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, 2007Oro
            
            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





(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).


oYesxNo


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 29, 2007, was $438.8 million. Shares of Common Stock held
      by each executive officer and director, and by each 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 outstanding as of February 22,
      2008 was 19,125,415.




DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the registrant’s definitive Proxy Statement relating to the 2008 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
            8Item
                1B.
            Unresolved
                Staff Comments
            12Item
                2.
            Properties
            12Item
                3.
            Legal
                Proceedings
            12Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            12PART
                IIItem
                5.
            Market
                for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            13Item
                6.
            Selected
                Financial Data
            17Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition andResults
                of Operation
            20Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item
                8.
            Financial
                Statements and Supplementary Data
            29Item
                9.
            Changes
                in and
                Disagreements With Accountants on Accounting andFinancial
                Disclosure
            29Item
                  9A.
            Controls
                and Procedures
            30Item
                9B.
            Other
                Information
            32PART
                IIIItem
                10.
            Directors
                and Executive Officers of the Registrant
            32Item
                11.
            Executive
                Compensation
            32Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
            32Item
                13.
            Certain
                Relationships and Related Transactions
            32Item
                14.
            Principal
                Accountant Fees and Services
            32PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            33Signatures
            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 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 industry generally,
      competition, 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, 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,” “we,” “us” or “our”) is a leading educational travel
      company
      that organizes and promotes international and domestic programs for students,
      athletes and professionals.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, we 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
      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,” “People to People Future Leaders Summit,”
and “World Leadership Forum” (“Student Leader 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.




Since
      1995, we have expanded our operations primarily through internal growth and
      two
      acquisitions of travel related businesses. Since 1963, we have organized
      programs for nearly 439,000 students, adults and




-1-


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 2007, 52,661 delegates traveled on our
      programs to 44 countries on seven continents, including students from over
      100
      different countries.





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,
      including President George W. Bush, who currently holds that position. 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 41 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.




Our
      principal offices are located in Spokane, Washington USA.




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, 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 January. 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 14 to
      23 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.




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 home stay (a brief stay with a host family), which gives
      students a glimpse of daily life in the visited country.




-2-


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 to participate
      in international tournaments with teams from across the world in up to
      eight 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, all athletes participate in an individual skill assessment,
      after
      which rosters are formed to ensure balanced and competitive teams. After the
      formation of rosters, the rest of the training camp focuses on team practice
      and
      fundamentals in preparation for the ensuing tournament competition. In each
      tournament, 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.





Student
      Leader Programs





Our
      Student Leader 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 Student Leader Programs through a direct-mail marketing effort throughout
      the year, and they travel throughout the year for approximately seven to ten
      days. They 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
      toorganizeand operate all activities of most of
      ourStudent Leader Programs, including speakers,
      facilitators, events, accommodations and transportation. Previously, these
      activities were provided by outside vendors.





Delegates
      traveling on these programs 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




-3-


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 major foreign facilities and institutions;
      and
      informal gatherings with foreign counterparts. Each program is led by a
      delegation leader chosen by us based upon his or her recognition in the field
      and expertise regarding the special focus of the particular
      program.




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 138,400 academic and service-learning
      credits.





Our
      delegates are also able to earn academic credit through Eastern Washington
      University’s Eisenhower Center (“EWU”). Student Ambassadors in grades nine
      through 12 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. Between 1980 and 2007, Student Ambassadors transferred more than
      41,700 college credits from EWU to universities of their choice.





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 SafeTravel, Inc., exhibits our adherence to safety
      on all our programs.





-4-


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 on our Citizen Ambassador Programs.




Service
      Marks




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,” and “World Leadership
      Forum.” 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.




Employees




On
      December 31, 2007, we employed 276 employees, of which 272 were full-time
      employees. Of our full-time employees, 267 are located in Spokane, Washington
      and five are located in Washington, D.C. We have 203 full-time employees engaged
      in selling and marketing and 69 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.





Competition





The
      travel industry and the educational segment within the travel industry are
      highly competitive. Our Student Ambassador Programs, Sport Ambassador Programs,
      and Student Leader 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 that 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 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
      41 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




-5-


we
      do.
      There can be no assurance that our present or future competitors will not exert
      significant competitive pressures on us in the future.





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 quality
      standards while increasing the volume of business. To grow the business, we
      intend to (i) expand the marketing and travel volume of existing student,
      sport, student leader and professional educational travel programs,
      (ii) introduce new student, sport, student leader and professional travel
      programs independently and through strategic alliances, and (iii) 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 2010. 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 improve 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 102.3 million people in
      2010, from 80.8 million people in 2000. This trend is expected to benefit
      us, since 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
      improve 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
      travel experiences. We intend to continue to maintain our contacts with foreign
      governmental agencies and officials and intend to continue to utilize 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.




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.
      We believe that these industries’ large size and fragmentation provides an
      opportunity for acquisitions of businesses that are either compatible with
      our
      current business or represent a developing specialty segment.





-7-


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
      predicated in forward-looking statements we make about our
      business.





Travel
      Industry





Our
      results of operations will depend
      upon factors affecting the travel industry in general. Ourenrollments and resultingrevenues
      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 fluctuationsand
      the weakening dollar value within the global market, 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 in theUnited Statesand
      key international markets.
      Therefore, any significant economic downturn or recession in theUnited Statesor
      these other markets could have a
      material adverse effect
      on our business, financial
      condition, cash flows and results of operations.





International
      Operations and Natural
      Occurrences





Our
      operations are subject to special
      risks inherent in doing business internationally, as substantially all of our
      travel programs are conducted outside theUnited States.
      In the past,gross program receiptsfrom
      programs to Europe, the South
      Pacific (Australia and New Zealand)and China have accountedfor
      a majority of ourreceipts.
      Risks inherent in doing business
      internationally include potential adverse effects from operations from war,U.S.military
      deployments, international and
      domestic terrorism, civil disturbances, political instability, governmental
      activities and deprivation of contract rights.





The
      continued U.S. military presence as a result from the war in Iraq has affected
      and will continue to affect the travel industry, the markets in which we
      operate, and our operations and profitability. The potential and 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
      attacks on September 11, 2001, the Gulf War in 1991, civil unrest in China
      in
      1989 and
      the
      Chernobyl disaster in 1986.





Demand
      for our travel programs also 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.





Terrorism





Terrorist
      attacks, such as the attacks that occurred in 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. 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




-8-


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 affect on our business or
      operations.





Seasonality;
      Fluctuations in Quarterly Results





Our
      business is highly seasonal. The majority of our travel programs are scheduled
      in June and July of each year, and 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, student leader 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





The
      travel industry in general and the educational segment of the travel industry
      is
      highly competitive and has 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 other entities
      which we compete with, 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. There can be no assurance that we will be able to compete successfully,
      and the failure to compete successfully may have a material adverse affect
      on
      our business, financial condition, cash flows and results of
      operations.





Dependence
      on “People to People”





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 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, we could have a material adverse affect
      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.





-9-


Dependence
      on Travel Suppliers





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 and resulting low demand for the products and services of such travel
      suppliers could have a material adverse affect on our business, financial
      condition, cash flows and results of operations.





Dependence
      on 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 affect 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 affect on our business, financial condition, cash flows and
      results of operations.





Marketing





Our
      performance 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 affect on our business,
      financial condition, cash flows and results of operations. Such changes in
      the
      direct-mail environment could include, but not be 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.





Government
      Regulation and Taxation





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





Fluctuation
      of Currency Exchange Rate; Increased Costs





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. 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






-10-


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 affect on our business, financial
      condition, cash flows and results of operations.





Casualty
      Losses





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 affect on our business, financial condition, cash flows
      and results of operations.





Growth,
      Acquisitions and Alliances





Our
      performance is dependent on our ability to grow our business and expand the
      marketing and travel volume of our youth, sports, student leader and
      professional travel programs. 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 affect on our business, financial
      condition, cash flows and results of operations.





Concentration
      of Credit Risk





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, it could be necessary to obtain
      credit financing to operate our travel programs.  Our
        short
        term investments primarily consist of municipal bonds, variable rate municipal
        demand notes and various auction rate securities. 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. 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 at the year
        ended
        December 31, 2007 is investment grade. We do not currently have any direct
        exposure to collateralized debt obligations (“CDO”) or other similar structured
        securities. The emerging credit market conditions may have an impact to the
        liquidity of our auction rate securities, and may result in reclassification
        from short-term to long-term investments if future liquidity conditions
        mandate.





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





Fluctuations
      in Stock Price





The
      market price of our Common Stock could be subject to significant fluctuations.
      Among the factors that


could
      affect our stock price are:





•
                Quarterly variations in operating results;


•
                Changes in revenue or earnings estimates or publication of research
                reports by analysts;


•
                Speculation in the press or investment community;


•
                Strategic actions by us or our competitors, such as acquisitions
                or
                restructurings;


-11-


•
                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.





Item 2.Properties





We
      constructed and own an office
      building, approximating 132,000 square feet, in which our headquarters are
      located in Spokane, Washington. During 2007, we vacated an office building
      and
      terminated the leases
      thereto,also
      in Spokane, Washington. See Note 5
      in the Consolidated Financial Statements,Property Plant and
      Equipment.





We
      also
      occupy office space totaling approximately 2,400 square feet in Arlington,
      Virginia, pursuant to a lease which expires April 30, 2011.




Item 3.Legal
      Proceedings




On
      January 28, 2008, Allen Hill and
      Sheryl Hill, etc., et al. brought an action against us in the Fourth
      Judicial District of the District Court for the County of Hennepin, State of
      Minnesota seeking 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 oneofour
      studentprogramsduring
      the summer of 2007. We have
      tendered our defense and indemnity under applicable insurance
      coverage,and
      defense counsel in Minneapolis,
      Minnesota has been assigned to represent us.





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.




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 2007.





-12-


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 22­­­­­­­, 2008, the last reported sale
      price of our Common Stock was $­­­­­­­­18.97 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, 2007 and 2006.




High
            
            LowQuarter
                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
            
            $
            17.09Quarter
                ended March 31, 2006
            $
            27.11
            
            $
            23.25Quarter
                ended June 30, 2006
            $
            30.36
            
            $
            24.99Quarter
                ended September 30, 2006
            $
            29.46
            
            $
            24.83Quarter
                ended December 31, 2006
            $
            30.87
            
            $
            25.71










-13-


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, 2002 in our Common Stock and in each of the indexes
      mentioned above and that all dividends were reinvested.









