**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 1934****For
                  the fiscal year ended December 31, 2005****Or****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934****For
                  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**
                  **110
                    S. Ferrall Street**
                  **Spokane,
                    WA**
                
                **99202**(Address
                    of Principal Executive Offices)
                
                (Zip
                    Code)Registrant’s
                    telephone number, including area code:**(509) 534-6200**Securities
                    registered pursuant to Section 12(b) of the Act:**None**Securities
                    registered pursuant to Section 12(g) of the Act:**Common
                    Stock, $.01 Par Value**(Title
                    of Class)
  Indicate
          by check mark if the registrant is a well-known seasoned issuer, as defined
          in
          Rule 405 of the Securities Act.
 o  Yes
 ý  No
 
 Indicate
          by check mark if the registrant is not required to file reports pursuant
          to
          Section 13 or Section 15(d) of the Act.
 o Yes
 ý No
 
 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.
 ý  Yes
 o  No
 
 Indicate
          by check mark if disclosure of delinquent filers pursuant to Item 405 of
          Regulation S-K is not contained herein, and will not be contained, to the
          best of registrant’s knowledge, in definitive proxy or information statements
          incorporated by reference in Part III of this Form 10-K or any amendment to
          this Form 10-K.
 o
  Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer, or a non-accelerated filer. See definition of “accelerated
          filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
          one):
 o  Large
          Accelerated filer
 ý  Accelerated
          filer
 o  Non-Accelerated
          filer
  
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).
  oYesýNo
 
 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
          National Market on June 30, 2005, was $152,225,680. 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 15, 2006 was 20,689,139.
  **DOCUMENTS
          INCORPORATED BY REFERENCE**
 
 Portions
          of the registrant’s definitive Proxy Statement relating to the 2006 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**
  **Page****PART
                    I**Item
                    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
                12**PART
                    II**Item
                    5.
                Market
                    for the Registrant’s Common Equity, Related Stockholder
                    Mattersand Issuer Purchases of Equity Securities
                13Item
                    6.
                Selected
                    Financial Data
                16Item
                    7.
                Management’s
                    Discussion and
                    Analysis of Financial Condition and Results 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
                    and Financial Disclosure
                29Item
                    9A.
                Controls
                    and Procedures
                30Item
                    9B.
                Other
                    Information
                32**PART
                    III**Item
                    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
                32**PART
                    IV**Item
                    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***
  **Business
          Overview**
  Ambassadors
          Group, Inc. (“Ambassadors”) is
          a
          leading educational travel company that organizes and promotes international
          and
          domestic programs for students, athletes and professionals. We were founded
          in
          1967, were 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 National 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 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” (“Conference Programs”), which provide domestic travel
          experiences for grade school and high school students emphasizing leadership,
          community involvement, and government education, and (iv) the “People to
          People Ambassador Programs” (“Professional Ambassador Programs”), which provide
          foreign travel experiences for professionals, with emphasis on meetings
          and
          seminars between delegates and persons in similar professions
          abroad.
  Since
          International’s initial public offering in 1995, we expanded our operations
          primarily through internal growth and two acquisitions of travel related
          businesses. Since 1983, we have organized programs for more
  -
              1
              -
 than
          301,000 students, adults and athletes. Our educational travel programs
          feature
          visits abroad, including, but not limited to, Antarctica, Australia, China,
          France, Germany, Great Britain, Italy, South Africa, and New Zealand. In
          2005,
          more than 37,800 delegates traveled on our programs to more than 36 countries
          on
          seven continents.
 
 We
          have
          the exclusive right from People to People International (“People to People”) to
          develop and conduct student programs for kindergarten through high school
          students using the People to People name. We also have the non-exclusive
          right
          to develop, market and operate programs for professionals, college students
          and
          athletes using the People to People name. However, at the present time,
          we are
          the only entity that has been given this right by People to People. These
          rights, granted pursuant to agreements with People to People, expire in
          2010
          and, at our election, may be extended through 2020. People to People is
          a
          private, non-profit organization
          dedicated to the promotion of world peace through cultural
          exchange.
 
 People
          to
          People was founded by President Dwight D. Eisenhower in 1956 and was originally
          administered by the U.S. State Department. Eight U.S. Presidents since
          President Eisenhower have served as 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 39 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 from
          August through February. Our representatives review candidate applications
          and conduct selection interviews throughout the country. Accepted applicants
          participate in orientation meetings to prepare for their educational travel
          program.
  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
          are
          accompanied by several teachers, and local delegation leaders and 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.
 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,
  -
              2
              -
 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, and leadership, physical training,
          and international cultural excursions.
  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.
 
 **Conference
          Programs**
 
 Our
          Conference 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. This program
          is
          specifically designed for students in 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 Conference Programs through a direct mail marketing effort throughout
          the
          year. Our Conference Programs also 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
          to organize and operate all activities of most of our Conference Programs,
          including speakers, facilitators, events, accommodations and transportation.
          Previously, these activities were supplied by outside vendors.
 
 Delegates
          traveling on these programs may receive transferable high school or university
          credits as part of the academic program. Universities recognizing academic
          credit include, but are not limited to, Stanford University, Princeton
          University, Yale University, the University of California, Los Angeles,
          the
          University of Washington, MIT (Massachusetts Institute of Technology),
          Brown
          University, Johns Hopkins University, Columbia University, Cornell University,
          Dartmouth College, and Georgetown University. In addition, students who
          successfully complete the program may be eligible to receive service
          learning credits, which have become a high school graduation requirement
          in many
          curricula countrywide.
 
 -
              3
              -
 **Professional
          Ambassador Programs**
  Our
          Professional Ambassador Programs provide professionals with common interests
          the
          opportunity to travel abroad to meet and exchange ideas with foreign citizens
          who have similar backgrounds, interests or professions. Professional 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 travel 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 professionally
          relevant associations and societies.
 
 We
          believe that our Professional 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 the Company 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
          Program, Sports Ambassador Program or Conference 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.
 
 Prior
          to
          2004, our delegates were 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. Since 1980, Student Ambassadors have transferred more than
          40,000
          college credits from EWU to the university of their choice.
 
 **Strategic
          Alliances**
 
 Alliances
          with Students on Ice, Inc. and Full On (Europe) Limited provide adventure
          and
          quality for our Student and Professional Ambassador Programs. These agreements
          prescribe the nature, scope and pricing of the travel services provided
          to our
          delegates. Alliances with SafeTravel, Inc. exhibit our adherence to safety
          on
          all our programs.
 
 Through
          our Sport Ambassador Programs, we have agreements with the Amateur Athletic
          Union, Young American Bowling Alliance, and American Youth Soccer Organization
          to offer international travel for its players. These agreements currently
          do not
          generate significant revenues.
 -
              4
              -
 
 We
          have
          also entered into strategic alliances to further introduce innovative,
          educational travel experiences both internationally and domestically. Such
          strategic alliances include that with the National Society of High School
          Scholars. 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 Professional 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
          Program,” “People to People Sports Ambassador Program,” “Youth Friendship
          Games,” 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, 2005, we employed 234 employees, of which 196 were full-time
          employees. Of our full-time employees, 189 are located in Spokane, Washington.
          We have 149 full-time employees engaged in selling and tour promotion and
          47
          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 Conference 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. Professional 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
          39 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.
 -
              5
              -
  We
          believe the barriers to entry are relatively low for any future competitors.
          Certain organizations engaged in the travel business could have substantially
          greater financial, marketing and sales resources than we do. There can
          be no
          assurance that our present or future competitors will not exert significant
          competitive pressures on us in the future.
 
 **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. On this website,
          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, and in any event 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, conference and professional educational travel programs,
          (ii) introduce new student, sport, conference 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. Our revenues and earnings are especially sensitive to events that
          affect domestic and international air travel and the level of hotel
          reservations. A number of factors, including those mentioned above, a rise
          in
          fuel prices or other travel costs, excessive inflation, currency fluctuations,
          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 the United States and key international markets. Therefore, any significant
          economic downturn or recession in the United States or these other markets
          could
          have a material adverse affect 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 the United States. In the past, gross revenues from programs to
          Europe,
          the South Pacific (Australia and New Zealand) and China have accounted
          for a
          majority of our gross revenues. 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
          have 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 near-term and long-term effects
          of these
          attacks are uncertain for our customers, the market for our Common Stock,
          the
          markets for our services and the U.S. economy. The
  -
              8
              -
 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. Our operating results
          may
          fluctuate as a result of many factors, including the mix of student, sports,
          conferences 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.
          In
          addition, we record on a quarterly basis realized gains and losses on our
          forward foreign exchange contracts that do not qualify as cash flow hedges
          under
          Statement of Financial Accounting Standards No. 133. As a result of the
          foregoing, annual or quarterly operating results may be below the expectations
          of public market analysts and investors. In such event, the price of 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 the Company, 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 Professional 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. The People to People
          agreements 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 would 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. We do not have long-term employment agreements with any
          of our
          executive officers. 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, direct mail and local
          informational meetings. Failure 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 in its 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, conferences 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.
 
 **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;
 •
Actions
          by institutional shareholders;
 •
General
          market conditions;
 •
Change
          in key employees;
 •
          Domestic and 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.
 
 -
              11
              -
 **Item 1B.** **** ***Unresolved
          Staff Comments***
 
 None.
 
 **Item 2.*********Properties***
 
 Our
          principal executive offices, consisting of approximately 48,000 square
          feet, are
          located in Spokane, Washington, and are occupied pursuant to a lease that
          expires December 31, 2009. The lease currently provides for monthly rental
          payments of approximately $37,000.
  We
          also
          occupy additional office space totaling approximately 11,000 square feet
          in
          Spokane, Washington, pursuant to a lease which expires December 31, 2006.
          Current monthly rent is approximately $4,600 per month, with increases
          specified
          in the lease.
  We
          occupy
          additional space totaling approximately 4,800 square feet in Spokane,
          Washington, primarily for storage of corporate records. The lease term
          expires
          December 31, 2009. Current monthly rent is approximately $1,000 per
          month.
 
 We
          are
          currently evaluating our existing facilities to determine if they are sufficient
          to meet our anticipated future needs. We plan on increasing the size of
          our
          operations in Spokane, Washington and believe we will be able to meet our
          future
          needs at comparable rates.
  **Item 3.*********Legal
          Proceedings***
  We
          are
          not a party to any 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 affect 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 2005.
  
  -
              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 National Market under the symbol
          “EPAX” since March 1, 2002. Prior to March 1, 2002, there was no
          public trading market for our equity securities. On September 15, 2005,
          our
          stock split two-for-one, doubling our shares of Common Stock outstanding.
          The
          stock split was implemented in the form of a 100 percent stock dividend,
          payable
          on September 15, 2005 to shareholders of record on August 31, 2005.
  As
          of
          February 15, 2006, the last reported sale price of our Common Stock was
          $26.87. The following table sets forth the high and low sale prices of
          a share
          of our Common Stock as reported on the NASDAQ National Market on a quarterly
          basis for our fiscal years ended December 31, 2005 and 2004. The high and
          low sale prices have been adjusted to reflect the affect of the September
          15,
          2005 two-for-one stock split.
  **High**
                
                **Low**Quarter
                    ended March 31, 2005
                
                $
                18.11
                
                $
                16.48Quarter
                    ended June 30, 2005
                
                $
                19.63
                
                $
                15.99Quarter
                    ended September 30, 2005
                
                $
                23.31
                
                $
                18.47Quarter
                    ended December 31, 2005
                
                $
                26.89
                
                $
                19.14Quarter
                    ended March 31, 2004
                
                $
                12.40
                
                $
                10.74Quarter
                    ended June 30, 2004
                
                $
                12.81
                
                $
                10.30Quarter
                    ended September 30, 2004
                
                $
                14.60
                
                $
                11.09Quarter
                    ended December 31, 2004
                
                $
                18.00
                
                $
                13.71
  **Holders
          of Record**
 
 As
          of
          February 10, 2006, there were approximately 57 holders of record of our
          Common Stock. This number does not include beneficial owners holding shares
          through nominee or street name.
 
  -
              13
              -
  **Dividends**
 
 In
          November 2003, the Board of Directors initiated a dividend policy, payable
          on a quarterly basis. Each quarter, our Board of Directors will review
          the
          dividend payment assessing the amount, timing and alignment with its strategic
          direction.
 
