**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, 2006****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:**Common
                Stock, $.01 Par Value**
            
            **The
                Nasdaq Stock Market**(Title
                of Class)
            
            (Name
                of each exchange on which registered)Securities
                registered pursuant to Section 12(g) of the Act:**None**




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


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).




o
            
            Yesý
            
            No





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant, based upon the closing sales price of the Common Stock on The Nasdaq
      Stock Market on June 30, 2006, was $269,091,710. 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 March 6,
      2007 was 19,374,841.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s definitive Proxy Statement relating to the 2007 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
            17Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            21Item
                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
            30Item
                9A.
            Controls
                and Procedures
            31Item
                9B.
            Other
                Information
            33**PART
                III**Item
                10.
            Directors,
                Executive Officers andCorporate Governance
            33Item
                11.
            Executive
                Compensation
            33Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters
            33Item
                13.
            Certain
                Relationships and Related Transactions,
                and Director Independence
            33Item
                14.
            Principal
                Accountant Fees and Services
            33**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            34Signatures
            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”, “we”, “us” or “our”) is
      a
      leading educational travel company that organizes and promotes international
      and
      domestic programs for students, athletes and professionals. We were founded
      in
      1967, 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 Stock Market began on March 1,
      2002 under the symbol “EPAX.”




Our
      business consists of several specialized private-label educational travel
      programs, including (i) the “People to People Student Ambassador Programs”
(“Student Ambassador Programs”), which provide opportunities for grade school,
      middle school and high school students to visit domestic and foreign
      destinations to learn about the history, government, economy and culture of
      such
      countries, (ii) the “People to People Sports Ambassador Programs” (“Sports
      Ambassador Programs”), which provide opportunities for middle school and high
      school athletes to participate in international sports challenges, (iii) the
      “People to People Leadership Summit,” “People to People Future Leaders Summit,”
and “World Leadership Forum” (“Student Leader Programs”), which provide domestic
      travel experiences for grade school 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.




-1-


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 than 344,000
      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 2006, 43,075
      delegates traveled on our programs to more than 40 countries on seven
      continents, including students from 70 different countries.





We
      have
      the exclusive right from People to People International (“People to People”) to
      develop and conduct student programs for kindergarten through high school
      students using the People to People name. We also have the non-exclusive right
      to develop, market and operate programs for professionals, college students
      and
      athletes using the People to People name. However, at the present time, we
      are
      the only entity that has been given this right by People to People. These
      rights, granted pursuant to agreements with People to People, expire in 2010
      and, at our election, may be extended through 2020. People to People is a
      private, non-profit organization
      dedicated to the promotion of world peace through cultural
      exchange.





People
      to
      People was founded by President Dwight D. Eisenhower in 1956 and was originally
      administered by the U.S. State Department. Eight U.S. Presidents since
      President Eisenhower have served as 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 40 years of continuous experience, relationships arising
      from organizing travel programs, and our association with People to People
      have
      provided the foundation for our Company. This foundation allows us to develop
      and maintain strong strategic alliances and a competitive edge in the
      educational and travel industries at a competitive program cost. This foundation
      also allows us to provide high quality and unique educational programs and
      customer service. We intend to continue to grow our business internally through
      marketing enhancements, new programs and strategic alliances, and may make
      selective acquisitions of and or joint agreements with travel, education, and
      direct marketing related businesses.




Our
      principal offices are located in Spokane, Washington USA.




**Student
      Ambassador Programs**




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




Our
      Student Ambassador Program delegations depart primarily during the summer
      months, June through August, and generally travel for approximately 14 to
      23 days, during which time each delegation visits one or more countries.
      Each delegation generally consists of approximately 30 to 40 students and is
      accompanied by several teachers and local delegation leaders/guides in each
      country who assist the delegations for the duration of each program. Teachers
      and students comprising a delegation generally come from the same
      locale.




Programs
      are designed by our staff of international planners and researchers to provide
      an educational and entertaining travel experience by exposing students to the
      history, government, economy and culture of the country or countries visited.
      We
      have contracts with program coordinators to provide day-to-day coordination
      and
      oversight of the programs. In many instances, we also provide students with
      the
      opportunity for a home stay (a brief stay with a host family), which gives
      students a glimpse of daily life in the visited country.




-2-


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





**Sports
      Ambassador Programs**




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




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




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





**Student
      Leader Programs**





Our
      Student Leader Programs provide the opportunity for motivated students with
      academic promise, leadership potential and a desire to serve their communities
      to travel domestically and internationally to exchange ideas with renowned
      speakers, field specific experts, professional educators and their peers. 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 Student Leader Programs through a direct mail marketing effort throughout
      the year, and they travel throughout the year for approximately seven to ten
      days. They include group discussions, workshops, educational meetings and other
      social and recreational activities. Programs originate from our internal
      marketing and research staff, who identify academic topics, speakers and
      facilitators. During 2005 we
      began
      to organize and operate all activities of most of our Student
      Leader Programs,
      including speakers, facilitators, events, accommodations and transportation.
      Previously, these activities were provided by outside vendors.





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


professional
      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 us based upon his or her recognition in the field
      and expertise regarding the special focus of the particular
      program.




**Academic
      Accreditation**




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





Our
      delegates are also able to earn academic credit through Eastern Washington
      University’s Eisenhower Center (“EWU”). Student Ambassadors in grades nine
      through 12 may enroll in EWU courses and earn up to 12 credits. In addition,
      Student Ambassadors in grades seven and eight are eligible to earn one credit
      per course. Between 1980 and 2006, Student Ambassadors transferred more than
      41,300 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.





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.





-4-


**Service
      Marks**




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




**Insurance**




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




**Employees**




On
      December 31, 2006, we employed 273 employees, of which 249 were full-time
      employees. Of our full-time employees, 240 are located in Spokane, Washington
      and six are located in Washington, DC. We have 204 full-time employees engaged
      in selling and marketing and 45 full-time employees in general and
      administrative positions. We also employ a temporary workforce on a seasonal
      basis to assist with our direct marketing efforts in recognition of the fact
      that our travel programs are seasonal in nature. None of our employees are
      subject to collective bargaining agreements or are represented by a union.
      We
      believe that our labor relations are good.





**Competition**





The
      travel industry and the educational segment within the travel industry are
      highly competitive. Our Student Ambassador Programs, Sport Ambassador Programs,
      and Student Leader Programs compete with similar educational travel programs
      operated by other individuals and organizations, as well as independent programs
      organized and sponsored by local teachers with the assistance of local travel
      agents. Our Sports Ambassador Programs also compete with independent
      organizations, which coordinate and travel already intact teams for
      international competition. 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
      40 years of experience organizing student and professional educational
      programs and established relationships with public officials, organizations
      and
      residents in countries where we provide programs, as well as our agreements
      with
      People to People, allow us to provide an educational opportunity that is not
      easily duplicated by competitors’ programs.




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





-5-








**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, or on the same day as, such material is
      electronically filed with or furnished to the SEC. We make these available
      free
      of charge.
















-6-


**BUSINESS
      STRATEGY**




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




**Expand
      the Marketing and Travel Volume**




U.S.
      Census data projects that there will be more than 41.1 million people in
      the 10 to 19 year-old age range by 2010. We believe that a large number of
      qualified students in this age group are not aware of our youth travel programs.
      In light of these factors, we intend to improve our marketing techniques by
      targeting additional age groups, making greater use of referrals from teachers,
      parents and past student travelers, and expanding and refining our extensive
      databases of potential delegates.





According
      to U.S. Census data, the number of Americans 45 to 74 years old is expected
      to grow substantially, increasing to more than 102.3 million people in
      2010, from 80.8 million people in 2000. This trend is expected to benefit
      us, since this population segment historically has been the most likely to
      participate in one of our professional travel programs. In addition, we believe
      that American adults interested in traveling abroad will increasingly seek
      convenient and unique experiences. Consequently, we believe that the opportunity
      exists to expand the professional educational travel programs by continuing
      to
      improve the quality and number of specialty professional programs, including
      professional education credit opportunities and by exploring new country
      destinations. We continue to look for alliances with partners that have strong
      brand recognition and access to well defined customer segments.





**Introduce
      New Programs**




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




**Pursue
      Acquisition Opportunities**




We
      consider the travel and youth education industries encompassed by our business
      to be large and fragmented, which present attractive acquisition opportunities.
      We believe that these industries’ large size and fragmentation provides an
      opportunity for acquisitions of businesses that are either compatible with
      our
      current business or represent a developing specialty segment.





-7-


**Item 1A.** **** ***RiskFactors***





*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 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.





-8-


***Seasonality;
      Fluctuations in Quarterly Results***





Our
      business is highly seasonal. The majority of our travel programs are scheduled
      in June and July of each year, and we anticipate that this trend will continue
      for the foreseeable future. We recognize gross program receipts, revenues and
      program pass-through expenses upon the departure of our program delegates for
      the majority of our programs. Substantially all of our operating income is
      generated in the second and third quarters, which historically has offset the
      operating losses incurred during the rest of the year. Annual results would
      be
      adversely affected if our revenues were to be substantially below seasonal
      norms
      during the second and third quarters of the year. Furthermore, our operating
      results may fluctuate as a result of many factors, including the mix of student,
      sports, student leader and professional programs and program destinations
      offered by us and our competitors, the introduction and acceptance of new
      programs and program enhancements by us and our competitors, timing of program
      completions, cancellation rates, competitive conditions in the industry,
      marketing expenses, extreme weather conditions, international or domestic
      conflicts, timing of and costs related to acquisitions, changes in relationships
      with certain travel providers, economic factors and other considerations
      affecting travel. As a result of the foregoing, annual or quarterly operating
      results may be below the expectations of public market analysts and investors.
      In such event, the price of our Common Stock could be materially and adversely
      affected.





