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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K


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|[X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|--- | ------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

OR



|[   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|----- | ----------------------------------------------------------------------------------

For the transition period from                                    to                                   .

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of Incorporation or Organization) |  | 91-1688605
(I.R.S. Employer Identification No.)
|                                                                       
|1071 Camelback Street
Newport Beach, CA 92660                           |  | 92660                                          
|(Address of Principal Executive Offices)                                |  | (Zip Code)                                     

Registrants Telephone Number, Including Area Code:         (949) 759-5900

Securities registered pursuant to Section 12(b) of the Act:         None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 Par Value
Title of Each Class

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X]     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. [X]

The aggregate market value of the voting stock of the registrant held by
non-affiliates of the Registrant, based upon the closing sales price of the
Common Stock on the Nasdaq Stock Market on March 7, 2002, was $63,050,387. The
number of shares of the registrants Common Stock outstanding as of March 7,
2002 was 9,821,686.

DOCUMENTS INCORPORATED BY REFERENCE

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





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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Securities Holders                                
|PART II          
|                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|Signatures       
|Index to Exhibits
|EXHIBIT 23.1     



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TABLE OF CONTENTS

|           |          |  |                                                                                       |  |    |    |  | 
|---------- | -------- |  | ------------------------------------------------------------------------------------- |  | -- | -- |  | 
|PART I    
|           | Item 1.  |  | Business                                                                              |  |    | 1  | 
|           | Item 2.  |  | Properties                                                                            |  |    | 10 | 
|           | Item 3.  |  | Legal Proceedings                                                                     |  |    | 11 | 
|           | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |    | 11 | 
|PART II   
|           | Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  |    | 11 | 
|           | Item 6.  |  | Selected Financial Data                                                               |  |    | 13 | 
|           | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |    | 15 | 
|           | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |    | 24 | 
|           | Item 8.  |  | Financial Statements and Supplementary Data                                           |  |    | 24 | 
|           | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |    | 24 | 
|PART III  
|           | Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |    | 25 | 
|           | Item 11. |  | Executive Compensation                                                                |  |    | 25 | 
|           | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |    | 25 | 
|           | Item 13. |  | Certain Relationships and Related Transactions                                        |  |    | 25 | 
|PART IV   
|           | Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |    | 26 | 
|SIGNATURES |          |  |                                                                                       |  | 54 |   





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PART I




Item 1.Business

Overview

Ambassadors International, Inc., a Delaware corporation, is a leading
educational travel, travel services, and performance improvement company which,
through its wholly owned subsidiaries, was engaged primarily in the business of
(i) promoting and organizing international educational travel and sports
programs for students, athletes and professionals (Ambassadors Group); and is
engaged in (ii) developing, marketing and managing meetings and incentive
programs for a nationwide roster of corporate clients, utilizing incentive
travel, merchandise award programs and corporate meeting management services
(the Performance Group); and (iii) providing comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions and
trade shows (the Services Group).

During 2001 and the years presented, Ambassadors Group was comprised of the
Companys wholly-owned subsidiary, Ambassadors Education Group, Inc., a
Delaware corporation (AEG), which, during 2001, changed its name to
Ambassadors Group, Inc. (AGI). Ambassadors Groups wholly-owned subsidiaries
consisted of Ambassador Programs, Inc., a Delaware corporation (API), and
Ambassadors Sports Group, Inc., a Delaware corporation (ASG). The Performance
Group is comprised of the Companys wholly owned subsidiary, Ambassadors
Performance Group, LLC, a Delaware corporation (APG). The Services Group is
comprised of the Companys wholly-owned subsidiary, Ambassadors Services Group,
Inc. (ASGI). References to the Company herein include Ambassadors
International, Inc. and its subsidiaries, unless the context otherwise
requires.

The Company was originally incorporated in the State of Washington in 1967
under the name International Ambassador Programs, Inc. to provide international
educational travel programs for students and professionals. The Company was
reincorporated in the State of Delaware in 1995. The Companys principal
executive offices are located at 1071 Camelback Street, Newport Beach,
California, 92660-3228 and its telephone number is (949) 759-5900.

Ambassadors Group

Ambassadors Group has been active since the Company was founded in 1967. The
Ambassadors Group consists of several specialized private-label travel
programs, including (i) the People to People Student Ambassador Programs
(Student Ambassador Programs), which provide opportunities for grade school,
junior high, and senior high students to visit foreign countries to learn about
the history, government, economy and culture of such countries, (ii) the
People to People Sports Ambassador Programs (Sports Ambassador Programs),
which provide opportunities for junior high and senior high school athletes to
participate in domestic and international sports travel programs, and (iii)
the People to People Ambassador Programs (Professional Exchange Programs),
which provide foreign travel experiences for professionals, with emphasis on
meetings and seminars between participants and persons in similar professions
abroad. See Business-Education Group.

Since 1983, AGI has organized programs for more than 188,000 students, athletes
and professionals in more than 35 countries on 5 continents. The Companys
educational travel programs feature visits to such countries as Australia,
China, France, Germany, Great Britain, Italy and New Zealand. In 2001, over
25,800 participants traveled on the Companys educational programs.

A majority of Ambassadors Groups programs are organized in connection with
People to People International (People to People), 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. Seven U.S.
Presidents since President Eisenhower have served as Honorary Chairman of
People to People, including President George W. Bush, who currently holds that
position. Mary Eisenhower, the Chief Executive Officer of People to People,
also continues her grandfathers legacy by serving the organization. Subject to
certain exceptions, the Companys agreements with People to People give the
Company the exclusive right to develop and conduct programs for kindergarten
through college age students using the People to People name and the
non-exclusive right to develop and conduct programs for professionals using the
People to People name. The Company extended its agreements with People to
People through the year 2010 and may further extend the agreements through
2020. The Company believes that its long association with People to People has
been a major factor in its ability to provide quality

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educational student, athlete, and professional travel programs, and that this
relationship provides the Company with greater access to foreign governmental
agencies, officials and institutions.

The Company also believes that its association with People to People and the
continued efforts of management have provided the foundation for the Company to
develop and maintain strong strategic alliances, including but not limited to
those with Yosemite National Institutes, U.S. Tennis Association, the Amateur
Athletic Union, USA Volleyball, Wrestling, and Swimming, U.S. Soccer, and Babe
Ruth Baseball.

On January 25, 2002, the Companys Board of Directors formally approved a
plan to spin-off its educational travel segment, Ambassadors Group, Inc., into
a fully independent and separate company. The Board of Directors also declared
a dividend of AGIs common stock for each outstanding share of the Companys
common stock. The distribution of AGIs common stock was intended to be
tax-free to the Company and to the Companys stockholders, and the Company has
received a favorable Internal Revenue Service private letter ruling to that
effect. The Company distributed all of AGIs common stock to its stockholders.
The Company has entered into agreements with AGI to provide for the separation
of AGIs business operations from the Company. These agreements between the
Company and AGI also govern various interim and ongoing relationships. The
trading of the common stock of AGI on the Nasdaq National Market began on March
1, 2002 under the ticker symbol EPAX. The Company will reflect the effects
of the spin-off on assets and earnings in its next quarterly filing under the
Securities Exchange Act of 1934. The proforma effects of the spin-off on the
Companys financial statements as of December 31, 2001 and for the years ended
December 31, 2001 and 2000 are included in Note 15 to the Consolidated
Financial Statements.

Performance Group

During 1996, the Company commenced operations of its Performance Group through
the acquisition of two existing entities. These operations were expanded in
1998 through the acquisition of two additional entities. During 1999, pursuant
to a restructuring plan, the Performance Group operations located in
Minneapolis, Minnesota were closed, and all finance and accounting functions
were consolidated into the Newport Beach, California office. Additionally, the
Company outsourced the incentive merchandising component of its incentives
business.

The Performance Group develops, markets and manages performance improvement
programs for a nationwide roster of clients. The programs offer services in
performance improvement programs and business meeting management services. The
performance improvement programs utilize debit cards, travel incentives and
merchandise awards, designed to achieve a multitude of specific corporate
objectives, including but not limited to achieving sales goals, improving
productivity, and attracting and retaining qualified employees. The business
meeting management services assist clients in planning, coordinating and
producing business meetings and conferences. These clients include both small
and large businesses including Fortune 1000 companies.

Services Group

The Companys Services Group operates its hotel reservation, registration, and
other services business for conventions, tradeshows and large specialty events
through ASGI. The Services Group commenced operations in 1998 through the
acquisition of two existing hotel reservation companies. Through the
acquisition of an existing company in 1999, ASGI added pre-registration and
on-site registration services to its list of services offered. Also during
1999, pursuant to a restructuring plan, the Services Groups operations located
in Boston, Massachusetts were consolidated with the operations in Atlanta,
Georgia, and the finance and accounting functions were consolidated into the
Newport Beach, California office.

The Services Group provides comprehensive hotel reservation, registration, and
other services for large event planners. The hotel services include
negotiating hotel room blocks, creating sub-blocks and fulfilling thousands of
requests for hotel rooms for large citywide events. Hotel reservation requests
are received by mail, fax and over the telephone by the Companys call center
staff. The Services Group accepts reservation requests over the Internet and
by e-mail and,through proprietary technology seamlessly utilizes the Internet
to book hotel reservations. This technology also enables clients, attendees,
and hotel partners to obtain real-time reports and information over the
Internet at any time.

The Services Group registration technology assists planners in pre-registering
attendees for multiple show events. The on-site registration technology
operates through an efficient distribution network with the capability of
registering

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thousands of attendees in a short period of time and in several different
locations. The Services Group also offers attendees and event exhibitors
various forms of lead retrieval systems.

Business

Ambassadors Group

Through Ambassadors Group, the Company organized and promoted educational
travel programs for students, adults and athletes, principally using the People
to People name. Ambassadors Group has the exclusive right to develop and
conduct programs for kindergarten through college age students using the People
to People name. Ambassadors Group also has the non-exclusive right to develop,
market and operate programs for professionals using the People to People name;
however, at the present time the Company is the only entity that has been given
this right by People to People. These rights have been granted pursuant to
agreements with People to People, which expire in 2010 and, at the election of
the Company, may be further extended through 2020. The principal offices of
the Companys Ambassadors Group are located in Spokane, Washington.

The Company also operates certain specialty travel programs for domestic travel
markets. Ambassadors Group has entered into an alliance with Yosemite National
Institutes, a non-profit organization with operations in Yosemite National
Park, Olympic National Park and Golden Gate National Recreation Area. The
agreement with Yosemite National Institutes is exclusive, except that Yosemite
National Institutes may conduct its own programs. Ambassadors Group also has an
agreement with the Amateur Athletic Union to provide international travel for
its players. These programs have included travel to Spain, Switzerland,
Austria, and Italy for athletes to play basketball games against the host
countries national teams. The agreements with Yosemite National Institute and
the Amateur Athletic Union have not generated significant revenues.

Student Ambassador Programs. The Companys Student Ambassador Programs provide
an opportunity for students in the fifth through twelfth grades to travel
domestically or visit one or more foreign countries to learn about the history,
government, economy and culture of such countries. The Company markets its
Student Ambassador Programs through a combination of direct mail and local
informational meetings from August through February. Representatives of the
Company review candidate applications and conduct selection interviews
throughout the country, after which accepted applicants participate in
orientation meetings to prepare for their program.

Student Ambassador Program delegations depart during the summer months, May
through August, and generally travel for approximately 14-23 days, during which
time each delegation visits one or more foreign countries. Each delegation
generally consists of approximately 30-40 students and several teachers, who
act as the delegations leaders. Teachers and students comprising a delegation
generally come from the same locale. Local guides in each country assist the
delegation in their travels.

Programs are designed by the Companys staff of international planners and
researchers to provide an educational and entertaining travel experience by
exposing students to the history, government, economy and culture of the
country or countries visited. In each country, the Company contracts with
overseas program coordinators to provide day-to-day oversight of the programs.
Additionally, a local guide trained by the Company accompanies the group
throughout the duration of its program. In most instances, the Company also
arranges to provide students the opportunity for a homestay (a brief stay with
a host family) which gives students a glimpse of daily life in the visited
country.

Students who complete certain written assignments and other projects can
receive high school and university credit for their participation in the
program. Universities recognizing academic credit include Stanford University,
University of California, Los Angeles, and Georgetown University. All students
who successfully complete the program are eligible to receive up to 40 Service
Learning Credits, which has become a graduation requirement in many curriculums
countrywide.

Sports Ambassador Programs. The Companys Sports Ambassador Programs provide an
opportunity for athletes to explore the host countrys culture and to
participate in international tournaments with teams from across the world in up
to 12 different sports. Athletes ages range from 11 to 19 years. The Company
markets its Sports Ambassador Programs through a combination of direct mail and
local informational meetings. Interested athletes apply to the program and are
interviewed by representatives of the Company. After which, the selected
athletes are accepted for the program.

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Participants in the Sports Ambassador Programs depart during the summer months
and travel for 9 to 14 days. Teams are formed based on gender and age. Most
teams are comprised of athletes from different states. During a 3 to 4-day
training camp, all athletes participate in an individual skill assessment,
after which rosters are formed to ensure balanced and competitive teams. After
the formation of rosters, the balance of the training camp focuses on team
practice and fundamentals, in preparation for the ensuing tournament
competition. In each tournament, the Company contracts with overseas
tournament organizers to provide day-to-day oversight of the programs.
Additionally, athletes are exposed to international culture through
Company-arranged educational excursions.

Athletes in grades 6 through 12 who complete certain written assignments and
projects can receive high school and university credit for their participation
in the program. All athletes who successfully complete the program are
eligible to receive up to 40 Service Learning Credits, which has become a
graduation requirement in many curriculums countrywide.

Professional Programs. The Companys Professional Programs provide
professionals with common interests the opportunity to travel abroad to meet
and exchange ideas with foreign citizens who have similar backgrounds,
interests or professions. The Company markets its Professional Programs through
a direct mail marketing effort throughout the year. Programs originate from the
Companys internal marketing and research staff, who identify potential
delegation topics and leaders. Professional programs have been conducted in
such areas as agriculture, economics, education, medicine and science.

The Company believes that its Professional Programs provide participants with
enriching experiences and deeper understandings of foreign cultures and people
than visits arranged independently or through travel agencies. The Professional
Programs operate year-round and are generally designed to provide a specialized
professional educational experience. Professional Programs travel 10 to 14
days. Unlike travel programs provided by travel agencies, these professional
exchanges are intended largely as working trips, with a significant amount of
the participants time involved in organized meetings, seminars and round-table
discussions with their foreign counterparts, inspection visits to major foreign
facilities and institutions and informal gatherings with foreign counterparts.
Each program is led by a delegation leader chosen by the Company based upon his
or her recognition in the field and expertise regarding the special focus of
the particular program.

Performance Group

The Performance Group develops, markets and manages performance improvement
programs for a nationwide roster of corporate clients. The programs offer
services in performance improvement programs and business meeting management
services. The Performance Group commenced its operations through a series of
acquisitions beginning in 1996. The principal offices of the Performance Group
are located in Newport Beach, California.

In offering performance improvement programs and business meeting management
services, the Performance Group follows a strategy aimed at developing and
implementing programs tailored to each clients objectives. In the event of
performance planning, the Companys employees first meet with the existing or
potential clients to determine their business objectives and their performance
enhancement opportunities. Once a client agrees to pursue a program, the
Company works with the client to determine the scope of the program by
identifying concepts and parameters to meet the objectives of the incentive
program. Program rules are then developed that specifically address the
campaign participants, frequently key wholesalers or dealers involved in the
clients distribution channel. These programs are designed to incrementally
increase revenues and profits for the client. The Companys employees develop
and customize services for the client that fall within the identified
parameters.

Performance Groups marketing team participates in various aspects of a
clients program development. The staff of creative writers and graphic
designers generally delivers promotional campaigns and materials that are
complete from concept through production, including design, printing,
collating, labeling and mailing. The Company offers web based campaign
performance tracking systems, with which clients can follow the period results
of their programs. The incentive program winners are then determined and
notified. Based on the program structure, awards can be in the form of
merchandise, travel, cash, recognition or any combination thereof. The Company
then fulfills the award through a program coordinator that finalizes each
aspect of the clients event and delivers the awards directly to the clients
award winners.

