawal policy, a delegate may be entitled to a refund of a portion of
his or her deposit, less certain fees, depending on the time of withdrawal. We
recognize withdrawal fees concurrent with the revenue recognition from the
related programs.





Internet
content and advertising revenues are recognized at the point of sale and
corresponding to an advertisement being viewed on the BookRags site,
respectively. Revenue from annual subscriptions for content access to the
website is deferred and recognized monthly over the term of the subscription.
Cost of internet content sales include amortization of intangible assets and
licensing agreement costs.





Selling
and Marketing Expenses




We
expense all selling and marketing expenses as incurred.





Income Taxes




In
accordance with SFAS No. 109, Accounting for Income Taxes,
(“SFAS 109”) 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 basis of assets and liabilities.




Earnings
Per Share




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





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. Our
other comprehensive income is composed of unrealized gains and losses on foreign
currency exchange contracts and available-for-sale securities.




Accounting
for Stock Options and Restricted Grants





We
maintain an Equity Participation Plan under which we have granted non-qualified
stock options and restricted stock to employees, non-employee directors and
consultants. Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, (“SFAS
123(R)”) using the modified prospective method, and the fair value recognition
provisions of the “Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards”(“FSP 123(R)-3”),
using the alternative transition method. We elected to adopt the alternative
transition method provided in FSP 123(R)-3 for calculating the tax
effects of stock-based compensation.The alternative transition method includes
simplified methods to


F-11


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





establish the beginning balance of the
additional-paid-in-capital pool (“APIC pool”)  related to the
tax effects of stock-based compensation, and for determining the subsequent
impact on the APIC pool and consolidated statements of cash flows of the tax
effects of stock-based compensation awards that are outstanding upon adoption of
SFAS 123(R).





Estimates




The
preparation of consolidated financial statements requires us 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, we evaluate our estimates and judgments, including those
associated with investments, intangible assets, income taxes, foreign currency
exchange contracts, revenue recognition, stock based compensation, and
contingencies and litigation.





We base
our 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





In
June 2008, the Financial Accounting Standards Board (“FASB”) issued FSP
EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1
concludes that unvested share-based payment awards that contain rights to
receive nonforfeitable dividends or dividend equivalents are participating
securities, and thus, should be included in the two-class method of computing
earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
or our first quarter 2009. Early application of EITF 03-6-1 is prohibited. It
also requires that all prior-period EPS data be adjusted retrospectively. We do
not believe that the adoption of this guidance will have a material impact on
our consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements that are presented in conformity with
generally accepted accounting principles in the United States. SFAS 162 became
effective beginning November 15, 2008. The adoption of this guidance did not
have an impact on our consolidated financial statements.





In April
2008, the FASB issued Staff Position SFAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP SFAS 142-3”) which amends the factors an entity
should consider in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”). FSP SFAS 142-3 applies to intangible assets that are
acquired individually or with a group of assets and intangible assets acquired
in both business combinations and asset acquisitions. It removes a provision
under SFAS 142, requiring an entity to consider whether a contractual renewal or
extension clause can be accomplished without substantial cost or material
modifications of the existing terms and conditions associated with the asset.
Instead, FSP SFAS 142-3 requires that an entity consider its own experience in
renewing similar arrangements. An entity would consider market participant
assumptions regarding renewal if no such relevant experience
exists.





F-12


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





FSP SFAS
142-3 is effective for fiscal years beginning after December 15, 2008 with early
adoption prohibited. We do not believe that the adoption of this guidance will
have a material impact on  our consolidated
financial statements.


In
December 2007, the FASB issued SFAS No. 141R, Business Combinations(“SFAS 141R”). SFAS
141R will change the accounting for business combinations. Under SFAS 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment for certain
specific items, including, acquisition costs will generally be expensed as
incurred, noncontrolling interests will be valued at fair value at the
acquisition date, acquired contingent liabilities will be recorded at fair value
at the acquisition date and subsequently measured at either the higher of such
amount or the amount determined under existing guidance for non-acquired
contingencies, in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date,
restructuring costs associated with a business combination will be generally
expensed subsequent to the acquisition date, and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141R also includes a substantial
number of new disclosure requirements. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, or our first quarter of 2009. Earlier adoption is prohibited. Business
acquisitions are not in our normal course of business and as necessary we will
comply with this standard. The effect of the adoption of FAS 141R will depend
upon the nature of any future business combinations we undertake.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”) and in February 2008, the FASB issued FASB Staff Position 157-2
Effective Date of FASB
Statement No. 157(“FSP 157-2”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements.
Rather, it applies under other accounting pronouncements that require or permit
fair value measurements. The provisions of this statement are to be applied
prospectively as of the beginning of the fiscal year in which this statement is
initially applied, with any transition adjustment recognized as a
cumulative-effect adjustment to the opening balance of retained earnings. The
provisions of SFAS 157 are effective for the fiscal years beginning after
November 15, 2007 for financial assets and liabilities, except those that
are recognized or disclosed at fair value in the financial statements on at
least an annually recurring basis. The provisions of FSP 157-2 apply to
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in an entity’s financial statements on at
least an annual recurring basis. FSP provisions delay the effective date of SFAS
157 to fiscal years beginning after November 15, 2008 for non-financial assets
and liabilities. We implemented SFAS 157 on January 1, 2008 for financial assets
and liabilities without any impact on our financial condition or results of
operations. We do
not expect the adoption of FSP 157-2 to have a material impact on the
measurement of our non-financial assets and liabilities.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The adoption of this
new standard on January 1, 2008 did not impact our consolidated financial
statements, as the fair value option was not elected for any of the instruments
existing as of the adoption date.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”). SFAS 160 requires
certain disclosures relating to noncontrolling interests and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in a
consolidated entity, reported as equity in the consolidated financial
statements. This statement changes the presentation of the statement of
operations. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, or our first quarter 2009. Early adoption is prohibited. We
do not believe that the adoption
of this standard will have a material impact on our consolidated financial
statements.





F-13


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




In March,
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133, (“SFAS 161”). SFAS 161 requires entities to provide qualitative
disclosures about the objectives and strategies for using derivatives,
quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their
hedged positions. The statement also asks entities to disclose more information
about the location and amounts of derivative instruments in financial
statements; how derivatives and related hedges are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities;and how the hedges affect the
entity's financial position, financial performance, and cash flows. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, or our first quarter 2009, with early
application encouraged, but not required. We will adopt this standard in
2009 and will comply with additional disclosure requirements.





3.      BookRags
Acquisition





On May
15, 2008, we acquired 100 percent of the outstanding common shares of
BookRags. BookRags is an educational website providing book summaries,
critical essays, online study guides, biographies and references to encyclopedia
articles. BookRags operates in an adjacent space to student travel and
education. BookRags’ core audiences of students, parents and teachers overlaps
with our key demographic and will enable us to expand our reach into new media
and online channels where this target audience continues to spend more and more
time. These reasons were considered in determining the purchase price which
resulted in goodwill being recorded for the acquisition.