***Competition***





The
      travel industry in general and the educational segment of the travel industry
      is
      highly competitive and has relatively low barriers to entry. We compete with
      other companies that provide similar educational travel programs for students
      and athletes, as well as independent programs organized and sponsored by local
      teachers and coaches with the assistance of local travel agents. People to
      People, under the terms of its agreement with us, reserves the right to offer
      programs to college students for studies abroad and to grant other entities
      which we compete with, the right to use the People to People name in connection
      with People to People’s professional education and sports programs. In general,
      our 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. Our agreements with
      People to People expire in 2010 and, at our election, may be further extended
      through 2020. We believe that we derive benefit from our ability to market
      our
      programs using the People to People name. If our agreements with People to
      People were terminated or if we were unable to use the People to People name
      to
      market new programs or destinations, we could have a material adverse affect
      on
      our business, financial condition, cash flows and results of operations.
      Similarly, if our relationship with People to People is disrupted or is
      adversely impacted because People to People experiences interruption, delay
      or
      ceases operations in the future for any reason, our business could be harmed
      and
      our stock price may decline.





-9-


***Dependence
      on Travel Suppliers***





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





***Dependence
      on Key Personnel***





Our
      performance is substantially dependent on the continued services and
      performances of our senior management and certain other key personnel. The
      loss
      of the services of any of our executive officers or other key employees could
      have a material adverse affect on our business, financial condition and results
      of operations. Our future success also depends on our ability to identify,
      attract, hire, train, retain and motivate other highly skilled managerial,
      marketing and customer service personnel. The failure to retain and attract
      necessary managerial, marketing and customer service personnel could have a
      material adverse affect on our business, financial condition, cash flows and
      results of operations.





***Marketing***





Our
      performance is substantially dependent on the effectiveness of our direct
      marketing efforts, including but not limited to, 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 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.





-10-


***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 our programs, including
      claims for serious personal injury or death. We believe that we have adequate
      liability insurance for risks arising in the normal course of business. Although
      we have experienced no claims for which we did not have adequate insurance
      coverage, there can be no assurance that insurance coverage will be sufficient
      to cover one or more large claims or that the applicable insurer will be solvent
      at the time of any covered loss. Further, there can be no assurance that we
      will
      be able to obtain insurance coverage at acceptable levels and cost in the
      future. Successful assertion against us of one or a series of large uninsured
      claims, or of one or a series of claims exceeding any insurance coverage could
      have a material adverse affect on our business, financial condition, cash flows
      and results of operations.





***Growth,
      Acquisitions and Alliances***





Our
      performance is dependent on our ability to grow our business and expand the
      marketing and travel volume of our youth, sports, student leader and
      professional travel programs. In addition, our ability to grow is dependent
      on
      our ability to acquire or enter into strategic alliances. Failure of growth
      strategies could have a material adverse affect on our business, financial
      condition, cash flows and results of operations.





***Concentration
      of Credit Risk***





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





**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.** **** ***UnresolvedStaff
      Comments***





None.





**Item 2.** **** ***Properties***





Our
      principal 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 expect to vacate the property in 2007 and will
      consider alternatives for subletting to a third party for the duration of 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. During 2007, we expect to vacate the property.




We
      occupy
      additional office space totaling approximately 11,000 square feet in Spokane,
      Washington, pursuant to a lease which expired December 31, 2006 but will
      continue month to month during 2007. Current monthly rent is approximately
      $4,700 per month. During 2007, we expect to vacate the property.




We
      also
      occupy office space totaling approximately 2,400 square feet in Arlington,
      Virginia pursuant to a lease which expires April 30, 2011. Current monthly
      rent
      is approximately $5,575 per month, with increases specified in the
      lease.





We
      are in
      the process of building a corporate office in Spokane, Washington, increasing
      the size of our corporate offices and mailhouse facilities. We expect to fully
      occupy the office in late 2007. We believe that we will be able to meet our
      future facility needs.




**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 2006.







-12-


**PART
      II**




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


***Purchases
      of Equity Securities***




**Market
      Information**




Our
      Common Stock has been traded on The Nasdaq Stock Market under the symbol “EPAX”
since March 1, 2002. 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
      March 6, 2007, the last reported sale price of our Common Stock was $31.54.
      The
      following table sets forth the high and low sale prices of a share of our Common
      Stock as reported on The Nasdaq Stock Market on a quarterly basis for our fiscal
      years ended December 31, 2006 and 2005. The high and low sale prices for
      2005 have been adjusted to reflect the affect of the September 15, 2005
      two-for-one stock split.




**High**
            
            **Low**Quarter
                ended March 31, 2006
            $
            27.11
            
            $
            23.25Quarter
                ended June 30, 2006
            $
            30.36
            
            $
            24.99Quarter
                ended September 30, 2006
            $
            29.46
            
            $
            24.83Quarter
                ended December 31, 2006
            $
            30.87
            
            $
            25.71Quarter
                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
            
            $
            19.14





-13-


**Performance
      Graph**





The
      following graph compares our cumulative total shareholder return with The Nasdaq
      Stock Market Index and The Russell 2000 Index. The graph assumes that $100
      was
      invested on March 1, 2002 (the first trading day for our Common Stock) in our
      Common Stock and in each of the indexes mentioned above and that all dividends
      were reinvested.







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





**Holders
      of Record**





As
      of
      March 6, 2007, there were approximately 63 holders of record of our Common
      Stock. This number does not include beneficial owners holding shares through
      nominee or street name.





**Dividends**





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


alignment
      with its strategic direction.





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


-14-


From
      February 2005 through February 2007, our Board of Directors declared the
      following dividend payments:





Declaration
                Date
            Record
                Date
            Payment
                Date
            Dividend
                Per ShareFebruary
                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
            March
                3, 2006
            March
                17, 2006
            $0.085May
                4, 2006
            May
                22, 2006
            June
                6, 2006
            $0.085August
                11, 2006
            August
                25, 2006
            September
                8, 2006
            $0.085November
                9, 2006
            November
                24, 2006
            December
                8, 2006
            $0.115February
                15, 2007
            March
                1, 2007
            March
                15, 2007
            $0.115





**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, 2006 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
            
            1,753,363
            
            $9.79
            
            781,255Equity
                compensation plans not approved by security holders
            
            N/A
            
            N/A
            
            N/ATotal
            
            1,753,363
            
            $
                9.79
            
            781,255




**Issuer
      Purchases of Equity Securities**




On
      May
      18, 2004, our Board of Directors authorized the repurchase of up to $5.0 million
      of our Common Stock in the open market or through private transactions. On
      August 12, 2005 and November 9, 2006, our Board of Directors increased the
      authorized Common Stock repurchase plan amounts to $14.0 million and to $25.0
      million, respectively. During the quarter ended December 31, 2006, we
      repurchased 279,400 shares of our Common Stock for $7.7 million. Since
      inception, we have repurchased approximately 788,400 shares of our Common Stock,
      adjusted to reflect the effect of our two-for-one
      stock split of our Common Stock, for an
      approximate total of $16.9 million. As of December 31, 2006, approximately
      $8.1
      million remained available for repurchase under the plan.




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




-15-


The
        following is a summary of issuer purchases of equity securities during the
        quarter ended December 31, 2006:
 **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, 2006
              
              
              $
              4,814,732October 1
                  - October 31, 2006
              
              
              55,700
              
              
              $
              27.61
              
              
              
              55,700
              
              
              
              3,276,977November 1
                  - November 30, 2006
              
              
              180,600
              
              
              
              27.51
              
              
              
              180,600
              
              
              
              9,309,017December 1
                  - December 31, 2006
              
              
              43,400
              
              
              
              27.78
              
              
              
              43,400
              
              
              
              8,103,240279,700
              
              
              $
              27.57
              
              
              
              279,700
              
              
              $
              8,103,240




**Recent
      Sales of Unregistered Securities**




During
      the fiscal year ended December 31, 2006, no equity securities were sold by
      us
      that were not registered under the Act.