 In
          November 2004, the Board of Directors increased the dividend policy, paying
          shareholders $0.26 per share annually, distributable at $0.065 per share
          on a
          quarterly basis. In November 2005, the Board of Directors again increased
          the
          dividend policy, paying shareholders $0.34 per share annually, distributable
          at
          $0.085 per share on a quarterly basis. From February, 2004 through February
          2006, our Board of Directors declared the following dividend
          payments:
 
 Declaration
                    Date
                Record
                    Date
                Payment
                    Date
                Dividend
                    Per ShareFebruary
                    24, 2004
                March
                    9, 2004
                March
                    23, 2004
                $0.055May
                    14, 2004
                June
                    1, 2004
                June
                    16, 2004
                $0.055August
                    13, 2004
                August
                    30, 2004
                September
                    14, 2004
                $0.055November
                    19, 2004
                December
                    6, 2004
                December
                    21, 2004
                $0.065February
                    11, 2005
                February
                    28, 2005
                March
                    15, 2005
                $0.065May
                    13, 2005
                May
                    30, 2005
                June
                    14, 2005
                $0.065August
                    12, 2005
                August
                    26, 2005
                September
                    9, 2005
                $0.065November
                    11, 2005
                November
                    28, 2005
                December
                    13, 2005
                $0.085February
                    17, 2006
                February
                    28, 2006
                March
                    15, 2006
                $0.085
 
 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.
  **Transfer
          Agent and Registrar**
  Mellon
          Investor Services LLC serves as transfer agent and registrar of our Common
          Stock.
  **Equity
          Compensation Plan Information**
 
 The
          following tables provide information as of December 31, 2005 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
                
                1,958,911
                
                $8.40
                
                905,375Equity
                    compensation plans not approved by security holders
                
                N/A
                
                N/A
                
                N/ATotal
                
                1,958,911
                
                $
                    8.40
                
                905,375
  
 -
              14
              -
   **Issuer
          Purchases of Equity Securities**
  On
          May
          18, 2004, our Board of Directors authorized the repurchase of up to $5
          million
          of our Common Stock in the open market or through private transactions.
          On
          August 12, 2005, our Board of Directors increased the authorized Common
          Stock
          repurchase plan amounts to $14.0 million. During the quarter ended December
          31,
          2005, we repurchased 36,500 shares of our Common Stock for $0.9 million.
          Since
          inception, we have repurchased approximately 388,000 shares of our Common
          Stock,
          adjusted to reflect the effect of our two-for-one
          stock split of our Common Stock, for an
          approximate total of $6.2 million. As of December 31, 2005, approximately
          $7.8
          million remained available for repurchase under the plan.
  The
          following is a summary of issuer purchases of equity securities during
          the
          quarter ended December 31, 2005:
 **Maximum
                    Number****Total
                    Number of**
                
                
                
                **(or
                    Approximate****Shares**
                
                
                
                **Dollar
                    Value) of****Purchased
                    as**
                
                
                
                **Shares
                    that May Yet****Total
                    Number**
                
                
                
                **Average**
                
                
                
                **Part
                    of Publicly**
                
                
                
                **Be****of**
                
                
                
                **Price**
                
                
                
                **Announced**
                
                
                
                **Purchased
                    Under****Shares**
                
                
                
                **Paid
                    per**
                
                
                
                **Plans
                    or**
                
                
                
                **the
                    Plans or****Period**
                
                
                **Purchased**
                
                
                
                **Share**
                
                
                
                **Programs**
                
                
                
                **Programs**Amount
                    available for repurchase at September 30, 2005
                
                
                
                $8,668,937October 1
                    - October 31, 2005
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,668,937November 1
                    - November 30, 2005
                
                
                2,900
                
                
                
                $24.00
                
                
                
                2,900
                
                
                
                8,599,338December 1
                    - December 31, 2005
                
                
                33,600
                
                
                
                23.95
                
                
                
                33,600
                
                
                
                7,794,63436,500
                
                
                
                $23.95
                
                
                
                36,500
                
                
                
                $7,794,634
 
  **Recent
          Sales of Unregistered Securities**
  During
          the fiscal year ended December 31, 2005, no equity securities were sold
          by us
          that were not registered under the Act.
  -
              15
              -
  **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, 2005, and the balance sheet data as of December 31,
          2005 and 2004 have been derived from audited financial statements included
          elsewhere in this Form 10-K. The statement of operations data for the years
          ending December 31, 2002 and 2001 and the balance sheet data as of
          December 31, 2002 and 2001 has been derived from the audited financial
          statements, which are not included in this Form 10-K. The financial data as
          of December 31, 2001 and for the year then ended and for the period
          January 1, 2002 through February 28, 2002, have been carved out from
          the consolidated financial statements of International using the historical
          operating results and historical bases of the assets and liabilities of
          International’s business, which we comprised. Historical results are not
          necessarily indicative of future results.
 **December
                      31,****2005**
                  
                  **2004**
                  
                  **2003**
                  
                  **2002(E)**
                  
                  **2001(B)(E)**Statement
                      of Operations data:Net
                      revenues, non-directly delivered programs (A)
                  
                  $
                  64,321
                  
                  $
                  51,824
                  
                  $
                  37,665
                  
                  $
                  36,090
                  
                  $
                  43,414Gross
                      revenue, directly delivered programs (A)
                  
                  $
                  4,969
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —Less
                      cost of sales, directly delivered programs (A)
                  
                  $
                  2,841
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —Net
                      revenues, all programs (A)
                  
                  $
                  66,449
                  
                  $
                  51,824
                  
                  $
                  37,665
                  
                  $
                  36,090
                  
                  $
                  43,414Selling
                      and tour promotion expenses
                  
                  $
                  27,574
                  
                  $
                  22,616
                  
                  $
                  18,534
                  
                  $
                  15,632
                  
                  $
                  18,734General
                      and administrative expenses
                  
                  $
                  8,185
                  
                  $
                  6,537
                  
                  $
                  4,566
                  
                  $
                  5,131
                  
                  $
                  6,189Write-down
                      of intangible assets
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  5,937Operating
                      income
                  
                  $
                  30,690
                  
                  $
                  22,671
                  
                  $
                  14,565
                  
                  $
                  15,327
                  
                  $
                  12,554Operating
                      margin
                  
                  
                  46
                  %
                  
                  44
                  %
                  
                  39
                  %
                  
                  42
                  %
                  
                  43
                  %Net
                      income after tax
                  
                  $
                  22,410
                  
                  $
                  15,647
                  
                  $
                  10,154
                  
                  $
                  10,798
                  
                  $
                  9,488Earnings
                      per share - basic (D)
                  
                  $
                  1.10
                  
                  $
                  0.78
                  
                  $
                  0.51
                  
                  $
                  0.55
                  
                  $
                  0.49Earnings
                      per share - diluted (D)
                  
                  $
                  1.05
                  
                  $
                  0.75
                  
                  $
                  0.50
                  
                  $
                  0.53
                  
                  $
                  0.49
  -
              16
              -
  **December 31,****2005**
                
                **2004**
                
                **2003**
                
                **2002(E)**
                
                **2001(B)(E)****(in
                    thousands, except per share data)**Balance
                    sheet data:Cash,
                    cash equivalents and available-for-sale securities (C)
                
                $
                116,604
                
                $
                87,557
                
                $
                67,525
                
                $
                51,399
                
                $
                39,773Total
                    assets
                
                $
                125,046
                
                $
                97,516
                
                $
                79,321
                
                $
                58,517
                
                $
                46,123Total
                    stockholders’ equity
                
                $
                66,502
                
                $
                49,501
                
                $
                40,809
                
                $
                27,860
                
                $
                24,839Other
                    key financial measures:Cash
                    flow from operating activities
                
                $
                37,792
                
                $
                27,906
                
                $
                17,255
                
                $
                21,382
                
                $
                6,994Cash
                    flow (used in) from investing activities
                
                $
                (15,592
                )
                $
                (22,830
                )
                $
                (10,749
                )
                $
                (13,354
                )
                $
                26,249Cash
                    dividends declared and paid
                
                $
                (5,729
                )
                $
                (4,630
                )
                $
                (1,100
                )
                $
                —
                
                $
                —Cash
                    dividends declared and paid, per common share
                
                $
                0.28
                
                $
                0.23
                
                $
                0.06
                
                $
                —
                
                $
                —Cash
                    flow (used in) from financing activities
                
                $
                (6,320
                )
                $
                (5,825
                )
                $
                34
                
                $
                (9,668
                )
                $
                (37,462)Deployable
                    cash (F1)
                
                $
                61,939
                
                $
                43,180
                
                $
                32,903
                
                $
                22,773
                
                $
                20,493Free
                    cash generated (F2)
                
                $
                26,677
                
                $
                15,611
                
                $
                13,879
                
                $
                11,834
                
                $
                12,324Return
                    on adjusted equity (F3)
                
                39
                %
                37
                %
                32
                %
                42
                %
                
                24%
   (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 program
                    receipts
                    during the years ended December 31, 2005, 2004, 2003, 2002, and 2001
                    were $180.0 million, $147.1 million, $108.6 million, $97.1 million,
                    and $116.3 million,
                    respectively.
  (B)
                Excluding
                    the effects of a write-down of intangible assets during the year
                    ended
                    December 31, 2001, operating income, net income after tax, and basic
                    and diluted earnings per share would have been $18.5 million, $13.2
                    million, and $0.68, respectively.
  (C)
                Cash
                    and cash equivalents and available-for-sale securities include
                    restricted
                    cash equivalents of a nominal amount at December 31, 2005, 2004,
                    2003, 2002 and 2001.
  (D)
                Earnings
                    per share - basic and diluted are calculated using our Common
                    Stock, which
                    was split in April 2001 and February 2002 in anticipation of our
                    spin-off from International. This Common Stock split resulted
                    in 9,813,140
                    shares issued and outstanding. Shares outstanding as of and for
                    the year
                    ended December 31, 2001 have been retroactively adjusted for this
                    stock split.
 
 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.
 
 Earnings
          per share - diluted are calculated using stock options, which were originally
          granted under International and converted to our options on February 28,
          2002 in
          connection with our spin-off from International. The dilutive effect of
          these
          converted stock options is excluded from our earnings per share calculation
          for
          the year ended December 31, 2001, as they were not our
          options.
  - 17
              -
   (E)
                The
                      consolidated financial statements for the year ended December
                      31, 2001 and
                      the period January 1, 2002 through February 28, 2002, have been
                      carved out from the consolidated financial statements of International
                      using the historical operating results and historical bases
                      of the assets
                      and liabilities of International’s business, which we comprised. We
                      composed the operations of the former Education Group segment
                      of
                      International. Accordingly, the historical financial information
                      presented
                      herein does not necessarily reflect what our financial position,
                      operating
                      results and cash flows would have been had we been a separate,
                      stand-alone
                      entity during the periods
                      presented.
 (F)
              **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.
  **(F1)
        Deployable Cash Reconciliation (at December 31, in
        thousands)**
  **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Cash
                  and cash equivalents and available-for-sale securities
              $
              116,604
              
              $
              87,557
              
              $
              67,525
              
              $
              51,399
              
              $
              39,773Prepaid
                  program costs and expenses
              
              1,596
              
              
              2,461
              
              
              1,608
              
              
              1,516
              
              
              1,501Less:
                  accounts payable
              
              (2,540
              )
              
              (1,390
              )
              
              (2,599
              )
              
              (2,181
              )
              
              (2,521)Less:
                  accrued expenses and other short-term liabilities (excluding deferred
                  taxes)
              
              (6,078
              )
              
              (6,693
              )
              
              (5,260
              )
              
              (2,060
              )
              
              (1,709)Less:
                  participant deposits
              
              (47,463
              )
              
              (38,608
              )
              
              (28,220
              )
              
              (25,901
              )
              
              (16,551)Less:
                  current portion of long-term capital lease
              
              (180
              )
              
              (147
              )
              
              (151
              )
              
              —
              
              
              —Total
                  deployable cash at December 31
              $
              61,939
              
              $
              43,180
              
              $
              32,903
              
              $
              22,773
              
              $
              20,493
  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 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.
 