The
aggregate purchase price for BookRags is expected to be approximately $18.9
million, of which $9.4 million has been paid, including $8.5 million of cash to
the prior owners at inception, $0.6 million in tax payments made on the seller’s
behalf, and $0.3 million of acquisition expenses. The remaining estimated
purchase price is comprised of common stock valued at $4.5 million and future
earn-out provisions of up to $5.0 million. The $4.5 million value of the
common stock issued was determined based on a ten day average closing price of
our common stock prior to the date of the acquisition for the issuance of
233,584 shares and is subject to change if escrow conditions are not met. In
2010, the escrow conditions will be known and the actual number of shares to be
issued will be determined. At that time, the actual number of common shares
issued will be recorded at their fair value as an addition to goodwill.
Therefore, the ultimate value of these shares may be higher or lower than $4.5
million. These shares have been excluded from outstanding stock and our basic
and diluted weighted average shares due to the two year escrow requirements
within the purchase agreement. Future payments pursuant to earn-out agreements
of up to $5.0 million in 2009 and 2010 will be added to goodwill when and if
required earning thresholds are met.




BookRags’
results of operations in 2007 and prior to May 15, 2008 were immaterial in
comparison to our results of operations as reported; therefore pro forma
financial information is not disclosed. BookRags’ results of operations since
May 15, 2008 are included in our consolidated financial statements.







F-14


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed (in thousands):




AssetsCurrent
      assets
            
            $
            209Intangible
      assets
            
            
            2,359Goodwill
            
            
            6,865Total
      assets acquired
            
            
            9,433Liabilities
      and net assets acquiredCurrent
      liabilities
            
            
            163Total
      liabilities assumed
            
            
            163Net
      assets acquired
            
            $
            9,270





The
difference between the total purchase price and the fair value of tangible and
intangible assets and liabilities was recorded as goodwill. The purchase price
allocation is still subject to finalization with regards to the items noted
above.





Identified
intangible assets as of December 31, 2008 were as follows (in
thousands):





Gross
              Carrying
              Value
            
            
            Accumulated
      Amortization
            
            
            Net
              Carrying
              ValueIntangible
      assets with determinable lives:Content
      license agreements
            
            $
            838
            
            
            $
            (26
            )
            
            $
            812Content
      copyrights
            
            
            569
            
            
            
            (29
            )
            
            
            540Online
      advertising capabilities and relationships
            
            
            512
            
            
            
            (80
            )
            
            
            432Other
            
            
            130
            
            
            
            (27
            )
            
            
            103Total
      intangible assets with determinable lives
            
            
            2,049
            
            
            
            (162
            )
            
            
            1,887Intangible
      assets with indefinite lives:Trade
      name
            
            
            517
            
            
            
            —
            
            
            
            517Total
      intangible assets with indefinite lives
            
            
            517
            
            
            
            —
            
            
            
            517Total
      intangible assets
            
            $
            2,566
            
            
            $
            (162
            )
            
            $
            2,404





Of the
$2.6 million intangible assets, $0.5 million was assigned to a trade name and is
not subject to amortization. The remaining $2.0 million of intangible
assets have a weighted-average useful life of approximately 12 years and
are being amortized on a straight-line basis using the actual life assigned to
each asset. Subsequent to the May 15, 2008 acquisition of BookRags, we added
$0.2 million to content copyrights. Amortization expense for the year ended
December 31, 2008 was $0.2 million.





Estimated
annual amortization expense for each of the next five years is as follows (in
thousands):


Years
      Ended December 31,2009
            
            $
            2702010
            
            $
            2702011
            
            $
            2422012
            
            $
            1462013
            
            $
            97




F-15




AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Although
goodwill and the trade name intangible are not amortized for financial statement
purposes, they are subject to annual impairment review. There were no
impairments during 2008. All of the intangible assets, including goodwill, are
expected to be deductible for income tax purposes and are included in the
BookRags segment.





4.
            Derivative
      Financial Instruments




The
majority of our travel programs take place outside of the United States and most
foreign suppliers require payment in currency other than the U.S. dollar.
Accordingly, we are exposed to foreign currency risk relative to changes in
foreign currency exchange rates between those currencies and the U.S. dollar.
Our processes include a program to provide a hedge against certain of these
foreign currency risks, and we use forward contracts that allow us to acquire
the foreign currency at a fixed price for a specified period of time. All of the
derivatives are cash flow hedges and at December 31, 2008 the majority of the
contracts qualified for cash flow hedge accounting under SFAS 133.




At December 31, 2008, the following forward contracts were
      outstanding (in thousands):


Notional
              Amount
            
            MaturesForward
      contracts:Australian
      dollar
            
            
            16,650
            
            January
      2009 – May 2010British
      pound
            
            
            6,350
            
            January
      2009 – June 2010Euro
            
            
            16,995
            
            February
      2009 – June 2010Japanese
      yen
            
            
            495,000
            
            April
      2009 – July 2009New
      Zealand dollar
            
            
            1,550
            
            March
      2009 – June 2010Forward
      contracts with variable option:Australian
      dollar
            
            
            10,500
            
            April
      2009 – April 2010British
      pound
            
            
            5,400
            
            July
      2009 – May 2010Euro
            
            
            33,300
            
            January
      2009 – June 2010New
      Zealand dollar
            
            
            3,710
            
            September
      2009 – May 2010




At
December 31, 2008 and 2007, we recorded a net loss of approximately $8.4
million and a net gain of $3.5 million in accumulated other comprehensive
income, respectively, associated with these financial instruments. Unrealized
losses on forward contracts recorded in accumulated other comprehensive income
at December 31, 2008, which are expected to be reclassified to net revenue
during the years ending December 31, 2009 and 2010, respectively, are
approximately $5.8 million and $1.8 million. During the year ended December 31,
2008, due to a reduction in planned delegate travel and reduction in negotiated
vendor costs, we determined that we were over-hedged for some of our 2009
expected foreign currency requirements. Therefore, we de-designated some of our
forward contracts as they no longer met the requirements of SFAS No. 133 for
hedge accounting treatment. Accordingly, a loss of $0.8 million was recorded in
the statement of operations as other expense for the year ended December 31,
2008.





Unrealized
gains or losses associated with these transactions that qualify for cash flow
hedge accounting under SFAS No. 133 are reported in other comprehensive income.
Any realized gains or losses associated with these transactions are recognized
in our net revenue in the period the hedge transaction occurs. The net
unrealized gain (loss) reclassified to revenue from accumulated other
comprehensive income for the years ended December 31, 2008, 2007 and 2006
was approximately $2.3 million, $1.7 million, and ($1.3) million, respectively.
Income tax (provision) benefit on the unrealized (loss) gain reclassified
in 2008, 2007 and 2006 was approximately ($1.2) million, ($0.9) million, and
$0.6 million, respectively. We assess hedge effectiveness
on a quarterly basis and record the gain or loss related to the ineffective
portion in the statements of operations. During the years ended
December 31, 2007 and 2006 there were no significant amounts recognized in
income due to hedge ineffectiveness.