-16-


**Item 6.*********Selected
      Financial Data***




This
      section presents our historical financial data which should be read
      carefully with the financial statements included in this Form 10-K,
      including the notes to the consolidated financial statements, and Management’s
      Discussion and Analysis of Financial Condition and Results of Operations. The
      statement of operations data for each of the years in the three-year period
      ended December 31, 2006, and the balance sheet data as of December 31,
      2006 and 2005 have been derived from audited financial statements included
      elsewhere in this Form 10-K. The statement of operations data for the years
      ended December 31, 2003 and 2002 and the balance sheet data as of
      December 31, 2003 and 2002 have been derived from the audited financial
      statements, which are not included in this Form 10-K. The financial data
      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,****2006(C)**
                  
                  **2005**
                  
                  **2004**
                  
                  **2003**
                  
                  **2002(D)****(in
                      thousands, except per share data)**Statement
                      of Operations data:Net
                      revenue, non-directly delivered programs (A)
                  $
                  69,554
                  
                  $
                  64,321
                  
                  $
                  51,824
                  
                  $
                  37,665
                  
                  $
                  
                  36,090Gross
                      revenue, directly delivered programs
                  $
                  19,401
                  
                  $
                  4,969
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  
                  —Total
                      revenue
                  $
                  88,955
                  
                  $
                  69,290
                  
                  $
                  51,824
                  
                  $
                  37,665
                  
                  $
                  
                  36,090Cost
                      of sales, directly delivered programs
                  $
                  11,473
                  
                  $
                  2,841
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  
                  —Gross
                      margin
                  $
                  77,482
                  
                  $
                  66,449
                  
                  $
                  51,824
                  
                  $
                  37,665
                  
                  $
                  
                  36,090Selling
                      and marketing expenses
                  $
                  31,638
                  
                  $
                  27,574
                  
                  $
                  22,616
                  
                  $
                  18,534
                  
                  $
                  
                  15,632General
                      and administrative expenses
                  $
                  11,721
                  
                  $
                  8,185
                  
                  $
                  6,537
                  
                  $
                  4,566
                  
                  $
                  
                  5,131Operating
                      income
                  $
                  34,123
                  
                  $
                  30,690
                  
                  $
                  22,671
                  
                  $
                  14,565
                  
                  $
                  
                  15,327Operating
                      margin
                  
                  44
                  %
                  
                  46
                  %
                  
                  44
                  %
                  
                  39
                  %
                  
                  
                  42
                  %Net
                      income
                  $
                  26,692
                  
                  $
                  22,410
                  
                  $
                  15,647
                  
                  $
                  10,154
                  
                  $
                  
                  10,798Earnings
                      per share - basic (B)
                  $
                  1.30
                  
                  $
                  1.10
                  
                  $
                  0.78
                  
                  $
                  0.51
                  
                  $
                  
                  0.55Earnings
                      per share - diluted (B)
                  $
                  1.25
                  
                  $
                  1.05
                  
                  $
                  0.75
                  
                  $
                  0.50
                  
                  $
                  
                  0.53


-17-


**December 31,****2006(C)**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002(D)****(in
                  thousands, except per share data)**Balance
                  sheet data:Cash,
                  cash equivalents and available-for-sale securities
              $
              133,134
              
              $
              116,604
              
              $
              87,557
              
              $
              67,525
              
              $
              51,399Total
                  assets
              $
              153,953
              
              $
              125,046
              
              $
              97,516
              
              $
              79,321
              
              $
              58,517Total
                  stockholders’ equity
              $
              84,047
              
              $
              66,502
              
              $
              49,501
              
              $
              40,809
              
              $
              27,860Other
                  key financial measures:Cash
                  flow from operating activities
              $
              37,207
              
              $
              37,792
              
              $
              27,906
              
              $
              17,255
              
              $
              21,382Cash
                  flow used in investing activities
              $
              (12,923
              )
              $
              (15,592
              )
              $
              (22,830
              )
              $
              (10,749
              )
              $
              (13,354)Cash
                  dividends declared and paid
              $
              (7,655
              )
              $
              (5,729
              )
              $
              (4,630
              )
              $
              (1,100
              )
              $
              —Cash
                  dividends declared and paid, per common share
              $
              0.37
              
              $
              0.28
              
              $
              0.23
              
              $
              0.06
              
              $
              —Cash
                  flow (used in) from financing activities
              $
              (14,416
              )
              $
              (6,320
              )
              $
              (5,825)
              
              $
              34
              
              $
              (9,668)Deployable
                  cash (E1)
              $
              67,947
              
              $
              61,939
              
              $
              43,180
              
              $
              32,903
              
              $
              22,773Free
                  cash flow (E2)
              $
              30,752
              
              $
              35,532
              
              $
              25,999
              
              $
              42,197
              
              $
              21,184Return
                  on adjusted equity (E3)
              36
              %
              39
              %
              37
              %
              32
              %
              
              42%


(A)
            Net
                revenues are a function of gross program receipts from non-directly
                delivered programs, less program pass-through expenses from non-directly
                delivered programs. Program pass-through expenses include all direct
                costs
                associated with our programs, including, but not limited to, costs
                related
                to airfare, hotels, meals, ground transportation, guides, professional
                exchanges and changes in currency exchange rates. Gross revenues,
                directly
                delivered programs are a function of the gross program receipts for
                those
                programs we directlyorganize
                and operate, including all activities such as speakers, facilitators,
                events, accommodations and transportation.Gross
                program receipts for both directly delivered and non-directly delivered
                programs during the years ended December 31, 2006, 2005, 2004, 2003
                and 2002 were $219.5 million, $180.0 million, $147.1 million, $108.6
                million, and $97.1 million, respectively. Gross margin as a percent
                of gross program receipts during the years ended December 31, 2006,
                2005,
                2004, 2003, and 2002 were 35%, 37%, 35%, 35%, and 37%,
                respectively.




(B)
            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. 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.





During
      September 2005, we implemented a two-for-one stock split in the form of a 100
      percent stock dividend. The earnings per share calculations for all periods
      presented


reflect
      the increase in the number of shares of Common Stock outstanding as a result
      of
      the stock split.




(C)
            Weadopted
                Statement of Financial Accounting Standards No. 123(R),*Share-Based
                Payment*,
                as of January 1, 2006.


During
      2006, stock option expense was $1.3 million, and $2.3 million excess tax benefit
      from stock based compensation is included in net cash provided by operating
      activities and net cash used in financing activities.





(D)
            The
                consolidated financial statements 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. 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.





-18-


(E)
            **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.




**(E1)
      Deployable Cash Reconciliation (in thousands)**





**December
                31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Cash
                and cash equivalents and available-for-sale securities
            $
            133,134
            
            $
            116,604
            
            $
            87,557
            
            $
            67,525
            
            $
            51,399Prepaid
                program costs and expenses
            
            3,786
            
            1,596
            
            2,461
            
            1,608
            
            1,516Less:
                accounts payable
            
            (2,941
            )
            (2,540
            )
            (1,390
            )
            (2,599
            )
            (2,181
            )Less:
                accrued expenses and other short-term liabilities (excluding deferred
                taxes)
            
            (5,190
            )
            (6,078
            )
            (6,693
            )
            (5,260
            )
            (2,060
            )Less:
                participant deposits
            
            (60,651
            )
            (47,463
            )
            (38,608
            )
            (28,220
            )
            (25,901
            )Less:
                current portion of long-term capital lease
            
            (191
            )
            (180
            )
            (147
            )
            (151
            )
            —Total
                deployable cash
            $
            67,947
            
            $
            61,939
            
            $
            43,180
            
            $
            32,903
            
            $
            22,773




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.





**(E2)
      Free Cash Flow Reconciliation (in thousands)**




**December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Cash
                  flow from operations as reported
              $
              37,207
              
              $
              37,792
              
              $
              27,906
              
              $
              17,255
              
              $
              21,382Purchase
                  of property and equipment
              
              (6,455
              )
              (2,260
              )
              (1,907
              )
              (1,057
              )
              (198
              )Free
                  cash flow
              $
              30,752
              
              $
              35,532
              
              $
              25,999
              
              $
              16,198
              
              $
              21,184




Free
      cash
      flow is a non-GAAP cash flow measure. Free cash flow is calculated as cash
      flow
      from operations less purchase of property and equipment.  Management
      believes this non-GAAP measure is useful to investors in understanding the
      cash
      generated within a calendar year for future use in operations.


-19-


**(E3)
      Return on Adjusted Stockholders’ Equity Reconciliation (in thousands except
      return percentages)**





**December
                31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Stockholders’
                equity at January 1, as reported
            $
            66,502
            
            $
            49,501
            
            $
            40,809
            
            $
            27,860
            
            $
            24,839Less:
                other comprehensive income (loss) at January 1
            (1,396
            )
            1,645
            
            3,451
            
            1,155
            
            (340
            )Plus:
                stockholders’ equity at December 31, as reported
            84,047
            
            66,502
            
            49,501
            
            40,809
            
            27,860Less:
                other comprehensive income (loss) at December 31
            1,636
            
            (1,396
            )
            1,645
            
            3,451
            
            1,155Average
                adjusted stockholders’ equity (the sum of the above divided by
                two)
            $
            75,155
            
            $
            57,877
            
            $
            42,607
            
            $
            32,032
            
            $
            25,942Net
                income
            $
            26,692
            
            $
            22,410
            
            $
            15,647
            
            $
            10,154
            
            $
            10,798Return
                on adjusted equity
            36
            %
            39
            %
            37
            %
            32
            %
            42
            %




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.





-20-


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




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




**Executive
      Overview**




We
      are a
      leading educational travel company that organizes and promotes international
      and
      domestic programs for students, athletes and professionals. Youth programs
      provide opportunities for grade school, middle school and high school students
      to learn about the history, government, economy and culture of the foreign
      and
      domestic destinations they visit as well as for middle and high school athletes
      to participate in international sports challenges. Our student leader programs
      provide educational opportunities for middle school and high school students
      to
      learn leadership, government, college admissions and community involvement
      skills at domestic destinations. Our professional programs emphasize meetings
      and seminars between delegates and persons in similar professions
      abroad.




We
      were
      founded in 1967, were reincorporated in Delaware in 1995, and operated as
      Ambassadors Education Group, a wholly owned subsidiary of International until
      February 2002, at which time we spun off to operate as an independent
      stand-alone company beginning in March, 2002. Since then, our Common Stock
      has
      traded on The Nasdaq Stock 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* .”


-21-




***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
      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 gross
      margin.