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 22, 2008, there were approximately 63 holders of record of our
      Common Stock. 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.


-14-


During
      2006 and 2007, and through February 2008, our Board of Directors declared the
      following dividend payments:





Declaration
                Date
            Record
                Date
            Payment
                Date
            
            Dividend Per
                ShareFebruary
                17, 2006
            March
                3, 2006
            March
                17, 2006
            
            $
            0.085May
                4, 2006
            May
                22, 2006
            June
                6, 2006
            
            $
            0.085August
                11, 2006
            August
                25, 2006
            September
                8, 2006
            
            $
            0.085November
                9, 2006
            November
                24, 2006
            December
                8, 2006
            
            $
            0.115February
                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
                12, 2008
            February
                27, 2008
            March,
                12, 2008
            
            $
            0.115





Transfer
      Agent and Registrar




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




Equity
      Compensation Plan Information





The
      following tables provide information as of December 31, 2007 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
            
            1,700,022
            
            $  10.97
            
            541,153Equity
              compensation
              plans
                not approved
              by
                security holders
            
            N/A
            
            N/A
            
            N/ATotal
            
            1,700,022
            
            $  10.97
            
            541,153






Issuer
      Purchases of Equity
      Securities




Between
      May 2004 and December 2006,our Board of Directors
      authorized the repurchase of up to $25.0million
      of our CommonStock 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. During the
      quarter ended December 31, 2007, we repurchased 302,899 shares of our Common
      Stock for $5.5 million. Since inceptionthrough December 31,
      2007, we have repurchased
      approximately
      1,186,900 shares of our Common Stock, adjusted to reflect the effect of ourtwo-for-one stock split of our Common Stock,for an approximate total
      of $25.1
      million. As of December 31, 2007, approximately $19.9 million remained available
      for repurchase under the plan.Subsequent to December
      31, 2007,
      through February 7, 2008, we repurchased approximately 0.2 million shares of
      our
      Common Stock for approximately $3.8 million.




Independent
      of this sharerepurchase plan, during
      the first
      quarter 2007, ourboard of directors approved a single repurchase of 1.2
      million shares of common stock for
      approximately $33.0 million.




-15-





The
      following is a summary of issuer purchases of equity securities during the
      quarter ended December 31, 2007:


Total
                Number of
            
            
            
            Maximum
                NumberShares
            
            
            
            (or
                ApproximatePurchased
                as
            
            
            
            Dollar
                Value) ofAverage
            
            
            
            Part
                of Publicly
            
            
            
            Shares
                that MayTotal
                Number
            
            
            
            Price
            
            
            
            Announced
            
            
            
            Yet
                Be Purchasedof
                Shares
            
            
            
            Paid
                per
            
            
            
            Plans
                or
            
            
            
            Under
                the Plans orPeriod
            
            
            Purchased
            
            
            
            Share
            
            
            
            Programs
            
            
            
            ProgramsAvailable
                for repurchase at September 30, 2007
            $
            5,443,060October 1
                – October 31, 2007
            
            
            107,800
            
            
            $
            18.66
            
            
            
            107,800
            
            
            
            3,431,535November 1
                – November 30, 2007
            
            
            183,199
            
            
            
            18.01
            
            
            
            183,199
            
            
            
            20,132,691December 1
                – December 31, 2007
            
            
            11,900
            
            
            
            18.17
            
            
            
            11,900
            
            
            
            19,916,484302,899
            
            
            $
            18.28
            
            
            
            302,899
            
            
            $
            19,916,484







Recent
      Sales of Unregistered
      Securities


During
      the fiscalyearended
      December 31, 2007,we soldno
      equity securities that were not
      registered under the Act.


-16-


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, 2007, and the balance sheet data as of December 31,
      2007 and 2006 have been derived from audited financial statements included
      elsewhere in this Form 10-K. The statement of operations data for the years
      ended December 31, 2004 and 2003 and the balance sheet data as of
      December 31, 2005, 2004 and 2003 have been derived from the audited
      financial statements, which are not included in this Form 10-K. Historical
      results are not necessarily indicative of future results.


December
                  31,2007(C)
              
              
              
              2006(C)
              
              
              2005
              
              
              2004
              
              
              2003(in
                  thousands, except per share data)Statement
                  of Operations data:Net
                  revenue, non-directly delivered programs (A)
              
              $
              84,512
              
              
              $
              69,554
              
              
              $
              64,321
              
              
              $
              51,824
              
              
              $
              37,665Gross
                  revenue, directly delivered programs
              
              $
              30,021
              
              
              $
              19,401
              
              
              $
              4,969
              
              
              
              -
              
              
              
              -Total
                  revenue
              
              $
              114,533
              
              
              $
              88,955
              
              
              $
              69,290
              
              
              $
              51,824
              
              
              $
              37,665Cost
                  of sales, directly delivered programs
              
              $
              18,488
              
              
              $
              11,473
              
              
              $
              2,841
              
              
              
              -
              
              
              
              -Gross
                  margin
              
              $
              96,045
              
              
              $
              77,482
              
              
              $
              66,449
              
              
              $
              51,824
              
              
              $
              37,665Selling
                  and marketing expenses
              
              $
              38,943
              
              
              $
              31,638
              
              
              $
              27,574
              
              
              $
              22,616
              
              
              $
              18,534General
                  and administrative expenses
              
              $
              15,274
              
              
              $
              11,721
              
              
              $
              8,185
              
              
              $
              6,537
              
              
              $
              4,566Operating
                  income
              
              $
              41,828
              
              
              $
              34,123
              
              
              $
              30,690
              
              
              $
              22,671
              
              
              $
              14,565Operating
                  margin
              
              
              44
              %
              
              
              44
              %
              
              
              46
              %
              
              
              44
              %
              
              
              39
              %Net
                  income
              
              $
              31,047
              
              
              $
              26,692
              
              
              $
              22,410
              
              
              $
              15,647
              
              
              $
              10,154Earnings
                  per share – basic (B)
              
              $
              1.60
              
              
              $
              1.30
              
              
              $
              1.10
              
              
              $
              0.78
              
              
              $
              0.51Earnings
                  per share – diluted (B)
              
              $
              1.55
              
              
              $
              1.25
              
              
              $
              1.05
              
              
              $
              0.75
              
              
              $
              0.50Balance
                  sheet data:Cash,
                  cash equivalents and available-for-sale securities
              
              $
              84,994
              
              
              
              133,134
              
              
              $
              116,604
              
              
              $
              87,557
              
              
              $
              67,525Total
                  assets
              
              $
              121,704
              
              
              $
              153,953
              
              
              $
              125,046
              
              
              $
              97,516
              
              
              $
              79,321Total
                  stockholders’ equity
              
              $
              72,400
              
              
              $
              84,047
              
              
              $
              66,502
              
              
              $
              49,501
              
              
              $
              40,809Other
                  key financial measures:Cash
                  flow from operating activities
              
              $
              16,436
              
              
              $
              37,207
              
              
              $
              37,792
              
              
              $
              27,906
              
              
              $
              17,255Cash
                  flow provided by (used in) investing activities
              
              $
              9,677
              
              
              $
              (12,923
              )
              
              $
              (15,592
              )
              
              $
              (22,830
              )
              
              $
              (10,749
              )Cash
                  dividends declared and paid
              
              $
              (8,940
              )
              
              $
              (7,655
              )
              
              $
              (5,729
              )
              
              $
              (4,630
              )
              
              $
              (1,100
              )Cash
                  dividends declared and paid, per common share
              
              $
              0.46
              
              
              $
              0.37
              
              
              $
              0.28
              
              
              $
              0.23
              
              
              $
              0.06Cash
                  flow (used in) from financing activities
              
              $
              (45,616
              )
              
              $
              (14,416
              )
              
              $
              (6,320
              )
              
              $
              (5,825
              )
              
              $
              34Deployable
                  cash (D1)
              
              $
              40,421
              
              
              $
              67,947
              
              
              $
              61,939
              
              
              $
              43,180
              
              
              $
              32,903Free
                  cash flow (D2)
              
              $
              (2,835
              )
              
              $
              30,752
              
              
              $
              35,532
              
              
              $
              25,999
              
              
              $
              16,198Return
                  on adjusted equity (D3)
              
              
              41
              %
              
              
              36
              %
              
              
              39
              %
              
              
              37
              %
              
              
              32
              %


-17-


(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 allactivities such as speakers, facilitators, events, accommodations
                and transportation. Gross program receipts for both directly delivered
                and
                non-directly delivered programs during the years ended December 31,
                2007, 2006, 2005, 2004 and 2003 were $277.3 million, $219.5 million,
                $180.0 million, $147.1 million, and $108.6 million, respectively.
                Gross margin as a percent of gross program receipts during the years
                ended
                December 31, 2007, 2006, 2005, 2004, and 2003 were 35%, 35%, 37%,
                35%, 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 ofJanuary
                1, 2006.During
                2007 and 2006, stock option expense was $0.9 million and $1.3 million,
                and
                $2.7 million and $2.4 million excess tax benefit from stock-based
                compensation is included in netcash
                provided by operating activities and net cash used in financing
                activities(D)
            Non-GAAP
                Financial
                Measures




See
      below
      for reconciliation and description of non-GAAP financial measures.





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.




(D1)
      Deployable Cash Reconciliation (in thousands)





December
                31,2007
            
            2006
            
            2005
            
            2004
            
            2003Cash
                and cash equivalents and
                available-for-sale securities
            $
            84,994
            $
            133,134
            $
            116,604
            $
            87,557
            $
            67,525Prepaid
                program costs and
                expenses
            
            3,624
            
            3,786
            
            1,596
            
            2,461
            
            1,608Less:
                accounts
                payable
            
            (2,425)
            
            (2,941)
            
            (2,540)
            
            (1,390)
            
            (2,599)Less:
                accrued expenses and other
                short-term liabilities (excluding deferred taxes)
            
            (2,862)
            
            (5,190)
            
            (6,078)
            
            (6,693)
            
            (5,260)Less:
                participant
                deposits
            
            (42,723)
            
            (60,651)
            
            (47,463)
            
            (38,608)
            
            (28,220)Less:
                current portion of long-term
                capital lease
            
            (187)
            
            (191)
            
            (180)
            
            (147)
            
            (151)Total
                deployable
                cash
            $
            40,421
            $
            67,947
            $
            61,939
            $
            43,180
            $
            32,903





Deployable
      cash is a non-GAAP liquidity measure. Deployable cash is calculated as the
      sum
      of cash and cash equivalents, available-for-sale securities and prepaid program
      costs and expenses less the sum




-18-


of
      accounts payable, accrued expenses and other short-term liabilities (excluding
      deferred taxes), participant deposits and the current portion of long-term
      capital lease. Management believes this non-GAAP measure is useful to investors
      in understanding the cash available to deploy for future business
      opportunities.