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Services Group

Through the Services Group, the Company provides comprehensive hotel
reservation, registration and travel services for meetings, conventions,
expositions and trade shows. The contracts for these services generally cover
an annual meeting or event and may be for a term of one to several years.
Pursuant to these agreements, the Company provides a wide range of services
associated with booking hotel space and guest registration, including securing
sufficient and appropriate hotel room inventories, coordinating blocking and
booking of all hotel rooms, monitoring the status and volume of reservations,
accepting individual and group reservations, mailing reservation confirmations
and providing an on-site housing services desk at a meeting site to coordinate
attendees housing needs. The principal offices of the Services Group are
located in Newport Beach, California.

Specialty Group

Through its wholly-owned subsidiary Ambassadors Specialty Group, Inc., the
Company has a minority investment in Grand Prix Tours, Inc. (GPT), which
organizes and operates over 40 programs annually to motor racing events in the
United States and internationally. GPT is the largest such travel company in
the United States.

The Specialty Group also had a minority interest in Scheduled Airlines Traffic
Offices, Inc. (SatoTravel), a travel management firm handling travel
management services primarily to the U.S. military and U.S. government, with
the remainder to major U.S. corporations. The Company participated in a
Management Agreement (the Management Agreement) with SATO Travel Holding Co.,
Inc., the parent corporation of SatoTravel, to provide general financial and
management consulting services. In consideration for providing these services,
the Company was paid a management fee and was reimbursed for reasonable
expenses incurred in connection with the rendering of services under the
Management Agreement.

During 2001, the Company sold its investment in Sato Travel and recognized a
gain on the investment approximating $8.3 million.

The Specialty Group also had a minority interest in GetThere.com, a company
engaged in the travel business via the Internet. During 2000, the Company sold
its investment in GetThere.com and recognized a gain on the investment
approximating $7.9 million.

Business Strategy

The Company believes that high quality programs and exceptional customer
service are and will remain key elements of the Companys success. The
Companys strategy is to maintain its quality standards while increasing its
volume of business. To increase its business, the Company intends to (i) expand
the scope of services through enhanced technology and increase the market
penetration of the Performance and Services Groups, and (ii) pursue selective
acquisitions of travel and performance improvement businesses.

Competition

The travel industry in general, and the educational segment of the travel
industry in particular, is highly competitive. During 2001 and the years
presented, the Companys student programs competed with similar educational
travel programs operated by other individuals and organizations, as well as
independent programs organized and sponsored by local teachers with the
assistance of local travel agents. The Companys sports programs competed with
independent organizations, which organize and travel already intact teams for
international competition. The Companys professional programs competed with
independent professional associations that sponsor and organize their own
travel programs through the assistance of local travel agents, and other
organizations that design travel programs for adults.

The Performance Group also competes in segments of the travel industry that are
highly competitive. In the meeting management and incentives businesses, the
Company competes with companies, which are larger and have greater resources
than the Company. The Company believes that, although some potential clients
will focus on price alone, other clients will also be interested in the quality
of the programs developed by the Company and the excellent customer service
provided by the Company. The Company believes that its programs are not easily
duplicated by its competitors.

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The Services Group operates within a highly competitive, technical segment of
the travel industry. The Company competes regarding price and service, but
believes its technology is a key element of its service.

The Company believes that the barriers to entry are relatively low for any
future competitors. Certain organizations engaged in the travel business have
substantially greater financial, marketing and sales resources than the
Company. There can be no assurance that the Companys present or future
competitors will not exert significant competitive pressures on the Company.

Servicemarks

The Company has registered a variety of service and trademarks, including but
not limited to Ambassadors Groups names High School Student Ambassador
Program, Citizen Ambassador Program and Youth Summit. In addition, the
Company has the right, subject to certain exceptions, to use People to Peoples
name, service mark and logo for use in marketing student, athletic, and
professional programs. The Company also owns the exclusive right to the names
American People Ambassador Programs and Missions in Understanding. In the
Services Group, the Company has trademarked its service technology, TESS.
The Company believes that the strength of its service and trademarks is
valuable to its business and intends to continue to protect and promote its
marks as appropriate. However, the Company believes that its business is not
dependent upon any trademark or service mark.

Insurance

The Company maintains insurance coverage that it believes adequate for its
business, including but not limited to, a total of $20 million in coverage for
professional and general liability. The Company also maintains insurance
coverage on real property (for owned and, where required leased property) and
personal property on a replacement cost basis. The Company has not experienced
difficulty in obtaining adequate insurance coverage. There is no assurance that
the insurance maintained by the Company will be adequate in the event of a
claim, or that such insurance will continue to be available in the future.

Employees

On February 4, 2002, the Company employed 279 employees, of which 265 were
full-time employees. Of the Companys full-time employees, 122 are located in
Spokane, Washington; 74 are located in Newport Beach, California; 45 are
located in Atlanta, Georgia; 12 are located in Novato, California; 3 are
located in Alexandria, Virginia; 4 are located in St. Louis, Missouri; 2 are
located in Winnebago, Illinois; and 3 are located in individual offices
throughout the United States. The Company has 57 full-time employees engaged in
marketing and sales and 208 full-time employees in operations, administration
and finance. The Company also employs temporary labor on a seasonal basis to
assist it with its direct marketing efforts in recognition of the fact that the
Companys travel programs are seasonal in nature. None of the Companys
employees is subject to collective bargaining agreements or is represented by a
union. The Company believes that its labor relations are good.

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Risk Factors

Certain statements in this Form 10 K, including statements included below and
under the captions Management Discussion and Analysis of Financial Condition
and Results of Operations, Business and elsewhere, constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to,
those discussed below and elsewhere in this Form 10 K.

Travel Industry and Natural Occurrences

Substantially all of the Companys operations are directly associated with the
travel industry, as a result, the Companys operations are subject to special
risks inherent in doing business in such industry. Such risks include the
adverse affect on operations from war, terrorism, civil disturbances, political
instability, governmental activities and deprivation of contract rights.
Periods of instability or uncertainty surrounding the travel industry may
reduce the demand for the Companys programs and services and could have a
material adverse affect on the Companys business and results of operations.
The terrorist attack of September 11, 2001 is an example of an event which
adversely affected the Companys operations. Demand for the Companys programs
and services may also be adversely affected by natural occurrences such as
hurricanes, earthquakes, epidemics and flooding in regions in which the Company
conducts its programs and provides its services.

General Economic Conditions

The Company derives a significant portion of its revenues directly or
indirectly from the travel industry. The travel industry, especially the
performance improvement and convention sectors, is sensitive to changes in
economic conditions. During general economic downturns and recessions,
companies tend to reduce or eliminate improvement programs and attendance at
conventions and trade shows. The travel industry is also highly susceptible to
unforeseen events, such as terrorism, fuel price escalation, travel-related
accidents, unusual weather patterns or other adverse occurrences. Any event
that results in decreased travel generally would have a material adverse affect
on the Companys business, financial condition and results of operations.

Acquisitions and Expansion of Business

Part of the Companys business strategy is to acquire selected travel, leisure
and performance improvement businesses which will complement its existing
businesses. The Company will be competing for acquisition opportunities with
other companies, many of which have greater name recognition, marketing support
and financial resources than the Company, which may result in a diminished
number of acquisition opportunities available to the Company and higher
acquisition prices. There can no assurance that the Company will be able to
identify, pursue or acquire any targeted businesses. In addition, if any
targeted businesses are acquired, there can be no assurance that the Company
will be able to profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial costs,
delays and/or other operational or financial problems.

If the Company enters into any significant acquisition for cash, a substantial
portion of the Companys available cash could be used in order to consummate
any such acquisition. The Company may also seek to finance such acquisition
through debt or equity financings, and there can be no assurance that such
financings will be available on terms acceptable to the Company or at all. If
consideration for an acquisition consists of equity securities, the Companys
stockholders could be diluted.

Acquisitions involve a number of special risks in addition to those described
above. These risks include, the diversion of managements attention to the
assimilation of the operations and personnel of the acquired businesses, the
potential loss of key employees of acquired companies, potential exposure to
unknown liabilities of acquired companies, adverse affects on the Companys
reported operating results due to acquisition costs and expenses associated
with integrating and assimilating the operations of the acquired businesses and
the amortization of acquired definite lived intangible assets. No assurance
can be given that any acquisitions by the Company will or will not occur, or
that if an acquisition does occur, that it will not have a material adverse
affect on the Company or that any such acquisition will

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be successful in enhancing the Companys business.

To properly manage its expansion through potential acquisitions, the Company
will be required to expend significant management and financial resources.
There can be no assurance that the Companys systems, procedures and controls
will be adequate to support the Companys operations as they expand, without
additional capital and resource expenditures. There can also be no assurance
that the Companys management will be able to manage its growth and operate a
larger organization efficiently or profitably. To the extent the Company is
unable to manage its growth efficiently and effectively or is unable to attract
and retain additional qualified management personnel, the Companys business,
financial condition and results of operations could be materially and adversely
affected.

Seasonality  Fluctuations in Quarterly Results

The Companys businesses are highly seasonal. The Company recognizes gross
program receipts, revenues and program pass-through expenses in the month a
program operates. Historically the majority of the Companys operating income
has been recognized in the second and third quarters, however as a result of
the spinoff of Ambassadors Group, Inc., the Company anticipates that the
majority of its operating income will be recognized in the first and fourth
quarters. The Companys annual results would be adversely affected if the
Companys revenue were to be substantially below seasonal norms during the
first and fourth quarters of the year. The Companys operating results may
fluctuate as a result of many factors, including the mix of programs and
events, program destinations and event locations, the introduction and
acceptance of new programs and program and event enhancements by the Company
and its competitors, timing of program and event operation, cancellation rates,
competitive conditions in the industry, marketing expenses, extreme weather
conditions, timing of and costs related to acquisitions, changes in
relationships with certain travel providers, economic factors and other
considerations affecting the travel industry. As a result of the foregoing,
annual or quarterly operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Companys
common stock could be materially and adversely affected.

Competition

The travel industry in general, and the performance improvement and convention
services sectors in particular, are highly competitive. The Companys
improvement programs and convention services compete with other companies which
provide similar programs and services. Many of these competitors are larger
than the Company and have greater resources than the Company, as well as,
corporations and associations themselves, which may choose to provide these
programs and services in-house. The Company believes the barriers to entry
in each of the fields in which it operates are relatively low. Certain of the
Companys competitors have substantially greater financial, marketing, and
sales resources that the Company. There can be no assurance that the Companys
present competitors or competitors that elect to enter the marketplace in the
future will not exert significant competitive pressures on the Company. Such
competition could have a material adverse affect on the Company.

Casualty Losses

Due to the nature of the Companys business, the Company may be subject to
liability claims arising out of accidents or disasters causing injury to
participants or attendees to its programs or events, including claims for
serious personal injury or death. The Company believes that it has adequate
liability insurance coverage for such risks arising in the normal course of its
business. Although the Company has never experienced a liability loss for
which it did not have adequate insurance coverage, there can be no assurance
that insurance coverage will be sufficient to cover one or more large claims or
that the insurance carrier will be solvent at the time of any covered loss.
There can be no assurance that the Company will be able to obtain sufficient
insurance coverage at acceptable premium levels in the future. Successful
assertion against the Company of one or a series of large uninsured claims, or
of one or a series of claims exceeding the Companys insurance coverage, could
have a material adverse affect on the Companys business, financial condition
and results of operations.

Dependence on Travel Suppliers

In order to provide its services and products, the Company is dependent on
airlines, hotels and other suppliers of travel services. Consistent with
industry practices, the Company does not currently have any long-term
agreements with its travel suppliers that obligate such suppliers to sell
services or products through the Company. Restricted access to

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travel
suppliers capacity or changes in pricing arrangements with travel suppliers
could have a material adverse affect on the Companys business, financial
condition and results of operations.

Dependence on Key Personnel

The Companys performance is substantially dependent on the continued services
and performance of its senior management and certain other key personnel. The
loss of the services of any of its executive officers or other key employees
could have a material adverse affect on the Companys business, financial
condition and results of operations. The Company does not have any long-term
employment agreements with any of its executive officers. The Companys future
success also depends on its ability to identify, attract, hire, train, retain
and motivate other highly skilled managerial, operational, marketing and
customer service personnel. The failure to retain and attract necessary
managerial, operational, marketing and customer service personnel could have a
material adverse affect on the Companys business, financial condition and
results of operations.

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Item 2. Properties

The principal executive offices of the Company occupy approximately 27,000
square feet of office space in Newport Beach, California, pursuant to a lease
dated June 15, 1998, which expires in 2005. The lease currently provides for
monthly rental payments of approximately $32,000. The Company subleases
approximately 4,800 square feet to two sublessees for $5,900 per month.

The Company occupies offices totaling approximately 18,100 square feet in
Atlanta, Georgia. The lease currently provides for monthly rental payments of
approximately $23,681 per month and the lease expires in 2002.

The Company occupies office space totaling 2,400 square feet in Novato,
California pursuant to a lease dated September 1, 1998, which expires in 2003.
The lease currently provides for monthly rental payments approximating $6,200
and will increase in subsequent years based on the local consumer price index.

The Company occupies storage space totaling approximately 2,100 square feet in
Smyrna, Georgia, with current monthly rental payments of approximately $3,000.
This lease expires in 2003.

The Company occupied office space totaling approximately 1,800 square feet in
Alexandria, Virginia, with current monthly rental payments of approximately
$2,632. This lease expired in 2004.

The Company leases, but no longer occupies, office space totaling approximately
15,900 square feet in Watertown, Massachusetts with current monthly rental
payments of $15,854. This lease expires in 2002. The Company has subleased
this location effective January 31, 2000. The monthly sublease rental payment
is $29,150 per month and expires concurrently with the master lease during
2002.

Through Ambassadors Group, the Company leased approximately 45,000 square feet,
in Spokane, Washington pursuant to a lease dated January 3, 1995 that expires
December 31, 2004. The lease provides for monthly rental payments of
approximately $37,000. The Company may cancel the lease without penalty (upon
one years prior notice) and also may extend the term of the lease for an
additional ten year period upon providing written notice to the Lessor of its
intention to exercise such option at least six months prior to the end of the
initial term in 2004. If the Company elects to exercise the extension option,
the monthly rental during the renewal period will be the fair market rental
value of the leased premises as of the date the option is exercised (as
determined based on market rentals of similar properties in the Spokane,
Washington area). The owner of the premises is a partnership consisting of two
former principals of the Company, who subsequently sold their interest in the
Company in January 1995.

Also through Ambassadors Group, the Company occupied office space totaling
approximately 10,850 square feet in Spokane, Washington, pursuant to a lease
dated October 2, 2000, which expires in 2004. The lease may be extended an
additional 5 years with 120 days advance notice to the landlord. Monthly rent
approximated $4,200 per month, with increases specified in the lease. If the
lease option to extend is chosen, the lease payments will increase pursuant to
the lease terms.

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

Management believes that its existing facilities are sufficient to meet its
present needs and anticipated needs for the foreseeable future. However,
additional facilities may be required in connection with future business
acquisitions.

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Item 3.Legal Proceedings

The Company is not a party to any material pending legal proceedings other than
ordinary routine litigation incidental to its business, the outcome of which
the Company believes will not have a material adverse effect on its business,
financial condition, cash flows or results of operations.




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

None.




PART II




Item 5.Market for Registrants Common Equity and Related Stockholder Matters

Stock Market and Other Information

The Companys common stock is traded and prices are quoted on the Nasdaq
National Market under the symbol AMIE since August 3, 1995. As of March 5,
2002, there were approximately 51 holders of record of the Companys Common
Stock. This number does not include beneficial owners holding shares through
nominee or street name.