F-16


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)








5.      Available-for-Sale
Securities




At
December 31, 2008 and 2007, the cost and estimated fair values of our
available-for-sale securities in state and municipal securities and corporate
obligations were as follows (in thousands):




Amortized
              Cost
            
            
            Gross
              Unrealized
              Gain
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
      Value/
              Carrying
              ValueDecember 31,
      2008
            
            $
            69,063
            
            
            $
            473
            
            
            $
            —
            
            
            $
            69,536December 31,
      2007
            
            $
            67,453
            
            
            $
            260
            
            
            $
            —
            
            
            $
            67,713




At
December 31, 2008, the amortized cost and fair value of the
available-for-sale securities, by contractual maturity were as follows (in
thousands):




Amortized
                Cost
              
              Fair
                ValueAuction
      rate securities (ARS)
              
              $
              2,100
              
              $
              2,100One
      year or less
              
              
              12,645
              
              
              12,669After
      one year through three years
              
              54,318
              
              54,767$
              69,063
              
              $
              69,536


At
December 31, 2007, the amortized cost and fair value of the
available-for-sale securities, by contractual maturity were as follows (in
thousands):


Amortized
                Cost
              
              Fair
                ValueAuction
      rate securities (ARS)
              
              $
              8,590
              
              $
              8,590One
      year or less
              
              
              38,150
              
              
              38,261After
      one year through three years
              
              20,713
              
              20,862$
              67,453
              
              $
              67,713




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.





During
2008, we experienced three failed ARS auctions, representing principal of $2.1
million. Due to the longer term nature of the next auctions and the continued
uncertainty in the financial markets, these ARS values have been classified as
long-term assets. The remaining $67.4 million in investments are comprised of
municipal securities, which we have the ability to liquidate at any
time.





Our ARS
portfolio is comprised of three AA rated investments. Based on the high-level
credit rating and the current restructuring within the aggregate ARS market, we
believe that the current illiquidity of our failed ARS’s is temporary. We will,
however, reassess the liquidity in future reporting periods based on several
factors, including the success or failure of future auctions, possible
failure of the investment to be redeemed, deterioration of the credit rating of
the investment, market risk and other factors. Such reassessment may change the











F-17


AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





classification
or valuation of these investments. We believe that the current lack of liquidity
relating to our ARS investments will have no impact on our ability to fund our
ongoing operations and growth initiatives.





6.   Fair
Value Measurement of Financial Assets and Liabilities





The
following table summarizes our financial assets and liabilities measured at fair
value on a recurring basis in accordance with SFAS No. 157 and SFAS No. 107 as
of December 31, 2008 (in thousands).




Balance
      as of
              December 31,
              2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets
            
            
            Significant
              Other
      Observable Inputs
            
            
            Significant
      Other
              Unobservable
      InputsAssets and
      liabilities:Cash
      equivalents:Municipal
      securities
            
            $
            5,611
            
            
            $
            5,611
            
            
            $
            —
            
            
            $
            —Available-for-sale
      securities:Auction
      rate securities
            
            
            2,100
            
            
            
            —
            
            
            
            —
            
            
            
            2,100Municipal
      securities
            
            
            67,436
            
            
            
            67,436
            
            
            
            —
            
            
            
            —75,147
            
            
            
            73,047
            
            
            
            —
            
            
            
            2,100Foreign
      currency exchange contracts
            
            
            (8,405
            )
            
            
            —
            
            
            
            (8,405
            )
            
            
            —Total
      financial assets and liabilities
            
            $
            66,742
            
            
            $
            73,047
            
            
            $
            (8,405
            )
            
            $
            2,100




Our
financial assets and liabilities are valued using market prices on both active
markets (level 1) and less active markets (level 2). Level 1
instrument valuations are obtained from real-time quotes for transactions in
active exchange markets involving identical assets. Level 2 instrument
valuations are obtained from readily available pricing sources for
comparable instruments. Our foreign currency exchange contracts are valued using
pricing models. Pricing models take into account the contract terms as well as
multiple inputs where applicable, such as equity prices, interest rate yield
curve, option volatility and currency rates. Our derivative instruments are
short-term in nature, typically one to twelve months. The Level 3
instrument valuation was obtained as current market quotations were not readily
available, traditional sources were not providing reliable information, unusual
market events had taken place, stale prices existed, or the security remained
illiquid.





The table
below presents a reconciliation for the year ended December 31, 2008, of assets
and liabilities measured at fair value on a recurring basis using Level 3
inputs:




Auction
      Rate
              SecuritiesDecember
      31, 2007
            
            $
            —Total
      realized / unrealized gains (losses):Included
      in earnings
            
            
            —Included
      in other comprehensive income
            
            
            —Purchases,
      issuances, and settlements, net
            
            
            —Transfers
      into Level 3, net
            
            
            2,100December
      31, 2008
            
            $
            2,100





F-18


AMBASSADORS
GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS —
  (Continued)





Unrealized
losses, net of tax, of $7.2 million, excluded from earnings for the year
ended December 31, 2008 and reported as components of other comprehensive
income, are related primarily to the difference in value of our
available-for-sale securities (level 1 and 3) and our foreign exchange contracts
(level 2) at the beginning and ending of the period. At December 31, 2008, our
available-for-sale securities had $0.5 million aggregate unrealized gain and our
foreign exchange contracts had an aggregate unrealized loss of $7.6 million. An
$0.8 million loss was recorded in earnings and reported as other expense for the
year ended December 31, 2008, which related to an unrealized loss on foreign
currency contracts for which it was determined that the hedged transaction was
no longer likely to occur.