(D2)
      Free Cash Flow Reconciliation (in thousands)




December
                31,2007
            
            2006
            
            2005
            
            2004
            
            2003Cash
                flow from operations as reported
            $
            16,436
            
            $
            37,207
            
            $
            37,792
            
            $
            27,906
            
            $
            17,255Purchase
                of property and equipment
            
            (19,271
            )
            (6,455
            )
            (2,260
            )
            (1,907
            )
            (1,057
            )Free
                cash flow
            $
            (2,835
            )
            $
            30,752
            
            $
            35,532
            
            $
            25,999
            
            $
            16,198


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.





(D3)
      Return on Adjusted Stockholders’ Equity Reconciliation (in thousands except
      return percentages)





December
                31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Stockholders’
                equity at January 1, as reported
            
            $
            84,047
            
            
            $
            66,502
            
            
            $
            49,501
            
            
            $
            40,809
            
            
            $
            27,860Less:
                other comprehensive income (loss) at January 1
            
            
            1,636
            
            
            
            (1,396
            )
            
            
            1,645
            
            
            
            3,451
            
            
            
            1,155Plus:
                stockholders’ equity at December 31, as reported
            
            
            72,400
            
            
            
            84,047
            
            
            
            66,502
            
            
            
            49,501
            
            
            
            40,809Less:
                other comprehensive income (loss) at December 31
            
            
            2,417
            
            
            
            1,636
            
            
            
            (1,396
            )
            
            
            1,645
            
            
            
            3,451Average
                adjusted stockholders’ equity (the sum of the above divided by
                two)
            
            $
            76,197
            
            
            $
            75,155
            
            
            $
            57,877
            
            
            $
            42,607
            
            
            $
            32,032Net
                income
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            22,410
            
            
            $
            15,647
            
            
            $
            10,154Return
                on adjusted equity
            
            
            41
            %
            
            
            36
            %
            
            
            39
            %
            
            
            37
            %
            
            
            32
            %




Return
      on
      adjusted equity is a non-GAAP operating result. Average adjusted 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. 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.





-19-


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




The
      following discussion should be read in conjunction with the selected
      consolidated financial data and our consolidated financial statements and the
      notes thereto included in this Annual Report.




Executive
      Overview




We
      are a
      leading educational travel company that organizes and promotes international
      and
      domestic programs for students, athletes and professionals. Youth 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 student leader 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.




We
      were founded in 1967, were
      reincorporated in Delaware in 1995, and operated as Ambassadors Education Group,
      a wholly owned subsidiary of International,until
      February 2002, at which time we
      spun off to operate as an independent stand-alone company beginning in March,
      2002. Since then, our Common Stock has traded onTheNASDAQStockMarket
      under the ticker symbol
“EPAX.”The
      consolidated financial statements include the accounts of Ambassadors Group,
      Inc., and our wholly owned subsidiaries, Ambassador Programs, Inc., Ambassadors
      Specialty Group, Inc., and Ambassadors Unlimited, LLC. Ambassador Programs,
      Inc.’s wholly owned subsidiary, Marketing Production Systems, LLC, is also
      included in our consolidated financial statements. All significant inter-company
      accounts and transactions have been eliminated in consolidation.




Our
      operations are organized to provide sevices to student, professionals and
      athletes through multiple itineraries within four educational and cultural
      program types. These programs have been aggregated as a single operating and
      reporting segment based on the similarity of their economic characteristics
      as
      well as services provided.




Our
      Seasonality





Our
      business is seasonal. The majority of our travel programs occur in June and
      July of each year. 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, these seasonal revenues
      have
      more than offset operating losses incurred during the rest of the year. Our
      annual results would be adversely affected if our revenues were to be
      substantially below seasonal norms during these periods. Our operating results
      may fluctuate as a result of many factors. See Item 1A, “Risk Factors”for
      further explanation.





Our
      Foreign Exposure





The
      majority of our programs take place outside the United States and most foreign
      suppliers require payment in local currency rather than in U.S. dollars.
      Accordingly, we are exposed to foreign currency risks in certain countries
      as
      foreign currency exchange rates between those currencies and the U.S. dollar
      fluctuate. We have a program to provide a hedge against certain of these foreign
      currency risks. We use forward contracts and options that allow us to acquire
      the foreign currency at a fixed price for a specified period of time. Some
      of
      our forward contracts and options include a variable component if a
      pre-determined trigger occurs during the term of the contract.




These
      foreign exchange contracts and options are entered into to support normal
      anticipated recurring purchases and, accordingly, are not entered into for
      speculative purposes. See Item 7, “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations—Market
      Risk.”


-20-






Program
      Revenueand Operating
      Expenses




Revenue
      from non-directly delivered
      programs is presented as net revenue and recognized as the program convenes.
      For
      these programs, we do not actively deliver the operations of each program,
      and
      our remaining performance obligation for these programs after they convene
      isperfunctory.For
      certain programs, however,weorganizeand
      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 being delivered.





Our
      policy is to obtain payment for
      substantially all travel services prior to entering into commitments for
      incurring expenses relating to such travel. Program pass-through and direct
      delivery expenses include all direct costs associated with our programs,
      including, but not limited to, costs related to airfare, hotels, meals, ground
      transportation, guides, presenters, facilitators, professional exchanges and
      changes in currency exchange rates.





Operating
      expenses, which are expensed
      as incurred, are the costs related to the creation of programs, promotional
      materials and marketing costs, salaries, rent, other general and administrative
      expenses and all ordinary expenses.





Results
      of Operations




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




Year
                Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(%
                of gross margin)Gross
                margin
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Selling
                and marketing
            
            
            41
            
            
            
            41
            
            
            
            41
            
            
            
            44
            
            
            
            49General
                and administrative expenses
            
            
            16
            
            
            
            15
            
            
            
            12
            
            
            
            13
            
            
            
            12Operating
                income
            
            
            44
            
            
            
            44
            
            
            
            46
            
            
            
            44
            
            
            
            39Other
                income
            
            
            4
            
            
            
            6
            
            
            
            4
            
            
            
            2
            
            
            
            2Income
                before tax
            
            
            48
            
            
            
            50
            
            
            
            50
            
            
            
            46
            
            
            
            41Income
                tax provision
            
            
            16
            
            
            
            16
            
            
            
            16
            
            
            
            16
            
            
            
            14Net
                income
            
            
            32
            %
            
            
            34
            %
            
            
            34
            %
            
            
            30
            %
            
            
            27
            %





-21-


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




During
      2007, we traveled 52,661 delegates compared to approximately 43,075 delegates
      in
      2006. In 2007 and 2006, 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, respectively. 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.




Our
      policy is to expense all selling and marketing costs as incurred. 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 towards 2008 and 2009 travel programs,
      and
      $0.8 million increased depreciation year over year associated with our new
      facility. As a percent of gross margin, selling and marketing expenses were
      consistently 41 percent during 2007 and 2006.




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.




During
      the year ended December 31, 2007, we increased our operating income to
      $41.8 million from $34.1 million for the year ended
      December 31, 2006. Operating income as a percent of gross margin remained
      consistently 44 percent for 2007 and 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 (see Part 2, Item 5) 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.




For
      the
      year ended December 31, 2007, income before income taxes was $46.0 million
      in comparison to income before income taxes of $38.9 million for the year ended
      December 31, 2006.




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 rate from 2006 was primarily the result of lower
      interest earned from tax-exempt securities.




Net
      income increased to $31.0 million for the year ended December 31, 2007 from
      $26.7 million for the year ended December 31, 2006.





-22-


Comparison
      of Year Ended December 31, 2006 to Year Ended December 31,
      2005





During
      2006, we traveled 43,075 delegates compared to approximately 37,800 delegates
      in
      2005. Gross margin increased 17 percent, to $77.5 million from
      $66.4 million in 2005. The $11.0 million increase is primarily due to the
      14 percent increase in delegates traveled during the year.




Our
      policy is to expense all selling and marketing costs as incurred. Selling and
      marketing expenses were $31.6 million and $27.6 million for the years ended
      December 31, 2006 and 2005, respectively. The $4.1 million increase is
      primarily the result of $1.0 million in additional personnel costs and $1.8
      million in selling support functions to support larger volume of delegates,
      as
      well as $1.3 million in increased marketing efforts towards 2007 travel
      programs. As a percent of gross margin, selling and marketing expenses were
      consistently 41 percent during 2006 and 2005.




General
      and administrative expenses increased to $11.7 million for the year ended
      December 31, 2006 from $8.2 million for the year ended December 31,
      2005. The $3.5 million increase is primarily the result of $1.6 million of
      additional personnel costs supporting our additional delegate base combined
      with
      $1.3 million of stock option compensation expense recorded during 2006 with
      the
      implementation of SFAS 123(R). As a percent of gross margin, general and
      administrative expenses increased to 15 percent in 2006 from 12 percent in
      2005.




For
      the
      year ended December 31, 2006, we increased our operating income to
      $34.1 million from $30.7 million for the year ended
      December 31, 2005. Operating income as a percent of gross margin decreased
      to 44 percent for 2006 from 46 percent in 2005.




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 $4.7 million in the year ended December 31, 2006, compared to
      $2.6 million in the year ended December 31, 2005. The increase in interest
      and dividend income is related to higher cash balances held and increased
      interest rates during 2006.  In 2006 and 2005, the average rate of return
      was3.3 percent and
      2.4 percent, respectively.




For
      the
      year ended December 31, 2006, income before income taxes was $38.9 million
      in comparison to income before income taxes of $33.3 million for the year ended
      December 31, 2005.