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(%
                of net revenue)**Gross
                margin
            100
            %
            100
            %
            100
            %
            100
            %
            100
            %Selling
                and marketing
            41
            
            41
            
            44
            
            49
            
            43General
                and administrative expenses
            15
            
            12
            
            13
            
            12
            
            14Operating
                income
            44
            
            46
            
            44
            
            39
            
            43Other
                income
            6
            
            4
            
            2
            
            2
            
            3Income
                before tax
            50
            
            50
            
            46
            
            41
            
            45Income
                tax provision
            16
            
            16
            
            16
            
            14
            
            15Net
                income
            34
            %
            34
            %
            30
            %
            27
            %
            30
            %







-22-


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





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




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




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




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




Other
      income consisted primarily of interest income generated by our cash, cash
      equivalents and available-for-sale securities. We realized interest and dividend
      income of $4.7 million in the year ended December 31, 2006, compared to
      $2.6 million in the year ended December 31, 2005. The increase in interest
      and dividend income is related to higher cash balances held and increased
      interest rates during 2006. In 2006 and 2005, the average rate of return
      was **** 3.3
      percent and 2.4 percent, respectively.




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




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




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











-23-


**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. Gross profit 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 the affect of 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 marketing costs as incurred. Selling and
      marketing 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
      marketing 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. 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.







-24-


**Liquidity
      and Capital Resources**




At
      December 31, 2006, we had approximately $133.1 million of cash, cash
      equivalents, and available-for-sale securities, which included program
      participant funds of approximately $60.7 million. At December 31,
      2005, we had approximately $116.6 million of cash and cash equivalents,
      restricted cash, and available-for-sale securities, which included program
      participant funds of $47.5 million.





Net
      cash
      provided by operations for the years ended December 31, 2006 and 2005 was
      approximately $37.2 million and $37.8 million, respectively. The $0.6
      million decrease in operating cash flows between the years ending
      December 31, 2006 and 2005, primarily results from a $4.3 million increase
      in earnings, the effect of stock based compensation expense and excess tax
      benefit during 2006, $4.3 million in increased participant fund balances year
      over year, and the net effect of certain payment timing for programs traveled
      or
      to be traveled.




Net
      cash
      used in investing activities for the years ended December 31, 2006 and 2005
      was $12.9 million and $15.6 million, respectively. The $2.7 million
      decrease year over year resulted from a $6.8 million decrease in net purchases
      of available-for-sale investments and a $4.2 million increase in purchases
      of
      property, plant and equipment during 2006. The increase in property, plant
      and
      equipment was primarily due to the construction of our new headquarters to
      be
      occupied in 2007.




Net
      cash
      used in financing activities was $14.4 million in the year ending December
      31,
      2006 and $6.3 million during the year ending December 31, 2005. The net change
      in financing activities was a result of three factors: an increase of $1.9
      million used for cash dividends to our shareholders, a $7.0 million increase
      in
      cash used for the repurchase of our Common Stock, offset by a decrease of $1.6
      million received from the proceeds of stock option exercises and the effects
      of
      excess tax benefit from stock based compensation in 2006. During 2006, we paid
      $7.7 million in cash dividends and used $10.7 million for stock
      repurchases. As of March 6, 2007, we deployed $35.6 million for the
      repurchase of Common Stock since December 31, 2006.




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.




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,
      and progress on our new headquarters continues as planned. As of December
      31, 2006, we capitalized $7.5 million of the less than $20 million total project
      costs. We plan on funding the remaining project costs with currently available
      cash, cash equivalents, and available-for-sale securities during 2007.




-25-


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, not already
      presented within our financial statements or discussed in our current report
      on
      Form 8-K filed on September 29, 2006. We believe that existing cash and cash
      equivalents and cash flows from operations will be sufficient to fund our
      anticipated operating needs and capital expenditures through 2007.





Other
      than capital leases, we have no long-term debt or purchase obligations as of
      December 31, 2006. The following table presents the maturities of our
      contractual cash obligations as of December 31, 2006 (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
            
            $
            1,971
            
            $
            742
            
            $
            1,229
            
            $
            —Capital
                lease
            
            
            407
            
            
            211
            
            
            196
            
            
            —Total
            
            $
            2,378
            
            $
            953
            
            $
            1,425
            
            $
            —




**Market
      Risk**




The
      following table summarizes the financial instruments other than derivative
      financial instruments held by us at December 31, 2006 and 2005, 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,
                  2006**
              
              **December 31,
                  2005****2007**
              
              **2008**
              
              **Total**
              
              **Fair**
                **Value**
              
              **Total**
              
              **Fair**
                **Value**U.S.
                  govt. and agency obligations
              $
              54,155
              
              $
              40,142
              
              $
              94,297
              
              $
              94,297
              
              $
              89,688
              
              $
              89,688Corporate
                  obligations
              $
              2,053
              
              $
              —
              
              $
              2,053
              
              $
              2,053
              
              
              —
              
              
              —Interest
                  rate
              3.70
              %
              3.53
              %
              3.65
              %
              —
              
              2.41
              %
              —




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, 2006 mature
      in 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.


-26-


At
      December 31, 2006 and 2005, we had outstanding forward contracts as follows
      (in thousands):




**Notional**
                **Amount**
              
              **U.S.
                  Dollar**
                **Average**
                **Contractual**
                **Exchange
                  Rate****December 31,
                  2006**Forward
                  contracts (pay $U.S./receive foreign currency):Australian
                  dollar
              
              14,000
              
              
              
              $
              0.73British
                  pound
              
              3,510
              
              
              
              $
              1.75Canadian
                  dollar
              
              1,080
              
              
              
              $
              0.90Euro
              
              16,550
              
              
              
              $
              1.26Japanese
                  yen
              
              225,000
              
              
              
              $
              0.01New
                  Zealand dollar
              
              4,500
              
              
              
              $
              0.66Forward
                  contracts with variable option (pay $U.S./receive foreign
                  currency):Australian
                  dollar
              
              15,640
              
              
              
              $
              0.72British
                  pound
              
              3,780
              
              
              
              $
              1.85Canadian
                  dollar
              
              440
              
              
              
              $
              0.91Euro
              
              8,950
              
              
              
              $
              1.29Japanese
                  yen
              
              170,500
              
              
              
              $
              0.01**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





At
      December 31, 2006 and 2005, we had unrealized foreign currency gains and
      (losses) associated with these financial instruments of approximately $2.6
      million and $(1.9) million, respectively.





**Off
      Balance Sheet Arrangements**




As
      of
      December 31, 2006, we had no off balance sheet arrangements, as defined in
      Item
      303(a)(4) of Regulation S-K promulgated by the SEC.




-27-


**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, 2006, 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.





***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.




-28-


***Revenue
      Recognition***





For
      non-directly delivered programs, we do not actively manage the operations of
      each program, and our remaining performance obligation for these programs after
      they convene is perfunctory. Therefore, revenue from these programs is presented
      as net revenues and recognized as the program convenes.   For 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
      July
      2006, the Financial Accounting Standards Board (“FASB”) released FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109,
      Accounting for Income Taxes* (“FIN
      48”). FIN 48 prescribes a comprehensive model for how a company should
      recognize, measure, present, and disclose in its financial statements uncertain
      tax positions that a company has taken or expects to take on a tax return.
      FIN
      48 is effective as of January 1, 2007. We do not expect its implementation
      to be
      material to our financial statements.




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in accordance with generally accepted accounting
      principles, and expands disclosures about fair value measurements. This
      statement does not require any new fair value measurements; rather, it applies
      under other accounting pronouncements that require or permit fair value
      measurements. The provisions of this statement are to be applied prospectively
      as of the beginning of the fiscal year in which this statement is initially
      applied, with any transition adjustment recognized as a cumulative-effect
      adjustment to the opening balance of retained earnings. The provisions of SFAS
      157 are effective for the fiscal years beginning after November 15, 2007.
      Therefore, we anticipate adopting this standard as of January 1, 2008. We
      have not determined the effect, if any, the adoption of this statement will
      have
      on our financial condition or results of operations.




**Item 7A.*********Quantitative and Qualitative Disclosures About Market
      Risk***




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




**Item 8.**  ***Financial
      Statements and Supplementary Data***




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




-29-


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




None.




-30-


**Item 9A.** **** ***Controls
      and Procedures***




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 2006, 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, 2006. 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, 2006.




Our
      management’s assessment of the effectiveness of our Company’s internal control
      over financial reporting as of December 31, 2006 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, 2006, 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.




-31-




**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 Item 9A,
      Management’s Report on Internal Control over Financial Reporting, that
      Ambassadors Group, Inc. maintained effective internal control over financial
      reporting as of December 31, 2006, 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, 2006,
      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, 2006, 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 sheets of Ambassadors
      Group, Inc. as of December 31, 2006 and 2005, and the related consolidated
      statements of operations, comprehensive income, stockholders’ equity, and cash
      flows for the years then ended  and our report dated March 8, 2007,
      expressed an unqualified opinion.








BDO
      Seidman, LLP





Spokane,
      Washington


March
      8,
      2007


-32-




**Item
      9B.** ***Other
      Information***




None.







**PART
      III**




**Item 10.**
            *******Directors
                , Executive Officers and Corporate
                Governance***




The
      information called for by this item is hereby incorporated by reference from
      our
      definitive Proxy Statement for the fiscal year ended December 31, 2006, to
      be filed with the SEC on or about April 2, 2007.




**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, 2006, to
      be filed with the SEC on or about April 2, 2007.




**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, 2006, to
      be filed with the SEC on or about April 2, 2007.





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




The
      information called for by this item is hereby incorporated by reference from
      our
      definitive Proxy Statement for the fiscal year ended December 31, 2006, to
      be filed with the SEC on or about April 2, 2007.