7.
            Property,
      Plant and Equipment




Property, plant and equipment and the
changes therein consist of the following (in thousands):


Land
            
            
            Building
            
            Office
              furniture,
              fixtures
      and
              equipment
            
            Computer
      equipment
              and
              software
            
            TotalDecember
      31, 2006, net
            
            $
            1,817
            $
            
            5,735
            $
            849
            $
            3,866
            $
            12,267CostAdditions
            
            
            —
            
            
            10,420
            
            5,413
            
            2,260
            
            18,093Deletions
            
            
            —
            
            
            —
            
            (490)
            
            (2,784)
            
            (3,274)Accumulated
      DepreciationAdditions
            
            
            —
            
            
            (170)
            
            (858)
            
            (1,517)
            
            (2,545)Deletions
            
            
            —
            
            
            —
            
            412
            
            2,501
            
            2,913December
      31, 2007, net
            
            
            1,817
            
            
            15,985
            
            5,326
            
            4,326
            
            27,454CostAdditions
            
            —
            
            43
            
            484
            
            4,492
            
            5,019Deletions
            
            —
            
            —
            
            (453)
            
            (64)
            
            (517)Accumulated
      DepreciationAdditions
            
            
            —
            
            
            (409)
            
            (1,076)
            
            (1,777)
            
            (3,262)Deletions
            
            
            —
            
            
            —
            
            407
            
            47
            
            454December
      31, 2008, net
            
            $
            1,817
            $
            
            15,619
            $
            4,688
            $
            7,024
            $
            29,148








Depreciation
and amortization expense on property and equipment of approximately $3.3
million, $2.5 million, and $1.4 million for the years ended December 31,
2008, 2007, and 2006, respectively, was included in the determination of net
income. During 2008, approximately $0.5 million in property, plant and equipment
was written off or sold for a net gain of $0.03 million. During 2007,
approximately $3.1 million in property, plant and equipment was written off for
a net loss of $0.2 million. During 2006, no property, plant and equipment was
written off.





8.
            Line
      of Credit





On May
30, 2008, we entered into a $20.0 million unsecured revolving line of credit
(the “Revolving Credit Agreement”) with Wells Fargo Bank, National Association
(“Wells Fargo”). This Revolving Credit Agreement expires on May 21, 2011. In
addition, the Revolving Credit Agreement provides for the issue of letters of
credit not to exceed $2.5 million. Monthly interest only payments are paid based
on a pricing grid under which the interest rate decreases or increases based on
our ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. We can elect to borrow utilizing the offshore London Inter-Bank
Offering Rate (“LIBOR”) plus an applicable spread or the prime rate. The credit
agreement contains certain quarterly financial covenants, including current
ratio greater than 1.50, deployable cash




F-19


AMBASSADORS
GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS —
  (Continued)


greater
than zero at all times, tangible net worth greater than $40.0 million, and net
income after taxes greater than $4.0 million. At December 31, 2008, we were in
compliance with all of the financial covenants of the credit
agreement.





At
December 31, 2008, we had no amounts outstanding on the revolving line of
credit. At December 31, 2008, the availability under the line of credit was
$18.6 million, with $1.4 million of the line of credit issued in the form of
letters of credits to several airline companies.




9.
            Income
      Taxes




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




Years
      Ended December 31,2008
            
            
            2007
            
            
            2006Current:
            
            
            1Federal
            
            $
            8,077
            
            
            $
            14,929
            
            
            $
            12,843State
            
            
            58
            
            
            
            95
            
            
            
            91Deferred
            
            
            1,034
            
            
            
            (71
            )
            
            
            (748
            )Total income tax
      provision
            
            $
            9,169
            
            
            $
            14,953
            
            
            $
            12,186




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





December 31,
      2008Assets
            
            Liabilities
            
            TotalAmortization
      of goodwill and non-compete agreement
            $
            833
            
            $
            —
            
            $
            833Accrued
      vacation and compensation
            213
            
            —
            
            213Unrealized
      loss on foreign currency exchange contracts
            2,676
            
            —
            
            2,676Unrealized
      gain on available-for-sale securities
            —
            
            (166)
            
            (166)Depreciation
            —
            
            (2,165)
            
            (2,165)Stock
      options
            1,032
            
            —
            
            1,032Restricted
      stock grants
            605
            
            —
            
            605Other
            —
            
            (7)
            
            (7)Total
      deferred tax assets (liabilities)
            $
            5,359
            
            $
            (2,338)
            
            $
            3,021December 31,
      2007Assets
            
            Liabilities
            
            TotalAmortization
      of goodwill and non-compete agreement
            $
            998
            
            $
            —
            
            $
            998Accrued
      vacation and compensation
            206
            
            —
            
            206Unrealized
      gain on foreign currency exchange contracts
            —
            
            (1,211)
            
            (1,211)Unrealized
      gain on available-for-sale securities
            —
            
            (93)
            
            (93)Depreciation
            —
            
            (1,082)
            
            (1,082Stock
      options
            692
            
            —
            
            692Restricted
      stock grants
            732
            
            —
            
            732Total
      deferred tax assets (liabilities)
            $
            2,628
            
            $
            (2,386)
            
            $
            242





F-20


AMBASSADORS
GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS —
  (Continued)








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 31,2008
              Amount
            
            
            %
            
            
            2007
              Amount
            
            
            %
            
            
            2006
              Amount
            
            
            %Provision
      at the federal statutory rate
            
            $
            9,700
            
            
            
            35.0
            %
            
            $
            16,100
            
            
            
            35.0
            %
            
            $
            13,607
            
            
            
            35.0
            %Tax-exempt
      interest
            
            
            (1,024
            )
            
            
            (3.7
            )
            
            
            (1,385
            )
            
            
            (3.0
            )
            
            
            (1,564
            )
            
            
            (4.0
            )State
      income tax, net of federal benefit
            
            
            38
            
            
            
            0.1
            
            
            
            95
            
            
            
            0.2
            
            
            
            59
            
            
            
            0.1Other
            
            
            455
            
            
            
            1.6
            
            
            
            143
            
            
            
            0.3
            
            
            
            84
            
            
            
            0.2Total income tax
      provision
            
            $
            9,169
            
            
            
            33.0
            %
            
            $
            14,953
            
            
            
            32.5
            %
            
            $
            12,186
            
            
            
            31.3
            %




In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—An Interpretation of FASB Statement 109, Accounting for Income Taxes(“FIN 48”). This statement clarifies the criteria that an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company’s financial statements. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax
positions taken or expected to be taken on a tax return, in order for those tax
positions to be recognized in the consolidated financial statements. Effective
January 1, 2007, we adopted the provisions of FIN 48. There was no material
effect on the financial statements, and as a result, there was no cumulative
effect related to adopting FIN 48. However, certain amounts have been
reclassified in the consolidated statement of financial position in order to
comply with the requirements of the statement.




As of
January 1, 2008, approximately $14,000 of unrecognized tax benefits from
2007 was disclosed relating to a change in income levels of a previously owned
investment. This benefit was increased by $26,000 and was resolved during 2008.
Our policy is to account for interest and penalties related to uncertain tax
positions as part of income tax expense.




The
following summarizes the unrecognized tax benefits activity during 2008 and
2007:


2008
            
            
            2007Unrecognized
      tax provision (benefit) as of January 1,
            
            $
            (14
            )
            
            $
            164Increases
      in tax positions taken in prior periods
            
            
            (26
            )
            
            
            —Decreases
      in tax positions taken in prior periods
            
            
            —
            
            
            
            —Current
      period tax positions:Settlements
            
            
            40
            
            
            
            (164
            )Increases
      in tax positions taken in current period
            
            
            —
            
            
            
            (14
            )Lapse
      of statute of limitations
            
            
            —
            
            
            
            —Unrecognized
      tax provision (benefit) as of December 31,
            
            $
            —
            
            
            $
            (14
            )




We file
tax returns in the U.S. federal jurisdiction and various state jurisdictions. We
are currently open to audit under the statute of limitations by the Internal
Revenue Service for the years after 2005. Our state income tax returns are open
to audit under the statute of limitations for the years after 2002.