We
      recorded an income tax provision of approximately $12.2 million for the year
      ended December 31, 2006, in comparison to $10.9 million for the year
      ended December 31, 2005. Our effective tax rate was 31.3 percent and 32.8
      percent for the years ended December 31, 2006 and 2005, respectively. The
      decrease in the effective rate from 2005 was primarily the result of higher
      interest earned from tax-exempt securities.




Net
      income increased to $26.7 million for the year ended December 31, 2006
      from $22.4 million for the year ended December 31, 2005.





-23-


Liquidity
      and Capital Resources




At
      December 31, 2007, we had approximately $85.0 million of cash, cash
      equivalents, and available-for-sale securities, which included program
      participant funds of approximately $42.7 million. At December 31,
      2006, we had approximately $133.1 million of cash and cash equivalents,
      restricted cash, and available-for-sale securities, which included program
      participant funds of $60.7 million.





Net
      cash
      provided by operations for the years ended December 31, 2007 and 2006 was
      approximately $16.4 million and $37.2 million, respectively. The $20.7
      million decrease in operating cash flows between the years ending
      December 31, 2007 and 2006 primarily results from a $4.4 million increase
      in earnings offset by $31.1 million decreased participant fund balances year
      over year.




Net
      cash
      provided by and used in investing activities for the years ended
      December 31, 2007 and 2006 was $9.7 million and $12.9 million,
      respectively. The $22.6 million increase year over year resulted primarily
      from
      a $35.4 million increase in net sales of available-for-sale investments and
      a
      $12.8 million increase in purchases of property, plant and equipment during
      2007. The increase in property, plant and equipment was primarily due to the
      construction of our new headquarters during 2007.




Net
      cash
      used in financing activities was $45.6 million in the year ending December
      31,
      2007 and $14.4 million during the year ending December 31, 2006. The net change
      in financing activities was a result of two factors: a $1.3 million increase
      in
      cash used for cash dividends to our shareholders; a $30.5 million increase
      in
      cash used for the repurchase of our Common Stock. During 2007, we paid $8.9
      million in cash dividends and used $41.2 million for stock
      repurchases.




The
      results of operations and financial position of our business may be affected
      by
      a number of trends or uncertainties that have, or we reasonably expect could
      have, a material impact on income from continuing operations and cash flows,
      as
      well as the balance sheet. Such trends and uncertainties include: the
      repercussions of the continued deployment of U.S. military as a result of the
      war with Iraq, possible future terrorist acts, and possible natural occurrences
      such as flooding or epidemics. Furthermore, these international occurrences
      and
      others may continue to affect the travel industry, as well as the markets in
      which we operate. The potential and long-term effects of these circumstances
      result in uncertainties 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.
      The consequences of such trends or events are unpredictable, and we are not
      currently able to determine whether the impact will be material or highly
      material on our business, financial condition, cash flows and results of
      operations. One such trend indicator is enrollments at a point in time for
      future travel.




Under
      our
      cancellation policy, a program delegate may be entitled to a refund of a portion
      of his or her deposit, less certain fees, depending on the time of cancellation.
      Should a greater number of delegates cancel their travel in comparison to that
      which is part of our ongoing operations, due to circumstances such as
      international or domestic unrest, terrorism or general economic downturn, our
      cash balances could be significantly reduced. Cash balances could also be
      reduced significantly if the financial institutions, which held balances beyond
      that federally insured, were to become insolvent.




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. 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
      anticipate any material capital expenditure commitments for 2008. 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 2008.





-24-


Other
      than capital leases, we have no long-term debt or purchase obligations as of
      December 31, 2007. The following table presents the maturities of our
      contractual cash obligations as of December 31, 2007 (in thousands),
      excluding normal accounts payable and accrued expenses:




Payments
                due by periodContractual
                Obligations
            
            Total
            
            Less
              than
              1
                year
            
            1
                – 3
              years
            
            4
                – 5
              yearsOperating
                leases
            
            $
            223
            
            $
            67
            
            $
            156
            
            $
            —Capital
                lease
            
            198
            
            187
            
            11
            
            —Total
            
            $
            421
            
            $
            254
            
            $
            167
            
            $
            —




2008
      Net Enrollments





Net
      enrollments consist of all individuals traveled year to date plus those actively
      enrolled for future travel. As of January 31, 2008, we had 45,230 net enrolled
      participants for our 2008 travel programs, compared to 60,389 net enrolled
      participants as of the same date last year for our 2007 travel programs. The
      decrease in enrollments is believed to be caused by an underperforming name
      source used to identify potential Student Ambassador delegates, inflationary
      pressures on 2008 program costs, and the current economic uncertainty. We
      believe the decrease in net enrollments for our 2008 programs will negatively
      impact 2008 earnings. We have taken, and will continue to take, measures to
      mitigate these negative impacts, such as but not limited to increased marketing
      efforts toward 2008 travel, decreasing the initial deposit to enroll onto our
      programs, and implementing an expense management plan. However, there can be
      no
      assurances that any of these measures will have any success, and if so, to
      what
      extent.





Market
      Risk




The
      following table summarizes the financial instruments other than derivative
      financial instruments held by us at December 31, 2007 and 2006, which are
      sensitive to changes in interest rates. This table presents principal cash
      flows
      for available-for-sale securities by contractual maturity date and the related
      average interest rate and fair value (in thousands):




December 31,
                2007
            
            December 31,
                20062008
            
            2009
            
            Total
            
            Fair
              Value
            
            Total
            
            Fair
              ValueState
                and municipal securities
            
            $
            46,851
            
            $
            20,862
            
            $
            67,713
            
            $
            67,713
            
            $
            94,297
            
            $
            94,297Corporate
                obligations
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            2,053
            
            $
            2,053Interest
                rate
            
            3.92
            %
            3.79
            %
            3.88
            %
            —
            
            3.65
            %
            —




Our
        short
        term investments primarily consist of municipal bonds, variable rate municipal
        demand notes and various auction rate securities. 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. 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 at the year ended December 31,
        2007
        is investment grade. We do not currently have any direct exposure to
        collateralized debt obligations (“CDO”) or other similar structured securities.
        We are unable to estimate the impact, if any, which emerging credit market
        conditions may have on the liquidity of our auction rate securities. Any
        reduction in liquidity of our auction rate securities will not have a material
        impact on our overall liquidity needs. We believe the $8.6 million auction
        rate
        security balance at December 31, 2007 is not impaired, but we may have to
        reclassify the investment from short-term to long-term investments if future
        liquidity conditions mandate.


The
      majority of our travel programs take place outside 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.
      We




-25-


generally
      hedge against certain of these foreign currency risks with less than two years’
maturity, and we use forward contracts and options, which allow us to acquire
      the foreign currency at a fixed price for a specified period of time. Some
      of
      our forward contracts and options include a variable component if a
      pre-determined trigger occurs during the term of the contract.




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




The
      table
      below provides information about 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, 2007 mature in 2008. 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, 2007 and 2006, we had outstanding forward contracts as follows
      (in thousands):





U.S.
                DollarAverageNotional
            ContractualAmount
            Exchange
                RateDecember 31,
                2007Forward
                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
            
            $
            
            0.73December 31,
                2006Forward
                contracts (pay $U.S./receive foreign currency):Australian
                dollar
            14,000
            
            $
            
            0.73British
                pound
            3,510
            
            $
            
            1.75Canadian
                dollar
            1,080
            
            $
            
            0.90Euro
            16,550
            
            $
            
            1.26Japanese
                yen
            225,000
            
            $
            
            0.01New
                Zealand dollar
            4,500
            
            $
            
            0.66Forward
                contracts with variable option (pay $U.S./receive foreign
                currency):Australian
                dollar
            15,640
            
            $
            
            0.72British
                pound
            3,780
            
            $
            
            1.85Canadian
                dollar
            440
            
            $
            
            0.91


Euro
            8,950
            
            $
            
            1.29Japanese
                yen
            170,500
            
            $
            
            0.01




-26-


At
      December 31, 2007 and 2006, we had unrealized foreign currency gains
      associated with these financial instruments of approximately $3.5 million and
      $2.6 million, respectively.





Off
      Balance Sheet Arrangements




As
      of
      December 31, 2007, we had no off balance sheet arrangements, as defined in
      Item
      303(a)(4) of Regulation S-K promulgated by the SEC.




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.
      On an
      on-going basis, we evaluate our estimates and judgments, including those
      associated with cash and cash equivalents, available-for-sale securities, income
      taxes, derivative financial instruments,  stock-based
      compensation, and contingencies and litigation.





Cash
      and Investments





Cash,
      cash equivalents, and
      available-for-sale securitiesare 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, 2007, 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.





Income
      Taxes





The
      asset
      and liability approach is used to account for income taxes by recognizing
      deferred tax assets and liabilities for the expected future tax consequences
      of
      temporary differences between the carrying amounts and the tax bases of assets
      and liabilities. While 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




-27-


locate alternative counterparties, or we would then consider alternate means
      of
      settling our foreign exchange contractual obligations.





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 isperfunctory.Therefore,
      revenue from these programs
      is presented as net revenues and recognized as the program convenes. For certain
      directly delivered programs, however,weorganizeand
      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.




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 deposit, less certain fees, depending on the time of cancellation. We
      recognize cancellation fees concurrent with the revenue recognition from the
      related programs.





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.





Recent
      Accounting Pronouncements





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (“SFAS 157”). 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.
      Therefore, we will adopt this standard as of January 1, 2008. We
      expect the effect, if any, the adoption of this statement will have on our
      financial condition or results of operations will be immaterial.





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, or our first fiscal
      quarter of 2008. Early adoption is permitted.We expect the effect, if
      any, the adoption of this statement will have on our financial condition or
      results of operations will be immaterial.





In
      December2007, the FASB issuedSFASNo.
      141R,Business
      Combinations(“SFAS
      141R”).SFAS141R
      will significantly change the
      accounting for business combinations. Under SFAS141R,
      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.
      Statement 141R will change the accounting treatment for certainspecific items, including,
      acquisition costs will
      begenerally 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




-28-


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.
      We have not yet determined the effect, if any, of the adoption of this statement
      on our financial condition or results of operations.





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 iseffective for fiscal
      years beginning on
      or after December 15, 2008,
      or our first quarter 2009. Early adoption is prohibited.We have not yet
      determined the effect, if any, of the adoption of this statement on our
      financial condition or results of operations.