  -
            18
            -
  **(F2)
        Free Cash Generated Reconciliation (at December 31, in
        thousands)**
  **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Cash
                  flow from operations as reported
              
              $
              37,792
              
              $
              27,906
              
              $
              17,255
              
              $
              21,382
              
              $
              6,994Change
                  in participant deposits
              
              
              (8,855
              )
              
              (10,388
              )
              
              (2,319
              )
              
              (9,350
              )
              
              6,212Purchase
                  of property and equipment
              
              
              (2,260
              )
              
              (1,907
              )
              
              (1,057
              )
              
              (198
              )
              
              (882
              )Total
                  free cash generated
              
              $
              26,677
              
              $
              15,611
              
              $
              13,879
              
              $
              11,834
              
              $
              12,324
  
 Free
        cash
        generated is a non-GAAP cash flow measure. Free cash generated is calculated
        as
        cash flow from operations less change in participant deposits 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. The change in participant deposits is excluded,
        as
        the cash related to such deposits is limited in use until travel has
        occurred.
  **(F3)
        Return on Adjusted Stockholders’ Equity Reconciliation (at December 31, in
        thousands except return percentages)**
  **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Stockholders’
                  equity at January 1, as reported
              
              $
              49,501
              
              $
              40,809
              
              $
              27,860
              
              $
              24,839
              
              $
              53,554Less:
                  other comprehensive income at January 1
              
              
              1,645
              
              
              3,451
              
              
              1,155
              
              
              (340
              )
              
              401Plus:
                  stockholders’ equity at December 31, as reported
              
              
              66,502
              
              
              49,501
              
              
              40,809
              
              
              27,860
              
              
              24,839Less:
                  other comprehensive income at December 31
              
              
              (1,396
              )
              
              1,645
              
              
              3,451
              
              
              1,155
              
              
              (340
              )Average
                  adjusted stockholders’ equity (the sum of the above divided by
                  two)
              
              $
              57,877
              
              $
              42,607
              
              $
              32,032
              
              $
              25,942
              
              $
              39,166Net
                  income
              
              $
              22,410
              
              $
              15,647
              
              $
              10,154
              
              $
              10,798
              
              $
              9,488Return
                  on adjusted equity
              
              
              39
              %
              
              37
              %
              
              32
              %
              
              42
              %
              
              24
              %
  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 conference 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 on the NASDAQ National Market 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. All significant
        inter-company accounts and transactions have been eliminated in
        consolidation.
  We
        have a
        single operating segment consisting of the educational travel and sports
        programs for students, athletes and professionals. These programs have similar
        economic characteristics, offer comparable products to delegates, and utilize
        similar processes for program marketing.
 
 ***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
        Revenue and Accounting Structure***
  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 is perfunctory. For certain programs, however,
        we
        have begun to organize and operate all activities including speakers,
        facilitators, events, accommodations and transportation. As such, we recognize
        the gross revenue and cost of sales of these directly delivered programs
        over
        the period the programs are 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 net
        revenues.
  **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001
                  (A)****(%****of
                  net revenue)**Net
                  revenue
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %Selling
                  and tour promotion expenses
              
              
              41
              
              
              44
              
              
              49
              
              
              43
              
              
              43General
                  and administrative expenses
              
              
              12
              
              
              13
              
              
              12
              
              
              14
              
              
              14Write-down
                  of intangible assets
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              14Operating
                  income
              
              
              46
              
              
              44
              
              
              39
              
              
              43
              
              
              29Other
                  income
              
              
              4
              
              
              2
              
              
              2
              
              
              3
              
              
              5Income
                  before tax
              
              
              50
              
              
              46
              
              
              41
              
              
              45
              
              
              34Income
                  tax provision
              
              
              16
              
              
              16
              
              
              14
              
              
              15
              
              
              12Net
                  income
              
              
              34
              %
              
              30
              %
              
              27
              %
              
              30
              %
              
              22
              %
   (A)  Excluding
        the effects of a write-down of intangible assets during the year ended
        December 31, 2001, the relative percentages of operating income, income
        before tax, and net income to consolidated revenues would have been 43%,
        48% and
        31%, respectively.
   -
            21
            -
  **Comparison
        of Year Ended December 31, 2005 to Year Ended December 31,
        2004**
 
 During
        2005, we traveled more than 37,800 delegates compared to approximately 31,000
        delegates in 2004, an increase of 22 percent. Net revenue increased 28 percent,
        to $66.4 million from $51.8 million in 2004. The $14.6 million
        increase is primarily the result of traveling additional delegates mentioned
        above, combined with increases in gross margin (net revenue as a percentage
        of
        gross program receipts) from 35 percent to 37 percent. The increase in margin
        was primarily due to traveling efficient group sizes, negotiating savings
        within
        program pass through expenses, and the benefits associated with receiving
        a
        reprieve of certain goods and services tax.
  Our
        policy is to expense all selling and tour promotion costs as incurred. Selling
        and tour promotion expenses were $27.6 million and $22.6 million for the
        years ended December 31, 2005 and 2004, respectively. The $5.0 million
        increase is primarily the result of $1.3 million additional personnel costs
        to
        support the larger volume of delegates and $2.7 million of increased marketing
        efforts toward 2006 and 2007 travel programs. As a percent of net revenue,
        selling and tour promotion costs decreased from 44 percent in 2004 to 41
        percent
        in 2005.
  General
        and administrative expenses increased to $8.2 million for the year ended
        December 31, 2005 from $6.5 million for the year ended December 31,
        2004. The $1.7 million, 26 percent, increase is primarily the result of $1.2
        million of additional personnel costs supporting our additional delegate
        base.
        As a percent of net revenues, general and administrative expenses decreased
        from
        13 percent in 2004 to 12 percent in 2005.
  For
        the
        year ended December 31, 2005, we increased our operating income to
        $30.7 million from $22.7 million for the year ended
        December 31, 2004. Operating income as a percent of net revenues increased
        to 46 percent for 2005 from 44 percent in 2004.
  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 $2.6 million in the year ended December 31, 2005, compared to
        $1.1 million in the year ended December 31, 2004. The increase in interest
        and dividend income is related to higher cash balances held and increased
        interest rates during 2005. In 2005 and 2004, the average rate of return
        was **** 2.4
        percent and 1.4 percent, respectively.
  For
        the
        year ended December 31, 2005, income before income taxes was $33.3 million
        in comparison to income before income taxes of $23.7 million for the year
        ended
        December 31, 2004.
  We
        recorded an income tax provision of approximately $10.9 million for the year
        ended December 31, 2005, in comparison to $8.1 million for the year
        ended December 31, 2004. The income tax provision incurred was based upon
        the annual effective income tax rate applied to the pre-tax income. Our
        effective tax rate was 32.8 percent and 34.0 percent for the years ended
        December 31, 2005 and 2004, respectively. The decrease in the effective rate
        from 2004 was primarily the result of higher interest earned from tax exempt
        securities.
  Net
        income increased to $22.4 million for the year ended December 31, 2005
        from $15.6 million for the year ended December 31, 2004.
  -
            22
            -
  **Comparison
        of Year Ended December 31, 2004 to Year Ended December 31,
        2003**
  We
        traveled approximately 31,000 delegates during 2004 as compared to more than
        23,000 delegates during 2003 . Net
        revenue increased to $51.8 million for the year ended December 31,
        2004 from $37.7 million for the year ended December 31, 2003. The
        $14.2 million, 38 percent, increase is primarily the result of traveling
        the
        additional delegates. Gross margin (revenue as a percentage of gross program
        receipts) remained comparable at 35 percent for the years ended
        December 31, 2004 and 2003 while we also maintained the quality
        measurements of our programs.
  Our
        policy is to expense all selling and tour promotion costs as incurred. Selling
        and tour promotion expenses increased to $22.6 million from $18.5 million
        comparing the years ended December 31, 2004 and 2003, respectively. The
        $4.1 million increase is primarily the result of $2.9 million additional
        personnel costs to support the larger volume of delegates and $1.1 million
        of
        increased marketing efforts toward 2005 travel.
  General
        and administrative expenses increased to $6.5 million for the year ended
        December 31, 2004 from $4.6 million for the year ended December 31,
        2003. The $2.0 million, 43 percent, increase is primarily the result of
        additional personnel supporting the additional delegate base, combined with
        professional fees related to compliance with the Sarbanes Oxley Act of
        2002.
  For
        the
        year ended December 31, 2004, we earned operating income of
        $22.7 million in comparison to the operating income of
        $14.6 million for the year ended December 31, 2003. Changes in
        operating income from 2003 to 2004 are the result of changes as described
        above.
  Other
        income consisted primarily of interest income generated by cash, cash
        equivalents and available-for-sale securities. We realized interest and dividend
        income of $1.1 million in the year ended December 31, 2004, compared to
        $0.8 million in the year ended December 31, 2003. The increase in interest
        and dividend income is related to higher cash balances held by us. In 2004
        and
        2003, the average rate of return was **** 1.4
        percent and 1.3 percent, respectively.
  For
        the
        year ended December 31, 2004, income before income taxes was $23.7 million
        in comparison to income before income taxes of $15.4 million for the year
        ended
        December 31, 2003. Changes in income before income taxes are the result of
        changes as described above.
  We
        incurred an income tax provision of approximately $8.1 million for the year
        ended December 31, 2004, in comparison to $5.2 million for the year
        ended December 31, 2003. The income tax provision incurred was based upon
        the annual effective income tax rate applied to the pre-tax income. Our
        effective tax rate was 34.0 percent for both 2004 and 2003.
  Net
        income increased to $15.6 million for the year ended December 31, 2004
        from $10.2 million for the year ended December 31, 2003. Changes in
        net income from 2004 to 2003 are the result of changes as described
        above.
 
    -
            23
            -
  **Liquidity
        and Capital Resources**
  Net
        cash
        provided by operations for the years ended December 31, 2005 and 2004 was
        approximately $37.8 million and $27.9 million, respectively. The $9.9
        million increase in operating cash flows from the year ending December 31,
        2004, to the year ending December 31, 2005, primarily results from a $6.8
        million increase in earnings, combined with the timing of certain payments
        for
        programs traveled or to be traveled.
  Net
        cash
        used in investing activities for the years ended December 31, 2005 and 2004
        was $15.6 million and $22.8 million, respectively. The $7.2 million
        decrease year over year resulted from $7.6 million net decreased activities
        with
        the sale or maturity and purchase of available-for-sale securities, netted
        with
        $0.4 million increased purchases of property and equipment.
  Net
        cash
        used in financing activities was $6.3 million in the year ending December
        31,
        2005 and $5.8 million during the year ending December 31, 2004. The net change
        in financing activities was a result of three factors: an increase of $1.1
        million used for cash dividends to our shareholders, a $1.2 million increase
        in
        cash used for the repurchase of our common stock, offset by an increase of
        $1.8
        million received from the proceeds of stock option exercises. During 2005,
        we
        paid $5.7 million in cash dividends and used $3.7 million for stock repurchases.
  At
        December 31, 2005, we had approximately $116.6 million of cash, cash
        equivalents, restricted cash and available-for-sale securities, which included
        program participant funds of approximately $47.5 million. At
        December 31, 2004, we had approximately $87.6 million of cash and cash
        equivalents, restricted cash, and available-for-sale securities, which included
        program participant funds of $38.6 million. 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.
  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.
  We
        continue to consider acquisitions of educational, travel and youth businesses
        that may require the use of cash and cash equivalents. No such acquisitions
        are
        currently pending and no assurance can be given that definitive agreements
        for
        any such acquisitions will be entered into, or, if they are entered into,
        that
        they will be on terms favorable to us.
  We
        do not
        have any material capital expenditure commitments for 2006. Management believes
        that existing cash and cash equivalents and cash flows from operations will
        be
        sufficient to fund our anticipated
  -
            24
            -
 operating
        needs, capital expenditures, dividend payments and acquisitions through the
        next
        12 months of operation.
 