F-21





AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





10.
            Capital
      Lease




We lease
certain office equipment under a capital lease arrangement. The total cost of
equipment under capital leases was $0.1 and $0.9 million, respectively and
accumulated depreciation was $0.01 million and $0.7 million, respectively, at
December 31, 2008 and 2007.





At
December 31, 2008, we have a $0.01 million remaining liability to be paid during
2009 related to this lease. At the end of the lease term, we have the option to
purchase the equipment at fair market value.





11.
            Commitments
      and Contingencies




We lease
office facilities and office equipment under non-cancelable operating leases. At
December 31, 2008, future minimum lease commitments were as follows (in
thousands):




Years
      Ended December 31,2009
            
            $
            1042010
            
            
            1062011
            
            
            7Total future minimum
      lease commitments
            
            $
            217





Total
rent expense for the years ended December 31, 2008, 2007, and 2006, was
approximately $0.2 million, $0.6 million, and $0.8 million,
respectively.





We are
subject to the possibility of various loss contingencies including claims, suits
and complaints, arising in the ordinary course of business. We consider the
likelihood of loss or impairment of an asset or the incurrence of a liability,
as well as our ability to reasonably estimate the amount of loss in determining
loss contingencies. An estimated loss contingency is accrued when it is probable
that an asset has been impaired or a liability has been incurred and the amount
of loss can be reasonably estimated. We regularly evaluate current information
available to us to determine whether such accruals should be adjusted and
whether new accruals are required. 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 nature, or involve such amounts as would not have a
material effect on our financial position, cash flows or results of
operations.





As
discussed in “Item 3: Legal
Proceedings”, it is reasonably possible that we will incur a loss in
connection with the litigation entitled Allen Hill and Sheryl Hill, et al.
v. Ambassadors Group, et al. We cannot estimate the possible loss at this
time, and therefore, have not accrued any loss related to this
litigation.





Under our
Bylaws, our directors and officers have certain rights to indemnification by us
against certain liabilities that may arise by reason of their status or service
as directors or officers. We maintain director and officer insurance, which may
cover certain liabilities arising from our obligation to indemnify our directors
and officers and former directors in certain circumstances.




12.           Accounting
for Stock-Based Compensation




Effective
November 2001, we 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 our directors, key
employees and consultants. The maximum number of shares which may be awarded
under the Plan is 3.6 million shares, and approximately 0.3 million shares
remain available for future issuance.





F-22


AMBASSADORS
GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS —
  (Continued)





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





Under the
terms of the Plan, stock grants follow the same grant price parameters as
options. The Compensation Committee also establishes the vesting period of the
grants, which is generally set at 100 percent at the conclusion of one to four
years. Our key employees who have been awarded stock grants and are full-time
employees are subject to a four-year vesting period, and our Board of Directors
who have been awarded stock grants are subject to a one-year vesting period.
During 2008, 2007, and 2006, we granted approximately 75,870, 57,300, and
38,600, restricted stock grants to key employees and directors. These grants are
expensed on a straight-line basis over the life of the grant.





The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of options. In addition, option
valuation models require the input of highly subjective assumptions,
particularly for the expected term and stock price volatility. The assumptions
used to calculate the fair value of options granted are evaluated and revised,
as necessary, to reflect market conditions and our experience. Our employee
stock options do not trade on a secondary exchange; therefore, employees do not
derive a benefit from holding stock options unless there is an appreciation in
the market price of our stock above the grant price. Such an increase in stock
price would benefit all shareholders commensurately.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ending December 2008, 2007, and
2006.




Years
      Ended December 31,2008
            
            
            
            
            2007
            
            
            
            2006Expected
      dividend yield
            
            
            2.66
            
            %
            
            
            
            1.41
            
            %
            
            
            1.38
            
            %Expected
      stock price volatility
            
            
            49.48
            
            %
            
            
            
            43.40
            
            %
            
            
            38.16
            
            %Risk-free
      interest rate
            
            
            2.48
            
            %
            
            
            
            3.93
            
            %
            
            
            4.65
            
            %Expected
      life of options
            
            
            4.51
            
            years
            
            
            
            4.45
            
            years
            
            
            4.95
            
            years




The
weighted-average fair value of options granted during 2008, 2007 and 2006 was
$3.51, $7.02, and $9.81, respectively.





The
expected life of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on historical
volatility of our stock. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an equivalent remaining
term. We have also included our anticipated dividend yield based on quarterly
cash dividends paid to our shareowners during 2008, 2007, and
2006. Additionally, an annualized forfeiture rate of 7.6 percent is used as
a best estimate of future forfeitures based on our historical forfeiture
experience. Under the true-up provisions of SFAS 123(R), the stock-based
compensation expense will be adjusted in later periods if the actual forfeiture
rate is different from the estimate.








F-23





AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Total
stock-based compensation expense recognized in the consolidated statement of
operations for the years ended 2008, 2007, and 2006 was $2.1 million, $2.0
million, $2.1 million before income taxes. Of the total stock-based compensation
expense during 2008, stock option expense was $0.9 million and restricted stock
grant expense was $1.2 million. Of the total stock-based compensation expense
during 2007, stock option expense was $1.0 million and restricted stock grant
expense was $0.9 million. Of the total stock-based compensation expense during
2006, stock option expense was $1.3 million and restricted stock grant expense
was $0.8 million.





The
following table presents information about the common stock options and
restricted grants as of December 31, 2008:




Options
      and Restricted Stock Outstanding
            
            
            Options
      ExercisableRange
      of Exercise Prices
            
            
            Shares
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (years)
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Shares
            
            
            Weighted
              Average
              Exercise
              PriceRestricted
      Stock Grants$
            0.00
            
            
            
            205,585
            
            
            
            2.63
            
            
            $
            N/A
            
            
            
            N/A
            
            
            
            N/AStock
      Options$
            3.47
      - 6.93
            
            
            
            666,978
            
            
            
            2.82
            
            
            $
            5.63
            
            
            
            666,978
            
            
            $
            5.636.94
      - 10.39
            
            
            
            325,094
            
            
            
            7.53
            
            
            
            9.19
            
            
            
            129,594
            
            
            
            9.1910.40
      - 13.86
            
            
            
            31,225
            
            
            
            4.56
            
            
            
            11.73
            
            
            
            31,225
            
            
            
            11.7313.87
      - 17.32
            
            
            
            323,927
            
            
            
            7.50
            
            
            