Item 7A.Quantitative and Qualitative
      Disclosures About Market Risk




The
      information contained in Item 7. “Management’s Discussion and
      Analysis of Results of Operations and Financial Condition–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 appear on page
      F-1 to this Annual Report. The Reports of Independent Registered Public
      Accounting Firms, 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.




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




None.


-29-


Item 9A.Controls
      and
      Procedures


Evaluation
      of Disclosure Controls and Procedures




As
      of
      December 31, 2007, 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 financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America and
      reflectourmanagement’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
      maintainingadequate
      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
      ofourcompany;
      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, 2007. 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 thisevaluation,ourmanagementconcluded
      thatwe maintained effective
      internal
      control over financial reporting as of December 31, 2007.




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, 2007, pursuant to Item 308 of Regulation S-K.




Changes
      in Internal Control over Financial Reporting




For
      the
      fiscal year ended December 31, 2007, 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.




-30-


Report
      of Independent Registered Public
      Accounting Firm




Board
      of Directors and
      Shareholders


Ambassadors
      Group,
      Inc.




We
      have audited Ambassadors Group,
      Inc.’s internal control over financial reporting as of December 31, 2007, based
      on criteria established inInternal
      Control –
Integrated Frameworkissued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      COSO criteria). Ambassador 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, Management’s Report on Internal Control
      Over Financial Reporting”. 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, 2007, 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,
      2007 and 2006, 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, 2007 and our report datedMarch 6,
      2008 expressed an unqualified opinion
      thereon.




BDO
      Seidman, LLP


Spokane,
      Washington


March
      6, 2008


-31-




Item
      9B.  Other
      Information




None.




PART
      III




Item 10.
            Directors
                and Executive
                Officers of the Registrant




The
      information called for by this item is hereby incorporated by reference from
      our
      definitive Proxy Statement for the fiscal year ended December 31, 2007, to
      be filed with the SEC on or about April 8, 2008.




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, 2007, to
      be filed with the SEC on or about April 8, 2008.




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, 2007, to
      be filed with the SEC on or about April 8, 2008.





Item 13.
            Certain
                Relationships and
                Related Transactions


The
      information called for by this item is hereby incorporated by reference from
      our
      definitive Proxy Statement for the fiscal year ended December 31, 2007, to
      be filed with the SEC on or about April 8, 2008.




Item
                14.
            Principal
                Accountant 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, 2007, to
      be filed with the SEC on or about April 8, 2008.


-32-


PART
      IV





Item 15.
            Exhibits,
                Financial Statement
                Schedules




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




(1)Financial
      Statements.Please 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.





-.33-


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.




We
      have audited the accompanying
      consolidated balance sheets of Ambassadors Group, Inc. as of December 31, 2007
      and 2006 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, 2007.  These financial statements are the
      responsibility of the Company’s management.  Our responsibility is to
      express an opinion on these financial statements based on our
      audits.




We
      conducted our audits 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 financial statements are free
      of material misstatement.  An audit includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall 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, 2007 and
      2006,
      and the results of its operations and its cash flows for each of the three
      years
      in the period ended December 31, 2007,in
      conformity with accounting principles
      generally accepted in the United States of America.




As
      discussed in Note 2 to the
      consolidated financial statements, the Company adopted Statement of Financial
      Accounting Standards No. 123(R),Share-Based
      Payment, as of January 1,
      2006.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the Company’s internal control over financial
      reporting as of December 31, 2007, 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 6, 2008 expressed an
      unqualified opinion thereon.







BDO
      Seidman, LLP


Spokane,
      Washington


March
      6, 2008


F-2





AMBASSADORS
      GROUP, INC.





CONSOLIDATED
      BALANCE SHEETS





December
                31,2007
            
            
            2006(in
                thousands, except
                share
              and
                per share
                data)AssetsCurrent
                assets:Cash
                and cash
                equivalents
            
            $
            17,281
            
            
            $
            36,784Available-for-sale
                securities
            
            
            67,713
            
            
            
            96,350Foreign
                currency exchange
                contracts
            
            
            3,461
            
            
            
            2,571Prepaid
                program cost and
                expenses
            
            
            3,624
            
            
            
            3,786Accounts
                receivable
            
            
            641
            
            
            
            675Total
                current assets
            
            
            92,720
            
            
            
            140,166Property,
                plant and equipment,
                net
            
            
            27,454
            
            
            
            12,267Deferred
                tax
                asset
            
            
            1,338
            
            
            
            1,328Other
                long-term
                assets
            
            
            192
            
            
            
            192Total
                assets
            
            $
            121,704
            
            
            $
            153,953LiabilitiesCurrent
                liabilities:Accounts
                payable
            
            $
            2,425
            
            
            $
            2,941Accrued
                expenses
            
            
            2,862
            
            
            
            3,922Participants’
                deposits
            
            
            42,723
            
            
            
            60,651Deferred
                tax
                liability
            
            
            1,096
            
            
            
            737Other
                liabilities
            
            
            —
            
            
            
            1,268Current
                portion of long-term
                capital lease
            
            
            187
            
            
            
            191Total
                current liabilities
            
            
            49,293
            
            
            
            69,710Long-term
                capital
                lease
            
            
            11
            
            
            
            196Total
                liabilities
            
            
            49,304
            
            
            
            69,906Commitments
                and contingencies
                (notes 3 and 9)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;
              19,345,924
                and 20,599,170 shares issued and outstanding at December
              31,
                2007 and 2006, respectively
            
            
            192
            
            
            
            205Additional
                paid-in
                capital
            
            
            1,082
            
            
            
            15,619Retained
                earnings
            
            
            68,709
            
            
            
            66,587Accumulated
                other comprehensive
                income
            
            
            2,417
            
            
            
            1,636Stockholders’
                equity
            
            
            72,400
            
            
            
            84,047Total
                liabilities and stockholders’ equity
            
            $
            121,704
            
            
            $
            153,953





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





F-3


AMBASSADORS
        GROUP, INC.




CONSOLIDATED
      STATEMENTS OF OPERATIONS








Years
                Ended
                December 31,2007
            
            2006
            
            2005(in
                thousands, except per share
                data)Net
                revenue, non-directly
                delivered programs
            
            $
            84,512
            
            
            $
            69,554
            
            
            $
            64,321Gross
                revenue, directly delivered
                programs
            
            
            30,021
            
            
            
            19,401
            
            
            
            4,969Total
                revenue
            
            
            114,533
            
            
            
            88,955
            
            
            
            69,290Cost
                of sales, directly delivered
                programs
            
            
            18,488
            
            
            
            11,473
            
            
            
            2,841Gross
                margin
            
            $
            96,045
            
            
            $
            77,482
            
            
            $
            66,449Operating
                expenses:Selling
                and
                marketing
            
            
            38,943
            
            
            
            31,638
            
            
            
            27,574General
                and
                administrative
            
            
            15,274
            
            
            
            11,721
            
            
            
            8,18554,217
            
            
            
            43,359
            
            
            
            35,759Operating
                income
            
            
            41,828
            
            
            
            34,123
            
            
            
            30,690Other
                income
                (expense):Interest
                and dividend
                income
            
            
            4,355
            
            
            
            4,674
            
            
            
            2,627Other,
                net
            
            
            (183
            )
            
            
            81
            
            
            
            214,172
            
            
            
            4,755
            
            
            
            2,648Income
                before income
                taxes
            
            
            46,000
            
            
            
            38,878
            
            
            
            33,338Income
                tax
                provision
            
            
            14,953
            
            
            
            12,186
            
            
            
            10,928Net
                income
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            22,410Earnings
                per share — basic and
                diluted:Net
                income per share –
                basic
            
            $
            1.60
            
            
            $
            1.30
            
            
            $
            1.10Weighted-average
                common shares
                outstanding — basic
            
            
            19,385
            
            
            
            20,554
            
            
            
            20,311Net
                income per share –
                diluted
            
            $
            1.55
            
            
            $
            1.25
            
            
            $
            1.05Weighted-average
                common shares
                outstanding — diluted
            
            
            20,094
            
            
            
            21,393
            
            
            
            21,312




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 31,2007
            
            2006
            
            2005(in
                thousands)Net
                income
            
            $
            31,047
            
            $
            26,692
            
            $
            22,410Unrealized
                gain (loss) on foreign currency exchange contracts, net of income
                tax
                (provision) benefit of  ($311), ($1,563), and $1,550
            
            579
            
            2,904
            
            (2,957
            )Unrealized
                gain (loss) on available-for-sale securities, net ofincome
                tax benefit (provision) of ($109), ($66), and $40
            
            
            202
            
            
            128
            
            
            (84
            )Comprehensive
                income
            
            $
            31,828
            
            $
            29,724
            
            $
            19,369




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, 2004
            
            
            20,252
            
            
            $
            202
            
            
            $
            16,785
            
            
            $
            30,869
            
            
            $
            1,645
            
            
            $
            49,501Net
                income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            22,410
            
            
            
            —
            
            
            
            22,410Stock
                options exercised
            
            
            548
            
            
            
            5
            
            
            
            3,323
            
            
            
            —
            
            
            
            —
            
            
            
            3,328Excess
                tax benefit from stock-based compensation
            
            
            —
            
            
            
            —
            
            
            
            3,319
            
            
            
            —
            
            
            
            —
            
            
            
            3,319Stock
                redemptions
            
            
            (193
            )
            
            
            (1
            )
            
            
            (3,740
            )
            
            
            —
            
            
            
            —
            
            
            
            (3,741
            )Restricted
                stock grant
            
            
            50
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Amortization
                of unearned restricted stock compensation
            
            
            —
            
            
            
            —
            
            
            
            455
            
            
            
            —
            
            
            
            —
            
            
            
            455Dividend
                to shareholders ($0.28 per share)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,729
            )
            
            
            —
            
            
            
            (5,729
            )Other
                comprehensive income, net of income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,041
            )
            
            
            (3,041
            )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
            
            
            $
            72,400





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


F-6


AMBASSADORS
      GROUP,
      INC.