The following table sets forth the high and low sale prices of a share of the
Companys Common Stock as quoted on the Nasdaq National Market for the periods
indicated:

|                                 |  |      |       |     |  |   |       | 
|-------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                 |  | High |       | Low
|                                 |  |      |       |    
|2000:                            |  |      |       |     |  |   |       | 
|Quarter ended March 31, 2000     |  | $    | 13.00 |     |  | $ | 10.13 | 
|Quarter ended June 30, 2000      |  | $    | 16.50 |     |  | $ | 12.25 | 
|Quarter ended September 30, 2000 |  | $    | 19.13 |     |  | $ | 14.13 | 
|Quarter ended December 31, 2000  |  | $    | 19.13 |     |  | $ | 16.25 | 
|2001:                            |  |      |       |     |  |   |       | 
|Quarter ended March 31, 2001     |  | $    | 20.13 |     |  | $ | 16.50 | 
|Quarter ended June 30, 2001      |  | $    | 27.60 |     |  | $ | 16.06 | 
|Quarter ended September 30, 2001 |  | $    | 27.10 |     |  | $ | 14.15 | 
|Quarter ended December 31, 2001  |  | $    | 21.80 |     |  | $ | 13.40 | 

The foregoing table does not give effect to the spin-off of Ambassadors Group,
Inc. on February 28, 2002.

Dividend Policy

Historically, the Company has not paid any dividends. However, as a result of
the Companys gain from the sale of an investment during 2000, the Company paid
a one-time special cash dividend of $0.53 per share on the Companys Common
Stock, paid to shareowners of record on February 28, 2001. This dividend
returned to the shareowners the per share gain recorded by the Company from the
sale of its investment in GetThere.com.

The Company intends to continue to retain its earnings for use in the operation
and expansion of its business and, therefore, does not anticipate declaring any
cash dividends in the foreseeable future. The payment of dividends in the
future will be at the discretion of the Board of Directors and will be
dependent upon the Companys financial condition, results of operations,
capital requirements and such other factors as the Board of Directors, in its
discretion, deems relevant.

Transfer Agent and Registrar

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

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Changes in Securities

In May and December 2000, the Company authorized stock grants totaling 110,000
shares of the Companys common stock to five of the Companys officers and
directors. The stock grants were made pursuant to the Companys Amended and
Restated 1995 Equity Participation Plan. The securities were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.

During 2001, employees and directors exercised previously issued options to
purchase a total of 155,779 shares of common stock at a weighted average
exercise price of $12.41. All of the stock grants and the exercise of options
were made pursuant to the Companys Amended and Restated 1995 Equity
Participation Plan. The grant of options and issuance of shares of common
stock upon exercise of options were exempt from the registration provisions of
the Securities Act of 1933, as amended (the Act), pursuant to Section 4(2)
thereof.

During 2001, the Company issued 17,588 shares of its Common Stock in connection
with its 1998 acquisition of Incentive Associates, Inc.

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Item 6.Selected Financial Data

Selected financial data as of and for the year ended:

|                                 |                                                   |                                               |              |        |         |   |         |        |      |   |         |        |  |   |         |        |  |   |        |       | 
|-------------------------------- | ------------------------------------------------- | --------------------------------------------- | ------------ | ------ | ------- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------ | ----- | 
|                                 |                                                   |                                               | DECEMBER 31,
|                                 |                                                   |                                               |             
|                                 |                                                   |                                               | 2001(A)      |        | 2000(B) |   | 1999(C) |        | 1998 |   | 1997   
|                                 |                                                   |                                               |              |        |         |   |         |        |      |   |        
|Statement of income data (D)(E): |                                                   | (dollars in thousands, except per share data)
|Operating
revenues (F)           |                                                   | $                                             | 60,454       |        |         | $ | 58,733  |        |      | $ | 43,988  |        |  | $ | 40,147  |        |  | $ | 26,541 |      
|Operating expenses:              |                                                   |                                               |              |        |         |   |         |        |      |   |         |        |  |   |         |        |  |   |        |      
|                                 | Selling and tour promotion                        |                                               |              | 20,797 |         |   |         | 23,205 |      |   |         | 18,624 |  |   |         | 15,555 |  |   |        | 9,826 | 
|                                 | General and administrative                        |                                               |              | 23,838 |         |   |         | 20,660 |      |   |         | 19,243 |  |   |         | 15,577 |  |   |        | 8,210 | 
|                                 | Restructuring and
write-down of intangible assets |                                               |              | 18,740 |         |   |         |       |      |   |         | 8,107  |  |   |         |       |  |   |        |      | 
|Operating income (loss)          |                                                   |                                               | (2,921       | )      |         |   | 14,868  |        |      |   | (1,986  | )      |  |   | 9,015   |        |  |   | 8,505  |      
|Net income                       |                                                   |                                               | 7,498        |        |         |   | 17,726  |        |      |   | 1,839   |        |  |   | 8,362   |        |  |   | 5,637  |      
|Net income per share  basic     |                                                   | $                                             | 0.78         |        |         | $ | 1.86    |        |      | $ | 0.19    |        |  | $ | 0.93    |        |  | $ | 0.83   |      
|Net income per share  diluted   |                                                   | $                                             | 0.75         |        |         | $ | 1.83    |        |      | $ | 0.19    |        |  | $ | 0.92    |        |  | $ | 0.82   |      
|Balance sheet data (G):          |                                                   |                                               |              |        |         |   |         |        |      |   |         |        |  |   |         |        |  |   |        |      
|Cash and cash equivalents        |                                                   | $                                             | 28,021       |        |         | $ | 38,071  |        |      | $ | 18,461  |        |  | $ | 55,290  |        |  | $ | 22,871 |      
|Total assets                     |                                                   |                                               | 165,304      |        |         |   | 168,390 |        |      |   | 142,763 |        |  |   | 127,732 |        |  |   | 34,449 |      
|Long-term debt                   |                                                   |                                               |             |        |         |   | 200     |        |      |   | 400     |        |  |   | 145     |        |  |   | 329    |      
|Total stockholders equity       |                                                   |                                               | 126,240      |        |         |   | 121,871 |        |      |   | 108,269 |        |  |   | 107,049 |        |  |   | 22,556 |      



|(A) |  | During 2001, the statement of income reflects the Companys operations
including a realized pre-tax gain of $8.3 million on the sale of an
investment. The Company sold its minority interest in SatoTravel, which
was purchased by an independent company, Navigant International, Inc.
(NASDAQ: FLYR). The statement of income also reflects the Companys
operations including a write down of intangible assets and certain
investments totaling $18.7 million. Excluding the gain on the sale of this
investment and the write down of intangible assets expense, net income
would have been $14.5 million and diluted earnings per share would have
been $1.46 in 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | During 2000, the statement of income reflects the Companys operations
including a realized gain of $7.9 million on the sale of an investment.
The Company sold its 15% interest in a joint venture whose sole investment
was stock of an internet company that completed an initial public offering
in 1999. Excluding the gain on the sale of this investment, net income
would have been $12.7 million and diluted earnings per share would have
been $1.31 in 2000.                                                                                                                                                                                                      
|   
|(C) |  | During 1999, the statement of income reflects the Companys operations
including restructuring charges approximating $8.1 million. Excluding
these restructuring charges, the net income would have been $7.4 million
and diluted earnings per share would have been $0.76 in 1999.                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(D) |  | In early 1996, the Company commenced operations of its Performance Group
through the acquisition of an entity engaged in this business. In
December 1996 and September 1997, the Company continued the expansion of
its Performance Group through two additional acquisitions. In 1998,
additional acquisitions are                                                                                                                                                                                                                                                                                                                                                          

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|    |  | included in the statement of income as of February, April, May, and July
commencing operations of the Services Group and enhancing the Performance
Group. Acquisitions added to the Companys statement of income within
the Education Group in June 1999 and within the Services Group in
September 1999. All of these acquisitions are included in the Companys
statement of income since their respective dates of acquisition.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(E) |  | The spin off of Ambassadors Group, Inc. will be accounted for as a
disposition of discontinued operations as of February 28, 2002, the date
of the spin, and accordingly, in the future, previously reported results
of operations of the Company will report the results of Ambassadors Group,
Inc. as income from discontinued operations.                                                                                       
|   
|    |  | If the spin off of Ambassadors Group, Inc. had occurred as of December
31, 2001, the total assets and shareholders equity of the Company at
that date would have approximated $119.2 million and $101.4 million,
respectively.                                                                                                                                                                                                    
|   
|    |  | The following is the pro forma condensed results of operations of the
Company had the spin off transaction occurred as of December 31, 2001:                                                                                                                                                                                                                                                                                       

|                                                |  |      |         |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                                                |  | 2001 |         | 2000
|                                                |  |      |         |     
|Revenue                                         |  | $    | 17,040  |      |  | $ | 18,411 |  
|Operating loss                                  |  |      | (15,475 | )    |  |   | (461   | )
|Income (loss) before income taxes               |  |      | (3,173  | )    |  |   | 10,399 |  
|Income from discontinued operations, net of tax |  |      | 9,488   |      |  |   | 11,056 |  
|Net income                                      |  |      | 7,498   |      |  |   | 17,726 |  



|    |  | The financial information of Ambassadors Group, Inc. used to derive the
above pro forma financial information has been carved out from the
consolidated financial statements of the Company using the historical
operation results and historical bases of the assets and liabilities of
the Companys business that Ambassadors Group, Inc. comprises.
Accordingly, the historical financial information of Ambassadors Group,
Inc., used to derive the above pro forma financial information, does not
necessarily reflect what the Companys financial position and operating
results would have been had Ambassadors Group, Inc. been a separate,
stand-alone entity during the periods presented.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(F) |  | Operating revenue is a function of gross program receipts less program
pass through expenses. Program pass through expenses include all direct
costs associated with the Companys programs, including costs related to
airfare, hotels, meals, ground transportation, guides, professional
exchanges and changes in currency exchange rates. Gross program receipts
during the years ended December 31, 2001, 2000, 1999, 1998 and 1997 were
$176 million, $172 million, $139 million, $116 million and $80 million.                                                                                                                                                                                 
|   
|(G) |  | All of the Companys acquisitions have been accounted for under the
purchase method of accounting. Therefore, the balance sheet data includes
the accounts of the acquired entities as of their respective dates of
acquisition. Since one of the acquisitions occurred effective December 31,
1996, the balance sheet data includes the accounts of this entity as of
December 31, 1996; however, the results of operations of this entity are
not included in the statement of income data until the year ended December
31, 1997.                                                                                                                                                                  

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

The following discussion should be read in conjunction with the Companys
consolidated financial statements and the notes thereto in this Annual Report
on Form 10-K. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Companys business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended, and
involve risks and uncertainties. Actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below. All forward-looking statements contained in this Annual Report on Form
10-K are qualified in their entirety by this statement.

General

In the years presented, the Company has been engaged primarily in (i) promoting
and organizing international educational travel programs for students,
athletes, and professionals, (ii) developing, marketing and managing meetings
and incentive programs, and (iii) providing comprehensive hotel reservation,
registration, and travel services for meetings, conventions, expositions, and
trade shows.

Since its initial public offering in August 1995, the Company has expanded its
operations primarily through internal growth and a series of acquisitions of
businesses within the travel and performance improvement industries. Prior to
1996, the Companys business was conducted through Ambassadors Group.
Ambassadors Group was expanded in February 1996 by the acquisition of certain
assets of Marc L. Bright and Associates and in June 1999 by the acquisition of
certain assets of Travel Dynamics, Inc. In February 2002, the Companys Board
of Directors approved the spin off of Ambassadors Group.

In January 1996, the Company completed the acquisition of The Helin
Organization and commenced operations of the Performance Group. In December
1996, the Company acquired Bitterman & Associates, Inc.; in September 1997, the
Company acquired certain of the assets of Debol & Associates; in February 1998,
the Company acquired the stock of Travel Incentives, Inc.; and in May 1998, the
Company acquired the stock of Incentive Associates, Inc., the cumulative effect
of which was to further expand the Companys Performance Group.

The Services Group was commenced in February 1998 with the purchase of certain
of the assets of Rogal America, Co., and expanded with the acquisitions in July
1998 of the assets of Destination, Inc., and in September 1999 of the stock of
Advanced Registration Systems, Inc.

In May 1998, the Company acquired the assets of I.G.S. Travel Corporation,
which commenced the operations of the Specialty Group.

All of these acquisitions were accounted for under the purchase method of
accounting. Therefore, the statements of income of the acquired businesses are
included in the Companys statements of income since their respective dates of
acquisition.

Gross program receipts reflect the total payments received by the Company from
Ambassadors Group participants and Performance Group and Services Group
clients. Gross program receipts less program pass-through expenses constitute
the Companys revenues. Program pass-through expenses include all direct costs
associated with the Companys programs including costs related to airfare,
hotels, meals, ground transportation, guides, professional exchanges, changes
in currency exchange rates and merchandise costs. The Company recognizes gross
program receipts, pass-through expenses and revenues upon the departure of the
program participant or as the service is rendered. Operating expenses, which
are expensed by the Company as incurred, are the costs related to the creation
of programs, promotional materials and marketing costs, salaries, rent, other
general and administrative expenses and all of the Companys ordinary expenses.
The Companys policy is to obtain payment for substantially all travel services
prior to entering into commitments for incurring expenses relating to such
travel.

The Companys businesses are seasonal. The majority of the Companys
Ambassadors Group travel programs occur in June and July of each year. The
Company has historically earned three-quarters of its annual revenues in the
second and third quarters, which has more than offset operating losses incurred
during the rest of the year. The Companys annual results would be adversely
affected if the Companys revenues were to be substantially below seasonal
norms during these

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periods. The Companys operating results will fluctuate as a result of the spin
off of Ambassadors Group, which was the primary contributor to the Companys
seasonality. The Companys operating results may also fluctuate as a result of
many factors including the mix of Performance and Services Group programs and
services, the mix of programs and program destinations offered by the Company
and its competitors, the introduction and acceptance of new programs and
program enhancements by the Company and its competitors, timing of program
completions, cancellation rates, competitive conditions in the industry,
marketing expenses, extreme weather conditions, international conflicts, timing
of and costs relating to acquisitions, changes in relationships with certain
travel providers, economic factors and other considerations affecting travel.

The substantial majority of Ambassadors Groups programs take place outside the
United States and most foreign suppliers require payment in local currency
rather than U.S. dollars. Accordingly, the Company is exposed to foreign
currency risks in certain countries as foreign currency exchange rates between
those currencies and the U.S. dollar fluctuate. To manage these risks, the
Company enters into forward foreign exchange contracts and forward contracts
with synthetic options.

These foreign exchange contracts are entered into to support normal anticipated
recurring purchases, and accordingly, are not entered into for speculative
purposes. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Market Risk.

Critical Accounting Policies

The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including cash and cash equivalents, available-for-sale securities,
investments, intangible assets, income taxes, derivative financial instruments,
and contingencies and litigation.

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

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

The Company values its goodwill and intangible assets using fair value on the
date of an acquisition. The Company periodically assesses the recoverability
of the recorded goodwill based upon the expected undiscounted cash flows of the
business operations that generated the goodwill. As experienced during the
fourth quarter of 2001, impacts of international unrest, terrorism, and the
resulting economic downturn can influence the recoverability of the goodwill
and intangible assets carrying value. During the fourth quarter of 2001, the
Company recorded a charge related to managements conclusion that the goodwill
was impaired (see Note 16 in the footnotes to the Consolidated Financial
Statements). The impact of external influences such as terrorism and economic
slowdown combined with the effects to the Companys operations could result in
future inability to recover the carrying value of the goodwill and intangible
assets that may not be reflected in the assets carrying values.

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The asset and liability approach is used to account for income taxes by
recognizing deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. While the Company has considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, in the event the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made.

The Company uses foreign currency exchange contracts as part of an overall
risk-management strategy. These instruments are used as a means of mitigating
exposure to foreign currency risk connected to anticipated travel programs. In
entering into these contracts, the Company has assumed the risk which might
arise from the possible inability of counterparties to meet the terms of their
contracts. The Company does not expect any losses as a result of counterparty
defaults. However, if such defaults occurred, the necessity would arise to
locate alternative counterparties, or the Company would then consider alternate
means of settling its foreign exchange contractual obligations.