            16.86
            
            
            
            183,053
            
            
            
            16.7717.33
      - 20.79
            
            
            
            12,824
            
            
            
            9.35
            
            
            
            18.41
            
            
            
            —
            
            
            
            —20.80
      - 24.25
            
            
            
            48,000
            
            
            
            6.34
            
            
            
            21.09
            
            
            
            32,750
            
            
            
            21.0924.26
      - 27.72
            
            
            
            205,058
            
            
            
            7.18
            
            
            
            27.11
            
            
            
            131,096
            
            
            
            27.0427.73
      - 31.18
            
            
            
            14,109
            
            
            
            7.47
            
            
            
            29.35
            
            
            
            5,429
            
            
            
            29.0331.19
      - 34.65
            
            
            
            12,659
            
            
            
            8.34
            
            
            
            34.65
            
            
            
            3,163
            
            
            
            34.65Total
      Stock Options
            
            
            1,639,874
            
            
            
            5.49
            
            
            $
            12.34
            
            
            
            1,183,288
            
            
            $
            10.89Combined
            
            
            
            1,845,459
            
            
            
            5.17
            
            
            $
            10.96
            
            
            
            1,183,288
            
            
            $
            10.89





At
December 31, 2007, there were 1,055,846 exercisable stock options at the
weighted-average exercise price of $9.23 per share.





At
December 31, 2008, the aggregate intrinsic value of stock options outstanding
was $4.3 million and the aggregate intrinsic value of stock options exercisable
was $2.4 million. There is no intrinsic value related to restricted stock
grants. The weighted average remaining contractual life of stock options and
restricted grants outstanding was 5.2 years and exercisable was 4.2 years. The
aggregate intrinsic value is before applicable income taxes, based on our $9.20
closing stock price at December 31, 2008, which would have been received by the
optionees had all options been exercised on that date. As of December 31, 2008,
total unrecognized stock-based compensation expense related to non-vested stock
options and restricted stock grants was approximately $4.2 million, which is
expected to be recognized over a period of approximately 3.9 years. During the
year ended December 31, 2008, the total intrinsic value of stock options
exercised was $0.8 million, and the total fair value of options vested was $1.5
million.








F-24








AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





At
December 31, 2007, the aggregate intrinsic value of stock options outstanding
was $14.8 million and the aggregate intrinsic value of stock options exercisable
was $10.3 million. There is no intrinsic value related to restricted stock
grants. The weighted average remaining contractual life of stock options and
restricted grants outstanding was 5.4 years and exercisable was 4.8 years. The
aggregate intrinsic value is before applicable income taxes, based on our $18.31
closing stock price at December 31, 2007, which would have been received by the
optionees had all options been exercised on that date. As of December 31, 2007,
total unrecognized stock-based compensation expense related to non-vested stock
options and restricted stock grants was approximately $4.6 million, which is
expected to be recognized over a period of approximately 3.9 years. During the
year ended December 31, 2007, the total intrinsic value of stock options
exercised was $8.0 million, and the total fair value of options vested was $1.3
million.





At
December 31, 2006, the aggregate intrinsic value of stock options outstanding
was $36.0 million and the aggregate intrinsic value of stock options exercisable
was $26.9 million. There is no intrinsic value related to restricted stock
grants. The weighted average remaining contractual life of stock options and
restricted grants outstanding was 6.1 years and exercisable was 4.9 years. The
aggregate intrinsic value is before applicable income taxes, based on our $30.35
closing stock price at December 31, 2006, which would have been received by the
optionees had all options been exercised on that date. As of December 31, 2006,
total unrecognized stock-based compensation expense related to non-vested stock
options and restricted stock grants was approximately $4.4 million, which is
expected to be recognized over a period of approximately 4.0 years. During the
year ended December 31, 2006, the total intrinsic value of stock options
exercised was $6.9 million, and the total fair value of options vested was $7.1
million.





Stock
option and restricted stock grant transactions during 2008 were as
follows:





Restricted
            
            Weighted
            
            
            
            WeightedStock
            
            Average
      Grant
            
            Stock
            
            AverageGrants
            
            Date
      Fair Value
            
            Options
            
            Exercise
      PriceBalance
      at December 31, 2007
            221,820
            
            $
            20.87
            
            1,478,202
            
            $
            12.62Granted
            75,870
            
            
            9.98
            
            215,709
            
            
            9.96Forfeited
            (2,700)
            
            
            22.62
            
            (8,025)
            
            
            20.74Vested
            (89,405)
            
            
            2.53
            
            N/A
            
            
            N/AExercised
            N/A
            
            
            N/A
            
            (46,012)
            
            
            8.67Balance
      December 31, 2008
            205,585
            
            $
            18.33
            
            1,639,874
            
            $
            12.34








13.
            Employee
      Benefit Plan




Effective March 2002, we
established a 401(k) Profit Sharing Plan (the “Sharing Plan”) for our employees.
Employees are eligible to participate in the Sharing Plan upon six months of
service and 18 years of age. Employees may contribute up to 92 percent of
their salary, subject to the maximum contribution allowed by the Internal
Revenue Service. Our matching contribution is discretionary based upon approval
by management. Employees are 100 percent vested in their contributions and vest
in our matching contributions after their initial four years of employment.
During the years ended December 31, 2008, 2007, and 2006, we contributed
approximately $0.2 million, $0.2 million, and $0.1 million to the Sharing Plan,
respectively.













F-25





AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





14.
            Earnings
      Per Share




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




Years
      Ended December 31,2008
            
            
            2007
            
            
            2006Numerator:Net
      income for basic and diluted earnings per share
            
            $
            18,546
            
            
            $
            31,047
            
            
            $
            26,692Denominator:Weighted-average
      shares outstanding – basic
            
            
            18,745
            
            
            
            19,385
            
            
            
            20,554Effect
      of dilutive common stock options
            
            
            388
            
            
            
            623
            
            
            
            783Effect
      of dilutive common stock grants
            
            
            77
            
            
            
            86
            
            
            
            56Weighted-average
      shares outstanding – diluted
            
            
            19,210
            
            
            
            20,094
            
            
            
            21,393Earnings
      per share – basic and diluted:Net
      income per share – basic
            
            $
            0.99
            
            
            $
            1.60
            
            
            $
            1.30Net
      income per share – diluted
            
            $
            0.97
            
            
            $
            1.55
            
            
            $
            1.25





15.
            Supplemental
      Disclosures of Consolidated Statements of Cash
  Flows




We paid
cash for taxes during 2008, 2007, and 2006 of approximately$8.5 million, $13.3
million, and $10.5 million, respectively.