CONSOLIDATED
      STATEMENTS OF CASH
      FLOWS


Years
                Ended December 31,2007
            
            
            2006
            
            
            2005(in
                thousands)Cash
                flows from operating activities:Net
                income
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            22,410Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            2,532
            
            
            
            1,447
            
            
            
            1,175Deferred
                income tax provision (benefit)
            
            
            (71
            )
            
            
            (748
            )
            
            
            130Stock–based
                compensation expense
            
            
            1,952
            
            
            
            2,057
            
            
            
            455Excess
                tax benefit from stock-based compensation
            
            
            (2,707
            )
            
            
            (2,376
            )
            
            
            —Writedown
                of PP&E
            
            
            155
            
            
            
            —
            
            
            
            —Equity
                in earnings on investment
            
            
            —
            
            
            
            (25
            )
            
            
            (11
            )Change
                in assets and liabilities:Other
                current assets
            
            
            34
            
            
            
            (608
            )
            
            
            57Prepaid
                program costs and expenses
            
            
            162
            
            
            
            (2,190
            )
            
            
            865Accounts
                payable, accrued expenses, and other liabilities
            
            
            1,260
            
            
            
            (230
            )
            
            
            3,856Participants’
                deposits
            
            
            (17,928
            )
            
            
            13,188
            
            
            
            8,855Net
                cash provided by operating activities
            
            
            16,436
            
            
            
            37,207
            
            
            
            37,792Cash
                flows from investing activities:Net
                proceeds from (purchase of) available-for-sale securities
            
            
            28,948
            
            
            
            (6,468
            )
            
            
            (13,296
            )Purchase
                and construction of property and equipment
            
            
            (19,271
            )
            
            
            (6,455
            )
            
            
            (2,260
            )Purchase
                of other investments
            
            
            —
            
            
            
            —
            
            
            
            (36
            )Net
                cash provided by (used in) investing activities
            
            
            9,677
            
            
            
            (12,923
            )
            
            
            (15,592
            )Cash
                flows from financing activities:Dividend
                payment to shareholders
            
            
            (8,940
            )
            
            
            (7,655
            )
            
            
            (5,729
            )Repurchase
                of common stock
            
            
            (41,163
            )
            
            
            (10,710
            )
            
            
            (3,741
            )Proceeds
                from exercise of stock options
            
            
            1,969
            
            
            
            1,753
            
            
            
            3,328Excess
                tax benefit from stock-based compensation
            
            
            2,707
            
            
            
            2,376
            
            
            
            —Capital
                lease payments
            
            
            (189
            )
            
            
            (180
            )
            
            
            (178
            )Net
                cash used in financing activities
            
            
            (45,616
            )
            
            
            (14,416
            )
            
            
            (6,320
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (19,503
            )
            
            
            9,868
            
            
            
            15,880Cash
                and cash equivalents, beginning of year
            
            
            36,784
            
            
            
            26,916
            
            
            
            11,036Cash
                and cash equivalents, end of year
            
            $
            17,281
            
            
            $
            36,784
            
            
            $
            26,916




See
      Note
      14 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 travel company that organizes and promotes international and
      domestic educational travel and sports programs for youth, athletes and
      professionals. These consolidated financial statements include the accounts
      of
      Ambassadors Group, Inc. and our wholly owned subsidiaries, Ambassador Programs,
      Inc., Ambassadors Specialty Group, Inc., and Ambassadors Unlimited, LLC. Also
      included is Ambassador Programs, Inc.’s wholly owned subsidiary, Marketing
      Production Systems, LLC. All significant intercompany accounts and transactions
      are eliminated in consolidation.





Our operations
        are organized to provide sevices to student, professionals and athletes through
        multiple itineraries within four educational and cultural program types.
        These
        programs have been aggregated as a single operating and reporting segment
        based
        on the similarity of their economic characteristics as well as services
        provided.


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. This stock split has been recorded retroactively through all periods
      presented.





All
      of
      our assets are located in the United States. Our revenues as a percentage of
      total revenues were derived from travel programs conducted in the following
      geographic areas:




Years
                Ended
              December 31,2007
            
            
            2006
            
            
            2005Europe
            
            
            50
            %
            
            
            43
            %
            
            
            46
            %South
                Pacific (primarily Australia and New Zealand)
            
            
            21
            %
            
            
            26
            %
            
            
            30
            %Asia
                (primarily China)
            
            
            12
            %
            
            
            13
            %
            
            
            11
            %United
                States
            
            
            15
            %
            
            
            13
            %
            
            
            12
            %Other
            
            
            2
            %
            
            
            5
            %
            
            
            1
            %





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 remaining maturities at date of purchase of three
      months or less to be cash equivalents.




We
      have a
      $1.8 million revolving credit facility for the purpose of issuing letters
      of credit to several airlines. The facility allows for letters of credit to
      be
      issued through December 2008. At December 31, 2007 and 2006, we had
      letters of credit outstanding of approximately $1.4 million under this
      facility.





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.
      The gains and losses on the derivative instruments that are reported in
      accumulated other comprehensive income are reclassified as earnings in the
      periods in which earnings are impacted by the variability of the cash flows
      of
      the hedged item. The ineffective portion of all hedges is recognized in the
      statements of operations as other income (expense). Unrealized gains and losses
      on foreign currency exchange contracts that are not qualifying cash flow hedges
      as defined by Statement of Financial Accounting Standards (“SFAS”) No. 133 are
      recognized in the statements of operations as other income (expense). All of
      our
      outstanding foreign currency exchange contracts at December 31, 2007 and
      2006 qualify as cash flow hedges.




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 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, 2007, 2006 and 2005, because any 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.





At
      December 31, 2007 and 2006, we held $67.7 million and $96.4 million of
      short-term investments, consisting primarily of municipal bonds, variable rate
      municipal demand notes and various auction rate securities. 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


F-9


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





be
      offered. 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. We do not currently have any direct exposure
      to collateralized debt obligations (“CDO”) or other similar structured
      securities. We are unable to estimate with certainty the impact, if any, which
      emerging credit market conditions may have on the liquidity of our auction
      rate
      securities.  We believe the $8.6 million auction rate security balance at
      December 31, 2007 is not impaired, but we may have to reclassify the investment
      from short-term to long-term investments if future liquidity conditions mandate.
      Any reduction in liquidity of our auction rate securities will not have a
      material impact on our overall liquidity needs.





Other
      Investments





During
      August 2003, we purchased a minority interest in a company. 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 purchased an investment in a safety
      awareness firm to support the education of and support of safe travel practices.
      This investment is reported using the cost method. These investments are
      included in other long-term assets on the 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 property and equipment, and thirty-nine
      years for plant assets.





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.




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 isperfunctory.Therefore,
      revenue from these programs
      is presented net of direct program costs, including accommodation and
      transportation, and recognized when the program convenes. For directly delivered
      programs, however,weorganizeand
      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 recognize withdrawal
      fees concurrent with the revenue recognition from the related
      programs.




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 program delegate may be entitled to a refund of a
      portion of his or her deposit, less certain fees, depending on the time of
      withdrawal.





F-10


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Selling
      and Marketing Expenses




We
      expense all selling and marketing expenses as incurred.





Income
      Taxes




The
      asset
      and liability approach is used to account for income taxes by recognizing
      deferred tax assets and liabilities for the expected future tax consequences
      of
      temporary differences between the carrying amounts and
      the
      tax 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 “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)”),
      using thealternative transition method.We elected to
      adopt the
      alternative transition methodprovided 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).





Prior
      to 2006, we applied the
      disclosure-only provisions of SFAS No. 123 as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation-Transition and Disclosure.” We measured
      compensation cost for stock-based employee compensation plans using the
      intrinsic value method of accounting prescribed by Accounting Principles Board
      (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” All of our
      stock options are granted at market value on the date of grant. Accordingly,
      no
      compensation expense was recognized in 2005 for options related to the stock
      option plan. Restricted stock grants, however, are subject to a one- or
      four-year vesting period, and the fair values on issuance date of these grants
      were expensed on a straight-line basis over the life of the
      grant.








F-11


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





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 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
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (“SFAS 157”). 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.
      Therefore, we will adopt this standard as of January 1, 2008. We
      expect the effect, if any, the adoption of this statement will have on our
      financial condition or results of operations will be immaterial.





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, or our first fiscal
      quarter of 2008. Early adoption is permitted.We expect the effect, if
      any, the adoption of this statement will have on our financial condition or
      results of operations will be immaterial.





In
      December2007, the FASB issuedSFASNo.
      141R,Business
      Combinations(“SFAS
      141R”).SFAS141R
      will significantly change the
      accounting for business combinations. UnderSFAS141R,
      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.SFAS141R
      will change the accounting
      treatment for certainspecific items, including,
      acquisition costs will
      begenerally 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. We
      have
      not yet determined the effect, if any, of the adoption of this statement on
      our
      financial condition or results of operations.





F-12


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





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 iseffective for fiscal
      years beginning on
      or after December 15, 2008,
      or our first quarter 2009. Early adoption is prohibited.We have not yet
      determined the effect, if any, of the adoption of this statement on our
      financial condition or results of operations.





3.
            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. Some
      of
      the forward contracts include a variable component if a pre-determined trigger
      occurs prior to or at the maturity of the contract. All of the derivatives
      are
      cash flow hedges of forecasted transactions.





At
      December 31, 2007, the following forward contracts were outstanding (in
      thousands):




Notional
              Amount
            
            MaturesForward
                contracts:Australian
                dollar
            
            
            4,800
            
            April
                2008 – May 2008British
                pound
            
            
            1,095
            
            February
                2008 – July 2008Canadian
                dollar
            
            
            400
            
            May
                2008 – July 2008Euro
            
            
            12,450
            
            April
                2008 – June 2008Japanese
                yen
            
            
            217,000
            
            April
                2008 – July 2008New
                Zealand dollar
            
            
            1,760
            
            April
                2008 – July 2008Forward
                contracts with variable option:Australian
                dollar
            
            
            11,520
            
            April
                2008 – May 2008British
                pound
            
            
            6,520
            
            April
                2008 – June 2008Canadian
                dollar
            
            
            375
            
            March
                2008Euro
            
            
            26,630
            
            January
                2008 – July 2008Japanese
                yen
            
            
            66,000
            
            April
                2008New
                Zealand dollar
            
            
            3,075
            
            April
                2008 – July 2008




At
      December 31, 2007 and 2006, we recorded a net unrealized gain of
      approximately $3.5 million and $2.6 million, respectively, associated with
      these
      financial instruments. Unrealized gains on forward contracts recorded in other
      comprehensive income at December 31, 2007, which are expected to be reclassified
      to net revenue during the year ending December 31, 2008, are approximately
      $3.5 million.