**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, 2006, to
      be filed with the SEC on or about April 2, 2007.


-33-


**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 Firms, 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.








-34-





**AMBASSADORS
      GROUP, INC.**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Page**Reports
                of Independent Registered Public Accounting Firms
            
            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-8


Notes
                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 sheets of Ambassadors Group,
      Inc.
      (the Company) as of December 31, 2006 and 2005 and the related consolidated
      statements of operations, comprehensive income, stockholders’ equity, and cash
      flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.




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




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Ambassadors Group, Inc.
      at
      December 31, 2006 and 2005, and the results of its operations and its cash
      flows
      for the years then ended **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.




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




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2006, 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 March 8, 2007 expressed an unqualified opinion
      thereon.









BDO
      Seidman, LLP


Spokane,
      Washington


March
      8,
      2007


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 statements of operations, comprehensive income,
      stockholders' equity and cash flows for the year ended December 31, 2004 present
      fairly, in all material respects, the results of operations and cash flows
      of
      Ambassadors Group, Inc. for the year 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 audit. We conducted our audit 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
      audit provides a reasonable basis for our opinion.











PricewaterhouseCoopers
      LLP


Portland,
      Oregon


March
      11,
      2005





















F-3


**AMBASSADORS
      GROUP, INC.**





**CONSOLIDATED
      BALANCE SHEETS**


**December 31,****2006**
                
                **2005****(in
                    thousands, except share**
                  **and
                    per share data)****Assets**Current
                    assets:Cash
                    and cash equivalents
                $
                36,784
                
                $
                26,916Available-for-sale
                    securities
                96,350
                
                89,688Foreign
                    currency exchange contracts
                2,571
                
                —Deferred
                    tax asset and other
                675
                
                955Prepaid
                    program costs and expenses
                3,786
                
                1,596Total
                    current assets
                140,166
                
                119,155Property,
                    plant and equipment, net
                12,267
                
                5,140Deferred
                    tax asset
                1,328
                
                584Other
                    long-term assets
                192
                
                167Total
                    assets
                $
                153,953
                
                $
                125,046**Liabilities**Current
                    liabilities:Accounts
                    payable
                $
                2,941
                
                $
                2,540Accrued
                    expenses
                3,922
                
                3,482Foreign
                    currency exchange contracts
                —
                
                1,896Participants’
                    deposits
                60,651
                
                47,463Deferred
                    tax liability
                737
                
                —Other
                    liabilities
                1,268
                
                2,596Current
                    portion of long-term capital lease
                191
                
                180Total
                    current liabilities
                69,710
                
                58,157Long-term
                    capital lease
                196
                
                387Total
                    liabilities
                69,906
                
                58,544Commitments
                    and contingencies (notes 3, 5 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; 20,599,170
                    and
                    20,656,957 shares issued and outstanding at December 31, 2006 and
                    2005, respectively
                205
                
                206Additional
                    paid-in capital
                15,619
                
                20,142Retained
                    earnings
                66,587
                
                47,550Accumulated
                    other comprehensive income (loss)
                1,636
                
                (1,396
                )Total
                    stockholders’ equity
                84,047
                
                66,502Total
                    liabilities and stockholders’ equity
                $
                153,953
                
                $
                125,046


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,****2006**
            
            **2005**
            
            **2004****(in
                thousands, except per share data)**Net
                revenue, non-directly delivered programs
            $
            69,554
            
            $
            64,321
            
            $
            51,824Gross
                revenue, directly delivered programs
            19,401
            
            4,969
            
            —Total
                revenue
            
            88,955
            
            
            69,290
            
            
            51,824Cost
                of sales, directly delivered programs
            
            11,473
            
            
            2,841
            
            
            —Gross
                margin
            $
            77,482
            
            $
            66,449
            
            $
            51,824Operating
                expenses:Selling
                and marketing
            31,638
            
            27,574
            
            22,616General
                and administrative
            11,721
            
            8,185
            
            6,53743,359
            
            35,759
            
            29,153Operating
                income
            34,123
            
            30,690
            
            22,671Other
                income (expense):Interest
                and dividend income
            4,674
            
            2,627
            
            1,067Other,
                net
            81
            
            21
            
            (32
            )4,755
            
            2,648
            
            1,035Income
                before income taxes
            38,878
            
            33,338
            
            23,706Income
                tax provision
            12,186
            
            10,928
            
            8,059Net
                income
            $
            26,692
            
            $
            22,410
            
            $
            15,647Earnings
                per share — basic and diluted:Net
                income per share - basic
            $
            1.30
            
            $
            1.10
            
            $
            0.78Weighted-average
                common shares outstanding — basic
            20,554
            
            20,311
            
            20,090Net
                income per share - diluted
            $
            1.25
            
            $
            1.05
            
            $
            0.75Weighted-average
                common shares outstanding — diluted
            21,393
            
            21,312
            
            20,898




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,****2006**
            
            **2005**
            
            **2004****(in
                thousands)**Net
                income
            
            $
            26,692
            
            $
            22,410
            
            $
            15,647Unrealized
                gain (loss) on foreign currency exchange contracts, net of income
                tax
                (provision) benefit of ($1,563), $1,550, and $884
            
            2,904
            
            (2,957
            )
            (1,716
            )Unrealized
                gain (loss) on available-for-sale securities, net of income tax benefit
                (provision) of ($66), $40, and $48
            
            128
            
            (84
            )
            (90
            )Comprehensive
                income
            
            $
            29,724
            
            $
            19,369
            
            $
            13,841




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







F-6


**AMBASSADORS
      GROUP, INC.**





**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**





**Accumulated****Additional**
            
            
            **Other****Common
                Stock**
            **Paid-In**
            **Retained**
            **Comprehensive****Shares**
            
            **Amount**
            **Capital**
            **Earnings**
            **Income
                (Loss)**
            **Total****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
            
            —
            
            —
            
            1,515Excess
                tax benefit from stock-based compensation
            —
            
            —
            
            489
            
            —
            
            —
            
            489Stock
                redemptions
            (196)
            
            (2)
            
            (2,566)
            
            —
            
            —
            
            (2,568)Restricted
                stock grant
            90
            
            —
            
            —
            
            —
            
            —
            
            —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
            $
            16,785
            $
            30,869
            $
            1,645
            $
            49,501Net
                income
            —
            
            —
            
            —
            
            22,410
            
            —
            
            22,410Stock
                options exercised
            548
            
            5
            
            3,323
            
            —
            
            —
            
            3,328Excess
                tax benefit from stock-based compensation
            —
            
            —
            
            3,319
            
            —
            
            —
            
            3,319Stock
                redemptions
            (193)
            
            (1)
            
            (3,740)
            
            —
            
            —
            
            (3,741)Restricted
                stock grant
            50
            
            —
            
            —
            
            —
            
            —
            
            —Amortization
                of unearned restricted stock compensation
            —
            
            —
            
            455
            
            —
            
            —
            
            455Dividend
                to shareholders ($0.28 per share)
            —
            
            —
            
            —
            
            (5,729)
            
            —
            
            (5,729)Other
                comprehensive income, net of income taxes
            —
            
            —
            
            —
            
            —
            
            (3,041)
            
            (3,041)**Balances,
                December 31, 2005**
            20,657
            $
            206
            $
            20,142
            $
            47,550
            $
            (1,396)
            $
            66,502Net
                income
            —
            
            —
            
            —
            
            26,692
            
            —
            
            26,692Stock
                options exercised
            307
            
            3
            
            1,750
            
            —
            
            —
            
            1,753Stock -based
                compensation expense
            —
            
            —
            
            2,057
            
            —
            
            —
            
            2,057Excess
                tax benefit from stock-based compensation
            —
            
            —
            
            2,376
            
            —
            
            —
            
            2,376Stock
                redemptions
            (400)
            
            (4)
            
            (10,706)
            
            —
            
            —
            
            (10,710)Restricted
                stock grant
            35
            
            —
            
            —
            
            —
            
            —
            
            —Dividend
                to shareholders ($0.37 per share)
            —
            
            —
            
            —
            
            (7,655)
            
            —
            
            (7,655)Other
                comprehensive income, net of income taxes
            —
            
            —
            
            —
            
            —
            
            3,032
            
            3,032**Balances,
                December 31, 2006**
            20,599
            $
            205
            $
            15,619
            $
            66,587
            $
            1,636
            $
            84,047





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,****2006**
            
            **2005**
            
            **2004****(in
                thousands)****Cash
                flows from operating activities:**Net
                income
            
            $
            26,692
            
            $
            22,410
            
            $
            15,647Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            1,447
            
            1,175
            
            962Deferred
                income tax provision (benefit)
            
            (748
            )
            130
            
            894Stock-based
                compensation expense
            
            2,057
            
            455
            
            45Excess
                tax benefit from stock based compensation
            
            (2,376
            )
            —
            
            —Equity
                in earnings on investment
            
            (25
            )
            (11
            )
            —Change
                in assets and liabilities:Other
                current assets
            
            (608
            )
            57
            
            110Prepaid
                program costs and expenses
            
            (2,190
            )
            865
            
            (853
            )Accounts
                payable, accrued expenses, and other liabilities
            
            (230
            )
            3,856
            
            713Participants’
                deposits
            
            13,188
            
            8,855
            
            10,388Net
                cash provided by operating activities
            
            37,207
            
            37,792
            
            27,906**Cash
                flows from investing activities:**Net
                purchase of available-for-sale securities
            
            (6,468
            )
            (13,296
            )
            (20,919
            )Purchase
                of property and equipment
            
            (6,455
            )
            (2,260
            )
            (1,907
            )Purchase
                of other investments
            
            —
            
            (36
            )
            (4
            )Net
                cash used in investing activities
            
            (12,923
            )
            (15,592
            )
            (22,830
            )**Cash
                flows from financing activities:**Dividend
                payment to shareholders
            
            (7,655
            )
            (5,729
            )
            (4,630
            )Repurchase
                of common stock
            Q
            (10,710
            )
            (3,741
            )
            (2,568
            )Proceeds
                from exercise of stock options
            
            1,753
            
            3,328
            
            1,515Excess
                tax benefit from stock based compensation
            
            2,376
            
            —
            
            —Capital
                lease payments
            
            (180
            )
            (178
            )
            (142
            )Net
                cash used in financing activities
            
            (14,416
            )
            (6,320
            )
            (5,825
            )Net
                increase (decrease) in cash and cash equivalents
            
            9,868
            
            15,880
            
            (749
            )Cash
                and cash equivalents, beginning of year
            
            26,916
            
            11,036
            
            11,785Cash
                and cash equivalents, end of year
            
            $
            36,784
            
            $
            26,916
            
            $
            11,036




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,****2006**
            
            **2005**
            
            **2004**South
                Pacific (primarily Australia and New Zealand)
            
            26
            %
            
            30
            %
            
            34
            %Europe
            
            43
            %
            
            46
            %
            
            48
            %Asia
                (primarily China)
            
            13
            %
            
            11
            %
            
            4
            %United
                States
            
            13
            %
            
            12
            %
            
            9
            %Other
            
            5
            %
            
            1
            %
            
            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, 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.