The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

Results of Operations

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

|                           |                                                   |  |                         |      |      |  |       |      |   |  |       |      |  
|-------------------------- | ------------------------------------------------- |  | ----------------------- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                           |                                                   |  | Year Ended December 31,
|                           |                                                   |  |                        
|                           |                                                   |  | 2001                    |      | 2000 |  | 1999 
|                           |                                                   |  |                         |      |      |  |      
|Revenue                    |                                                   |  | 100.0                   | %    |      |  | 100.0 | %    |   |  | 100.0 | %   
|Operating expenses:        |                                                   |  |                         |      |      |  |       |      |   |  |       |     
|                           | Selling and tour promotion                        |  |                         | 34.4 | %    |  |       | 39.5 | % |  |       | 42.3 | %
|                           | General and administrative                        |  |                         | 39.4 | %    |  |       | 35.2 | % |  |       | 43.8 | %
|                           | Restructuring and write down
of intangible assets |  |                         | 31.0 | %    |  |       |     |   |  |       | 18.4 | %
|                           |                                                   |  |                         |      |      |  |       |      |   |  |       |     
|Total operating expenses   |                                                   |  | 104.8                   | %    |      |  | 74.7  | %    |   |  | 104.5 | %   
|Operating income (loss)    |                                                   |  | (4.8                    | %)   |      |  | 25.3  | %    |   |  | (4.5  | )%  
|Other income               |                                                   |  | 23.9                    | %    |      |  | 21.1  | %    |   |  | 11.1  | %   
|Income before income taxes |                                                   |  | 19.1                    | %    |      |  | 46.4  | %    |   |  | 6.6   | %   
|Income tax provision       |                                                   |  | 6.7                     | %    |      |  | 16.2  | %    |   |  | 2.4   | %   
|                           |                                                   |  |                         |      |      |  |       |      |   |  |       |     
|Net income                 |                                                   |  | 12.4                    | %    |      |  | 30.2  | %    |   |  | 4.2   | %   
|                           |                                                   |  |                         |      |      |  |       |      |   |  |       |     

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Business Segment Information

The Company operated Ambassadors Group, the Performance Group, and the Services
Group segments during 2001, 2000, and 1999. Corporate and other consists of
general corporate assets (primarily cash and cash equivalents, investments and
goodwill), Specialty Group activity, and other activities, which are not
directly related to the Ambassadors, Performance and Services Groups. Selected
financial information related to these segments is as follows (in thousands):

|      |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |        |  
|----- | ---------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | -------- | ------ | --------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------ | -
|      |                                                                                    |  | Ambassadors |        | Performance |  | Services |        | Corporate |  |       |        |  
|      |                                                                                    |  | Group       |        | Group       |  | Group    |        | and Other |  | Total
|      |                                                                                    |  |             |        |             |  |          |        |           |  |      
|2001: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |       
|      | Revenues                                                                           |  | $           | 43,414 |             |  | $        | 10,333 |           |  | $     | 6,707  |   |  | $ |        |   |  | $ | 60,454 |  
|      | Depreciation and amortization                                                      |  |             | 650    |             |  |          | 463    |           |  |       | 291    |   |  |   | 1,062   |   |  |   | 2,466  |  
|      | Operating income (loss) prior to
write-down
of intangible assets                   |  |             | 20,569 |             |  |          | 510    |           |  |       | 216    |   |  |   | (5,476  | ) |  |   | 15,819 |  
|      | Write-down
of intangible assets                                                    |  |             |       |             |  |          |       |           |  |       |       |   |  |   | 18,740  |   |  |   | 18,740 |  
|      | Operating income (loss)                                                            |  |             | 20,569 |             |  |          | 510    |           |  |       | 216    |   |  |   | (24,216 | ) |  |   | (2,921 | )
|2000: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |       
|      | Revenues                                                                           |  | $           | 40,322 |             |  | $        | 10,728 |           |  | $     | 7,433  |   |  | $ | 250     |   |  | $ | 58,733 |  
|      | Depreciation and amortization                                                      |  |             | 846    |             |  |          | 497    |           |  |       | 224    |   |  |   | 1,096   |   |  |   | 2,663  |  
|      | Operating income (loss)                                                            |  |             | 16,189 |             |  |          | 1,207  |           |  |       | 387    |   |  |   | (2,915  | ) |  |   | 14,868 |  
|1999: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |       
|      | Revenues                                                                           |  | $           | 26,532 |             |  | $        | 10,474 |           |  | $     | 6,982  |   |  | $ |        |   |  | $ | 43,988 |  
|      | Depreciation and amortization                                                      |  |             | 517    |             |  |          | 466    |           |  |       | 175    |   |  |   | 1,283   |   |  |   | 2,441  |  
|      | Operating income (loss) prior to
restructuring and write-down
of intangible assets |  |             | 10,085 |             |  |          | (700   | )         |  |       | (231   | ) |  |   | (3,033  | ) |  |   | 6,121  |  
|      | Restructuring and write-down
of intangible assets                                  |  |             |       |             |  |          | 487    |           |  |       | 782    |   |  |   | 6,838   |   |  |   | 8,107  |  
|      | Operating income (loss)                                                            |  |             | 10,085 |             |  |          | (1,187 | )         |  |       | (1,013 | ) |  |   | (9,871  | ) |  |   | (1,986 | )

Comparison of Year Ended December 31, 2001 to December 31, 2000

The Companys gross program receipts increased $4.5 million to $176.2 million
in 2001, from $171.7 million in 2000. Ambassadors Group traveled over 25,800
participants during 2001 as compared to approximately 25,300 participants
during 2000. The mix of student, athlete, and professional 2001 participants
as compared to the mix of 2000 participants resulted in $8.5 million of
increased gross receipts. Ambassadors Group increase was offset by decreases
in housing revenues within the Services Group and decreases of program revenues
within the Performance Group, totaling approximately $4.0 million. These
decreases were the result of a loss of business and lost revenues directly
attributable to the events of September 11, 2001.

Net revenue increased 3% to $60.5 million during 2001 from $58.7 million in
2000. Ambassadors Group increased $3.1 million as a result of the varied mix
of participants during 2001 in comparison to 2000. The Performance Group and
Services Group decreased a total of $1.1 million due to lower gross margins
realized on programs operated and programs operating in 2000 which did not
operate during 2001.

Selling and tour promotion expenses decreased to $20.8 million during 2001 from
$23.2 million in 2000, a $2.4 million decrease. The majority of this decrease,
or $1.9 million, is attributable to Ambassadors Groups decreased marketing
expenses as a result of the Companys marketing efforts subsequent to the
terrorist acts of September 11, 2001 and the resulting overall negative
sentiment toward travel and the travel industry. This decrease was
complemented with improved financial measurement and expense control programs
that enabled the Services Group to decrease its selling and tour promotion
expenses by $0.6 million when comparing the years ended 2001 to 2000. The
Performance Groups selling and tour promotion expenses remained relatively
comparable year over year.

General and administrative expenses increased during 2001 to $23.8 million from
$20.7 million in 2000, an increase of $3.2 million. Corporate incurred
nonrecurring expenses totaling approximately $2.6 million, including
professional fees

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associated with the Companys spin off of Ambassadors Group in the amount of
approximately $0.5 million, and stock compensation expense related to stock
grants to five directors and officers, approximating $2.1 million.

During the fourth quarter of 2001, the Company incurred an $18.7 million
impairment expense for intangible assets and certain investments, incurred
primarily as a result of the impact to operations of the terrorist acts that
occurred on September 11, 2001, the response by the United States since October
7, 2001, the resulting negative impact these events have had on domestic and
international air travel and the travel industry in general, and the slow down
of the economy during 2001 This impairment expense included the impairment
charge for goodwill associated with all segments of the Company.

During 2001, the Company incurred an operating loss of $2.9 million in
comparison to the operating income of $14.9 million in 2000. Excluding the
impairment of intangibles charges during 2001 of $18.7 million, operating
income would have been $15.8 million. Changes in operating loss and income from
2000 to 2001 are the result of changes as described above.

Other income in 2001 totaled $14.5 million in comparison to $12.4 million
during 2000. Other income during 2001 consisted primarily of $5.7 million in
interest income generated by cash, cash equivalents, and available-for-sale
securities and an $8.3 million gain on the sale of an investment. Other income
during 2000 consisted primarily of $5.7 million in interest income generated by
cash, cash equivalents, and available-for-sale securities, a $7.9 million gain
on the sale of an investment, and $1.6 million in unrealized foreign exchange
losses on forward foreign exchange contracts and options. At December 31,
2001, the Company had $135.3 million in cash, cash equivalents and
available-for-sale securities, compared to $125.4 million at December 31, 2000.

The Companys effective income tax rate remained consistent at 35% during both
2001 and 2000. The Company recorded an income tax provision of $4.0 million in
2001 compared to $9.5 million in 2000.

Net income decreased to $7.5 million from $17.7 million during the years ended
December 31, 2001 and 2000, respectively. Excluding the non-recurring items:
the write-down of intangible assets expense during 2001 and the gains on the
sales of investments during 2001 and 2000, net income would have been $14.5
million during the year ended December 31, 2001 in comparison to $12.7 million
during the year ended December 31, 2000, an increase of $1.8 million. These
changes were the result of changes as described above.

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

The Companys gross program receipts increased $32.4 million to $171.7 million
in 2000, from $139.3 million in 1999. Ambassadors Group traveled 46% more
participants year over year resulting in over 25,300 participants traveling
during 2000. The Ambassadors Group increase was complemented with increases of
registration revenues within the Services Group of approximately $0.8 million
and partially offset by decreases of approximately $5.9 million within the
Performance Group. The decrease in the Performance Group was directly related
to managements decision to close certain offices in the fourth quarter of
1999.

Net revenue increased 34% to $58.7 million from $44.0 million in 1999.
Ambassadors Group increased $13.8 million, or 52%, as a result of the increase
in traveled participants. The Performance Group remained relatively consistent
with prior year net revenues and the Services Group increased net revenues $0.5
million through its registrations product line.

Selling and tour promotion expenses increased to $23.2 million during 2000 from
$18.6 million in 1999, an increase of $4.6 million. The majority of this
increase, or $3.8 million, is attributable to increased student and
professional program marketing expenses, supporting additional participant
volume within Ambassadors Group. This is combined with a full year of sports
selling and marketing expenses during 2000 from Ambassadors Groups June 1999
acquisition, which increased expenses $1.9 million year over year. These
increases were partially offset by improved financial measurement and expense
control programs that enabled the Performance and Services Groups to decrease
their selling and tour promotion expenses by $0.9 million and $0.2 million,
respectively.

General and administrative expenses increased during 2000 to $20.7 million from
$19.2 million in 1999, an increase of $1.5 million. Ambassadors Group
increased $1.9 million to support increased participant volume within the
student and professional programs and a full year of sports administrative
expenses during 2000 from the Education Groups June 1999 acquisition. In
addition, Corporate incurred unearned compensation expense related to stock
grants during 2000

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totaling approximately $0.2 million. These increases were offset by
approximately $0.9 million of decreased expenses within the Performance Group
as a result of the Companys restructuring during 1999.

During the fourth quarter of 1999, in connection with managements decisions to
close certain offices to improve operating efficiencies and reduce costs and to
outsource the merchandising business, the Company recorded a restructuring
charge and a write-down of intangible assets totaling approximately $8.1
million. Cash spent on the restructuring was funded from operations during
2000 and 1999. The restructuring plan involved the elimination of
approximately 60 positions, the write-down of intangible assets and property
and equipment and the consolidation of offices as follows (in thousands):

|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 
|------------------------------------ |  | -------- |  | ---------- | ----- | ------------- | ----- | ------------ | ------ | -------- | ------ | ------------ | --- | - | --- | - | ---- | ---------- | ---- | - | - | - | - | 
|                                     |  |          |  |            |       | Restructuring |       |              |        |          |        | Reserve      |     |   |     |   |      | Reserve   
|                                     |  |          |  |            |       | and           |       |              |        |          |        | Balance at   |     |   |     |   |      | Balance at
|                                     |  | Cash/    |  | Impairment |       | 1999          |       | December 31, |        | 2000     |        | December 31,
|                                     |  | Non-Cash |  | Charge     |       | Activity      |       | 1999         |        | Activity |        | 2000        
|                                     |  |          |  |            |       |               |       |              |        |          |        |             
|Write-down of
intangible assets      |  | Non-cash |  | $          | 6,838 |               |       | $            | (6,838 | )        |        | $            |    |   |     | $ |     |            |      | $ |  |  
|Severance and related
charges        |  | Cash     |  |            | 700   |               |       |              | (134   | )        |        |              | 566 |   |     |   | (566 | )          |      |   |  |  
|Consolidation of offices             |  | Cash     |  |            | 299   |               |       |              | (27    | )        |        |              | 272 |   |     |   | (272 | )          |      |   |  |  
|Write-down of property
and equipment |  | Non-cash |  |            | 270   |               |       |              | (270   | )        |        |              |    |   |     |   |     |            |      |   |  |  
|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 
|Total                                |  |          |  |            |       | $             | 8,107 |              |        | $        | (7,269 | )            |     | $ | 838 |   |      | $          | (838 | ) |   | $ |  | 
|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 

The total restructuring charges, excluding intangibles, incurred by the
Performance and Services Groups were approximately $487,000 and $782,000,
respectively. These charges consisted of severance and related charges,
expenses incurred in closing offices and the write-down of property and
equipment associated with the closure of those offices. The write-down of
intangible assets included goodwill and non-compete contracts and totaled
approximately $4.4 million in the Performance Group and approximately $2.4
million in the Services Group.

The write-down of the Performance Groups intangible assets, approximating $4.4
million, consisted of the remaining goodwill balances relating to five previous
acquisitions that were being operated from the Minneapolis location that was
closed in December 1999 as a result of losing a majority of customers. All
administrative staff was terminated.

The write-down of Services Groups intangible asset, approximating $2.4
million, consisted of a partial write-down of goodwill on one acquisition that
was previously being operated from the Boston office. The Boston office was
closed in December of 1999 due to a significant number of clients not renewing
their contracts. Administrative staff was either terminated or relocated to the
Atlanta location.

During 2000, the Companys operating income increased $16.9 million to $14.9
million from an operating loss of $(2.0) million in 1999. During 1999, the
restructuring and write-down charges reduced the operating income by $8.1
million. Excluding the $8.1 million of restructuring and impairment of
intangible assets expenses during 1999, operating income would have been $6.1
million. Other changes in operating income from 1999 to 2000 are the result of
changes as described above.

Other income in 2000 totaled $12.4 million in comparison to $4.9 million during
1999. Other income during 2000 consisted primarily of $5.7 million in interest
income generated by cash, cash equivalents, and available-for-sale securities,
a $7.9 million gain on the sale of an investment, and $1.6 million in
unrealized foreign exchange losses on forward foreign exchange contracts and
options. In 1999, the Company realized interest and dividend income of $3.8
million and $0.9 million in management fees from an investment, of which a
portion was non-recurring in nature. On December 31, 2000, the Company had
$125.4 million in cash, cash equivalents and available-for-sale securities,
compared to $100.2 million on December 31, 1999.

The Companys effective income tax rate decreased to 35% during 2000 from 36%
during 1999. This decrease is a combination of the tax effect of the
1999-restructuring plan, combined with the effect of changes in the tax rate
due to the Companys cash management and investment strategies. These
strategies resulted in a significant amount of tax-exempt

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interest income. The Company recorded an income tax provision of $9.5 million
in 2000 compared to $1.0 million in 1999.

Net income increased to $17.7 million from $1.8 million during the years ended
December 31, 2000 and 1999, respectively. Excluding the gains on the sale of
an investment during 2000 and the restructuring and write down of intangible
assets expense during 1999, net income would have been $12.7 million during the
year ended December 31, 2001 in comparison to $7.4 million during the year
ended December 31, 2000, an increase of $5.3 million. This increase was the
result of changes as described above.

Liquidity and Capital Resources

The Companys business is not capital intensive. However, the Company does
retain funds for operating purposes in order to conduct sales and marketing
efforts for future programs and to facilitate acquisitions of other companies.

Net cash provided by operations for the years ended December 31, 2001, 2000,
and 1999, was $7.2 million, $29.4 million, and $14.4 million respectively. The
decrease in cash flows from operations in 2001 versus 2000 is primarily due to
the decline in 2001 net income and less participant deposits being collected by
the Company at December 31, 2001 in comparison to December 31, 2000. The
increase in cash flow from operations in 2000 versus 1999 is primarily due to
enhanced collections of participant deposits and timing of accounts payable and
accrued expense payments.