Unrealized
      gains or losses associated with these transactions that qualify as cash flow
      hedges under SFAS No. 133 are reported in other comprehensive income. Any
      realized gains or losses associated with these transactions are recognized
      in
      our operations in the period the contracts are closed. The net unrealized
      gain (loss) reclassified to revenue from accumulated other comprehensive
      income for the years ended December 31, 2007, 2006 and 2005 was
      approximately $1.7 million, ($1.3) million, and $1.7 million,


F-13


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





respectively.
      Income tax (provision) benefit on the unrealized (loss) gain reclassified
      in 2007, 2006 and 2005 was approximately$(0.9) million, $0.6
      million, and $(0.8) million, respectively. We assess hedge ineffectiveness
      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,
      2006, and 2005, there were no significant amounts recognized in income due
      to
      hedge ineffectiveness.





4.
            Available-for-Sale
                Securities




At
      December 31, 2007 and 2006, the cost and estimated fair values of our
      available-for-sale securities in state and municipal securites and corporate
      obligations were as follows (in thousands):




Amortized
                Cost
            
            
            Gross
              Unrealized
              Gain
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
                Value/
              Carrying
              ValueDecember 31,
                2007
            
            $
            67,453
            
            
            $
            260
            
            
            $
            —
            
            
            $
            67,713December 31,
                2006
            
            $
            96,400
            
            
            $
            —
            
            
            $
            (50
            )
            
            $
            96,350




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
            
            $
            8,590
            
            $
            8,590One
                year or less
            
            
            38,150
            
            
            38,261After
                one year through three years
            
            20,713
            
            20,862$
            67,453
            
            $
            67,713




At
      December 31, 2006, 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
            
            $
            25,668
            
            $
            25,668One
                year or less
            
            
            30,568
            
            
            30,540After
                one year through two years
            
            40,164
            
            40,142$
            96,400
            
            $
            96,350




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.





F-14







AMBASSADORS
      GROUP, INC.




NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.
            Property,
                Plant and Equipment




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


December 31,2007
            
            2006Land
            
            $
            1,817
            
            $
            1,817Building
            
            
            16,155
            
            
            —Construction
                in progress
            
            
            —
            
            
            5,735Office
                furniture, fixtures and equipment
            
            
            8,895
            
            
            3,972Computer
                equipment and software
            
            8,055
            
            7,492Leasehold
                improvements
            
            —
            
            1,08734,922
            
            20,103Less
                accumulated depreciation and amortization
            
            (7,468
            )
            (7,836
            )$
            27,454
            
            $
            12,267





Depreciation
      and amortization expense on property and equipment of approximately $2.5
      million, $1.4 million, and $1.2 million for the years ended December 31,
      2007, 2006, and 2005, respectively, was included in the determination of net
      income. During 2007, approximately $3.1 million in property, plant and equipment
      was written off for a net loss of $0.2 million. During 2006 and 2005, no
      property, plant and equipment was written off.




6.
            Other
                Liabilities





During
      October 2003, we received a $3.1 million refund of monies previously paid
      to a foreign tax authority. During 2003 through 2007, it was unclear as to
      whether the refund was permanent and accordingly, we recorded this refund as
      a
      liability on the balance sheet and on a quarterly basis, we adjusted the
      liability for interest and any gain or loss on the currency exchange. During
      2007, 2006, and 2005, $1.3 million, $1.4 million, and $1.1 million respectively,
      of the refund, excluding interest and foreign currency gains, was recognized
      into income as the uncertainty of potential repayment of this liability was
      eliminated. At December 31, 2006, the remaining refund of $1.3 million was
      included in other liabilities, and at December 31, 2007, no liability
      remained on the balance sheet.




7.
            Income
                Taxes


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




Years
                Ended December 31,2007
            
            2006
            
            2005Current:
            
            1Federal
            
            $
            14,929
            
            $
            12,843
            
            $
            10,762State
            
            95
            
            91
            
            36Deferred
            
            (71
            )
            (748)
            
            130$
            14,953
            
            $
            12,186
            
            $
            10,928


F-15





AMBASSADORS
      GROUP, INC.




NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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





December 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)
            
            (1,082
            )Stock
                options
            
            692
            
            —
            
            692Restricted
                stock grants
            
            732
            
            —
            
            732Total
                deferred tax assets (liabilities)
            
            $
            2,628
            
            $
            (2,386)
            
            $
            242





December 31,
                2006Assets
            
            Liabilities
            
            TotalAmortization
                of goodwill and non-compete agreement
            
            $
            1,162
            
            $
            —
            
            $
            1,162Accrued
                vacation and compensation
            
            147
            
            —
            
            147Unrealized
                gain on foreign currency exchange contracts
            
            —
            
            (900)
            
            (900)Unrealized
                loss on available-for-sale securities
            
            16
            
            —
            
            16Depreciation
            
            —
            
            (687)
            
            (687
            )Stock
                options
            
            441
            
            —
            
            441Restricted
                stock grants
            
            412
            
            —
            
            412Total
                deferred tax assets (liabilities)
            
            $
            2,178
            
            $
            (1,587)
            
            $
            591





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 31,2007
              Amount
            
            
            %
            
            
            2006
              Amount
            
            
            %
            
            
            2005
              Amount
            
            
            %Provision
                at the federal statutory rate
            
            $
            16,100
            
            
            
            35.0
            %
            
            $
            13,607
            
            
            
            35.0
            %
            
            $
            11,668
            
            
            
            35.0
            %Tax-exempt
                interest
            
            
            (1,385
            )
            
            
            (3.0
            )
            
            
            (1,564
            )
            
            
            (4.0
            )
            
            
            (877
            )
            
            
            (2.6
            )State
                income tax, net of federal benefit
            
            
            95
            
            
            
            0.2
            
            
            
            59
            
            
            
            0.1
            
            
            
            23
            
            
            
            0.1Other
            
            
            143
            
            
            
            0.3
            
            
            
            84
            
            
            
            0.2
            
            
            
            114
            
            
            
            0.3$
            14,953
            
            
            
            32.5
            %
            
            $
            12,186
            
            
            
            31.3
            %
            
            $
            10,928
            
            
            
            32.8
            %




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 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


F-16


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




reclassified
      in the statement of financial position in order to comply with the requirements
      of the statement.




As
      of
      January 1, 2007, we provided a liability for approximately $164,000 of
      unrecognized tax benefits, of which $163,000 was interest, related to various
      federal and state income tax matters. The majority of unrecognized tax benefits
      consisted of items that are offset by deferred tax assets and the federal tax
      benefit of state income tax items. Thus, the amount that would impact our
      effective tax rate, if recognized, is insignificant. The liability decreased
      to
      zero and an insignificant amount of additional interest was recognized during
      the year ended December 31, 2007 due to a settlement with the Internal
      Revenue Service. No penalties were recognized during the year ended December
      31,
      2007. 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 2007:





Unrecognized
                tax benefit as of January 1, 2007
            
            $
            164Increases
                in tax positions taken in prior periods
            
            
            -Decreases
                in tax positions taken in prior periods
            
            
            -Current
                period tax positions:Settlements
            
            
            (164
            )Increases
                in tax positions taken in current period
            
            
            (14
            )Lapse
                of statute of limitations
            
            
            -Unrecognized
                tax benefits as of December 31, 2007
            
            $
            (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 2001.





8.
            Capital
                Lease




We
      lease
      certain office equipment under a capital lease arrangement. The total cost
      of
      equipment under capital leases was $0.9 million and accumulated depreciation
      was
      $0.7 million and $0.5 million, respectively, at December 31, 2007 and
      2006.  The following is a schedule of minimum lease payments required
      under the capital lease as of December 31, 2007 (in
      thousands):




Years
                Ended December 31,2008
            
            
            $
            1982009
            
            
            
            11Total
                minimum lease payments
            
            
            
            209Less
                amount representing interest
            
            
            
            11198Less
                current portion
            
            
            
            187LLong-term
                portion of capital
                lease
            L
            
            $
            11




At
      the
      end of the lease term, we have the option to purchase the equipment at fair
      market value.


F-17





AMBASSADORS
      GROUP, INC.




NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.
            Commitments
                and Contingencies




We
      lease
      office facilities and office equipment under non-cancelable operating leases.
      At
      December 31, 2007, future minimum lease commitments were as follows (in
      thousands):


Years
                Ended December 31,2008
            
            $
            672009
            
            672010
            
            672011
            
            
            22$
            223





Total
      rent expense for the years ended December 31, 2007, 2006, and 2005, was
      approximately $0.6 million, $0.8 million, and $0.7 million,
      respectively.





Pursuant
      to an agreement dated December 28, 2007 and consistent with our share repurchase
      plan, subsequent to December 31,
      2007 through February 7, 2008, we repurchased approximately 0.2 million shares
      of our Common Stock for approximately $3.8 million.





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




10.
            Stock
                Plans




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 0.5 million shares
      remain available for future issuance.




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 2007, 2006, and 2005, we granted approximately 57,300, 38,600, and
      50,100, restricted stock grants to key employees and directors. These grants
      are
      expensed on a straight-line basis over the life of the grant.





F-18


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





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. 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
      assumptions used to calculate the fair value of options granted are evaluated
      and revised, as necessary, to reflect market conditions and our experience.
      Prior to 2006, we adopted disclosure-only provisions of SFAS No. 123, as amended
      by SFAS No. 148, Accounting
      for Stock-Based Compensation—Transition and Disclosure. We chose to
      measure compensation cost for stock-based employee compensation plans using
      the
      intrinsic value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued
      to
      Employees. All stock options are granted at market value on the date of
      grant. Accordingly, no compensation expense was recognized in 2005 for options
      related to the stock option plan. We adopted the provisions of SFAS No. 123(R),
      Share Based Payment on
      January 1, 2006, using the modified prospective method of adoption.




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 2007, 2006, and
      2005.