 Other
        than capital leases, we have no long-term debt or purchase obligations as
        of
        December 31, 2005. The following table presents the maturities of our
        contractual cash obligations as of December 31, 2005 (in thousands),
        excluding normal accounts payable and accrued expenses:
  **Payments
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less**
                **than**
                **1
                  year**
              
              **1
                  - 3**
                **years**
              
              **4
                  - 5**
                **years**Operating
                  leases
              
              $
              2,712
              
              $
              741
              
              $
              1,971
              
              $
              —Capital
                  lease
              
              
              618
              
              
              211
              
              
              407
              
              
              —Total
              
              $
              3,330
              
              $
              952
              
              $
              2,378
              
              $
              —
  **Market
        Risk**
  The
        following table summarizes the financial instruments other than derivative
        financial instruments held by us at December 31, 2005 and 2004, 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,
                  2005**
              
              **December 31,
                  2004****2006**
              
              **2007**
              
              **Total**
              
              **Fair**
                **Value**
              
              **Total**
              
              **Fair**
                **Value**U.S.
                  govt. and agency obligations
              
              $
              52,906
              
              $
              36,782
              
              $
              89,688
              
              $
              89,688
              
              $
              76,521
              
              $
              76,521Interest
                  rate
              
              
              2.01
              %
              
              2.98
              %
              
              2.41
              %
              
              —
              
              
              1.38
              %
              
              —
  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
        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, 2005 mature
        in 2006 and 2007. 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.
   -
            25
            -
  At
        December 31, 2005 and 2004, we had outstanding forward contracts as follows
        (in thousands)
 **Notional**
                  **Amount**
                
                **U.S.
                    Dollar**
                  **Average**
                  **Contractual**
                  **Exchange
                    Rate****December 31,
                    2005**Forward
                    contracts (pay $U.S./receive foreign currency):Australian
                    dollar
                
                15,500
                
                $
                0.75British
                    pound
                
                5,100
                
                $
                1.81Canadian
                    dollar
                
                800
                
                $
                0.83Euro
                
                18,850
                
                $
                1.26Japanese
                    yen
                
                304,000
                
                $
                0.01South
                    African rand
                
                2,100
                
                $
                0.16New
                    Zealand dollar
                
                5,450
                
                $
                0.68Forward
                    contracts with variable option (pay $U.S./receive foreign
                    currency):Australian
                    dollar
                
                12,710
                
                $
                0.77British
                    pound
                
                4,640
                
                $
                1.85Canadian
                    dollar
                
                374
                
                $
                0.83Euro
                
                12,510
                
                $
                1.25Japanese
                    yen
                
                56,100
                
                $
                0.01South
                    African rand
                
                642
                
                $
                0.14New
                    Zealand dollar
                
                2,210
                
                $
                0.69**December 31,
                    2004**Forward
                    contracts (pay $U.S./receive foreign currency):Australian
                    dollar
                
                7,400
                
                $
                0.74British
                    pound
                
                4,150
                
                $
                1.78Canadian
                    dollar
                
                500
                
                $
                0.74Euro
                
                7,500
                
                $
                1.19Japanese
                    yen
                
                92,500
                
                $
                0.01South
                    African rand
                
                763
                
                $
                0.17New
                    Zealand dollar
                
                1,000
                
                $
                0.62Forward
                    contracts with variable option (pay $U.S./receive foreign
                    currency):Australian
                    dollar
                
                5,000
                
                $
                0.76Euro
                
                3,500
                
                $
                1.28New
                    Zealand dollar
                
                1,000
                
                $
                0.66
  
  At
        December 31, 2005 and 2004, we had unrealized foreign currency (losses) and
        gains associated with these financial instruments of approximately $(1.9)
        million and $2.6 million, respectively.
  -
            26
            -
  **Off
        Balance Sheet Arrangements**
  As
        of
        December 31, 2005, 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, and contingencies and
        litigation.
 
 ***Cash
        and Investments***
 
 Cash,
        cash equivalents, and available-for-sale securities are
        initially recorded at cost, which includes any premiums and discounts.  We
        determine the appropriate classification of investment securities at the
        time of
        purchase.  Held-to-maturity securities are those securities that we have
        the positive intent and ability to hold to maturity and are recorded at
        amortized cost.  Available-for-sale securities are those securities that
        would be available to be sold in the future in response to our liquidity
        needs.
 Available-for-sale securities are reported at fair value, with unrealized
        holding gains and losses reported in shareholders’ equity as a separate
        component of other comprehensive income, net of applicable deferred income
        taxes.
  Management
        evaluates investment securities for other-than-temporary declines in fair
        value
        on a quarterly basis.  If the fair value of investment securities falls
        below their amortized cost and the decline is deemed to be other-than-temporary,
        the securities will be written down to current market value, resulting in
        a loss
        recorded in the income statement.  There were no investment securities that
        management identified to be other-than-temporarily impaired during the year
        ended December 31, 2005, 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, which might arise
        from
        the possible inability of counterparties to meet the terms of their contracts.
        We do not expect any losses as a result of counterparty defaults. However,
        if
        such defaults occurred, the necessity would arise to locate alternative
        counterparties, or we would then consider alternate means of settling our
        foreign exchange contractual obligations.
 
 
 -
            27
            -
 ***Other
        Liabilities***
 
 We
        received a refund of monies previously paid for certain foreign goods and
        services taxes. It is unclear whether the refund is permanent and accordingly,
        we have recorded this refund as a liability on the balance sheet and adjust
        the
        value accordingly for interest and gain or loss on the currency exchange.
        Also
        quarterly, we recognize into income any amounts for which the uncertainty
        has
        been eliminated.
  ***Revenue
        Recognition***
 
 For
        non-directly delivered programs, we do not actively manage the operations
        of
        each program, and our remaining performance obligation for these programs
        after
        they convene is perfunctory. Therefore, revenue from these programs is presented
        as net revenue and recognized as the program convenes.   For certain
        directly delivered programs, however, we organize and operate all activities
        including speakers, facilitators, events, accommodations and transportation.
        As
        such, we recognize the gross revenue and cost of sales of these directly
        delivered programs over the period the programs are operated.
  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
        December 2004, the Financial Accounting Standards Board (''FASB'') issued
        Statement No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which is a revision
        of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB
        Opinion No. 25. In March 2005, the SEC issued Staff Accounting Bulletin No.
        107
        (“SAB 107”) relating to the adoption of SFAS 123(R). SFAS No. 123(R) requires
        all share-based payments to employees, including grants of employee stock
        options, to be valued at fair value on the date of grant, and to be expensed
        over the applicable vesting period. Pro forma disclosure of share-based
        payments’ effect to the statement of operations is no longer an alternative, and
        SFAS No. 123(R) is effective for all stock-based awards granted on or after
        January 1, 2006. In addition, companies must also recognize compensation
        expense
        related to any awards that are not fully vested as of the effective date.
        Compensation expense for the unvested awards will be measured based on the
        fair
        value of the awards previously calculated in developing the pro forma
        disclosures in accordance with the provisions of SFAS No. 123.
 
 We
        adopted SFAS 123(R) in the first quarter of fiscal 2006 and will continue
        to
        evaluate the impact of SFAS 123(R) on our operating results and financial
        condition. The pro forma information in Note 2 to our Consolidated Financial
        Statements presents the estimated compensation charges under APB Opinion
        No. 25.
        As a result of the provisions of SFAS 123(R) and SAB 107, we expect the
        compensation charges under SFAS 123(R) to reduce diluted net income per share
        by
        approximately $0.03 to $0.05 per share for fiscal 2006. However, our assessment
        of the estimated compensation charges is affected by our stock price as well
        as
        assumptions regarding a number of complex and subjective variables and their
        related tax impact. These variables include, but are not limited to, the
        volatility of our stock price and employee stock option exercise behaviors.
        We
        will recognize compensation cost for stock-based awards issued after January
        1,
        2006 on a straight line basis over the requisite service period for the entire
        award.
 
 -
            28
            -
 **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, 2005, 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 reflect  our  management’s
        judgments and estimates concerning effects of events and transactions that
        are
        accounted for or disclosed.
  **Management’s
        Report on Internal Control over Financial Reporting**
  We
        are
        responsible for establishing and maintaining  adequate
        internal control over financial reporting.  Our
        internal control over financial reporting includes the policies and procedures
        that pertain to the maintenance of records that in reasonable detail accurately
        and fairly reflect the transactions and dispositions of the assets of the
        registrant; to recording transactions as necessary to permit preparation
        of
        financial statements in accordance with generally accepted accounting
        principles, to making receipts and expenditures only in accordance with
        authorizations of management and directors of  our  Company;
        and for prevention or timely detection of unauthorized acquisition, use or
        disposition of our assets that could have a material effect on the financial
        statements.  We
        recognize that because of its inherent limitation, internal control over
        financial reporting may not prevent or detect misstatements. Also, projections
        of any evaluation of effectiveness to future periods are subject to the risk
        that controls may become inadequate because of changes in conditions, or
        that
        the degree of compliance with the policies or procedures may deteriorate. 
Accordingly, even effective internal control over financial reporting can
        provide only reasonable assurance with respect to financial statement
        preparation.
  We
        conducted an evaluation of the effectiveness of our internal control over
        financial reporting as of December 31, 2005. This  evaluation
        was based on  the
        framework  in “ Internal
        Control - Integrated Framework” published by the Committee of Sponsoring
        Organizations of the Treadway Commission. Based on this  evaluation,  our  management  concluded
        that  we
        maintained effective internal control over financial reporting as of December
        31, 2005.
  Our
        management’s assessment of the effectiveness of our Company’s internal control
        over financial reporting as of December 31, 2005 has been audited by BDO
        Seidman, LLP, an Independent Registered Public Accounting Firm, as stated
        in
        their report which appears herein.
  **Changes
        in Internal Control over Financial Reporting**
  For
        the
        fiscal year ended December 31, 2005, 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 Stockholders
 Ambassadors
        Group, Inc.
 Spokane,
        Washington
  We
        have
        audited management's assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, that Ambassadors Group,
        Inc. maintained effective internal control over financial reporting as of
        December 31, 2005, based on criteria established in Internal Control-Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). Ambassadors Group, Inc. management is responsible for
        maintaining effective internal control over financial reporting and for its
        assessment of the effectiveness of internal control over financial reporting.
        Our responsibility is to express an opinion on management's assessment and
        an
        opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and 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, management's assessment that Ambassadors Group, Inc. maintained
        effective internal control over financial reporting as of December 31, 2005,
        is
        fairly stated, in all material respects, based on the COSO criteria. Also
        in our
        opinion, Ambassadors Group, Inc. maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2005, based
        on the
        COSO criteria.
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheet of Ambassadors
        Group, Inc. as of December 31, 2005 and the related consolidated statements
        of
        operations, comprehensive income, stockholders’ equity, and cash flows for the
        year ended December 31, 2005, and our report dated February 28, 2006, expressed
        an unqualified opinion.
 
 
 BDO
        Seidman, LLP
 
 Spokane,
        Washington
 February
        28, 2006
  -
            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, 2005, to
        be filed with the SEC on or about April 14, 2006.
  **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, 2005, to
        be filed with the SEC on or about April 14, 2006.
  **Item 12.**
              ***Security
                  Ownership of Certain Beneficial Owners and
                  Management******and 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, 2005, to
        be filed with the SEC on or about April 14, 2006.
 
 **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, 2005, to
        be filed with the SEC on or about April 14, 2006.
  **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, 2005, to
        be filed with the SEC on or about April 14, 2006.
  -
            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 Reports 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**
  **Page**Reports
                  of Independent Registered Public Accounting Firm
              
              F-2Consolidated
                  Balance Sheets
              
              F-4Consolidated
                  Statements of Operations
              
              F-5Consolidated
                  Statements of Comprehensive Income
              
              F-6Consolidated
                  Statements of Changes in Stockholders’ Equity
              
              F-7Consolidated
                  Statements of Cash Flows
              
              F-8Notes
                  to Consolidated Financial Statements
              
              F-9
   F
            -1
  
  **Report
        of Independent Registered Public Accounting Firm**
  
  Board
        of
        Directors and Stockholders
 Ambassadors
        Group, Inc.
 Spokane,
        Washington
 
 We
        have
        audited the accompanying consolidated balance sheet of Ambassadors Group,
        Inc.
        as of December 31, 2005 and the related consolidated statements of operations,
        comprehensive income, stockholders’ equity, and cash flows for the year ended
        December 31, 2005. 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 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 the financial
        statements are free of material misstatement. An audit also 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 audit provides 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, 2005, and the results of its operations and its cash flows for
        the
        year ended December 31, 2005 **,** in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Ambassadors Group,
        Inc.’s
        internal control over financial reporting as of December 31, 2005, based
        on
        criteria established in Internal Control - Integrated Framework issued by
        the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
        our
        report dated February 28, 2006 expressed an unqualified opinion
        thereon.
  