Net cash used in investing activities for the years ended December 31, 2001,
2000, and 1999 was $13.0 million, $9.4 million, and $44.3 million respectively.
The investing activities during 2001 and 2000 primarily related to investing in
available-for-sale securities. The net cash used in investing activities in
2001 was also netted with the proceeds from the sale of other investments
during the year. The net cash used in investing activities in 1999 primarily
related to investing in available-for-sale securities as well as $6.6 million
of purchases of acquisitions and other investments.

The Company does not have any material capital expenditure commitments for
2002. However, the Company approved the spin off of its Ambassadors Group in
February 2002,and a certain cash amount will be spent pursuant to the
transaction. See the Companys filing, Ambassadors Group, Inc. Form 10,
Certain Transactions, Capital Contribution for a detailed calculation of such
use. The Company plans to disclose the impact of the spin off in its quarterly
filings with the SEC after the first quarter of 2002 pursuant to the Securities
and Exchange Act of 1934.

The terms of the Companys acquisitions of certain businesses also include
contingent consideration, which could range up to approximately $0.6 million in
2002. Additionally, the Company is continuing to pursue further acquisitions
of related travel and performance improvement businesses that may require the
use of cash and cash equivalents. However, no assurance can be given that
definitive agreements for any such investment or acquisition will be entered
into, or, if they are entered into, that they will be on terms favorable to the
Company.

Net cash used in financing activities during 2001 totaling $4.2 million
primarily relates to cash paid by the Company for a dividend to its
shareowners, netted with cash received by the Company from employees exercises
of stock options during the year. Net cash used in financing activities during
2000 totaling $0.4 million primarily relates to payments during the year on the
Companys debt obligation. Net cash used in financing activities during 1999
totaling $6.9 million primarily relates to the purchase and retirement of
common stock totaling $7.3 million. As of December 31, 2001, the Company had
no long-term debt. As of December 31, 2000 and 1999, the Company had $0.4
million and $0.7 million, respectively, in long-term debt as a result of
acquisitions during 1999 and 1997.

During 2001, the Company had a credit facility available with a major financial
institution, with a limit of up to $50.0 million for foreign currency purchases
and foreign exchange forward contracts. This credit facility was terminated
upon the spin off of the Companys Ambassadors Group in February 2002.

As of December 31, 2001, the Company had approximately $135.3 million of cash
and cash equivalents, available-for-sale securities, and restricted cash
equivalents, including program participant funds of $26.5 million. Under the
Companys cancellation policy, a program participant may be entitled to a
refund of a portion of his or her deposit, less certain fees, depending on the
timing of cancellation. Should a greater number of participants cancel their
travel in comparison to that which is part of the Companys ongoing operations,
due to circumstances such as international unrest, terrorism, or general
economic downturn, the Companys cash balances could be significantly reduced.
Cash balances could also be reduced

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significantly if the financial institutions, which held balances beyond that
federally insured, were to become insolvent. Management believes that existing
cash and cash equivalents and cash flows from operations will be sufficient to
fund the Companys anticipated operating needs, capital expenditures and
acquisitions at least through 2002.

Market Risk

The following table summarizes the financial instruments other than derivative
financial instruments held by the Company at December 31, 2001 and 2000, which
are sensitive to changes in interest rates. This table presents principal cash
flows for available-for-sale securities and notes payable outstanding at
December 31, 2001 and 2000 by contractual maturity date and the related average
interest rate and fair value (amounts in thousands):

|                                       |  |                          |        |                   |  |                   |        |       |  |       |   |       |  |       |         |      |  |   |         |  |  |      |        |   |  |   |        | 
|-------------------------------------- |  | ------------------------ | ------ | ----------------- |  | ----------------- | ------ | ----- |  | ----- | - | ----- |  | ----- | ------- | ---- |  | - | ------- |  |  | ---- | ------ | - |  | - | ------ | 
|                                       |  | Year Ending December 31, |        | December 31, 2001 |  | December 31, 2000
|                                       |  |                          |        |                   |  |                  
|                                       |  |                          |        |                   |  |                   |        |       |  | After |   |       |  |       |         | Fair |  |   |         |  |  | Fair
|                                       |  | 2002                     |        | 2003              |  | 2003              |        | Total |  | Value |   | Total |  | Value
|                                       |  |                          |        |                   |  |                   |        |       |  |       |   |       |  |      
|U.S. government and
agency obligations |  | $                        | 91,464 |                   |  | $                 | 13,123 |       |  | $     |  |       |  | $     | 104,587 |      |  | $ | 104,587 |  |  | $    | 87,240 |   |  | $ | 87,240 | 
|Interest rate                          |  |                          | 3.88   | %                 |  |                   | 4.71   | %     |  |       |  |       |  |       | 3.99    | %    |  |   |         |  |  |      | 5.9    | % |  |   |       | 
|Notes payable                          |  | $                        | 200    |                   |  | $                 |       |       |  |       |  |       |  | $     | 200     |      |  | $ | 200     |  |  | $    | 400    |   |  | $ | 400    | 
|Interest rate (fixed)                  |  |                          | 4.0    | %                 |  |                   |       |       |  |       |  |       |  |       | 4.0     | %    |  |   |         |  |  |      | 4.0    | % |  |   |       | 

The substantial majority of Ambassadors Groups travel programs take place
outside the United States and most foreign suppliers require payment in
currency other than the U.S. dollar. Accordingly, the Company is exposed to
foreign currency risk relative to changes in foreign currency exchange rates
between those currencies and the U.S. dollar. The Company has a program to
provide a hedge against certain of these foreign currency risks. The Company
uses forward contracts, which allow the Company to acquire the foreign currency
at a fixed price for a specified period of time. Some of the Companys forward
contracts include a synthetic component if a pre-determined trigger occurs
during the term of the contract.

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

The table below provides information about the Companys derivative financial
instruments that are sensitive to foreign currency exchange rates. For foreign
currency forward exchange agreements, the table presents the notional amounts
and weighted average exchange rates. All contracts mature in 2002. These
notional amounts generally are used to calculate the contractual payments to be
exchanged under the contract. None of these contracts is entered into for
trading purposes.

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

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

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

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

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations (SFAS 141). SFAS 141 establishes new
standards for accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 141, use of the
pooling-of-interest method is prohibited. The Company adopted this statement
during the third quarter of fiscal 2001. The adoption of SFAS 141 did not have
a material impact on the Companys consolidated financial statements.

On July 20, 2001, the FASB issued Statement No. 142 (SFAS 142), Goodwill and
Other Intangible Assets. SFAS 142 changes the accounting for goodwill and
certain other intangible assets from an amortization method to an
impairment-only approach. Upon adoption of SFAS 142, goodwill and certain other
intangible assets will be tested at the reporting unit annually and whenever
events or circumstances occur indicating that goodwill and certain other
intangible assets might be impaired. Amortization of goodwill and certain other
intangible assets, including goodwill recorded in past business combinations,
will cease. The adoption date for the Company will be January 1, 2002. The
Company has not yet

23



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##### Table of Contents



determined what the impact of SFAS 142, including the transition impairment
test, will be on the Companys results of operations and financial position.

The Company expects that the adoption of SFAS No. 142 will result in a pre-tax
increase to net earnings of approximately $0.5 million for the fiscal year 2002
from the cessation of amortization of previously recorded goodwill and does not
expect to recognize any impairments. The Company has nominal identifiable
intangible assets as of December 31, 2001.

In August 2001, the FASB approved SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143), which will be effective for the
fiscal year beginning January 1, 2003. SFAS No. 143 addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In
October 2001, the FASB approved SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of (SFAS No. 121) and the accounting and reporting provisions
of APB. No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the disposal of a segment
of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS
No. 121, but resolves certain implementation issues associates with that
Statement. SFAS No. 144 will be effective for the fiscal year beginning
January 1, 2002. The Company does not anticipate that the adoption of SFAS No.
143 and SFAS No. 144 will have a material impact on its financial condition or
results of operations.




Item 7A.Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated herein by reference to
the section entitled Market Risk in Managements Discussion and Analysis of
Results of Operations and Financial Condition (Part II, Item 7).




Item 8.Financial Statements and Supplementary Data

Consolidated Financial Statements: See Part IV, Item 14 of this Form 10-K.




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

None.

24



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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

The information called for by this item is hereby incorporated by reference
from the Registrants definitive Proxy Statement for the fiscal year ended
December 31, 2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16, 2002.




Item 11.Executive Compensation

The information called for by this item is hereby incorporated by reference
from the Registrants definitive Proxy Statement for the fiscal year ended
December 31, 2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16, 2002.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information called for by this item is hereby incorporated by reference
from the Registrants definitive Proxy Statement for the fiscal year ended
December 31, 2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16, 2002.




Item 13.Certain Relationships and Related Transactions

The information called for by this item is hereby incorporated by reference
from the Registrants definitive Proxy Statement for the fiscal year ended
December 31, 2001, which Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about April 16, 2002.

25



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##### Table of Contents






PART IV




Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K



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



| | (1) |  | Consolidated Financial Statements:
| | --- |  | ----------------------------------

|                                                                                                                |  |  |         | 
|--------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|Report of Independent Accountants                                                                               |  |  | 27      | 
|Consolidated Balance Sheets at December 31,
2001 and 2000                                                       |  |  | 28      | 
|Consolidated Statements of Income for the years
ended December 31, 2001, 2000 and 1999                          |  |  | 29      | 
|Consolidated Statements of Comprehensive
Income for the years ended
December 31, 2001, 2000, and 1999           |  |  | 30      | 
|Consolidated Statements of Changes in Stockholders
Equity for the years ended December 31, 2001,
2000 and 1999 |  |  | 31      | 
|Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000, and 1999                     |  |  | 32      | 
|Notes to Consolidated Financial Statements                                                                      |  |  | 33 - 53 | 



| | (2) |  | Financial Statement Schedules:                                                                                      
| | --- |  | --------------------------------------------------------------------------------------------------------------------
|
| |     |  | No financial statement schedules are presented as the                                                               
|
| |     |  | required information is either not applicable or included in
the Consolidated Financial Statements or notes thereto.
|
| | (3) |  | Exhibits                                                                                                            
|
| |     |  | The exhibits listed on the accompanying Exhibit Index are
filed as part of this Form 10-K.                          



|(b) |  | Reports on Form 8-K                                                          
|--- |  | -----------------------------------------------------------------------------
|   
|    |  | No reports on Form 8-K were filed during the quarter ended December 31,
2001.

26



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##### Table of Contents



Report of Independent Accountants

Board of Directors and Stockholders
Ambassadors International, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income, of changes in
stockholders equity and of cash flows present fairly, in all material
respects, the financial position of Ambassadors International, Inc. and its
subsidiaries (the Company) at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.



| | /s/ PricewaterhouseCoopers LLP
| | ------------------------------

Portland, Oregon
February 7, 2002, except for Note 15, which is as of February 28, 2002

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##### Table of Contents



Ambassadors International, Inc.
Consolidated Balance Sheets
December 31, 2001 and 2000
(dollars in thousands, except share data)

|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |        |        |         |         | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------ | ------------------------- | ------- | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                                   |                                                                                                                     |                                     |                                            |                           |         | 2001    |         | 2000  
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|Assets:                                            |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   | Current assets:                                                                                                     |                                     |                                            |                           |         |         |         |        |       
|                                                   |                                                                                                                     | Cash and cash equivalents           |                                            | $                         | 28,021  |         |         | $      | 38,071 |        
|                                                   |                                                                                                                     | Restricted cash equivalents         |                                            |                           | 12      |         |         |        | 112    |        
|                                                   |                                                                                                                     | Available-for-sale securities       |                                            |                           | 107,303 |         |         |        | 87,240 |        
|                                                   |                                                                                                                     | Accounts receivable                 |                                            |                           | 4,487   |         |         |        | 4,146  |        
|                                                   |                                                                                                                     | Prepaid program costs and expenses  |                                            |                           | 5,250   |         |         |        | 6,839  |        
|                                                   |                                                                                                                     | Deferred income taxes               |                                            |                           | 1,202   |         |         |        | 355    |        
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     |                                            | Total current assets      |         |         | 146,275 |        |        |         | 136,763 | 
|                                                   | Property and equipment, net                                                                                         |                                     |                                            | 4,205                     |         |         |         | 4,604  |       
|                                                   | Other investments                                                                                                   |                                     |                                            | 323                       |         |         |         | 3,406  |       
|                                                   | Goodwill and covenants not-to-compete, net of $1,876
and $3,035 of accumulated amortization                         |                                     |                                            | 6,344                     |         |         |         | 22,722 |       
|                                                   | Deferred income taxes                                                                                               |                                     |                                            | 8,069                     |         |         |         | 788    |       
|                                                   | Other assets                                                                                                        |                                     |                                            | 88                        |         |         |         | 107    |       
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     |                                            | Total assets              |         | $       | 165,304 |        |        | $       | 168,390 | 
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|Liabilities:                                       |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   | Current liabilities:                                                                                                |                                     |                                            |                           |         |         |         |        |       
|                                                   |                                                                                                                     | Accounts payable                    |                                            | $                         | 6,396   |         |         | $      | 4,344  |        
|                                                   |                                                                                                                     | Accrued expenses                    |                                            |                           | 5,438   |         |         |        | 5,489  |        
|                                                   |                                                                                                                     | Participants deposits              |                                            |                           | 26,527  |         |         |        | 35,358 |        
|                                                   |                                                                                                                     | Notes payable, current portion      |                                            |                           | 200     |         |         |        | 200    |        
|                                                   |                                                                                                                     | Foreign currency exchange contracts |                                            |                           | 503     |         |         |        | 928    |        
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     |                                            | Total current liabilities |         |         | 39,064  |        |        |         | 46,319  | 
|                                                   | Notes payable, due after one year                                                                                   |                                     |                                            |                          |         |         |         | 200    |       
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     |                                            | Total liabilities         |         |         | 39,064  |        |        |         | 46,519  | 
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|Commitments and contingencies (Notes 2, 7, and 11) |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|Stockholders equity:                              |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   | Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding                           |                                     |                                            |                          |         |         |         |       |       
|                                                   | Common stock, $.01 par value; authorized, 20,000,000 shares;
issued and outstanding, 9,813,001 and 9,676,324 shares |                                     |                                            | 98                        |         |         |         | 97     |       
|                                                   | Additional paid-in capital                                                                                          |                                     |                                            | 88,144                    |         |         |         | 86,055 |       
|                                                   | Retained earnings                                                                                                   |                                     |                                            | 39,018                    |         |         |         | 36,654 |       
|                                                   | Unearned compensation                                                                                               |                                     |                                            |                          |         |         |         | (1,336 | )     
|                                                   | Accumulated other comprehensive (loss) income                                                                       |                                     |                                            | (1,020                    | )       |         |         | 401    |       
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     | Total stockholders equity                 |                           |         | 126,240 |         |        |        | 121,871 |        
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       
|                                                   |                                                                                                                     |                                     | Total liabilities and stockholders equity |                           | $       | 165,304 |         |        | $      | 168,390 |        
|                                                   |                                                                                                                     |                                     |                                            |                           |         |         |         |       