Years
                Ended December 31,2007
            
            
            
            2006
            
            
            
            2005Expected
                dividend yield
            
            
            1.41
            
            %
            
            
            1.38
            
            %
            
            
            1.36
            
            %Expected
                stock price volatility
            
            
            43.40
            
            %
            
            
            38.16
            
            %
            
            
            37.07
            
            %Risk-free
                interest rate
            
            
            3.93
            
            %
            
            
            4.65
            
            %
            
            
            4.19
            
            %Expected
                life of options
            
            
            4.45
            
            years
            
            
            4.95
            
            years
            
            
            5.58
            
            years




The
      weighted-average fair value of options granted during 2007, 2006 and 2005 was
      $7.02, $9.81, and $8.70, 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 2007, 2006, and
      2005. Additionally, an annualized forfeiture rate of 9.0 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.




Total
      stock-based compensation expense recognized in the consolidated statement of
      operations for the years ended 2007 and 2006 was $2.0 million and $2.1 million
      before income taxes. Of the total stock-based compensation expense during 2007,
      stock option expense was $0.9 million and restricted stock grant expense was
      $1.0 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. Total stock-based compensation expense for restricted stock grants
      recognized in the consolidated statements of operations for the year ended
      2005
      was $0.5 million.





F-19





AMBASSADORS
      GROUP, INC.




NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Had
      compensation cost for our stock option plan been determined based on fair value
      at the grant dates consistent with the method of SFAS 123(R), net income and
      net
      income per share amounts for the year ended December 31, 2005 would have been
      changed to the pro-forma amounts indicated below (in thousands except per share
      data). Disclosures for 2007 and 2006 are not presented as the amounts are
      recognized in the consolidated financial statements.




Year
                ended
              December
                31,2005


Net
              income as reported
            $
            22,410Add:
                Stock-based employee compensation expense for stock grants, included
                in
              reported
                net in come, net of related tax effects
            
            306Deduct
                Stock-based employee compensation expense determined under fair-value
              based
                method for all awards, net of related tax effects
            
            (872)Pro-forma
                net income
            $
            21,844Pro-forma
                net income per share – basic
            $
            1.08Pro-forma
                net income per share – diluted
            $
            1.02





Prior
      to
      the adoption of SFAS 123(R), we presented all tax benefits resulting from the
      exercise of stock options as operating cash inflows in the consolidated
      statements of cash flows, in accordance with the provisions of the Emerging
      Issues Task Force (“EITF”) Issue No. 00-15, Classification in the Statement
      of
      Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of
      a
      Nonqualified Employee Stock Option. SFAS 123(R) requires the benefits of
      tax deductions in excess of the compensation cost recognized for those options
      to be classified as financing cash inflows rather than operating cash inflows,
      on a prospective basis. We show this amount as “Excess tax benefit from
      stock-based compensation” on the consolidated statement of cash
      flows.





-
 F-20


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





The
      following table presents information about the common stock options and
      restricted grants as of December 31, 2007:




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
            
            
            
            221,820
            
            
            
            2.09
            
            
            $
            0.00
            
            
            
            -
            
            
            
            -Stock
                Options$
            0.00
              - $3.46
            
            
            
            2,566
            
            
            
            1.85
            
            
            $
            3.11
            
            
            
            2,566
            
            
            $
            3.113.47
              - 6.93
            
            
            
            686,233
            
            
            
            3.81
            
            
            
            5.63
            
            
            
            686,233
            
            
            
            5.636.94
              - 10.39
            
            
            
            134,135
            
            
            
            5.54
            
            
            
            9.20
            
            
            
            134,135
            
            
            
            9.2010.40
              - 13.86
            
            
            
            50,725
            
            
            
            5.94
            
            
            
            11.77
            
            
            
            31,875
            
            
            
            11.8213.87
              - 17.32
            
            
            
            321,467
            
            
            
            8.51
            
            
            
            16.90
            
            
            
            102,663
            
            
            
            16.6820.80
              - 24.25
            
            
            
            48,000
            
            
            
            7.31
            
            
            
            21.09
            
            
            
            17,500
            
            
            
            21.0924.26
              - 27.72
            
            
            
            206,808
            
            
            
            8.32
            
            
            
            27.11
            
            
            
            79,410
            
            
            
            21.0027.73
              - 31.18
            
            
            
            15,609
            
            
            
            8.80
            
            
            
            29.48
            
            
            
            1,464
            
            
            
            27.8931.19
              - 34.65
            
            
            
            12,659
            
            
            
            9.34
            
            
            
            34.65
            
            
            
            -
            
            
            
            -1,700,022
            
            
            
            5.41
            
            
            $
            10.97
            
            
            
            1,055,846
            
            
            $
            9.23





At
      December 31, 2006, there were 1,168,600 exercisable stock options at the
      weighted-average exercise price of $7.35 per share.





At
      December 31, 2007, the aggregate intrinsic value of stock options and restricted
      grants outstanding was $14.8 million and the aggregate intrinsic value of stock
      options and restricted grants exercisable was $10.3 million. 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.


F-21


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Stock
      option and restricted stock grant transactions during 2007 were as
      follows:





Restricted
            
            Weighted
            
            
            
            WeightedStock
            
            AverageGrant
            
            Stock
            
            AverageGrants
            
            Date
                Fair Value
            
            Options
            
            Exercise
                PriceBalance
                at December 31, 2006
            168,709
            
            $
            21.87
            
            1,584,654
            
            $
            10.83Granted
            57,297
            
            
            18.41
            
            202,584
            
            
            19.36Forfeited
            (1,050)
            
            
            25.00
            
            (20,029)
            
            
            24.53Exercised
            (3,136)
            
            
            27.89
            
            (289,007)
            
            
            6.81Balance
                December 31, 2007
            221,820
            
            $
            20.87
            
            1,478,202
            
            $
            12.62





11.
            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, 2007,
      2006, and 2005, we contributed approximately $0.2 million, $0.1 million, and
      $0.1 million to the Sharing Plan, respectively.




12.
            Fair
                Value of Financial Instruments




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




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




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






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




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




Available-for-Sale
      Securities —The fair value of our investment in debt securities is based on quoted
      market prices.


F-22


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)








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


December 31,
                2007
            
            December 31,
                2006Carrying
              Amount
            
            Fair
              Value
            
            Carrying
              Amount
            
            Fair
              ValueCash
                and cash equivalents
            
            $
            17,281
            
            $
            17,281
            
            $
            36,784
            
            $
            36,784Derivatives
            
            $
            3,461
            
            $
            3,461
            
            $
            2,571
            
            $
            2,571Available-for-sale
                securities
            
            $
            67,713
            
            $
            67,713
            
            $
            96,350
            
            $
            96,350




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




13.
            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 31,2007
            
            
            2006
            
            
            2005Numerator:Net
                income for basic and diluted earnings per share
            
            $
            31,047
            
            
            $
            26,692
            
            
            $
            22,410Denominator:Weighted-average
                shares outstanding – basic
            
            
            19,385
            
            
            
            20,554
            
            
            
            20,311Effect
                of dilutive common stock options
            
            
            623
            
            
            
            783
            
            
            
            968Effect
                of dilutive common stock grants
            
            
            86
            
            
            
            56
            
            
            
            33Weighted-average
                shares outstanding – diluted
            
            
            20,094
            
            
            
            21,393
            
            
            
            21,312Earnings
                per share – basic and diluted:Net
                income per share – basic
            
            $
            1.60
            
            
            $
            1.30
            
            
            $
            1.10Net
                income per share – diluted
            
            $
            1.55
            
            
            $
            1.25
            
            
            $
            1.05





14.
            Supplemental
                Disclosures of Consolidated Statements of Cash Flows


We
      paid
      cash for taxes during 2007, 2006, and 2005 of approximately$13.3 million, $10.5
      million, and $8.5 million, respectively.


-
 F-23


AMBASSADORS
      GROUP, INC.




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Our
      non-cash investing and financing activities during the years ended
      December 31, 2007, 2006, and 2005, are as follows (in
      thousands):




2007
            
            
            2006
            
            
            2005Unrealized
                gain (loss) on foreign currency exchange contracts
            
            $
            890
            
            
            $
            4,467
            
            
            $
            (4,505
            )Unrealized
                gain (loss) on available-for-sale securities
            
            
            311
            
            
            
            194
            
            
            
            (129
            )Tax
                benefit from stock options exercised
            
            
            —
            
            
            
            —
            
            
            
            3,319Property,
                plant and equipment
            
            
            1,397
            
            
            
            (2,119
            )
            
            
            —Capital
                lease obligation
            
            
            —
            
            
            
            —
            
            
            
            144




15.
            Quarterly
                Financial Data




Summarized
      quarterly financial data for 2007, 2006, and 2005 is as follows (unaudited,
      and
      in thousands except per share data):





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 reflect total payments received by us. 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 reflect total payments received by us. 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-24





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,Chief
                Executive Officer


Date:
      February 29, 2008




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)
            
            February
                29, 2008Jeffrey
                D. Thomas/s/
                JOHN A. UEBERROTH
            
            
            Chairman
                of the Board of Directors
            
            February
                29, 2008John
                A. Ueberroth/s/
                MARGARET M. THOMAS
            
            
            Executive
                Vice-President
            
            February
                29, 2008Margaret
                M. Thomas/s/
                CHADWICK J. BYRD
            
            
            Chief
                Financial Officer and Secretary
            
            February
                29, 2008Chadwick
                J. Byrd/s/
                BRIGITTE M. BREN
            
            
            Director
            
            February
                29, 2008Brigitte
                M. Bren/s/
                DANIEL G. BYRNE
            
            
            Director
            
            February
                29, 2008Daniel
                G. Byrne/s/
                RAFER L. JOHNSON
            
            
            Director
            
            February
                29, 2008Rafer
                L. Johnson/s/
                JAMES M. KALUSTIAN
            
            
            Director
            
            February
                29, 2008James
                M. Kalustian/s/
                JOSEPH J. UEBERROTH
            
            
            Director
            
            February
                29, 2008Joseph
                J. Ueberroth/s/
              RICARDO L. VALENCIA
            
            
            Director
            
            February
                29, 2008Ricardo
              L. Valencia/s/RICHARD
              D.C. WHILDEN
            
            
            Director
            
            February
              29,
              2008Richard
              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, 2007.21.1
            
            List
                of subsidiaries of the registrant as of December 31,
                2007.*23.1
            
            Consent
                of BDO Seidman, LLP, Independent Registered Public Accounting
                Firm.*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).*




*
      Filed
      herewith.


II
            -
            2