  BDO
        Seidman, LLP
  Spokane,
        Washington
 February
        28, 2006
  F
            -2
   **Report
        of Independent Registered Public Accounting Firm**
  
 To
        the
        Board of Directors and Stockholders
 of
        Ambassadors Group, Inc.
 
 In
        our
        opinion, the consolidated balance sheet as of December 31, 2004  and the
        related consolidated statements of operations, comprehensive income,
        stockholders' equity  and cash flows for each of two years in the
        period ended December 31, 2004 present fairly, in all
        material respects, the financial position of the Ambassadors Group, Inc.
        and its subsidiaries **** at
        December 31, 2004, and the results of their operations and their cash flows
        for each of the two years in the period ended December 31, 2004, **** in
        conformity with accounting principles generally accepted in the United States
        of
        America. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our
        audits. We conducted our audits of these statements in accordance with 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,
        and
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 PricewaterhouseCoopers
        LLP
 Portland,
        Oregon
 March
        11,
        2005
 
 F
            -3
  **AMBASSADORS
        GROUP, INC.**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 **December 31,****2005**
                
                **2004****(in
                    thousands, except share**
                  **and
                    per share data)****Assets**Current
                    assets:Cash
                    and cash equivalents
                
                $
                26,916
                
                $
                11,036Available-for-sale
                    securities
                
                89,688
                
                76,521Foreign
                    currency exchange contracts
                
                —
                
                2,609Deferred
                    tax asset and other
                
                955
                
                123Prepaid
                    program costs and expenses
                
                1,596
                
                2,461Total
                    current assets
                
                119,155
                
                92,750Property
                    and equipment, net
                
                5,140
                
                3,911Deferred
                    tax asset
                
                584
                
                735Other
                    long-term assets
                
                167
                
                120Total
                    assets
                
                $
                125,046
                
                $
                97,516**Liabilities**Current
                    liabilities:Accounts
                    payable
                
                $
                2,540
                
                $
                1,390Accrued
                    expenses
                
                3,482
                
                2,887Foreign
                    currency exchange contracts
                
                1,896Other
                    liabilities
                
                2,596
                
                3,806Participants’
                    deposits
                
                47,463
                
                38,608Deferred
                    tax liability
                
                —
                
                723Current
                    portion of long-term capital lease
                
                180
                
                147Total
                    current liabilities
                
                58,157
                
                47,561Long-term
                    capital lease
                
                387
                
                454Total
                    liabilities
                
                58,544
                
                48,015Commitments
                    and contingencies (notes 3 and 9)**Stockholders’
                    Equity**Preferred
                    stock, $.01 par value; 2,000,000 shares authorized; none
                  issued
                    and outstanding
                
                —
                
                —Common
                    stock, $.01 par value; 50,000,000 shares authorized; 20,656,957
                    and
                    20,251,682 shares issued and outstanding at December 31, 2005 and
                    2004, respectively
                
                206
                
                202Additional
                    paid-in capital
                
                22,375
                
                18,187Retained
                    earnings
                
                47,550
                
                30,869Unearned
                    restricted stock compensation
                
                (2,233
                )
                (1,402)Accumulated
                    other comprehensive income (loss)
                
                (1,396
                )
                1,645Total
                    stockholders’ equity
                
                66,502
                
                49,501Total
                    liabilities and stockholders’ equity
                
                $
                125,046
                
                $
                97,516
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
   F
            -4
   **AMBASSADORS
        GROUP, INC.**
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Years
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****(in
                  thousands, except**
                **per
                  share data)**Net
                  revenues, non-directly delivered programs
              
              $
              64,321
              
              $
              51,824
              
              $
              37,665Gross
                  revenue, directly delivered programs
              
              
              4,969
              
              
              —
              
              
              —Less
                  cost of sales, directly delivered programs
              
              
              2,841
              
              
              —
              
              
              —Net
                  revenues from all programs
              
              $
              66,449
              
              $
              51,824
              
              $
              37,665Operating
                  expenses:Selling
                  and tour promotion
              
              
              27,574
              
              
              22,616
              
              
              18,534General
                  and administrative
              
              
              8,185
              
              
              6,537
              
              
              4,56635,759
              
              
              29,153
              
              
              23,100Operating
                  income
              
              
              30,690
              
              
              22,671
              
              
              14,565Other
                  income (expense):Interest
                  and dividend income
              
              
              2,627
              
              
              1,067
              
              
              820Other,
                  net
              
              
              21
              
              
              (32
              )
              
              —2,648
              
              
              1,035
              
              
              820Income
                  before income taxes
              
              
              33,338
              
              
              23,706
              
              
              15,385Income
                  tax provision
              
              
              10,928
              
              
              8,059
              
              
              5,231Net
                  income
              
              $
              22,410
              
              $
              15,647
              
              $
              10,154Earnings
                  per share - basic and diluted:Net
                  income per share - basic
              
              $
              1.10
              
              $
              0.78
              
              $
              0.51Weighted-average
                  common shares outstanding - basic
              
              
              20,311
              
              
              20,090
              
              
              19,846Net
                  income per share - diluted
              
              $
              1.05
              
              $
              0.75
              
              $
              0.50Weighted-average
                  common shares outstanding - diluted
              
              
              21,312
              
              
              20,898
              
              
              20,340
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 
  F
            -5
   **AMBASSADORS
        GROUP,  INC.**
  **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
  **Years
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(in
                  thousands)Net
                  income
              
              $
              22,410
              
              $
              15,647
              
              $
              10,154Unrealized
                  gain (loss) on foreign currency exchange contracts, net of income
                  tax
                  (provision) benefit of $1,550, $884, and $(1,213)
              
              
              (2,957
              )
              
              (1,716
              )
              
              2,354Unrealized
                  loss on available-for-sale securities, net of income tax benefit
                  of $40,
                  $48, and $35
              
              
              (84
              )
              
              (90
              )
              
              (58
              )Comprehensive
                  income
              
              $
              19,369
              
              $
              13,841
              
              $
              12,450
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  
 F-6
  **AMBASSADORS
          GROUP, INC.**
 
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
  **Unearned**
                
                **Accumulated****Additional**
                
                
                
                **Restricted
                    Stock**
                
                **Other****Common
                    Stock**
                
                **Paid-In**
                
                **Retained**
                
                **Stock**
                
                **Comprehensive****Shares**
                
                **Amount**
                
                **Capital**
                
                **Earnings**
                
                **Compensation**
                
                **Income
                    (Loss)**
                
                **Total****(in thousands, except  per share data)****Balances,
                    December 31, 2002**
                
                
                19,756
                
                $
                198
                
                $
                15,709
                
                $
                10,798
                
                
                —
                
                $
                1,155
                
                $
                27,860Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                10,154
                
                
                —
                
                
                —
                
                
                10,154Stock
                    options exercised
                
                
                272
                
                
                2
                
                
                1,145
                
                
                —
                
                
                —
                
                
                —
                
                
                1,147Tax
                    benefit associated with exercise of stock options
                
                
                —
                
                
                —
                
                
                452
                
                
                —
                
                
                —
                
                
                —
                
                
                452Dividend
                    to shareholders ($0.06 per share)
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,100
                )
                
                —
                
                
                —
                
                
                (1,100
                )Other
                    comprehensive income, net of income taxes
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,296
                
                
                2,296**Balances,
                    December 31, 2003**
                
                
                20,028
                
                
                200
                
                
                17,306
                
                
                19,852
                
                
                —
                
                
                3,451
                
                
                40,809Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                15,647
                
                
                —
                
                
                —
                
                
                15,647Stock
                    options exercised
                
                
                330
                
                
                4
                
                
                1,511
                
                
                —
                
                
                —
                
                
                —
                
                
                1,515Tax
                    benefit associated with exercise of stock options
                
                
                —
                
                
                —
                
                
                489
                
                
                —
                
                
                —
                
                
                —
                
                
                489Stock
                    redemptions
                
                
                (196
                )
                
                (2
                )
                
                (2,566
                )
                
                —
                
                
                —
                
                
                —
                
                
                (2,568
                )Restricted
                    stock grant
                
                
                90
                
                
                —
                
                
                1,447
                
                
                —
                
                
                (1,447
                )
                
                —
                
                
                —Amortization
                    of unearned restricted stock compensation
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                45
                
                
                —
                
                
                45Dividend
                    to shareholders ($0.23 per share)
                
                
                —
                
                
                —
                
                
                —
                
                
                (4,630
                )
                
                —
                
                
                —
                
                
                (4,630
                )Other
                    comprehensive income, net of income taxes
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,806
                )
                
                (1,806
                )**Balances,
                    December 31, 2004**
                
                
                20,252
                
                
                202
                
                
                18,187
                
                
                30,869
                
                
                (1,402
                )
                
                1,645
                
                
                49,501Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                22,410
                
                
                —
                
                
                —
                
                
                22,410Stock
                    options exercised
                
                
                548
                
                
                5
                
                
                3,323
                
                
                —
                
                
                —
                
                
                —
                
                
                3,328Tax
                    benefit associated with exercise of stock options
                
                
                —
                
                
                —
                
                
                3,319
                
                
                —
                
                
                —
                
                
                —
                
                
                3,319Stock
                    redemptions
                
                
                (193
                )
                
                (1
                )
                
                (3,740
                )
                
                —
                
                
                —
                
                
                —
                
                
                (3,741
                )Restricted
                    stock grant
                
                
                50
                
                
                —
                
                
                1,286
                
                
                —
                
                
                (1,286
                )
                
                —
                
                
                —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
                
                $
                22,375
                
                $
                47,550
                
                $
                (2,233)
                
                $
                (1,396
                )
                $
                66,502
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
   F
            -7
 **AMBASSADORS
        GROUP,  INC.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **Years
                    Ended December 31,****2005**
                
                **2004**
                
                **2003****(in
                    thousands)****Cash
                    flows from operating activities:**Net
                    income
                
                $
                22,410
                
                $
                15,647
                
                $
                10,154Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                1,175
                
                
                962
                
                
                935Amortization
                    of unearned compensation
                
                
                455
                
                
                45
                
                
                —Deferred
                    income tax provision
                
                
                130
                
                
                894
                
                
                44Equity
                    in earnings on investment
                
                
                (11
                )
                
                —
                
                
                (33
                )Change
                    in assets and liabilities:Other
                    current assets
                
                
                57
                
                
                110
                
                
                (142
                )Prepaid
                    program costs and expenses
                
                
                865
                
                
                (853
                )
                
                (92
                )Accounts
                    payable, accrued expenses, and other liabilities
                
                
                3,856
                
                
                713
                
                
                4,070Participants’
                    deposits
                
                
                8,855
                
                
                10,388
                
                
                2,319Net
                    cash provided by operating activities
                
                
                37,792
                
                
                27,906
                
                
                17,255**Cash
                    flows from investing activities:**Net
                    purchase of available-for-sale securities
                
                
                (13,296
                )
                
                (20,919
                )
                
                (9,679
                )Purchase
                    of property and equipment
                
                
                (2,260
                )
                
                (1,907
                )
                
                (1,057
                )Purchase
                    of other investments
                
                
                (36
                )
                
                (4
                )
                
                (13
                )Net
                    cash used in investing activities
                
                
                (15,592
                )
                
                (22,830
                )
                
                (10,749
                )**Cash
                    flows from financing activities:**Dividend
                    payment to shareholders
                
                
                (5,729
                )
                
                (4,630
                )
                
                (1,100
                )Repurchase
                    of common stock
                
                
                (3,741
                )
                
                (2,568
                )
                
                —Proceeds
                    from exercise of stock options
                
                
                3,328
                
                
                1,515
                
                
                1,147Capital
                    lease payments
                
                
                (178
                )
                
                (142
                )
                
                (13
                )Net
                    cash provided by (used in) financing activities
                
                
                (6,320
                )
                
                (5,825
                )
                
                34Net
                    increase (decrease) in cash and cash equivalents
                
                
                15,880
                
                
                (749
                )
                
                6,540Cash
                    and cash equivalents, beginning of year
                
                
                11,036
                
                
                11,785
                
                
                5,245Cash
                    and cash equivalents, end of year
                
                $
                26,916
                
                $
                11,036
                
                $
                11,785
  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
            -8
  **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. All significant intercompany accounts and transactions are
        eliminated in consolidation.
 