We
      have a
      $1.8 million revolving credit facility for the purpose of issuing letters
      of credit to several airlines. The facility allows for letters of credit to
      be
      issued through December 2007. At December 31, 2006 and 2005, we had
      letters of credit outstanding of approximately $1.4 million and $1.3 million,
      respectively, under this facility. Additionally, at December 31, 2005, 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.




***Derivative
      Financial Instruments***




We
      value
      all derivative instruments on our balance sheet at fair value. Changes in the
      fair value of derivatives are recorded each period in current earnings or other
      comprehensive income, depending on whether a derivative is designated as part
      of
      a hedge transaction and, if it is, depending on the type of hedge transaction.
      For qualifying cash flow hedge transactions in which we hedge the variability
      of
      cash flows related to a forecasted transaction, changes in the fair value of
      derivative instruments are reported in accumulated other comprehensive income.
      The gains and losses on the derivative instruments that are reported in
      accumulated other comprehensive income are reclassified as earnings in the
      periods in which earnings are impacted by the variability of the cash flows
      of
      the hedged item. The ineffective portion of all hedges is recognized in the
      statements of operations as other income (expense). Unrealized gains and losses
      on foreign currency exchange contracts that are not qualifying cash flow hedges
      as defined by Statement of Financial Accounting Standards (“SFAS”) No. 133 are
      recognized in the statements of operations as other income (expense). All of
      our
      outstanding foreign currency exchange contracts at December 31, 2006 and
      2005 qualify as cash flow hedges.




***Available-for-sale
      Securities***




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





Management
      evaluates investment securities for other-than-temporary declines in fair value
      on a quarterly basis.  If the fair value of investment securities falls
      below their amortized cost and the decline is deemed to be other-than-temporary,
      the securities will be written down to current market value, resulting in a
      loss
      recorded in the statement of operations.  There were no investment
      securities that management identified to be other-than-temporarily impaired
      during the years ended December 31, 2006 and 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)**





***Other
      Investments***





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. These investments are included in other
      long
      term assets on the balance sheet.




***Property,
      Plant and Equipment***




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





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




***Goodwill***




Goodwill
      totals approximately $70,000 at December 31, 2006 and 2005 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 Marketing Expenses***




We
      expense all selling and marketing 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 and Restricted Grants***





We
      maintain an Equity Participation Plan under which we have granted non-qualified
      stock options and restricted stock to employees, non-employee directors and
      consultants. Effective January 1, 2006, we adopted "Share Based Payment" (SFAS
      123(R)) using the modified prospective method, and the fair value recognition
      provisions of the “Transition Election Related to Accounting for the Tax Effects
      of Share-Based Payment Awards” ** (“FSP 123(R)”),
      using the alternative
      transition method . We
      elected to adopt the alternative transition method  provided
      in FSP123(R)-3 for
      calculating the tax effects of stock-based compensation. The alternative
      transition method includes simplified methods to establish the beginning balance
      of the additional-paid-in-capital pool (“APIC pool”) related to the tax effects
      of stock-based compensation, and for determining the subsequent impact on the
      APIC pool and consolidated statements of cash flows of the tax effects of
      stock-based compensation awards that are outstanding upon adoption of SFAS
      123(R).





Prior
      to
      2006, we applied the disclosure-only provisions of  SFAS No. 123 
as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition
      and Disclosure.” We measured compensation cost for stock-based employee
      compensation plans using the intrinsic value method of accounting prescribed
      by
      Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
      to Employees.” All of our stock options are granted at market value on the date
      of grant. Accordingly, no compensation expense was recognized in 2005 or 2004
      for options related to the stock option plan. Restricted stock grants, however,
      are subject to a one or four year vesting period, and the fair values on
      issuance date of these grants were expensed on a straight line basis over the
      life of the grant.


******


***Estimates***




The
      preparation of consolidated financial statements requires us to make estimates
      and judgments that affect the reported amounts of assets, liabilities, revenue
      and expenses, and related disclosure of contingent assets and liabilities.
      On an
      on-going basis, we evaluate our estimates and judgments, including those
      associated with investments, intangible assets, income taxes, foreign exchange
      contracts, and contingencies and litigation.





**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**




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
      July
      2006, the Financial Accounting Standards Board (“FASB”) released FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109,
      Accounting for Income Taxes* (“FIN
      48”). FIN 48 prescribes a comprehensive model for how a company should
      recognize, measure, present, and disclose in its financial statements uncertain
      tax positions that a company has taken or expects to take on a tax return.
      FIN
      48 is effective as of January 1, 2007. We do not expect its implementation
      to be
      material to our financial statements.







In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in accordance with generally accepted accounting
      principles, and expands disclosures about fair value measurements. This
      statement does not require any new fair value measurements; rather, it applies
      under other accounting pronouncements that require or permit fair value
      measurements. The provisions of this statement are to be applied prospectively
      as of the beginning of the fiscal year in which this statement is initially
      applied, with any transition adjustment recognized as a cumulative-effect
      adjustment to the opening balance of retained earnings. The provisions of SFAS
      157 are effective for the fiscal years beginning after November 15, 2007.
      Therefore, we anticipate adopting this standard as of January 1, 2008. We
      have not determined the effect, if any, the adoption of this statement will
      have
      on our financial condition or results of operations.





**3.**
            **Derivative
                Financial Instruments**




The
      majority of our travel programs take place outside of the United States and
      most
      foreign suppliers require payment in currency other than the U.S. dollar.
      Accordingly, we are exposed to foreign currency risk relative to changes in
      foreign currency exchange rates between those currencies and the U.S. dollar.
      Our processes include a program to provide a hedge against certain of these
      foreign currency risks, and we use forward contracts that allow us to acquire
      the foreign currency at a fixed price for a specified period of time. Some
      of
      the forward contracts include a variable component if a pre-determined trigger
      occurs prior to or at the maturity of the contract. All of the derivatives
      are
      cash flow hedges of forecasted transactions.


F-13


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





At
      December 31, 2006, the following forward contracts were outstanding (in
      thousands):




**Notional**
                **Amount**
              
              **Matures**Forward
                  contracts:Australian
                  dollar
              
              14,000
              
              January
                  2007 - May 2007British
                  pound
              
              3,510
              
              January
                  2007 - June 2007Canadian
                  dollar
              
              1,080
              
              January
                  2007 - April 2007Euro
              
              16,550
              
              January
                  2007 - June 2007Japanese
                  yen
              
              225,000
              
              April
                  2007 - May 2007New
                  Zealand dollar
              
              4,500
              
              February
                  2007 - June 2007Forward
                  contracts with variable option:Australian
                  dollar
              
              15,640
              
              April
                  2007 - November 2007British
                  pound
              
              3,780
              
              May
                  2007 - July 2007Canadian
                  dollar
              
              440
              
              April
                  2007Euro
              
              8,950
              
              April
                  2007 - May 2007Japanese
                  yen
              
              170,500
              
              May
                  2007 - July 2007




At
      December 31, 2006 and 2005, we recorded a net unrealized gain and (loss) of
      approximately $2.6 million and ($1.9) million, respectively, associated with
      these financial instruments. Unrealized gains on forward contracts recorded
      in
      other comprehensive income at December 31, 2006, which are expected to be
      reclassified to net revenue during the year ending December 31, 2007, are
      approximately $2.6 million.





Unrealized
      gains or losses associated with these transactions that qualify as cash flow
      hedges under SFAS No. 133 are reported in other comprehensive income. Any
      realized gains or losses associated with these transactions are recognized
      in
      our operations in the period the contracts are closed. The net unrealized
      gain (loss) reclassified to revenue from other accumulated comprehensive
      income for the years ended December 31, 2006, 2005 and 2004 was
      approximately ($1.3) million, $1.7 million and $3.1 million, respectively.
      Income tax (provision) benefit on the unrealized (loss) gain reclassified
      in 2006, 2005 and 2004 was approximately **** $0.6
      million, $(0.8) million and $(1.6) 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 operations. During the years ended
      December 31, 2006, 2005, and 2004, there were no significant amounts
      recognized in income due to hedge ineffectiveness.