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

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Ambassadors International, Inc.
Consolidated Statements of Income
for the years ended December 31, 2001, 2000, and 1999
(in thousands, except share and per share data)

|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |           | 
|----------------------------- | -------------------------------------------------------------------------- | - | ------ | --------- | ---- | - | ------ | --------- | - | - | ------ | --------- | 
|                              |                                                                            |   | 2001   |           | 2000 |   | 1999  
|                              |                                                                            |   |        |           |      |   |       
|Revenue                       |                                                                            | $ | 60,454 |           |      | $ | 58,733 |           |   | $ | 43,988 |          
|Operating expenses:           |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Selling and tour promotion                                                 |   |        | 20,797    |      |   |        | 23,205    |   |   |        | 18,624    | 
|                              | General and administrative                                                 |   |        | 23,838    |      |   |        | 20,660    |   |   |        | 19,243    | 
|                              | Restructuring and write-down of intangible assets                          |   |        | 18,740    |      |   |        |          |   |   |        | 8,107     | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              |                                                                            |   | 63,375 |           |      |   | 43,865 |           |   |   | 45,974 |          
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Operating income (loss)       |                                                                            |   | (2,921 | )         |      |   | 14,868 |           |   |   | (1,986 | )        
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Other income (expense):       |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Interest and dividend income                                               |   |        | 5,686     |      |   |        | 5,681     |   |   |        | 3,814     | 
|                              | Realized and unrealized gain (loss)
on foreign currency exchange contracts |   |        | 58        |      |   |        | (1,565    | ) |   |        |          | 
|                              | Realized gain on sale of available-for-sale securities                     |   |        | 8,306     |      |   |        | 7,933     |   |   |        |          | 
|                              | Other, net                                                                 |   |        | 406       |      |   |        | 354       |   |   |        | 1,052     | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              |                                                                            |   | 14,456 |           |      |   | 12,403 |           |   |   | 4,866  |          
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Income before income taxes    |                                                                            |   | 11,535 |           |      |   | 27,271 |           |   |   | 2,880  |          
|Income tax provision          |                                                                            |   | 4,037  |           |      |   | 9,545  |           |   |   | 1,041  |          
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Net income                    |                                                                            | $ | 7,498  |           |      | $ | 17,726 |           |   | $ | 1,839  |          
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Earnings per share  basic:   |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Net income per share                                                       |   | $      | 0.78      |      |   | $      | 1.86      |   |   | $      | 0.19      | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Weighted-average common shares
outstanding  basic                         |   |        | 9,641,712 |      |   |        | 9,541,814 |   |   |        | 9,717,627 | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|Earnings per share  diluted: |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Net income per share                                                       |   | $      | 0.75      |      |   | $      | 1.83      |   |   | $      | 0.19      | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          
|                              | Weighted-average common shares
outstanding  diluted                       |   |        | 9,959,865 |      |   |        | 9,682,354 |   |   |        | 9,770,023 | 
|                              |                                                                            |   |        |           |      |   |        |           |   |   |        |          

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

29



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Ambassadors International, Inc.
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2001, 2000, and 1999
(in thousands)

|                                                                                                            |  |      |       |      |  |      |        |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                                                                            |  | 2001 |       | 2000 |  | 1999
|                                                                                                            |  |      |       |      |  |     
|Net income                                                                                                  |  | $    | 7,498 |      |  | $    | 17,726 |   |  | $ | 1,839 |  
|Unrealized gain (loss) on marketable equity
security, net of income taxes of $435, $3,353 and ($3,353)      |  |      | (680  | )    |  |      | (5,707 | ) |  |   | 5,707 |  
|Unrealized gain (loss) on foreign currency exchange
contracts, net of income taxes of $399, ($372), and $29 |  |      | (741  | )    |  |      | 633    |   |  |   | (50   | )
|                                                                                                            |  |      |       |      |  |      |        |   |  |   |       |  
|Comprehensive income                                                                                        |  | $    | 6,077 |      |  | $    | 12,652 |   |  | $ | 7,496 |  
|                                                                                                            |  |      |       |      |  |      |        |   |  |   |       |  

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

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Ambassadors International, Inc.
Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2001, 2000, and 1999
(in thousands, except share data)

|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  |             |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------ | --------- | ---------- |  | -------- | -- | -------- |  | ----------- | ------ | ---------- |  | ----- | ------ | - |  | - | ------ | - |  | ----------- | ------ | - |  | - | ------- | -
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  | Accumulated |        |   |  |  
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  | Other       |        |   |  |  
|                                                                         |  | Common Stock |           | Additional |  |          |    |          |  | Unearned    |        | Comprehen- |  |       |        |  
|                                                                         |  |              |           | Paid-In    |  | Retained |    | Compen-  |  | sive Income |        |            |  |      
|                                                                         |  | Shares       |           | Amount     |  | Capital  |    | Earnings |  | sation      |        | (Loss)     |  | Total
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |      
|Balances, December 31, 1998                                              |  |              | 9,915,534 |            |  | $        | 99 |          |  | $           | 90,043 |            |  | $     | 17,089 |   |  |   |       |   |  | $           | (182   | ) |  | $ | 107,049 |  
|Stock options exercised                                                  |  |              | 60,037    |            |  |          | 1  |          |  |             | 560    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 561     |  
|Stock issued as compensation                                             |  |              | 21,471    |            |  |          |   |          |  |             | 218    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 218     |  
|Stock purchased and retired                                              |  |              | (595,500  | )          |  |          | (6 | )        |  |             | (7,303 | )          |  |       |       |   |  |   |       |   |  |             |       |   |  |   | (7,309  | )
|Tax benefit associated with
stock grants and exercise of
stock options   |  |              |          |            |  |          |   |          |  |             | 110    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 110     |  
|Stock issued for acquisition
of subsidiaries                             |  |              | 76,145    |            |  |          | 1  |          |  |             | 889    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 890     |  
|Additional consideration in
satisfaction of purchase
price contingencies |  |              | 19,216    |            |  |          |   |          |  |             | (746   | )          |  |       |       |   |  |   |       |   |  |             |       |   |  |   | (746    | )
|Other comprehensive income,
net of income taxes                          |  |              |          |            |  |          |   |          |  |             |       |            |  |       |       |   |  |   |       |   |  |             | 5,657  |   |  |   | 5,657   |  
|Net income                                                               |  |              |          |            |  |          |   |          |  |             |       |            |  |       | 1,839  |   |  |   |       |   |  |             |       |   |  |   | 1,839   |  
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  |             |        |   |  |   |         |  
|Balances, December 31, 1999                                              |  |              | 9,496,903 |            |  |          | 95 |          |  |             | 83,771 |            |  |       | 18,928 |   |  |   |       |   |  |             | 5,475  |   |  |   | 108,269 |  
|Stock options exercised                                                  |  |              | 18,613    |            |  |          | 1  |          |  |             | 201    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 202     |  
|Issuance of restricted stock                                             |  |              | 110,000   |            |  |          | 1  |          |  |             | 1,573  |            |  |       |       |   |  | $ | (1,574 | ) |  |             |       |   |  |   |        |  
|Amortization of unearned compensation                                    |  |              |          |            |  |          |   |          |  |             |       |            |  |       |       |   |  |   | 238    |   |  |             |       |   |  |   | 238     |  
|Stock purchased and retired                                              |  |              | (20,000   | )          |  |          | (1 | )        |  |             | (235   | )          |  |       |       |   |  |   |       |   |  |             |       |   |  |   | (236    | )
|Tax benefit associated with
stock grants and exercise of
stock options   |  |              |          |            |  |          |   |          |  |             | 28     |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 28      |  
|Additional consideration in
satisfaction of purchase
price contingencies |  |              | 70,808    |            |  |          | 1  |          |  |             | 717    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 718     |  
|Other comprehensive loss,
net of income taxes                            |  |              |          |            |  |          |   |          |  |             |       |            |  |       |       |   |  |   |       |   |  |             | (5,074 | ) |  |   | (5,074  | )
|Net income                                                               |  |              |          |            |  |          |   |          |  |             |       |            |  |       | 17,726 |   |  |   |       |   |  |             |       |   |  |   | 17,726  |  
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  |             |        |   |  |   |         |  
|Balances, December 31, 2000                                              |  |              | 9,676,324 |            |  |          | 97 |          |  |             | 86,055 |            |  |       | 36,654 |   |  |   | (1,336 | ) |  |             | 401    |   |  |   | 121,871 |  
|Stock options exercised                                                  |  |              | 155,779   |            |  |          | 2  |          |  |             | 1,932  |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 1,934   |  
|Stock grants vested                                                      |  |              |          |            |  |          |   |          |  |             | 736    |            |  |       |       |   |  |   | 1,336  |   |  |             |       |   |  |   | 2,072   |  
|Stock retired                                                            |  |              | (36,690   | )          |  |          | (1 | )        |  |             | (771   | )          |  |       |       |   |  |   |       |   |  |             |       |   |  |   | (772    | )
|Tax benefit associated with
stock grants and exercise of
stock options   |  |              |          |            |  |          |   |          |  |             | (121   | )          |  |       |       |   |  |   |       |   |  |             |       |   |  |   | (121    | )
|Additional consideration in
satisfaction of purchase
price contingencies |  |              | 17,588    |            |  |          |   |          |  |             | 313    |            |  |       |       |   |  |   |       |   |  |             |       |   |  |   | 313     |  
|Dividend payment on
common stock                                         |  |              |          |            |  |          |   |          |  |             |       |            |  |       | (5,134 | ) |  |   |       |   |  |             |       |   |  |   | (5,134  | )
|Other comprehensive loss,
net of income taxes                            |  |              |          |            |  |          |   |          |  |             |       |            |  |       |       |   |  |   |       |   |  |             | (1,421 | ) |  |   | (1,421  | )
|Net income                                                               |  |              |          |            |  |          |   |          |  |             |       |            |  |       | 7,498  |   |  |   |       |   |  |             |       |   |  |   | 7,498   |  
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  |             |        |   |  |   |         |  
|Balances, December 31, 2001                                              |  |              | 9,813,001 |            |  | $        | 98 |          |  | $           | 88,144 |            |  | $     | 39,018 |   |  | $ |       |   |  | $           | (1,020 | ) |  | $ | 126,240 |  
|                                                                         |  |              |           |            |  |          |    |          |  |             |        |            |  |       |        |   |  |   |        |   |  |             |        |   |  |   |         |  

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

31



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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000, and 1999
(in thousands)

|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |         |        |       |         |  
|------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | ------ | ------- | ------ | ----- | ------- | -
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        | 2001   |         | 2000    |        | 1999  
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |       
|Cash flows from operating activities:             |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Net income                                                                                          |                                                                               | $                                     | 7,498                                     |        |        | $       | 17,726  |        |        | $      | 1,839   |       
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities:                   |                                                                               |                                       |                                           |        |        |         |         |        |        |        |         |       
|                                                  |                                                                                                     | Write-down of intangible assets                                               |                                       |                                           | 18,010 |        |         |         |       |        |        |         | 6,838  |      
|                                                  |                                                                                                     | Write-down of other investments                                               |                                       |                                           | 730    |        |         |         |       |        |        |         |       |      
|                                                  |                                                                                                     | Write-down of property and equipment                                          |                                       |                                           |       |        |         |         |       |        |        |         | 270    |      
|                                                  |                                                                                                     | Gain on sale of available-for-sale securities                                 |                                       |                                           | (8,306 | )      |         |         | (7,933 | )      |        |         |       |      
|                                                  |                                                                                                     | Depreciation and amortization                                                 |                                       |                                           | 2,466  |        |         |         | 2,663  |        |        |         | 2,441  |      
|                                                  |                                                                                                     | Deferred income tax benefit                                                   |                                       |                                           | (7,267 | )      |         |         | (518   | )      |        |         | (1,254 | )    
|                                                  |                                                                                                     | Loss on foreign currency exchange contracts                                   |                                       |                                           |       |        |         |         | 1,565  |        |        |         |       |      
|                                                  |                                                                                                     | Unrealized gain on foreign currency exchange contracts                        |                                       |                                           | (1,565 | )      |         |         |       |        |        |         |       |      
|                                                  |                                                                                                     | Amortization of unearned compensation                                         |                                       |                                           | 2,072  |        |         |         | 238    |        |        |         |       |      
|                                                  |                                                                                                     | Other, net                                                                    |                                       |                                           | (70    | )      |         |         | (32    | )      |        |         | 287    |      
|                                                  |                                                                                                     | Change in assets and liabilities, net of effects
of purchase of subsidiaries: |                                       |                                           |        |        |         |         |        |        |        |         |        |      
|                                                  |                                                                                                     |                                                                               | Restricted cash equivalents           |                                           |        | 100    |         |         |        |       |        |         |        | 40    |        
|                                                  |                                                                                                     |                                                                               | Accounts receivable                   |                                           |        | (341   | )       |         |        | 751    |        |         |        | 964   |        
|                                                  |                                                                                                     |                                                                               | Prepaid program costs and expenses    |                                           |        | 1,589  |         |         |        | (971   | )      |         |        | (542  | )      
|                                                  |                                                                                                     |                                                                               | Other assets                          |                                           |        |       |         |         |        |       |        |         |        | 159   |        
|                                                  |                                                                                                     |                                                                               | Accounts payable and accrued expenses |                                           |        | 1,071  |         |         |        | 3,289  |        |         |        | 2,688 |        
|                                                  |                                                                                                     |                                                                               | Participants deposits                |                                           |        | (8,831 | )       |         |        | 12,610 |        |         |        | 676   |        
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  |                                                                                                     |                                                                               |                                       | Net cash provided by operating activities |        |        | 7,156   |         |        |        | 29,388 |         |        |       | 14,406  |  
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|Cash flows from investing activities:             |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Proceeds from sale of available-for-sale securities                                                 |                                                                               |                                       | 94,225                                    |        |        |         | 78,946  |        |        |        | 60,169  |       
|                                                  | Purchase of available-for-sale securities                                                           |                                                                               |                                       | (111,573                                  | )      |        |         | (94,341 | )      |        |        | (94,929 | )     
|                                                  | Proceeds from the sale of other investments                                                         |                                                                               |                                       | 7,205                                     |        |        |         | 8,771   |        |        |        |        |       
|                                                  | Purchase of other investments                                                                       |                                                                               |                                       | (320                                      | )      |        |         | (399    | )      |        |        | (2,655  | )     
|                                                  | Cash paid for acquisition of subsidiaries, including
contingent consideration, net of cash received |                                                                               |                                       | (1,454                                    | )      |        |         | (790    | )      |        |        | (3,962  | )     
|                                                  | Purchase of property and equipment                                                                  |                                                                               |                                       | (1,141                                    | )      |        |         | (1,578  | )      |        |        | (1,658  | )     
|                                                  | Payment for covenant-not-to-compete agreement                                                       |                                                                               |                                       |                                          |        |        |         | (38     | )      |        |        | (1,271  | )     
|                                                  | Change in other assets and proceeds from sale of
property and equipment                             |                                                                               |                                       | 24                                        |        |        |         | 31      |        |        |        | 4       |       
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  |                                                                                                     |                                                                               |                                       | Net cash used in investing activities     |        |        | (13,034 | )       |        |        | (9,398 | )       |        |       | (44,302 | )
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|Cash flows from financing activities:             |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Payments on note payable                                                                            |                                                                               |                                       | (200                                      | )      |        |         | (346    | )      |        |        | (185    | )     
|                                                  | Proceeds from exercise of stock options                                                             |                                                                               |                                       | 1,934                                     |        |        |         | 202     |        |        |        | 561     |       
|                                                  | Purchase and retirement of common stock                                                             |                                                                               |                                       | (772                                      | )      |        |         | (236    | )      |        |        | (7,309  | )     
|                                                  | Dividends paid on common stock                                                                      |                                                                               |                                       | (5,134                                    | )      |        |         |        |        |        |        |        |       
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  |                                                                                                     |                                                                               |                                       | Net cash used in financing activities     |        |        | (4,172  | )       |        |        | (380   | )       |        |       | (6,933  | )
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Net increase (decrease) in cash and cash equivalents                                                |                                                                               |                                       | (10,050                                   | )      |        |         | 19,610  |        |        |        | (36,829 | )     
|                                                  | Cash and cash equivalents, beginning of year                                                        |                                                                               |                                       | 38,071                                    |        |        |         | 18,461  |        |        |        | 55,290  |       
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Cash and cash equivalents, end of year                                                              |                                                                               | $                                     | 28,021                                    |        |        | $       | 38,071  |        |        | $      | 18,461  |       
|                                                  |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|Supplemental disclosure of cash flow information: |                                                                                                     |                                                                               |                                       |                                           |        |        |         |         |        |        |        |        
|                                                  | Cash paid for interest                                                                              |                                                                               | $                                     | 14                                        |        |        | $       | 25      |        |        | $      | 17      |       
|                                                  | Cash paid for income taxes                                                                          |                                                                               |                                       | 10,296                                    |        |        |         | 8,829   |        |        |        | 2,520   |       

See Notes 8 and 11 for non-cash investing and financing activities.