 We
        have a
        single operating segment consisting of the educational travel and sports
        programs for students, athletes and professionals. These programs have similar
        economic characteristics, offer comparable products to delegates and utilize
        similar processes for program marketing.
 
 O n
        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,****2005**
              
              **2004**
              
              **2003**South
                  Pacific (primarily Australia and New Zealand)
              
              30
              %
              34
              %
              36
              %Europe
              
              46
              %
              48
              %
              50
              %Asia
                  (primarily China)
              
              11
              %
              4
              %
              2
              %United
                  States
              
              12
              %
              9
              %
              7
              %Other
              
              1
              %
              5
              %
              5
              %
  
 **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, certain 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, which 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.
  F
            -9
  **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.
  Our
        restricted cash equivalents of  $12,000 represent certificates of
        deposit issued in our name and held by an airline company as collateral for
        airfare purchase agreements. **** Additionally,
        we have a $2.5 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 September 2006, which must expire no later than
        November 2007. At December 31, 2005, 2004 and 2003, we had letters of
        credit outstanding of approximately $1.3 million, $1.2 million, and $1.3
        million, respectively, 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 other comprehensive income. The gains
        and
        losses on the derivative instruments that are reported in other comprehensive
        income are reclassified as earnings in the periods in which earnings are
        impacted by the variability of the cash flows of the hedged item. The
        ineffective portion of all hedges is recognized in the statements of operations
        as other income (expense). Unrealized gains and losses on foreign currency
        exchange contracts that are not qualifying cash flow hedges as defined by
        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, 2005 and 2004 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 income statement.  There were no investment securities that
        management identified to be other-than-temporarily impaired during the year
        ended December 31, 2005, 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.
 F
            -10
   **AMBASSADORS
        GROUP, INC**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
  During
        August 2003, we purchased a minority interest in a company. This company
        provides a one full day development activity for our delegates traveling
        in
        Europe and Australia. This investment is reported using the equity method.
        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.
  ***Property
        and Equipment***
  Property
        and equipment are stated at cost. Cost of maintenance and repairs that do
        not
        improve or extend the lives of the respective assets are expensed currently.
        Major additions and betterments are capitalized. Depreciation and amortization
        are provided over the lesser of the estimated useful lives of the respective
        assets or the lease term (excluding extensions), using the straight-line
        method,
        generally three to seven years.
 
 We
        perform reviews for the impairment of property and equipment whenever events
        or
        changes in circumstances indicate that the carrying amount of an asset may
        not
        be recoverable. When property and equipment are sold or retired, the related
        cost and accumulated depreciation are removed from the accounts and any gain
        or
        loss is recognized in the statement of operations.
  ***Goodwill***
  Goodwill
        totals approximately $70,000 at December 31, 2005 and 2004 and is included
        in
        other long term assets on the balance sheet. These assets are subject to
        estimates regarding future cash flows associated with prior business
        acquisitions. If expected cash flows do not occur as forecasted, an adjustment
        to the carrying value of goodwill would be charged to income in the period
        incurred.
  ***Revenue
        Recognition***
  For
        non-directly delivered programs, we do not actively manage the operations
        of
        each program, and our remaining performance obligation for these programs
        after
        they convene is perfunctory. Therefore, revenue from these programs is presented
        net of direct program costs, including accommodation and transportation,
        and
        recognized when the program convenes. For directly delivered programs, however,
        we organize and operate all activities including speakers, facilitators,
        events,
        accommodations and transportation. As such, we recognize the gross revenue
        and
        cost of sales of these directly delivered programs over the period the programs
        are operating. We recognize withdrawal fees concurrent with the revenue
        recognition from the related programs.
  We
        bill
        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.
 
 ***Selling
        and Tour Promotion Expenses***
  We
        expense all selling and tour promotion expenses as incurred.
 F
            -11
   **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 ***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***
  We
        adopted the disclosure-only provisions of the SFAS No. 123 and as amended
        by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
        Disclosure.” We have chosen to measure 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, 2004, or 2003 for unexercised options related to the stock option
        plan.
  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 2005, 2004 and 2003:
 **2005**
                    
                    **2004**
                    
                    **2003**Expected
                        dividend yield
                    
                    
                    1.36
                    %
                    
                    1.75
                    %
                    
                    1.81
                    %Expected
                        stock price volatility
                    
                    
                    37.07
                    %
                    
                    37.44
                    %
                    
                    38.87
                    %Risk-free
                        interest rate
                    
                    
                    4.19
                    %
                    
                    3.63
                    %
                    
                    5.27
                    %Expected
                        life of options
                    
                    
                    5.58
                    years
                    
                    6.27
                    years
                    
                    7.12
                    years
 
  The
        weighted-average fair value of options granted during 2005, 2004 and 2003
        was $
        $8.70,  $5.11 and $4.27 respectively.
  
  F
            -12
  **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 under the plan consistent with the method of SFAS No.
        123,
        net income and net income per share amounts for the years ended
        December 31, 2005, 2004 and 2003 would have been changed to the pro-forma
        amounts indicated below (in thousands except per share data):
 **2005**
                  
                  **2004**
                  
                  **2003**Net
                      income as reported
                  $
                  22,410
                  
                  $
                  15,647
                  
                  $
                  10,154Add:
                      Stock-based employee compensation expense for stock grants,
                      included in
                      reported net income, net of related tax effects
                  
                  306
                  
                  
                  —
                  
                  
                  —Deduct:
                      Stock-based employee compensation expense determined under
                      fair-value
                      based method for all awards, net of related tax effects
                  (872)
                  
                  (372)
                  
                  (474)Pro-forma
                      net income
                  $
                  21,844
                  
                  $
                  15,275
                  
                  $
                  9,680Pro-forma
                      net income per share - basic
                  $
                  1.08
                  
                  $
                  0.76
                  
                  $
                  0.49Pro-forma
                      net income per share - diluted
                  $
                  1.02
                  
                  $
                  0.73
                  
                  $
                  0.48
 ***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, derivative
        financial instruments, 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.
  ***Reclassifications***
  Certain
        prior-year amounts have been reclassified to conform with current year financial
        statement presentation.  Such reclassifications had no impact on previously
        reported net income or stockholders’ equity.
  ***New
        Accounting Pronouncements***
 
 In
        December 2004, the Financial Accounting Standards Board (''FASB'') issued
        Statement No. 123 (R), “Share-Based Payment” (“SFAS 123(R)”), which is a
        revision of SFAS No. 123, “Accounting for Stock -Based Compensation” and
        supersedes APB Opinion No. 25. In March 2005, the Securities and Exchange
        Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating
        to the adoption of SFAS 123(R). SFAS No. 123(R) requires all share-based
        payments to employees, including grants of employee stock options, to be
        valued
        at fair value on the date of grant, and to be expensed over the applicable
        vesting period. Pro-forma disclosure of share-based payments effect to the
        statement of operations is no longer an alternative, and SFAS No. 123(R)
        is
        effective for all stock-based awards granted on or after January 1, 2006.
        In
        addition, companies must also recognize compensation expense related to any
        awards that are not fully vested as of the effective date. Compensation expense
        for the unvested awards will be measured based on the fair value of the awards
        previously calculated in developing the pro-forma disclosures in accordance
        with
        the provisions of SFAS No. 123.
 
  F
            -13
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 We
        adopted SFAS 123(R) in the first quarter of fiscal 2006 and will continue
        to
        evaluate the impact of SFAS 123(R) on our operating results and financial
        condition. The pro-forma information above presents the estimated compensation
        charges under SFAS No. 123. As a result of the provisions of SFAS 123(R)
        and SAB
        107, we expect the compensation charges under SFAS 123(R) to reduce diluted
        net
        income per share by approximately $0.03 to $0.05 per share for fiscal 2006.
        However, our assessment of the estimated compensation charges is affected
        by our
        stock price as well as assumptions regarding a number of complex and subjective
        variables and the related tax impact. These variables include, but are not
        limited to, the volatility of our stock price and employee stock option exercise
        behaviors. We will recognize compensation cost for stock-based awards issued
        after January 1, 2006 on a straight line basis over the requisite service
        period
        for the entire award.
 
 **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 at the maturity of the contract. All of the derivatives are cash flow
        hedges of forecasted transactions.
 
 At
        December 31, 2005, the following forward contracts were outstanding (in
        thousands):
  **Notional**
                **Amount**
              
              **Matures**Forward
                  contracts:Australian
                  dollar
              
              15,500
              
              April
                  2006 - May 2007British
                  pound
              
              5,100
              
              January
                  2006 - June 2007Canadian
                  dollar
              
              800
              
              January
                  2006 - June 2006Euro
              
              18,850
              
              January
                  2006 - June 2007Japanese
                  yen
              
              304,000
              
              April
                  2006 - April 2007South
                  African rand
              
              2,100
              
              January
                  2006 - September 2006New
                  Zealand dollar
              
              5,450
              
              February
                  2006 - April 2007Forward
                  contracts with variable option:Australian
                  dollar
              
              12,710
              
              April
                  2006 - May 2006British
                  pound
              
              4,640
              
              May
                  2006Canadian
                  dollar
              
              374
              
              June
                  2006Euro
              
              12,510
              
              April
                  2006 - June 2006Japanese
                  yen
              
              56,100
              
              July
                  2006South
                  African rand
              
              642
              
              September
                  2006New
                  Zealand dollar
              
              2,210
              
              April
                  2006
  At
        December 31, 2005 and 2004, associated with these financial instruments, we
        recorded a net unrealized loss and gain of approximately $1.9 million and
        $2.6
        million, respectively. Unrealized losses on forward contracts recorded in
        other
        comprehensive loss and expected to be reclassified to net revenue during
        the
        year ending December 31, 2006 are approximately $1.3 million.
  F-14
 **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 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 other accumulated comprehensive
        income for the years ended December 31, 2005, 2004 and 2003 was
        approximately $1.7 million, $3.1 million and $(1.1) million, respectively.
        Income tax (provision) benefit on the unrealized gain reclassified in 2005,
        2004 and 2003 was approximately **** $(0.8)
        million, $(1.6) million and $0.6 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 income. During the years ended
        December 31, 2005, 2004, and 2003, there were no significant amounts
        recognized in income due to hedge ineffectiveness.
 
 **4.**
              **Available-for-Sale
                  Securities**
  At
        December 31, 2005, and December 31, 2004, the cost and estimated fair
        values of our available-for-sale securities in U.S. government and agency
        obligations were as follows (in thousands):
  **Cost**
              
              **Gross**
                **Unrealized**
                **Gain**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair
                  Value/**
                **Carrying**
                **Value**December 31,
                  2005
              
              $
              89,936
              
              $
              —
              
              $
              (248
              )
              $
              89,688December 31,
                  2004
              
              $
              76,640
              
              $
              —
              
              $
              (119
              )
              $
              76,521
  At
        December 31, 2005, the amortized cost and fair value of the
        available-for-sale securities, by contractual maturity were as follows (in
        thousands):
  **Amortized**
                **Cost**
              
              **Fair**
                **Value**Auction
                  rate securities
              
              $
              30,192
              
              $
              30,192One
                  year or less
              
              
              22,732
              
              
              22,714After
                  one year through two years
              
              
              37,012
              
              
              36,782$
              89,936
              
              $
              89,688
  At
        December 31, 2004, the amortized cost and fair value of the
        available-for-sale securities, by contractual maturity were as follows (in
        thousands):
  **Amortized**
                **Cost**
              
              **Fair**
                **Value**Auction
                  rate securities
              
              $
              23,701
              
              $
              23,701One
                  year or less
              
              
              12,295
              
              
              12,295After
                  one year through two years
              
              40,644
              
              40,525$
              76,640
              
              $
              76,521
  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
            -15
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
  **5.**
              **Property
                  and Equipment**
  Property
        and equipment consists of the following (in thousands):
  **December 31,****2005**
              