**4.**
            **Available-for-Sale
                Securities**




At
      December 31, 2006 and 2005, the cost and estimated fair values of our
      available-for-sale securities in U.S. government and agency and corporate
      obligations were as follows (in thousands):




**Amortized
                Cost**
            
            **Gross**
              **Unrealized**
              **Gain**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair
                Value/**
              **Carrying**
              **Value**December 31,
                2006
            $
            96,400
            
            $
            —
            
            $
            (50
            )
            $
            96,350December 31,
                2005
            $
            89,936
            
            $
            —
            
            $
            (248
            )
            $
            89,688




F-14


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





At
      December 31, 2006, the amortized cost and fair value of the
      available-for-sale securities, by contractual maturity were as follows (in
      thousands):




**Amortized**
              **Cost**
            
            **Fair**
              **Value**Auction
                rate securities
            
            $
            25,668
            
            $
            25,668One
                year or less
            
            
            30,568
            
            
            30,540After
                one year through two years
            
            40,164
            
            40,142$
            96,400
            
            $
            96,350




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




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





**5.**
            **Property,
                Plant and Equipment**




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




**December 31,****2006**
            
            **2005**Land
            
            $
            1,817
            
            $
            —Construction
                in progress
            
            
            5,735
            
            
            —Office
                furniture, fixtures and equipment
            
            
            3,972
            
            
            3,810Computer
                equipment and software
            
            7,492
            
            6,680Leasehold
                improvements
            
            1,087
            
            1,05820,103
            
            11,548Less
                accumulated depreciation and amortization
            
            (7,836
            )
            (6,408
            )$
            12,267
            
            $
            5,140




Progress
      on our new headquarters continues as planned. As of December 31, 2006, we
      capitalized $7.6 million of the less than $20 million total project
      costs.




Depreciation
      and amortization expense on property and equipment of approximately $1.4
      million, $1.2 million, $1.0 million, for the years ended December 31, 2006,
      2005, and 2004, respectively, was included in the determination of net income.
      During 2006 and 2005, no property and equipment was written off. During 2004,
      approximately $1.9 million in fully depreciated property and equipment was
      written off.




F-15


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





**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 2006, 2005, and 2004, $1.4
      million, $1.1 million, and $0.4 million respectively, of the refund, excluding
      interest and foreign currency gains, was recognized into income as the
      uncertainty of potential repayment of this liability was eliminated. At
      December 31, 2006 and 2005, the remaining refund of $1.3 million and $2.6
      million was included in other liabilities. We anticipate recognizing the
      remaining $1.3 million in operations during 2007.




**7.**
            **Income
                Taxes**




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




**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Current:
            1Federal
            $
            12,843
            
            $
            10,762
            
            $
            7,147State
            91
            
            36
            
            18Deferred
            (748
            )
            130
            
            894$
            12,186
            
            $
            10,928
            
            $
            8,059




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




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


**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





F-16


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





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





**Years
                Ended December 31,****2006**
              **Amount**
            
            **%**
            
            
            **2005**
              **Amount**
            
            **%**
            
            
            **2004**
              **Amount**
            
            **%**Provision
                at the federal statutory rate
            $
            13,607
            
            35.0
            %
            $
            11,668
            
            35.0
            %
            $
            8,297
            
            35.0
            %Tax
                exempt interest
            
            (1,564
            )
            (4.0
            )
            
            (877
            )
            (2.6
            )
            
            (350
            )
            (1.5
            )State
                income tax, net of federal benefit
            
            59
            
            0.1
            
            
            23
            
            0.1
            
            
            12
            
            0.1Other
            
            84
            
            0.2
            
            
            114
            
            0.3
            
            
            100
            
            0.4$
            12,186
            
            31.3
            %
            $
            10,928
            
            32.8
            %
            $
            8,059
            
            34.0
            %




**8.**
            **Capital
                Lease**




We
      lease
      certain office equipment under a capital lease arrangement. The total cost
      of
      equipment under capital leases was $0.9 million and accumulated depreciation
      was
      $0.5 million and $0.4 million, respectively, at December 31, 2006 and
      2005.  The following is a schedule of minimum lease payments required
      under the capital lease as of December 31, 2006 (in
      thousands):


**Year
                  Ended December 31,**2007
              $
              2112008
              1842009
              12407Less
                  amount representing interest
              20387Less
                  current portion
              191$
              196






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, 2006, future minimum lease commitments were as follows (in
      thousands):




**Year
                Ended December 31,**2007
            $
            7422008
            7072009
            
            522$
            1,971


F-17


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





Total
      rent expense for the years ended December 31, 2006, 2005, 2004, was
      approximately $0.8 million, $0.7 million, and $0.8 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.




**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 0.8 million shares
      remain available for future issuance.




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





Under
      the
      terms of the Plan, stock grants follow the same grant price parameters as
      options. The Compensation Committee also establishes the vesting period of
      the
      grants, which is generally set at 100 percent at the conclusion of one to four
      years. Our key employees who have been awarded stock grants and are full time
      employees are subject to a four year vesting period, and our Board of Directors
      who have been awarded stock grants are subject to a one year vesting period.
      During 2006, 2005, and 2004, we granted approximately 38,600, 50,100,
      and 89,200 stock grants to key employees, and these grants are expensed on
      a straight line basis over the life of the grant, through 2010, 2009, and 2008
      respectively. Most of these stock grants are outstanding and unvested as of
      December 31, 2006 and 2005.





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





The
      assumptions used to calculate the fair value of options granted are evaluated
      and revised, as necessary, to reflect market conditions and our experience.
      Prior to 2006, we adopted  disclosure-only provisions of SFAS No. 123,
      as amended by SFAS No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* .
      We
      chose to measure compensation cost for stock-based employee compensation plans
      using the intrinsic value method of accounting prescribed by APB Opinion No.
      25, *Accounting
      for Stock Issued to Employees* .
      All
      stock options are granted at market value on the date of grant. Accordingly,
      no
      compensation expense was recognized in 2005 and 2004 for options related to
      the
      stock option plan. We adopted the provisions of SFAS No. 123(R), *Share
      Based Payment* on
      January 1, 2006, using the modified prospective method of adoption.




F-18


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions used for grants in the years ending December 2006, 2005, and 2004.







**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Expected
                dividend yield
            
            1.38
            %
            1.36
            %
            1.75
            %Expected
                stock price volatility
            
            38.16
            %
            37.07
            %
            37.44
            %Risk-free
                interest rate
            
            4.65
            %
            4.19
            %
            3.63
            %Expected
                life of options
            
            4.95
            years
            5.58
            years
            6.27
            years




The
      weighted-average fair value of options granted during 2006, 2005 and 2004 was
      $9.81, $8.70 and $5.11, respectively.




The
      expected life of the options represents the estimated period of time until
      exercise and is based on historical experience of similar awards, giving
      consideration to the contractual terms, vesting schedules and expectations
      of
      future employee behavior. Expected stock price volatility is based on historical
      volatility of our stock. The risk-free interest rate is based on the implied
      yield available on U.S. Treasury zero-coupon issues with an equivalent remaining
      term. We have also included our anticipated dividend yield based on quarterly
      cash dividends paid to our shareowners during 2006, 2005 and
      2004. Additionally, an annualized forfeiture rate of 8.0 percent is used as
      a best estimate of future forfeitures based on our historical forfeiture
      experience. Under the true-up provisions of SFAS 123(R), the stock-based
      compensation expense will be adjusted in later periods if the actual forfeiture
      rate is different from the estimate.




Total
      stock-based compensation expense recognized in the consolidated statement of
      operations for the year ended 2006 was $2.1 million before income taxes. Of
      the
      total stock-based compensation expense during the year, stock option expense
      was
      $1.3 million and restricted stock grant expense was $0.8 million. Total
      stock-based compensation expense for restricted stock grants recognized in
      the
      consolidated statements of operations for the years ended 2005 and 2004 was
      $0.5
      million and an insignificant amount, respectively.





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 123(R),
      net
      income and net income per share amounts for the years ended 2005 and 2004 would
      have been changed to the pro-forma amounts indicated below (in thousands except
      per share data). Disclosures for 2006 are not presented as the amounts are
      recognized in the consolidated financial statements.


**Years
                ended December 31,****2005**
            
            **2004**Net
                income as reported
            
            $
            22,410
            
            $
            15,647Add:
                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)Pro-forma
                net income
            
            $
            21,844
            
            $
            15,275Pro-forma
                net income per share - basic
            
            $
            1.08
            
            $
            0.76Pro-forma
                net income per share - diluted
            
            $
            1.02
            
            $
            0.73




F-19


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





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





The
      following table presents information about the common stock options and
      restricted grants as of December 31, 2006:




**Options
                and Grants Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Shares**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Weighted
                Average Exercise Price**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**$0.00
                - $2.79
            
            168,709
            
            2.50
            $
            —
            
            —
            $
            —2.79
                - 5.58
            
            298,578
            
            2.85
            
            3.94
            
            298,578
            
            3.945.79
                - 8.37
            
            631,231
            
            5.04
            
            6.12
            
            619,681
            
            6.118.37
                - 11.16
            
            173,926
            
            6.41
            
            9.88
            
            119,726
            
            9.6911.16
                - 13.95
            
            37,050
            
            6.70
            
            12.15
            
            16,750
            
            12.1513.95
                - 16.73
            
            27,669
            
            8.33
            
            16.15
            
            4,632
            
            15.9916.73
                - 19.52
            
            128,101
            
            7.84
            
            16.74
            
            63,072
            
            16.7419.52
                - 22.31
            
            73,000
            
            8.62
            
            21.09
            
            18,250
            
            21.0925.10
                - 27.89
            
            215,099
            
            9.32
            
            27.13
            
            27,911
            
            26.801,753,363
            
            5.53
            
            9.79
            
            1,168,600
            
            7.35







At
      December 31, 2005, there were 1,124,226 exercisable stock options at the
      weighted average exercise price of $5.92 per share.