The accompanying notes are an integral part of the consolidated financial
statements.
32Table of Contents

Ambassadors International, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2001 and 2000 and for the years ended
December 31, 2001, 2000 and 1999

1. Company Business and Summary of Significant Accounting Policies:

Organization and Basis of Consolidation

Ambassadors International, Inc. (the Company) is an educational travel,
travel services and performance improvement company. The Companys
operations are classified in the following segments:



| |  | Ambassadors Group- Organizes and promotes international
educational travel and sports programs for students, athletes and
professionals. During 2001 in anticipation of its spin off from the
Company, Ambassadors Education Group changed its name to Ambassadors
Group, Inc. On January 25, 2002, the Board of Directors of the
Company approved the distribution of all the outstanding shares of
Group common stock to the holders of the Company common stock. (See
Note 15).
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Ambassadors Performance Group- Develops, markets and manages
meetings and incentive programs for a nationwide roster of corporate
clients utilizing incentive travel, merchandise award programs and
corporate meeting management services.                                                                                                                                                                                                                                       
| 
| |  | Ambassadors Services Group- Provides comprehensive hotel
reservation, registration and travel services for meetings,
conventions, expositions and trade shows.                                                                                                                                                                                                                                                                                                                    

The Company was founded in 1967 and was reincorporated in Delaware in
1995. Ambassadors Group represented the entire operations of the Company
until 1996 when the Performance Group commenced operations. The Services
Group commenced operations in 1998.

The consolidated financial statements include the accounts of Ambassadors
International, Inc. and its subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.

Ambassadors Group Spin off

On January 25, 2002, the Companys Board of Directors formally approved a
plan to spin-off its educational travel program business, Ambassadors
Group, Inc. (AGI), into a fully independent and separate company. The
Board of Directors also declared a dividend of AGIs common stock to the
Companys stockholders of record on February 4, 2002. The dividend was
distributed after the close of business on February 28, 2002, in the
amount of one share of AGIs common stock for each outstanding share of
the Companys common stock. The distribution of AGIs common stock was
intended to be tax-free to the Company and to the Companys stockholders,
and the Company has received a favorable Internal Revenue Service private
letter ruling to that effect. The Company distributed all of AGIs common
stock to its stockholders.

The Company has entered into agreements with AGI that provide for the
separation of AGIs business operations from the Company. These
agreements between the Company and AGI also govern various interim and
ongoing relationships. The trading of the common stock of AGI on the
Nasdaq National Market began on March 1, 2002 under the ticker symbol
EPAX.

The Company will reflect the effects of the spin-off on assets and
earnings in its next quarterly filing under the Securities Exchange Act
of 1934. The proforma effect of the spin-off on the Companys financial
statements as of December 31, 2001 and for the years ended December 31,
2001 and 2000 are included in Note 15.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

Estimates

The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including investments, intangible assets, income taxes, derivative financial
instruments, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Credit Risk

The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, certain investments
and trade accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such balances may
be in excess of the federal depository insurance limit or may be on deposit at
institutions which are not covered by this insurance. The Company believes that
its primary trade accounts receivable credit risk exposure is limited as travel
program participants are required to pay for their entire program costs prior
to the program departure and trade accounts receivable for non-travel related
programs are principally with large credit-worthy corporations.

The Company uses foreign currency exchange contracts as part of an overall
risk-management strategy. These instruments are used as a means of mitigating
exposure to foreign currency risk connected to anticipated travel programs. In
entering into these contracts, the Company has assumed the risk which might
arise from the possible inability of counterparties to meet the terms of their
contracts. The Company does not expect any losses as a result of counterparty
defaults.

Cash and Cash Equivalents

The Company invests cash in excess of operating requirements in short-term time
deposits, money market instruments, government mutual bond funds and other
investments. The Company considers investments with remaining maturities at
date of purchase of three months or less to be cash equivalents.

The Companys restricted cash equivalents represent certificates of deposit
issued in the Companys name and held by one airline as collateral for airfare
purchase agreements. Additionally, the Company has a $3.0 million revolving
credit facility for the purpose of issuing letters of credit to several
airlines. The facility expires in 2002, but allows for letters of credit to be
issued through 2003. At December 31, 2001, the Company had letters of credit
outstanding approximating $1.3 million under this facility.

Derivative Financial Instruments

The Company accounts for derivative financial instruments under Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. All derivative instruments are recorded
on the balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For qualifying cash
flow hedge transactions in which the Company is hedging the variability of cash
flows related to a forecasted transaction, changes in the fair value of the
derivative instrument are reported in other

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

comprehensive income. The gains and losses on the derivative instruments that
are reported in other comprehensive income are reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges is recognized in current
period earnings. Unrealized gains and losses on foreign currency exchange
contracts that are not qualifying cash flow hedges as defined by SFAS 133 are
recorded in the statements of income.

Investments

The Company classifies its marketable investments as available-for-sale
securities. Available-for-sale securities consist of debt and equity
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 income in the period the investments are sold.

The Company classifies its minority investments in other operating companies
and joint ventures as other investments. Other investments include:



| |  |  | The Company owns a 20% interest in a company, which
provides packaged tours primarily to Formula One, Indy Car and
NASCAR races. This investment is reported on the equity method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In January 1999, the Company purchased a minority
interest in a joint venture that owns the capital stock of
Scheduled Airlines Traffic Offices, Inc. (SatoTravel). During
June 2001, the Company sold its ownership stake in SatoTravel
to Navigant International, Inc. (Navigant)(Nasdaq: FLYR). The
Company received approximately $7.2 million in cash,
approximately 237,000 shares of common stock of Navigant and
recorded a gain of approximately $8.3 million in other income
($5.5 million net of income taxes). The agreement also provides
for an additional $1.4 million payment of cash and stock to be
paid to the Company if SatoTravel, as a subsidiary of Navigant,
achieves certain revenue objectives by June 14, 2002. Prior to
the Company selling its ownership stake in SatoTravel, the
President and Chief Executive Officer of the Company was also
the co-chairman of the board of directors and the Companys
Chief Financial Officer was a director of the joint venture.
|
| |  |  | In October 2000, the Company purchased a minority
interest in Milepoint, Inc., a development stage internet
company which enables customers to convert accrued credits
toward online purchasing. This investment is reported at the
lower of cost or estimated net realizable value. During the
quarter ended December 31, 2001, the Company recorded a loss of
approximately $400,000 representing what the Companys
management believes to be other than a temporary decline in the
market value of this investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | During January 2001, the Company purchased a minority
interest in Off the Beaten Path LLP. Off the Beaten Path
provides unique adventure travel experiences to a sophisticated
clientele throughout the Rocky Mountains, American Southwest,
Alaska and Patagonia. This investment is reported at the lower
of cost or estimated net realizable value. During the quarter
ended December 31, 2001, the Company recorded a loss of
approximately $330,000 representing what the Companys
management believes to be other than a temporary decline in the
market value of this investment.                                                                                                                                                                                                                                                                                                                                                                                                             

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

At December 31, 2001 and 2000, the Company had a total of approximately
$323,000 and $3,406,000, respectively, of these other investments.

Property and Equipment

Property and equipment are stated at cost. Cost of maintenance and repairs
which do not improve or extend the lives of the respective assets are expensed
currently. Major additions and betterments are capitalized. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
respective assets or the lease term (including extensions), using the
straight-line method, generally 5 to 7 years.

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

Goodwill and Covenants-Not-to-Compete

Goodwill has been amortized using the straight-line method over 10 to 30 years.
Costs of covenants-not-to-compete are amortized using the straight-line method
over the term of the agreements, generally 5 to 7 years. The Company
periodically assessed the recoverability of the recorded goodwill based upon
the expected undiscounted cash flows of the business operations that generated
the goodwill. During the fourth quarter of 2001, the Company recorded a charge
related to managements conclusion that the goodwill was impaired (see Note
16).

Revenue Recognition

The Company bills travel participants in advance, which are recorded as
participants deposits. The Company pays for certain direct program costs such
as airfare, hotel, rail passes and other program costs in advance of travel,
which are recorded as prepaid program costs and expenses. The Company
recognizes travel revenue and related costs when travel convenes.

Revenue from hotel reservation, registration and related travel services is
recognized when the convention commences. Revenue from the sale of merchandise
is recognized when the merchandise is shipped. Revenue from pre-paid
certificate-based merchandise incentive programs is deferred until the
Companys obligations are fulfilled or upon managements estimates (based upon
historical trends) that the certificate will not be redeemed.

Selling and Tour Promotion Expenses

The Company expenses all selling and tour promotion expenses as incurred.

Income Taxes

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

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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

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

Accounting for Stock Options

The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method, and has provided in Note 8
the pro forma disclosure of the effect on net income and earnings per share as
if the fair value based method had been applied in measuring compensation
expense. In conjunction with the spin-off of AGI, the exercise price of all
outstanding options was adjusted to reflect the corresponding change in value.
(See Note 8).

Business Segment

The Company reports segment data based on the management approach which
designates the internal reporting that is used by the Company for making
operating decisions and assessing performance as the source. The Company also
discloses information regarding total revenues by geographic area.

Recent Pronouncements

On July 20, 2001, the FASB issued SFAS No. 141, Business Combinations.SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method will be prohibited. The Company adopted this
statement during the third quarter of fiscal 2001. The adoption of SFAS No. 141
did not have a material impact on the Companys consolidated financial
statements.

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets.SFAS 142
changes the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment-only approach. Upon Adoption of SFAS 142,
goodwill and certain other intangible assets will be tested at the reporting
unit annually and whenever events or circumstances occur indicating that
goodwill and certain other intangible assets might be impaired. Amortization
of goodwill and certain other intangible assets, including goodwill recorded in
past business combinations, will cease. The adoption date for the Company will
be January 1, 2002.

The Company expects that the adoption of SFAS No. 142 will result in a pre-tax
increase to net earnings of approximately $0.5 million for the fiscal year 2002
from the cessation of amortization of previously recorded goodwill and does not
expect to recognize any impairments.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

In August 2001, the FASB approved SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143), which will be effective for the
fiscal year beginning January 1, 2003. SFAS No. 143 addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In
October 2001, the FASB approved SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of (SFAS No. 121) and the accounting and reporting provisions
of APB. No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the disposal of a segment
of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS
No. 121, but resolves certain implementation issues associated with that
Statement. SFAS No. 144 will be effective for the fiscal year beginning
January 1, 2002. The Company does not anticipate that the adoption of SFAS No.
143 and SFAS No. 144 will have a material impact on its financial condition or
results of operations.

2. Derivative Financial Instruments:

The substantial majority of Ambassadors Groups travel programs take place
outside of the United States and most foreign suppliers require payment in
currency other than the U.S. dollar. Accordingly, the Company is exposed to
foreign currency risk relative to changes in foreign currency exchange rates
between those currencies and the U.S. dollar. The Company has a program to
provide a hedge against certain of these foreign currency risks. The Company
uses forward contracts which allow the Company to acquire the foreign currency
at a fixed price for a specified period of time. Some of the Companys forward
contracts include a synthetic component if a pre-determined trigger occurs
during the term of the contract. All of the Companys derivatives at December
31, 2001 and 2000 are cash flow hedges of forecasted transactions. The Company
had a $50.0 million credit facility with a major financial institution to
support foreign currency purchases and foreign exchange forward contracts.
This credit facility was terminated upon the spin off of the Companys
Ambassadors Group effective March 2002.

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

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

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

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

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

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

Unrealized gains or losses associated with these transactions that qualify as
cash flow hedges under SFAS 133 are reported in other comprehensive income. Any
realized gains or losses associated with these transactions are recognized in
the Companys operations in the period the contracts are closed. The net
unrealized gain (loss) reclassified to revenue from other accumulated
comprehensive income for the years ended December 31, 2001 and 2000 was
approximately $60,000 and $(232,000), respectively. Income tax (benefit) on the
unrealized gain (loss) reclassified in 2001 and 2000 was approximately $36,000
and $(137,000), respectively. The Company assesses hedge ineffectiveness on a
quarterly basis and records the gain or loss related to the ineffective portion
in the statements of income. During the years ended December 31, 2001 and
2000, there were no significant amounts recognized in income due to hedge
ineffectiveness.

After the unexpected events of September 11, 2001 and the resulting decline in
the travel industry, the Company took early exit of forward foreign currency
contracts aggregating $5.7 million as it was anticipated that such contracts
would not be needed for the related travel season and the related forecasted
transactions were no longer probable of occurring. The Company recorded a
nominal gain as a result of the early termination of these contracts.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

3. Investments:

At December 31, 2001 and 2000, the cost and estimated fair values of the
Companys investments in marketable equity securities and U.S. government and
agency obligations were as follows (in thousands):

|                   |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |         | 
|------------------ | -------------------------------------- |  | ---- | ------- | ----- |  | ---------- | - | ---------- |  | ----------- | ------ | - |  | - | ------- | 
|                   |                                        |  |      |         |       |  | Gross      |   | Gross      |  | Fair Value/
|                   |                                        |  |      |         |       |  | Unrealized |   | Unrealized |  | Carrying   
|                   |                                        |  | Cost |         | Gains |  | Losses     |   | Value     
|                   |                                        |  |      |         |       |  |            |   |           
|December 31, 2001: |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |        
|                   | U.S. government and agency
obligations |  | $    | 104,587 |       |  | $          |  |            |  | $           |       |   |  | $ | 104,587 | 
|                   |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |        
|                   | Marketable equity securities           |  | $    | 3,795   |       |  | $          |  |            |  | $           | (1,079 | ) |  | $ | 2,716   | 
|                   |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |        
|December 31, 2000: |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |        
|                   | U.S. government and agency
obligations |  | $    | 87,240  |       |  | $          |  |            |  | $           |       |   |  | $ | 87,240  | 
|                   |                                        |  |      |         |       |  |            |   |            |  |             |        |   |  |   |        

Substantially all of U.S. government and agency obligations mature or are
callable in 2002.

During 2001, the Company sold its interest in Sato Travel, who was purchased by
an independent company, Navigant International (Nasdaq: FLYR) during the year.
The Company recorded a gain on the sale of this investment of approximately
$8.3 million during 2001.

During 2000, the Company sold its 15% interest in a joint venture whose
sole investment was stock of an internet company that completed an initial
public offering during 1999. The Company recorded a gain on the sale of this
investment of approximately $7.9 million during 2000.

4. Property and Equipment:

Property and equipment consists of the following at December 31, 2001 and 2000
(in thousands):

|                                               |  |      |        |      |  |   |        |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                               |  | 2001 |        | 2000
|                                               |  |      |        |     
|Office furniture, fixtures and equipment       |  | $    | 4,399  |      |  | $ | 4,049  |  
|Computer equipment                             |  |      | 5,120  |      |  |   | 4,825  |  
|Leasehold improvements                         |  |      | 1,546  |      |  |   | 1,334  |  
|                                               |  |      |        |      |  |   |        |  
|                                               |  |      | 11,065 |      |  |   | 10,208 |  
|Less accumulated depreciation and amortization |  |      | (6,860 | )    |  |   | (5,604 | )
|                                               |  |      |        |      |  |   |        |  
|                                               |  | $    | 4,205  |      |  | $ | 4,604  |  
|                                               |  |      |        |      |  |   |        |  

Depreciation and amortization expense on property and equipment of
approximately $1,411,000, $1,575,000, and $1,161,000 for the years ended
December 31, 2001, 2000, and 1999, respectively, was included in the
determination of net income.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

5. Notes Payable:

In conjunction with certain acquisitions (see Note 11), the Company has issued
unsecured notes payable which were outstanding at December 31, 2001 and 2000 as
follows (in thousands):

|                                                                                              |  |      |      |      |  |   |      |  
|--------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                                                                              |  | 2001 |      | 2000
|                                                                                              |  |      |      |     
|Note payable, due in annual payments of $200
plus interest of approximately 4.0% through 2002 |  | $    | 200  |      |  | $ | 400  |  
|                                                                                              |  |      |      |      |  |   |      |  
|                                                                                              |  |      | 200  |      |  |   | 400  |  
|Less: current portion                                                                         |  |      | (200 | )    |  |   | (200 | )
|                                                                                              |  |      |      |      |  |   |      |  
|Notes payable, due after one year                                                             |  | $    |     |      |  | $ | 200  |  
|                                                                                              |  |      |      |      |  |   |      |  

The holders of these notes are current or previous employees of the Company.
Interest expense incurred on these notes payable was approximately $14,000,
$30,000, and $17,000, for the years ended December 31, 2001, 2000, and 1999,
respectively.