              **2004**Office
                  furniture, fixtures and equipment
              
              $
              3,810
              
              $
              3,591Computer
                  equipment and software
              
              6,680
              
              4,573Leasehold
                  improvements
              
              1,058
              
              98011,548
              
              9,144Less
                  accumulated depreciation and amortization
              
              (6,408
              )
              (5,233)$
              5,140
              
              $
              3,911
 
 Depreciation
        and amortization expense on property and equipment of approximately $1.2
        million, $1.0 million and $0.9 million, for the years ended December 31,
        2005, 2004 and 2003, respectively, was included in the determination of net
        income. During 2005, no property and equipment was written off while in 2004,
        approximately $1.9 million in fully depreciated property 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. It is currently unclear as to whether the refund
        is
        permanent and accordingly, we have recorded this refund as a liability on
        the
        balance sheet. On a quarterly basis, we adjust the liability for interest
        and
        any gain or loss on the currency exchange. During 2005 and 2004, $1.1 million
        and $0.4 million, respectively, was recognized into income as the uncertainty
        of
        potential repayment of this liability was eliminated. At December 31, 2005
        and 2004, the remaining refund of $2.6 million and $3.8 million was included
        in
        other liabilities.
  **7.**
              **Income
                  Taxes**
  The
        provision for income taxes consisted of the following (in
        thousands):
  **Years
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**Current:
                
                1Federal
                
                $
                10,762
                
                $
                7,147
                
                $
                5,176State
                
                36
                
                18
                
                11Deferred
                
                130
                
                894
                
                44$
                10,928
                
                $
                8,059
                
                $
                5,231
  F
              -16
 **AMBASSADORS
          GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  Components
        of the net deferred tax assets and liabilities are as follows (in
        thousands):
 **December 31,
                    2005****Assets**
                
                **Liabilities**
                
                **Total**Amortization
                    of goodwill and non-compete agreement
                
                $
                1,326
                
                $
                —
                
                $
                1,326Accrued
                    vacation and compensation
                
                
                143
                
                
                —
                
                
                143Unrealized
                    loss on foreign currency exchange contracts
                
                
                663
                
                
                —
                
                
                663Unrealized
                    loss on available-for-sale securities
                
                
                82
                
                
                —
                
                
                82Depreciation
                
                
                —
                
                
                (917
                )
                
                (917
                )Restricted
                    stock grants
                
                
                175
                
                
                —
                
                
                175Total
                    temporary differences
                
                $
                2,389
                
                $
                (917
                )
                $
                1,472
  **December 31,
                  2004****Assets**
              
              **Liabilities**
              
              **Total**Amortization
                  of goodwill and non-compete agreement
              
              $
              1,490
              
              $
              —
              
              $
              1,490Accrued
                  vacation and compensation
              
              122
              
              —
              
              122Unrealized
                  gain on foreign currency exchange contracts
              
              —
              
              (887)
              
              (887)Unrealized
                  loss on available-for-sale securities
              
              42
              
              —
              
              42Depreciation
              
              —
              
              (755)
              
              (755)Total
                  temporary differences
              
              $
              1,654
              
              $
              (1,642)
              
              $
              12
 
 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,**2005**
                    **Amount**
                  
                  
                  **%**
                  
                  **2004**
                    **Amount**
                  
                  **%**
                  
                  **2003**
                    **Amount**
                  
                  **%**Provision
                      at the federal statutory rate
                  
                  $
                  11,668
                  
                  
                  35.0
                  %
                  $
                  8,297
                  
                  
                  35.0
                  %
                  $
                  5,385
                  
                  
                  35.0
                  %Tax
                      exempt interest
                  
                  
                  (877
                  )
                  
                  (2.6
                  )
                  
                  (350
                  )
                  
                  (1.5
                  )
                  
                  (235
                  )
                  
                  (1.5
                  )State
                      income tax, net of federal benefit
                  
                  
                  23
                  
                  
                  0.1
                  
                  
                  12
                  
                  
                  0.1
                  
                  
                  7
                  
                  
                  —Other
                  
                  
                  114
                  
                  
                  0.3
                  
                  
                  100
                  
                  
                  0.4
                  
                  
                  74
                  
                  
                  0.5$
                  10,928
                  
                  
                  32.8
                  %
                  $
                  8,059
                  
                  
                  34.0
                  %
                  $
                  5,231
                  
                  
                  34.0
                  %
 F
              -17
 **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **8.**
              **Capital
                  Lease**
  We
        lease
        certain office equipment under a capital lease arrangement. The total cost
        and
        accumulated depreciation of equipment under capital leases are approximately
        $899,000 and $756,000 and $350,000 and $164,000, respectively, at
        December 31, 2005 and 2004.  The following is a schedule of
        minimum lease payments required under the capital lease as of December 31,
        2005 (in thousands):
  **Year
                    Ended December 31,**2006
                
                $
                2112007
                
                
                2112008
                
                
                1842009
                
                
                12618Less
                    amount representing interest
                
                
                51567Less
                    current portion
                
                
                180$
                387
   At
        the
        end of the lease term, we have the option to purchase the equipment at fair
        market value.
  **9.**
              **Commitments
                  and Contingencies**
  We
        lease
        office facilities and office equipment under non-cancelable operating leases.
        At
        December 31, 2005, future minimum lease commitments were as follows (in
        thousands):
 **Year
                        Ended December 31,**2006
                    
                    $
                    7412007
                    
                    
                    7422008
                    
                    
                    7072009
                    
                    
                    522$
                    2,712
  Total
        rent expense for the years ended December 31, 2005, 2004 and 2003, was
        approximately $0.7 million, $0.8 million and $0.7 million,
        respectively.
  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.
   F
            -18
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 **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 0.9 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, 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 2005 and 2004, we granted approximately 50,100 and 44,600 stock grants
        to
        key employees, and these grants are expensed on a straight line basis over
        the
        life of the grant, through 2009 and 2008, respectively. Most of these stock
        grants are outstanding and none of them are vested as of December 31, 2005
        and
        2004.
  F
            -19
  **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, 2005:
  **Weighted-Average****Number**
                **of
                  Shares**
              
              **Range
                  of**
                **Exercise
                  Price**
              
              **Exercise**
                **Price**
              
              **Remaining**
                **Life
                  (years)**Exercisable
                  options
              
              457,360
              
              $
              3.11
              -
              4.96
              
              $
              3.97
              
              3.3Exercisable
                  options
              
              531,271
              
              5.96
              -
              8.04
              
              6.14
              
              6.1Exercisable
                  options
              
              82,863
              
              8.04
              -
              10.72
              
              9.52
              
              7.3Exercisable
                  options
              
              18,925
              
              10.72
              -
              13.40
              
              11.72
              
              8.1Exercisable
                  options
              
              33,807
              
              16.08
              -
              18.76
              
              16.74
              
              8.9Total
                  exercisable options
              
              1,124,226
              
              3.11
              -
              18.76
              
              5.92Unexercisable
                  stock grants
              
              138,953
              $
              -
              -
              -
              
              -
              
              3.1Unexercisable
                  options
              
              227,325
              
              5.96
              -
              8.04
              
              6.12
              
              6.1Unexercisable
                  options
              
              72,222
              
              8.04
              -
              10.72
              
              9.62
              
              7.3Unexercisable
                  options
              
              74,400
              
              10.72
              -
              13.40
              
              11.66
              
              8.1Unexercisable
                  options
              
              20,716
              
              13.40
              -
              16.08
              
              15.99
              
              9.4Unexercisable
                  options
              
              112,923
              
              16.08
              -
              18.76
              
              16.73
              
              8.9Unexercisable
                  options
              
              74,000
              
              18.76
              -
              21.44
              
              21.09
              
              9.6Unexercisable
                  options
              
              114,146
              
              24.12
              -
              26.80
              
              26.80
              
              9.9Total
                  unexercisable stock grants and options
              
              834,685
              $
              -
              -
              26.80
              
              11.73Total
              
              1,958,911
              
              $
              -
              -
              26.80
              
              $
              8.40
              
              6.5
  At
        December 31, 2004, there were 1,258,540 exercisable stock options at the
        weighted average exercise price of $4.77 per share.
   F
            -20
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 Stock
        option and restricted stock grant transactions during 2003, 2004 and 2005
        were
        as follows:
  **Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise
                  Price****Balance
                  at December 31, 2002**
              
              
              2,383,340
              
              $
              5.14Granted
              
              
              254,446
              
              
              8.37Forfeited
              
              
              (68,986
              )
              
              5.65Exercised
              
              
              (272,166
              )
              
              4.16**Balance
                  at December 31, 2003**
              
              
              2,296,634
              
              $
              5.60Granted
              
              
              362,114
              
              
              10.80Forfeited
              
              
              (39,216
              )
              
              7.74Exercised
              
              
              (330,086
              )
              
              4.20**Balance
                  at December 31, 2004**
              
              
              2,289,446
              
              $
              6.59Granted
              
              
              252,945
              
              
              19.01Forfeited
              
              
              (35,080
              )
              
              9.00Exercised
              
              
              (548,400
              )
              
              6.03**Balance
                  December 31, 2005**
              
              
              1,958,911
              
              $
              8.40
 
 **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, 2005,
        2004 and 2003, we contributed approximately $95,000, $33,000 and $31,000,
        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.
   F
            -21
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 
 *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 *.*
  The
        estimated fair values of the financial instruments as of the dates indicated
        are
        as follows (in thousands):
 **December 31,
                    2005**
                
                **December 31,
                    2004****Carrying**
                  **Amount**
                
                **Fair**
                  **Value**
                
                **Carrying**
                  **Amount**
                
                **Fair**
                  **Value**Cash
                    and cash equivalents
                
                $
                26,916
                
                $
                26,916
                
                $
                11,036
                
                $
                11,036Derivatives
                
                $
                (1,896
                )
                $
                (1,896
                )
                $
                2,609
                
                $
                2,609Available-for-sale
                    securities
                
                $
                89,688
                
                $
                89,688
                
                $
                76,521
                
                $
                76,521
  *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.
   F
            -22
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 
 **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,****2005**
                
                **2004**
                
                **2003**Numerator:Net
                    income for basic and diluted earnings per share
                
                $
                22,410
                
                $
                15,647
                
                $
                10,154Denominator:Weighted-average
                    shares outstanding - basic
                
                
                20,311
                
                
                20,090
                
                
                19,846Effect
                    of dilutive common stock options
                
                
                968
                
                
                798
                
                
                494Effect
                    of dilutive common stock grants
                
                
                33
                
                
                10
                
                
                —Weighted-average
                    shares outstanding - diluted
                
                
                21,312
                
                
                20,898
                
                
                20,340Earnings
                    per share - basic and diluted:Net
                    income per share - basic
                
                $
                1.10
                
                $
                0.78
                
                $
                0.51Net
                    income per share - diluted
                
                $
                1.05
                
                $
                0.75
                
                $
                0.50
   **14****.**
              **Supplemental
                  Disclosures of Consolidated Statements of Cash
                  Flows**
  We
        paid
        cash for taxes during 2005, 2004, and 2003 of approximately **** $8.5
        million, $7.4 million, and $4.5 million respectively.
  Our
        non-cash investing and financing activities during the years ended
        December 31, 2005, 2004, and 2003, are as follows (in thousands):
  **2005**
              
              **2004**
              
              **2003**Unrealized
                  gain (loss) on foreign currency exchange contracts
              
              $
              (4,505
              )
              $
              (2,600
              )
              $
              3,567Unrealized 
                  loss on available-for-sale securities
              
              
              (129
              )
              
              (138
              )
              
              (93
              )Tax
                  benefit from stock options exercised
              
              
              3,319
              
              
              489
              
              
              452Capital
                  lease obligation
              
              
              144
              
              
              —
              
              
              756
  
  F
            -23
  **AMBASSADORS
        GROUP, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
  **15.**
              **Quarterly
                  Financial Data**
  Summarized
        quarterly financial data for 2005, 2004, and 2003 is as follows (unaudited,
        and
        in thousands except per share data):
  **Quarters
                  Ended****March 31**
              
              **June 30**
              
              **September 30**
              
              **December 31****2005**Net
                  revenues
              
              $
              2,179
              
              $
              29,693
              
              $
              30,447
              
              $
              4,130Selling
                  and tour promotion expense
              
              5,512
              
              5,918
              
              7,991
              
              8,153General
                  and administrative expense
              
              1,137
              
              1,654
              
              1,754
              
              3,640Income
                  (loss) before income taxes
              
              (3,995
              )
              22,891
              
              21,467
              
              (7,025
              )Net
                  income (loss)
              
              (2,637
              )
              15,249
              
              14,612
              
              (4,814
              )Earnings
                  (loss) per share-basic
              
              (0.13
              )
              0.76
              
              0.72
              
              (0.24
              )Earnings
                  (loss) per share-diluted
              
              (0.13
              )
              0.72
              
              0.68
              
              (0.24
              )
  Gross
        program receipts reflect total payments received by us. Gross program receipts
        totaled $6.0 million, $81.5 million, $82.2 million and $10.3 million for
        the
        quarters ended March 31, June 30, September 30, and
        December 31, 2005, respectively.
 