At
      December 31, 2006, the aggregate intrinsic value of stock options and restricted
      grants outstanding was $36.0 million and the aggregate intrinsic value of stock
      options and restricted grants exercisable was $26.9 million. The weighted
      average remaining contractual life of stock options and restricted grants
      outstanding was 6.1 years and exercisable was 4.9 years. The aggregate intrinsic
      value is before applicable income taxes, based on our $30.35 closing stock
      price
      at December 31, 2006, which would have been received by the optionees had all
      options been exercised on that date. As of December 31, 2006, total unrecognized
      stock-based compensation expense related to non-vested stock options and
      restricted stock grants was approximately $4.4 million, which is expected to
      be
      recognized over a period of approximately 4.0 years. During the year ended
      December 31, 2006, the total intrinsic value of stock options exercised was
      $6.9
      million, and the total fair value of options vested was $7.1
      million.







F-20


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**





Stock
      option and restricted stock grant transactions during 2004, 2005 and 2006 were
      as follows:




**Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price****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
                at December 31, 2005**
            1,958,911
            
            $
            8.40Granted
            142,839
            
            20.05Forfeited
            (35,880
            )
            11.52Exercised
            (312,507
            )
            5.61**Balance
                December 31, 2006**
            1,753,363
            
            $
            9.79





**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, 2006,
      2005, and 2004, we contributed approximately $143,000, $95,000, and $33,000
      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,
                2006**
            
            **December 31,
                2005****Carrying**
              **Amount**
            
            **Fair**
              **Value**
            
            **Carrying**
              **Amount**
            
            **Fair**
              **Value**Cash
                and cash equivalents
            
            $
            36,784
            
            $
            36,784
            
            $
            26,916
            
            $
            29,916Derivatives
            
            $
            2,571
            
            $
            2,571
            
            $
            (1,896
            )
            $
            (1,896
            )Available-for-sale
                securities
            
            $
            96,350
            
            $
            96,350
            
            $
            89,688
            
            $
            89,688




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




**13.**
            **Earnings
                Per Share**




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




**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Numerator:Net
                income for basic and diluted earnings per share
            
            $
            26,692
            
            $
            22,410
            
            $
            15,647Denominator:Weighted-average
                shares outstanding - basic
            
            20,554
            
            20,311
            
            20,090Effect
                of dilutive common stock options
            
            783
            
            968
            
            798Effect
                of dilutive common stock grants
            
            56
            
            33
            
            10Weighted-average
                shares outstanding - diluted
            
            21,393
            
            21,312
            
            20,898Earnings
                per share - basic and diluted:Net
                income per share - basic
            
            $
            1.30
            
            $
            1.10
            
            $
            0.78Net
                income per share - diluted
            $
            1.25
            $
            1.05
            $
            0.75





F-22


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**







**14.**
            **Supplemental
                Disclosures of Consolidated Statements of Cash
                Flows**




We
      paid
      cash for taxes during 2006, 2005, and 2004 of approximately **** $10.5
      million, $8.5 million, and $7.4 million, respectively.




Our
      non-cash investing and financing activities during the years ended
      December 31, 2006, 2005, and 2004, are as follows (in thousands):




**2006**
            
            **2005**
            
            **2004**Unrealized
                gain (loss) on foreign currency exchange contracts
            
            $
            4,467
            
            $
            (4,505
            )
            $
            (2,600
            )Unrealized
                gain (loss) on available-for-sale securities
            
            194
            
            (129
            )
            (138
            )Tax
                benefit from stock options exercised
            
            —
            
            3,319
            
            489Property,
                plant and equipment
            
            (2,119
            )
            —
            
            —Capital
                lease obligation
            
            —
            
            144
            
            —




**15.**
            **Quarterly
                Financial Data**




Summarized
      quarterly financial data for 2006, 2005, and 2004 is as follows (unaudited,
      and
      in thousands except per share data):





**Quarters
                Ended****March 31**
            
            **June 30**
            
            **September 30**
            
            **December 31****2006**Total
                revenue
            
            $
            4,651
            
            $
            39,654
            
            $
            38,706
            
            $
            5,944Gross
                margin
            
            $
            2,505
            
            $
            35,180
            
            $
            35,093
            
            $
            4,704Selling
                and marketing expense
            
            6,515
            
            7,234
            
            9,176
            
            8,713General
                and administrative expense
            
            2,013
            
            2,295
            
            2,399
            
            5,014Income
                (loss) before income taxes
            
            (5,068
            )
            27,059
            
            24,781
            
            (7,894
            )Net
                income (loss)
            
            (3,448
            )
            18,467
            
            17,099
            
            (5,426
            )Earnings
                (loss) per share-basic
            
            (0.17
            )
            0.90
            
            0.83
            
            (0.26
            )Earnings
                (loss) per share-diluted
            
            (0.17
            )
            0.86
            
            0.80
            
            (0.26
            )




Gross
      program receipts reflect total payments received by us. Gross program receipts
      totaled $5.4 million, $98.7 million, $102.7 million and $12.6 million for the
      quarters ended March 31, June 30, September 30, and
      December 31, 2006, respectively.




**Quarters
                Ended****March 31**
            
            **June 30**
            
            **September 30**
            
            **December 31****2005**Total
                revenue
            
            $
            2,179
            
            $
            29,693
            
            $
            31,204
            
            $
            6,215Gross
                margin
            
            $
            2,179
            
            $
            29,693
            
            $
            30,447
            
            $
            4,130Selling
                and marketing 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
            )


F-23


**AMBASSADORS
      GROUP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**




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**Total
                revenue
            
            $
            1,260
            
            $
            25,854
            
            $
            21,391
            
            $
            3,319Gross
                margin
            
            $
            1,260
            
            $
            25,854
            
            $
            21,391
            
            $
            3,319Selling
                and marketing 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.





**1****6.**
            **Subsequent
                Event**





During
      the first quarter 2007, our board of directors approved the purchase of
      1,200,001 shares of the Company’s common stock, at $27.46  per share for a
      total purchase price of approximately $33.0 million, from Invemed Catalyst
      Fund,
      L.P. The board of directors approved this single purchase opportunity with
      Invemed Catalyst Fund, L.P. independent from the Company’s current share
      repurchase program approved by the board of directors
      in May 2004 and increased in August 2005 and November 2006.


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.




AMBSASSADORS
                  GROUP, INC.By:
              /s/
                  JEFFREY D. THOMASJeffrey
                  D. Thomas,*Chief
                  Executive Officer*






Date:
      March 9, 2007




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,
                2007Jeffrey
                D. Thomas/s/
                JOHN A. UEBERROTH
            
            
            Chairman
                of the Board of Directors
            
            March 9,
                2007John
                A. Ueberroth/s/
                MARGARET M. THOMAS
            
            
            Executive
                Vice-President
            
            March 9,
                2007Margaret
                M. Thomas/s/
                CHADWICK J. BYRD
            
            
            Chief
                Financial Officer and Secretary
            
            March 9,
                2007Chadwick
                J. Byrd/s/
                BRIGITTE M. BREN
            
            
            Director
            
            March 9,
                2007Brigitte
                M. Bren/s/
                DANIEL G. BYRNE
            
            
            Director
            
            March 9,
                2007Daniel
                G. Byrne/s/
                DALE F. FREY
            
            
            Director
            
            March 9,
                2007Dale
                F. Frey/s/
                RAFER L. JOHNSON
            
            
            Director
            
            March 9,
                2007Rafer
                L. Johnson/s/
                JAMES M. KALUSTIAN
            
            
            Director
            
            March 9,
                2007James
                M. Kalustian/s/
                JOSEPH J. UEBERROTH
            
            
            Director
            
            March 9,
                2007Joseph
                J. Ueberroth





/s/
                RICHARD D. C. WHILDEN
            
            
            Director
            
            March 9,
                2007Richard
                D. C. Whilden









II
            -
            1







**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.*10.1
            
            2001
                Equity Participation Plan incorporated by reference to the registrant’s
                Registration Statement on Form 10 filed on January 7, 2002.10.2
            
            Form
                of 2001 Equity Participation Plan Agreement incorporated by reference
                to
                the registrant’s Registration Statement on Form 10 filed on
                November 15, 2001.10.3
            
            Form
                of Indemnification Agreement between the registrant and each of its
                executive officers and directors incorporated by reference to the
                registrant’s Registration Statement on Form 10 filed on January 25,
                2002.10.4
            
            Commercial
                Lease Agreement by and between Portolese & Sample Investments and the
                registrant incorporated by reference to the registrant’s Form 8-K filed on
                January 4, 2005.10.5
            
            AIA
                Document A101, Standard Form of Agreement between Owner and Contractor
                by
                and between the registrant and Graham Construction and Management,
                Inc.
                incorporated by reference to registrant’s Form 8-k filed on September 29,
                2006.10.6
            
            Employment
                Agreement by and between the registrant and Jeffrey D. Thomas,
                incorporated by reference to the registrant’s Form 8-K filed on October 3,
                2006.10.7
            
            Stock
                Purchase Agreement by and between the registrant and Invemed Catalyst
                Fund, L.P. incorporated by reference to the registrant’s Form 8-K filed on
                January 31, 2007.21.1
            
            List
                of subsidiaries of the registrant as of December 31,
                2006.*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