Our
non-cash investing and financing activities during the years ended
December 31, 2008, 2007, and 2006, are as follows (in
thousands):




2008
              
              
              2007
              
              
              2006Unrealized
      gain (loss) on foreign currency exchange contracts
              
              $
              (11,107
              )
              
              $
              890
              
              
              $
              4,467Unrealized
      gain  on available-for-sale securities
              
              
              213
              
              
              
              311
              
              
              
              194Property,
      plant and equipment
              
              
              22
              
              
              
              1,397
              
              
              
              (2,119
              )Capital
      lease
              
              
              37
              
              
              
              —
              
              
              
              —





16.
            Segment
      Reporting





Our
operations are organized into two reporting segments, consisting of (1)
Ambassador Programs and Other, which provide educational travel services to
students, professionals and athletes through multiple itineraries within four
educational and cultural program types, and (2) BookRags, an internet research
site housing content sales and advertising revenue.











F-26








AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Ambassador
Programs’ gross margin is comprised of gross receipts less direct program costs,
including accommodations, transportation, speakers, facilitators, and event
costs. BookRags’ gross margin is comprised of content and subscription and
advertising revenues via www.bookrags.com,
less commissions and amortization of intangible assets directly associated with
sales.





Prior to
May 15, 2008, we only had one segment. Segment information as of and for the
year ended December 31, 2008 is as follows (in thousands):




Ambassador
      Programs and Other
            
            
            BookRags
            
            
            ConsolidatedTotal
      revenue
            
            $
            96,030
            
            
            $
            1,897
            
            
            $
            97,927Gross
      margin
            
            $
            77,174
            
            
            $
            1,705
            
            
            $
            78,879Depreciation
      and amortization
            
            $
            (3,264
            )
            
            $
            (162
            )
            
            $
            (3,426
            )Operating
      income
            
            $
            24,327
            
            
            $
            1,142
            
            
            $
            25,469Income
      tax provision
            
            $
            (8,784
            )
            
            $
            (385
            )
            
            $
            (9,169
            )Net
      income
            
            $
            17,770
            
            
            $
            776
            
            
            $
            18,546Total
      additions to property, plant, and equipment
            
            $
            5,042
            
            
            $
            —
            
            
            $
            5,042Total
      additions to goodwill and intangible assets
            
            $
            —
            
            
            $
            9,431
            
            
            $
            9,431Intangible
      assets, excluding goodwill
            
            $
            —
            
            
            $
            2,404
            
            
            $
            2,404Total
      assets
            
            $
            113,713
            
            
            $
            10,564
            
            
            $
            124,277





Changes
to the carrying amount of goodwill and other investments during the year ended
December 31, 2008 were as follows (in thousands):


Ambassador
      Programs and Other
            
            
            BookRags
            
            
            ConsolidatedGoodwill
      at December 31, 2007
            
            $
            70
            
            
            $
            —
            
            
            $
            70Acquisition
            
            
            —
            
            
            
            6,865
            
            
            
            6,865Goodwill
      at December 31, 2008
            
            
            70
            
            
            
            6,865
            
            
            
            6,935Minority
      interest at December 31, 2007
            
            
            122
            
            
            
            —
            
            
            
            122Equity
      loss on investments
            
            
            (4
            )
            
            
            —
            
            
            
            (4
            )Investments
      at December 31 , 2008
            
            
            118
            
            
            
            —
            
            
            
            118Total
      goodwill and other investments
            
            $
            188
            
            
            $
            6,865
            
            
            $
            7,053








Any
intercompany sales or services provided that exist, which are rare, are
eliminated. Intercompany expenses paid for by Ambassador Programs on behalf of
BookRags are recorded as intercompany receivables and payables and eliminated
upon consolidation. On October 1, 2008, an operating agreement was entered into
by Ambassador Programs and BookRags. The operating agreement outlines the agreed
upon charges for services provided by Ambassador Programs to BookRags for
accounting, human resources, and technology support.  In addition, it
defines the terms in which the two companies can perform lead generation for
marketing purposes.











F-27








AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





17.
            Quarterly
      Financial Data




Summarized
quarterly financial data for 2008, 2007, and 2006 is as follows (unaudited, and
in thousands except per share data). All adjustments necessary to fairly present
the interim results have been recorded:




Quarters
      EndedMarch 31
            
            
            June 30
            
            
            September 30
            
            
            December 312008Total
      revenue
            
            $
            7,880
            
            
            $
            42,286
            
            
            $
            40,119
            
            
            $
            7,642Gross
      margin
            
            
            3,470
            
            
            
            36,717
            
            
            
            33,018
            
            
            
            5,674Selling
      and marketing expense
            
            
            9,364
            
            
            
            8,875
            
            
            
            11,272
            
            
            
            11,331General
      and administrative expense
            
            
            3,018
            
            
            
            3,168
            
            
            
            2,822
            
            
            
            3,560Income
      (loss) before income taxes
            
            
            (8,009
            )
            
            
            25,579
            
            
            
            19,591
            
            
            
            (9,446
            )Net
      income (loss)
            
            
            (5,474
            )
            
            
            17,184
            
            
            
            13,298
            
            
            
            (6,462
            )Earnings
      (loss) per share-basic
            
            
            (0.29
            )
            
            
            0.91
            
            
            
            0.72
            
            
            
            (0.35
            )Earnings
      (loss) per share-diluted
            
            
            (0.29
            )
            
            
            0.89
            
            
            
            0.70
            
            
            
            (0.35
            )




Gross
program receipts reflect total payments received by us. Gross program receipts
totaled $8.9 million, $104.0 million, $101.2 million and $15.1 million for the
quarters ended March 31, June 30, September 30, and
December 31, 2008, respectively.
  Quarters
      EndedMarch 31
              
              
              June 30
              
              
              September 30
              
              
              December 312007Total
      revenue
              
              $
              7,279
              
              
              $
              48,765
              
              
              $
              52,138
              
              
              $
              6,351Gross
      margin
              
              
              3,437
              
              
              
              42,860
              
              
              
              45,969
              
              
              
              3,779Selling
      and marketing expense
              
              
              9,238
              
              
              
              9,643
              
              
              
              10,185
              
              
              
              9,877General
      and administrative expense
              
              
              2,747
              
              
              
              3,277
              
              
              
              3,479
              
              
              
              5,771Income
      (loss) before income taxes
              
              
              (7,438
              )
              
              
              31,167
              
              
              
              33,305
              
              
              
              (11,034
              )Net
      income (loss)
              
              
              (4,984
              )
              
              
              20,949
              
              
              
              22,504
              
              
              
              (7,422
              )Earnings
      (loss) per share-basic
              
              
              (0.25
              )
              
              
              1.09
              
              
              
              1.16
              
              
              
              (0.39
              )Earnings
      (loss) per share-diluted
              
              
              (0.25
              )
              
              
              1.05
              
              
              
              1.12
              
              
              
              (0.39
              )
  Gross
program receipts totaled $7.8 million, $121.4 million, $134.6 million and $13.6
million for the quarters ended March 31, June 30, September 30,
and December 31, 2007, respectively.
 