  **Quarters
                  Ended****March 31**
              
              **June 30**
              
              **September 30**
              
              **December 31****2004**Net
                  revenues
              
              $
              1,260
              
              $
              25,854
              
              $
              21,391
              
              $
              3,319Selling
                  and tour promotion expense
              
              3,785
              
              5,031
              
              6,926
              
              6,874General
                  and administrative expense
              
              1,072
              
              1,248
              
              1,204
              
              3,013Income
                  (loss) before income taxes
              
              (3,395
              )
              19,877
              
              13,511
              
              (6,287
              )Net
                  income (loss)
              
              (2,241
              )
              13,119
              
              8,918
              
              (4,149
              )Earnings
                  (loss) per share-basic
              
              (0.11
              )
              0.66
              
              0.45
              
              (0.21
              )Earnings
                  (loss) per share-diluted
              
              (0.11
              )
              0.63
              
              0.43
              
              (0.21
              )
  Gross
        program receipts totaled $4.1 million, $72.8 million, $61.2 million and $9.0
        million for the quarters ended March 31, June 30, September 30,
        and December 31, 2004, respectively.
  **Quarters
                  Ended****March 31**
              
              **June 30**
              
              **September 30**
              
              **December 31****2003**Net
                  revenues
              
              $
              1,037
              
              $
              18,184
              
              $
              16,231
              
              $
              2,213Selling
                  and tour promotion expense
              
              2,976
              
              3,659
              
              6,377
              
              5,522General
                  and administrative expense
              
              883
              
              1,127
              
              726
              
              1,830Income
                  (loss) before income taxes
              
              (2,600
              )
              13,665
              
              9,304
              
              (4,984
              )Net
                  income (loss)
              
              (1,716
              )
              9,019
              
              6,141
              
              (3,290
              )Earnings
                  (loss) per share-basic
              
              (0.09
              )
              0.46
              
              0.31
              
              (0.17
              )Earnings
                  (loss) per share-diluted
              
              (0.09
              )
              0.45
              
              0.30
              
              (0.17
              )
  Gross
        program receipts totaled $2.6 million, $53.7 million, $46.8 million and $5.5
        million for the quarters ended March 31, June 30, September 30,
        and December 31, 2003, 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:
        March 9, 2006
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
   **Signature**
              
              **Title**
              
              **Date**/s/
                  JEFFREY D. THOMAS
              
              
              President,
                  Chief Executive
                Officer
                  and Director
                (Principal
                  Executive Officer)
              
              March 9,
                  2006Jeffrey
                  D. Thomas/s/
                  JOHN A. UEBERROTH
              
              
              Chairman
                  of the Board of Directors
              
              March 9,
                  2006John
                  A. Ueberroth/s/
                  MARGARET M. THOMAS
              
              
              Executive
                  Vice-President
              
              March 9,
                  2006Margaret
                  M. Thomas/s/
                  CHADWICK J. BYRD
              
              
              Chief
                  Financial Officer and Secretary
              
              March 9,
                  2006Chadwick
                  J. Byrd/s/
                  BRIGITTE M. BREN
              
              
              Director
              
              March 9,
                  2006Brigitte
                  M. Bren/s/
                  JAMES L. EASTON
              
              
              Director
              
              March 9,
                  2006James
                  L. Easton/s/
                  DALE F. FREY
              
              
              Director
              
              March 9,
                  2006Dale
                  F. Frey/s/
                  RAFER L. JOHNSON
              
              
              Director
              
              March 9,
                  2006Rafer
                  L. Johnson/s/
                  DANIEL G. BYRNE
              
              
              Director
              
              March 9,
                  2006Daniel
                  G. Byrne
 
 /s/
                    JOSEPH J. UEBERROTH
                
                
                Director
                
                March 9,
                    2006Joseph
                    J. Ueberroth/s/
                    RICHARD D. C. WHILDEN
                
                
                Director
                
                March 9,
                    2006Richard
                    D. C. Whilden
 
  **INDEX
        TO EXHIBITS**
  **Exhibit**
                **Number**
              
              **Description**3.1
              
              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 Registration Statement on Form 10 filed on February
                  5, 2002.10.1
              
              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, 2005.21.1
              
              List
                  of subsidiaries of the registrant as of December 31,
                  2005.*23.1
              
              Consent
                  of BDO Seidman, LLP, Independent Registered Public Accounting
                  Firm.*23.2
              
              Consent
                  of PricewaterhouseCoopers, 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
   
 **EXHIBIT
        21.1**
 
  SUBSIDIARIES
        OF THE COMPANY
  
 The
        following is a list of our subsidiaries as of December 31, 2005:
 
 1.
              Ambassadors
                  Specialty Group, Inc.
 2.
              Ambassador
                  Programs, Inc.
 3.
              Ambassadors
                  Unlimited, LLC.
 
   
   **EXHIBIT
        23.1**
 
  CONSENT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 We
        hereby
        consent to the incorporation by reference in the Registration Statements
        on
        Forms S-8 (No. 333-83572) of Ambassadors Group, Inc. of our report dated
        February 28, 2006, relating to the consolidated financial statements and
        the
        effectiveness of Ambassadors Group Inc.’s internal control over financial
        reporting, which appears in this Form 10-K.
 
 
 
 BDO
        Seidman, LLP
 Spokane,
        Washington
 March
        8,
        2006
  
  
  **EXHIBIT
        23.2**
 
  CONSENT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 
 We
        hereby
        consent to the incorporation by reference in the Registration Statements
        on
        Forms S-8 (No. 333-83572)  of Ambassadors Group, Inc. of our report dated
        March 11, 2005 relating to the financial statements, which appears in this
        Form
        10-K.
 
 
 PricewaterhouseCoopers
        LLP
 Portland,
        Oregon
 March
        9,
        2006
   
   **EXHIBIT
        31.1**
 
 **CERTIFICATION**
 
 I,
        Jeffrey D. Thomas, certify that:
 
 1.    I
        have reviewed this annual report on Form 10-K of Ambassadors Group, Inc.;
 
 2.    Based
        on my knowledge, this annual report does not contain any untrue statement
        of a
        material fact or omit to state a material fact necessary to make the statements
        made, in light of the circumstances under which such statements were made,
        not
        misleading with respect to the period covered by this annual report;
 
 3.    Based
        on my knowledge, the financial statements, and other financial information
        included in this annual report, fairly present in all material respects the
        financial condition, results of operations and cash flows of the registrant
        as
        of, and for, the periods presented in this annual report;
 
 4.    The
        registrant’s other certifying officers and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
        (as
        defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
        and
        have:
 
 a)
              designed
                  such disclosure controls and procedures, or caused such disclosure
                  controls and procedures to be designed under our supervision, to
                  ensure
                  that material information relating to the registrant, including
                  its
                  consolidated subsidiaries, is made known to us by others within
                  those
                  entities, particularly during the period in which this annual report
                  is
                  being prepared;
 
 b)
              designed
                  such internal control over financial reporting, or caused such
                  internal
                  control over financial reporting to be designed under our supervision,
                  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;
 
 c)
              evaluated
                  the effectiveness of the registrant’s disclosure controls and procedures,
                  and presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures, as of
                  the end of
                  the period covered by this report based on such evaluation; and
 
 d)
              disclosed
                  in this report any change in the registrant’s internal control over
                  financial reporting that occurred during the registrant’s fourth fiscal
                  quarter that has materially affected, or is reasonably likely to
                  materially affect, the registrant’s internal control over financial
                  reporting; and
 
 5.    The
        registrant’s other certifying officers and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
 
 a)
              all
                  significant deficiencies and material weaknesses in the design
                  or
                  operation of internal control over financial reporting which are
                  reasonably likely to adversely affect the registrant’s ability to record,
                  process, summarize and report financial information; and
 
 b)
              any
                  fraud, whether or not material, that involves management or other
                  employees who have a significant role in the registrant’s internal
                  controls over financial reporting.
 
 Date:
        March 9, 2006
 
 By:
                  /s/ Jeffrey D. ThomasName:
                  Jeffrey D. ThomasTitle:
                  Chief Executive Officer
 
 
  
   **EXHIBIT
        31.2**
 
 **CERTIFICATION**
 
 I,
        Chadwick J. Byrd, certify that:
 
 1.    I
        have reviewed this annual report on Form 10-K of Ambassadors Group, Inc.;
 
 2.    Based
        on my knowledge, this annual report does not contain any untrue statement
        of a
        material fact or omit to state a material fact necessary to make the statements
        made, in light of the circumstances under which such statements were made,
        not
        misleading with respect to the period covered by this annual report;
 
 3.    Based
        on my knowledge, the financial statements, and other financial information
        included in this annual report, fairly present in all material respects the
        financial condition, results of operations and cash flows of the registrant
        as
        of, and for, the periods presented in this annual report;
 
 4.    The
        registrant’s other certifying officers and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
        (as
        defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
        and
        have:
 
 a)
              designed
                  such disclosure controls and procedures, or caused such disclosure
                  controls and procedures to be designed under our supervision, to
                  ensure
                  that material information relating to the registrant, including
                  its
                  consolidated subsidiaries, is made known to us by others within
                  those
                  entities, particularly during the period in which this annual report
                  is
                  being prepared;
 
 b)
              designed
                  such internal control over financial reporting, or caused such
                  internal
                  control over financial reporting to be designed under our supervision,
                  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;
 
 c)
              evaluated
                  the effectiveness of the registrant’s disclosure controls and procedures,
                  and presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures, as of
                  the end of
                  the period covered by this report based on such evaluation; and
 
 d)
              disclosed
                  in this report any change in the registrant’s internal control over
                  financial reporting that occurred during the registrant’s fourth fiscal
                  quarter that has materially affected, or is reasonably likely to
                  materially affect, the registrant’s internal control over financial
                  reporting; and
 
 5.    The
        registrant’s other certifying officers and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
 
 a)
              all
                  significant deficiencies and material weaknesses in the design
                  or
                  operation of internal control over financial reporting which are
                  reasonably likely to adversely affect the registrant’s ability to record,
                  process, summarize and report financial information; and
 
 b)
              any
                  fraud, whether or not material, that involves management or other
                  employees who have a significant role in the registrant’s internal
                  controls over financial reporting.
 
 Date:
        March 9, 2006
 
 By:
        /s/
        Chadwick J. Byrd
 Name:
        Chadwick J. Byrd
 Title:
        Chief Financial Officer
 
 
  
   **EXHIBIT
        32.1**
 
 **CERTIFICATION
        PURSUANT TO**
 **18
        U.S.C. SECTION 1350,**
 **AS
        ADOPTED PURSUANT TO**
 **SECTION
        906 OF THE SARBANES-OXLEY ACT OF 2002**
 
 In
        connection with the annual report of Ambassadors Group, Inc., (the “Company”) on
        Form 10-K for the period ending December 31, 2005, as filed with the Securities
        and Exchange Commission on the date hereof (the “Report”), the undersigned,
        Jeffrey D. Thomas, chief executive officer of the Company; and Chadwick J.
        Byrd,
        chief financial officer of the Company, certify, pursuant to 18 U.S.C. §1350, as
        adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to their
        knowledge:
 
 (1)
        The
        Report fully complies with the requirements of section 13(a) or 15(d) of
        the
        Securities Exchange Act of 1934; and
 
 (2)
        The
        information contained in the Report fairly presents, in all material respects,
        the financial condition and results of operations of the Company.
  
 */s/ 
                  Jeffrey D. Thomas**Jeffrey
                  D. Thomas**Chief
                  Executive Officer**/s/ 
                  Chadwick J. Byrd**Chadwick
                  J. Byrd**Chief
                  Financial Officer*