 Quarters
      EndedMarch 31
                
                
                June 30
                
                
                September 30
                
                
                December 312006Total
      revenue
                
                $
                4,651
                
                
                $
                39,654
                
                
                $
                38,706
                
                
                $
                5,944Gross
      margin
                
                
                2,505
                
                
                
                35,180
                
                
                
                35,093
                
                
                
                4,704Selling
      and marketing expense
                
                
                6,515
                
                
                
                7,234
                
                
                
                9,176
                
                
                
                8,713General
      and administrative expense
                
                
                2,013
                
                
                
                2,295
                
                
                
                2,399
                
                
                
                5,014Income
      (loss) before income taxes
                
                
                (5,068
                )
                
                
                27,059
                
                
                
                24,781
                
                
                
                (7,894
                )Net
      income (loss)
                
                
                (3,448
                )
                
                
                18,467
                
                
                
                17,099
                
                
                
                (5,426
                )Earnings
      (loss) per share-basic
                
                
                (0.17
                )
                
                
                0.90
                
                
                
                0.83
                
                
                
                (0.26
                )Earnings
      (loss) per share-diluted
                
                
                (0.17
                )
                
                
                0.86
                
                
                
                0.80
                
                
                
                (0.26
                )
 
 Gross
program receipts totaled $5.4 million, $98.7 million, $102.7 million and $12.6
million for the quarters ended March 31, June 30, September 30,
and December 31, 2006, respectively.






F-28








AMBASSADORS
GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





18.
            Subsequent
      Events





In the
first quarter of  2009, our subsidiary, World Adventures Unlimited, Inc.
(“WAU”) (FKA ‘Ambassadors Specialty Group, Inc.’ (“ASG”)), signed a five year
license agreement with Discovery Education, Inc. (“Discovery Education”). The
agreement grants us the exclusive right to license all-inclusive land based
group travel packages for students, kindergarten through twelfth grade to
destinations outside of North America using the Discovery Education marks and
the name “Discovery Student Adventures”. We do not expect any students to travel
on these programs until 2010.





F-29


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.By:
            /s/
      JEFFREY D. THOMASJeffrey
      D. Thomas,President
      and Chief Executive Officer


Date: March 11,
2009




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. THOMAS
            
            
            President,
      Chief Executive
              Officer
      and Director
              (Principal
      Executive Officer)
            
            March
      11, 2009Jeffrey
      D. Thomas/s/
      JOHN A. UEBERROTH
            
            
            Chairman
      of the Board of Directors
            
            March
      11, 2009John
      A. Ueberroth/s/
      CHADWICK J. BYRD
            
            
            Chief
      Financial Officer and Secretary
            
            March
      11, 2009Chadwick
      J. Byrd
            
            
            (Principal Financial
      and Accounting Officer)/s/
      BRIGITTE M. BREN
            
            
            Director
            
            March
      11, 2009Brigitte
      M. Bren/s/
      DANIEL G. BYRNE
            
            
            Director
            
            March
      11, 2009Daniel
      G. Byrne/s/
      RAFER L. JOHNSON
            
            
            Director
            
            March
      11, 2009Rafer
      L. Johnson/s/
      JAMES M. KALUSTIAN
            
            
            Director
            
            March
      11, 2009James
      M. Kalustian/s/
      JOSEPH J. UEBERROTH
            
            
            Director
            
            March
      11, 2009Joseph
      J. Ueberroth/s/
      RICARDO L. VALENCIA
            
            
            Director
            
            March
      11, 2009Ricardo
      L. Valencia/s/
      RICHARD D. C. WHILDEN
            
            
            Director
            
            March
      11, 2009Richard
      D. C. Whilden







II -
1


INDEX
TO EXHIBITS




Exhibit
              Number
            
            Description3.1
            
            Amended
      and Restated Certificate of Incorporation of the registrant incorporated
      by reference to the registrant’s Registration Statement on Form 10
      filed on November 15, 2001.3.2
            
            Certificate
      of Amendment to Amended and Restated Certificate of Incorporation of the
      registrant incorporated by reference to the registrant’s Form 8-K filed on
      May 17, 2005.3.3
            
            Bylaws
      of the registrant incorporated by reference to the registrant’s
      Registration Statement on Form 10 filed on November 15,
      2001.4.1
            
            Form
      of Common Stock Certificate of the registrant incorporated by reference to
      the registrant’s Form 10-K filed on March 9, 2007.10.1
            
            2001
      Equity Participation Plan incorporated by reference to the registrant’s
      Registration Statement on Form 10 filed on January 7,
      2002.10.2
            
            Form
      of 2001 Equity Participation Plan Agreement incorporated by reference to
      the registrant’s Registration Statement on Form 10 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 filed on January 25,
      2002.10.4
            
            Commercial
      Lease Agreement by and between Portolese & Sample Investments and the
      registrant incorporated by reference to the registrant’s Form 8-K filed on
      January 4, 2005.10.5
            
            AIA
      Document A101, Standard Form of Agreement between Owner and Contractor by
      and between the registrant and Graham Construction and Management, Inc.
      incorporated by reference to registrant’s Form 8-K filed on September 29,
      2006.10.6
            
            Employment
      Agreement by and between the registrant and Jeffrey D. Thomas,
      incorporated by reference to the registrant’s Form 8-K filed on October 3,
      2006.10.7
            
            Stock
      Purchase Agreement by and between the registrant and Invemed Catalyst
      Fund, L.P. incorporated by reference to the registrant’s Form 8-K filed on
      January 31, 2007.10.8
            
            Stock
      Purchase Agreement incorporated by reference to the registrant’s Form 8-K
      filed on May 21, 2008.10.9
            
            Credit
      Agreement by and between the registrant and Wells Fargo Bank, N.A.
      incorporated by reference to the registrant’s Form 8-K file on May 30,
      2008.10.10
            
            Revolving
      Line of Credit Note incorporated by reference to the registrant’s Form 8-K
      filed May 30, 200814.1
            
            Code
      of Ethics incorporated by reference from our definitive Proxy Statement
      for the fiscal year ended December 31, 2008, to be filed with the SEC on
      or about April 6, 2009.21.1
            
            List
      of subsidiaries of the registrant as of December 31,
  2008.*23.1
            
            Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm.*




II -
2


31.1
            
            Certification
      by Chief Executive Officer required by Rule 13a-14(a) or
      Rule 15(d)-14(a).*31.2
            
            Certification
      by Chief Financial Officer required by Rule 13a-14(a) or Rule
      15(d)-14(a).*32.1
            
            Certification
      by the Chief Executive Officer and Chief Financial Officer as required by
      Rule 13a-14(b) or 15(d)-14(b) and Section 1350 of Chapter 63 of Title
      13 of the United  States Code (18 U.S.C.
  §1350).*


II-3