6. Income Taxes:

The provision (benefit) for income taxes for the years ended December 31, 2001,
2000, and 1999 consisted of the following (in thousands):

|         |         |   |        |        |      |   |       |       |  |   |        |       | 
|-------- | ------- | - | ------ | ------ | ---- | - | ----- | ----- |  | - | ------ | ----- | 
|         |         |   | 2001   |        | 2000 |   | 1999 
|         |         |   |        |        |      |   |      
|Current: |         |   |        |        |      |   |       |       |  |   |        |      
|         | Federal |   | $      | 10,722 |      |   | $     | 9,441 |  |   | $      | 2,023 | 
|         | State   |   |        | 581    |      |   |       | 622   |  |   |        | 272   | 
|Deferred |         |   | (7,266 | )      |      |   | (518  | )     |  |   | (1,254 | )    
|         |         |   |        |        |      |   |       |       |  |   |        |      
|         |         | $ | 4,037  |        |      | $ | 9,545 |       |  | $ | 1,041  |      
|         |         |   |        |        |      |   |       |       |  |   |        |      

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

|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|------------------------------------------------------ |  | ----------------- | ----- | ----------- |  | ----- | ---- | - |  | - | ----- | -
|                                                       |  | December 31, 2001
|                                                       |  |                  
|                                                       |  | Assets            |       | Liabilities |  | Total
|                                                       |  |                   |       |             |  |      
|Accrued vacation and compensation                      |  | $                 | 156   |             |  |       |     |   |  | $ | 156   |  
|Depreciation                                           |  |                   |      |             |  | $     | (165 | ) |  |   | (165  | )
|Unrealized loss on foreign currency exchange contracts |  |                   | 861   |             |  |       |     |   |  |   | 861   |  
|Amortization of goodwill and non-compete agreements    |  |                   | 8,188 |             |  |       |     |   |  |   | 8,188 |  
|Net operating loss carryforwards                       |  |                   | 47    |             |  |       |     |   |  |   | 47    |  
|Customer advances                                      |  |                   | 76    |             |  |       |     |   |  |   | 76    |  
|Allowance for uncollectible accounts receivable        |  |                   | 108   |             |  |       |     |   |  |   | 108   |  
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|Total temporary differences and tax attributes         |  | $                 | 9,436 |             |  | $     | (165 | ) |  | $ | 9,271 |  
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|------------------------------------------------------ |  | ----------------- | ----- | ----------- |  | ----- | ---- | - |  | - | ----- | -
|                                                       |  | December 31, 2000
|                                                       |  |                  
|                                                       |  | Assets            |       | Liabilities |  | Total
|                                                       |  |                   |       |             |  |      
|Accrued vacation and compensation                      |  | $                 | 368   |             |  |       |     |   |  | $ | 368   |  
|Depreciation                                           |  |                   |      |             |  | $     | (208 | ) |  |   | (208  | )
|Unrealized loss on foreign currency exchange contracts |  |                   | 344   |             |  |       |     |   |  |   | 344   |  
|Amortization of goodwill and non-compete agreements    |  |                   | 840   |             |  |       |     |   |  |   | 840   |  
|Net operating loss carryforwards                       |  |                   | 156   |             |  |       |     |   |  |   | 156   |  
|Customer advances                                      |  |                   |       |             |  |       | (471 | ) |  |   | (471  | )
|Allowance for uncollectible accounts receivable        |  |                   | 114   |             |  |       |     |   |  |   | 114   |  
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  
|Total temporary differences and tax attributes         |  | $                 | 1,822 |             |  | $     | (679 | ) |  | $ | 1,143 |  
|                                                       |  |                   |       |             |  |       |      |   |  |   |       |  

The income tax provision (benefit) for the years ended December 31, 2001, 2000,
and 1999 differs from that computed using the federal statutory rate applied to
income before income taxes as follows (in thousands):

|                                         |  |        |       |      |  |        |      |   |  |        |       |   |  |  |      |   |  |   |       |   |  |  |       |  
|---------------------------------------- |  | ------ | ----- | ---- |  | ------ | ---- | - |  | ------ | ----- | - |  |  | ---- | - |  | - | ----- | - |  |  | ----- | -
|                                         |  | 2001   |       | 2000 |  | 1999  
|                                         |  |        |       |      |  |       
|                                         |  | Amount |       | %    |  | Amount |      | % |  | Amount |       | %
|                                         |  |        |       |      |  |        |      |   |  |        |       |  
|Provision at the federal statutory rate  |  | $      | 4,037 |      |  |        | 35.0 | % |  | $      | 9,545 |   |  |  | 35.0 | % |  | $ | 979   |   |  |  | 34.0  | %
|Nondeductible goodwill amortization      |  |        | 151   |      |  |        | 1.3  |   |  |        | 146   |   |  |  | 0.5  |   |  |   | 161   |   |  |  | 5.6   |  
|Write-down of intangible assets          |  |        | 717   |      |  |        | 6.2  |   |  |        |      |   |  |  |     |   |  |   | 652   |   |  |  | 22.6  |  
|State income tax, net of federal benefit |  |        | 282   |      |  |        | 2.4  |   |  |        | 399   |   |  |  | 1.5  |   |  |   | 80    |   |  |  | 2.8   |  
|Tax exempt interest                      |  |        | (991  | )    |  |        | (8.6 | ) |  |        | (897  | ) |  |  | (3.3 | ) |  |   | (884  | ) |  |  | (30.7 | )
|Other                                    |  |        | (159  | )    |  |        | (1.4 | ) |  |        | 352   |   |  |  | 1.3  |   |  |   | 53    |   |  |  | 1.8   |  
|                                         |  |        |       |      |  |        |      |   |  |        |       |   |  |  |      |   |  |   |       |   |  |  |       |  
|                                         |  | $      | 4,037 |      |  |        | 35.0 | % |  | $      | 9,545 |   |  |  | 35.0 | % |  | $ | 1,041 |   |  |  | 36.1  | %
|                                         |  |        |       |      |  |        |      |   |  |        |       |   |  |  |      |   |  |   |       |   |  |  |       |  

At December 31, 2001, the Company has federal and state net operating loss
(NOL) carryforwards of approximately $126,000 and $1,632,000, respectively.
Federal NOL carryforwards can be used to offset future regular taxable income,
up to $133,000 annually and expire in 2011. State NOL carryforwards have no
annual limitations and expire beginning in 2018.

7. Commitments and Contingencies:

The Company leases office facilities and office equipment under non-cancelable
operating leases. At December 31, 2001, future non-cancelable lease
commitments, net of sublease income, are as follows (in thousands):

|             |  |   |       | 
|------------ |  | - | ----- | 
|Year Ending  |  |   |       | 
|December 31, |  |   |       | 
|             |  |   |       | 
|2002         |  | $ | 1,360 | 
|2003         |  |   | 1,251 | 
|2004         |  |   | 1,116 | 
|2005         |  |   | 133   | 
|             |  |   |       | 
|             |  | $ | 3,860 | 
|             |  |   |       | 

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

Total rent expense for the years ended December 31, 2001, 2000, and 1999 was
approximately $1,424,000, $1,756,000, and $1,743,000, respectively. The Company
may cancel the lease on the Companys Ambassadors Groups office without
penalty (upon one years prior notice) and also may extend the term of the
lease for an additional ten-year period upon providing written notice to the
lessor at least six months prior to the end of the initial lease term in 2004.

The Company entered into agreements to sublease office facilities in Newport
Beach, California and Boston, Massachusetts. Sublease rental income for the
years ended December 31, 2001, 2000 and 1999 was approximately $ 353,000,
$366,000, and $60,000, respectively. Future minimum rental income under the
non-cancelable subleases is approximately $146,000 for the year ended December
31, 2002.

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

8. Stock Plans:

The Company adopted the 1995 Equity Participation Plan (the Plan) during 1995
and amended and restated the Plan in 1999 and 1998. The Plan provides for the
grant of stock options, awards of restricted stock, performance or other awards
or stock appreciation rights to directors, key employees and consultants of the
Company. The maximum number of shares which may be awarded under the Plan is
1.4 million shares. Awards cannot exceed 100,000 shares to any individual in a
calendar year.

Under the terms of the Plan, options to purchase shares of the Companys common
stock are granted at a price set by the Compensation Committee of the Board of
Directors, not to be less than the par value of a share of common stock and if
granted as performance-based compensation or as incentive stock options, no
less than the fair market value of the stock on the date of grant. The
Compensation Committee establishes the vesting period of the awards. The
options may be exercised any time after they are fully vested for a period up
to 10 years from the grant date.

In conjunction with the spin-off of AGI and subsequent to December 31, 2001,
the number of shares and exercise price of outstanding stock options were
adjusted. As a result of this adjustment, each option has the same ratio of
exercise price per share to market value per share and the same aggregate
difference between market value and exercise price as existed immediately prior
to the spin-off. No new measurement date occurred upon modification of the
stock options.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

Had compensation cost for the Companys plans been determined based on the fair
value at the grant dates for awards under the plans consistent with the method
of SFAS No. 123, the Companys net income and net income per share would have
been changed to the pro forma amounts indicated below (in thousands except per
share data):

|           |  |                   |       |                   |  |                   |       |       |  |          |        |       |  |   |        |  |  |   |       |  |  |   |     | 
|---------- |  | ----------------- | ----- | ----------------- |  | ----------------- | ----- | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ----- |  |  | - | --- | 
|           |  | Year Ended        |       | Year Ended        |  | Year Ended       
|           |  | December 31, 2001 |       | December 31, 2000 |  | December 31, 1999
|           |  |                   |       |                   |  |                  
|           |  | As                |       | Pro               |  | As                |       | Pro   |  | As       |        | Pro  
|           |  | Reported          |       | Forma             |  | Reported          |       | Forma |  | Reported |        | Forma
|           |  |                   |       |                   |  |                   |       |       |  |          |        |      
|Net income |  | $                 | 7,498 |                   |  | $                 | 6,809 |       |  | $        | 17,726 |       |  | $ | 16,341 |  |  | $ | 1,839 |  |  | $ | 800 | 
|           |  |                   |       |                   |  |                   |       |       |  |          |        |       |  |   |        |  |  |   |       |  |  |   |     | 

|                               |  |                   |      |                   |  |                   |      |       |  |          |      |       |  |   |      |  |  |   |      |  |  |   |      | 
|------------------------------ |  | ----------------- | ---- | ----------------- |  | ----------------- | ---- | ----- |  | -------- | ---- | ----- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                               |  | Year Ended        |      | Year Ended        |  | Year Ended       
|                               |  | December 31, 2001 |      | December 31, 2000 |  | December 31, 1999
|                               |  |                   |      |                   |  |                  
|                               |  | As                |      | Pro               |  | As                |      | Pro   |  | As       |      | Pro  
|                               |  | Reported          |      | Forma             |  | Reported          |      | Forma |  | Reported |      | Forma
|                               |  |                   |      |                   |  |                   |      |       |  |          |      |      
|Net income per share  basic   |  | $                 | 0.78 |                   |  | $                 | 0.71 |       |  | $        | 1.86 |       |  | $ | 1.71 |  |  | $ | 0.19 |  |  | $ | 0.08 | 
|                               |  |                   |      |                   |  |                   |      |       |  |          |      |       |  |   |      |  |  |   |      |  |  |   |      | 
|Net income per share  diluted |  | $                 | 0.75 |                   |  | $                 | 0.68 |       |  | $        | 1.83 |       |  | $ | 1.69 |  |  | $ | 0.19 |  |  | $ | 0.08 | 
|                               |  |                   |      |                   |  |                   |      |       |  |          |      |       |  |   |      |  |  |   |      |  |  |   |      | 

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 2001, 2000, and 1999:

|                         |  |           |     |      |           |      |     |           |  |  |     |  
|------------------------ |  | --------- | --- | ---- | --------- | ---- | --- | --------- |  |  | --- | -
|                         |  | 2001      |     | 2000 |           | 1999
|                         |  |           |     |      |           |     
|Dividend yield           |  |           | 0.0 | %    |           |      | 0.0 | %         |  |  | 0.0 | %
|Expected volatility      |  |           | 56  | %    |           |      | 56  | %         |  |  | 58  | %
|Risk free interest rates |  |           | 5.8 | %    |           |      | 6.4 | %         |  |  | 5.3 | %
|Expected option lives    |  | 4.7 years |     |      | 6.0 years |      |     | 5.9 years | 

Stock option transactions are summarized as follows:

|                           |           |  |           |          |                  |   |            |       |  |  |           |      | 
|-------------------------- | --------- |  | --------- | -------- | ---------------- | - | ---------- | ----- |  |  | --------- | ---- | 
|                           |           |  | Number of |          | Weighted-Average |   | Expiration
|                           |           |  | Shares    |          | Exercise Price   |   | Date      
|                           |           |  |           |          |                  |   |           
|Balance, December 31, 1998 |           |  | 642,189   |          |                  | $ | 15.52      |       |  |  | 2005-2008 |     
|                           | Granted   |  |           | 375,800  |                  |   |            | 12.60 |  |  |           | 2009 | 
|                           | Forfeited |  |           | (171,965 | )                |   |            | 15.61 |  |  |           |      | 
|                           | Exercised |  |           | (60,037  | )                |   |            | 9.19  |  |  |           |      | 
|                           |           |  |           |          |                  |   |            |       |  |  |           |     
|Balance, December 31, 1999 |           |  | 785,987   |          |                  |   | 14.61      |       |  |  | 2005-2009 |     
|                           | Granted   |  |           | 384,375  |                  |   |            | 13.38 |  |  |           | 2010 | 
|                           | Forfeited |  |           | (87,362  | )                |   |            | 15.75 |  |  |           |      | 
|                           | Exercised |  |           | (18,613  | )                |   |            | 10.83 |  |  |           |      | 
|                           |           |  |           |          |                  |   |            |       |  |  |           |     
|Balance, December 31, 2000 |           |  | 1,064,387 |          |                  |   | 14.12      |       |  |  | 2005-2010 |     
|                           | Granted   |  |           | 233,850  |                  |   |            | 21.54 |  |  |           | 2011 | 
|                           | Forfeited |  |           | (145,097 | )                |   |            | 13.86 |  |  |           |      | 
|                           | Exercised |  |           | (155,779 | )                |   |            | 12.41 |  |  |           |      | 
|                           |           |  |           |          |                  |   |            |       |  |  |           |     
|Balance, December 31, 2001 |           |  | 997,361   |          |                  | $ | 16.40      |       |  |  | 2005-2011 |     
|                           |           |  |           |          |                  |   |            |       |  |  |           |     

44



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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

The following table presents information about the options as of December 31,
2001:

|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |     | 
|------------------------------ | ----------------- |  | --------- | ------- | -------------- | - | -------------- | ------------ | ------------ | - | ---------------- | ----- |  |  | --- | --- | 
|                               |                   |  |           |         |                |   |                |              |              |   | Weighted-Average
|                               |                   |  |           |         |                |   |                |              |              |   |                 
|                               |                   |  | Number of |         | Range of       |   |                |              |              |   | Remaining       
|                               |                   |  | Shares    |         | Exercise Price |   | Exercise Price |              | Life (Years)
|                               |                   |  |           |         |                |   |                |              |             
|Exercisable options            |                   |  | 29,375    |         |                | $ | 8.25 -  8.78   |              |              | $ | 8.39             |       |  |  | 3.8 |    
|Exercisable options            |                   |  | 133,677   |         |                |   | 8.79 - 11.70   |              |              |   | 10.14            |       |  |  | 5.7 |    
|Exercisable options            |                   |  | 87,224    |         |                |   | 11.71 - 14.63  |              |              |   | 13.44            |       |  |  | 7.9 |    
|Exercisable options            |                   |  | 78,649    |         |                |   | 14.64 - 17.55  |              |              |   | 15.20            |       |  |  | 6.8 |    
|Exercisable options            |                   |  | 35,496    |         |                |   | 17.56 - 20.48  |              |              |   | 19.84            |       |  |  | 6.0 |    
|Exercisable options            |                   |  | 27,673    |         |                |   | 23.41 - 26.33  |              |              |   | 26.25            |       |  |  | 7.4 |    
|Exercisable options            |                   |  | 40,723    |         |                |   | 26.34 - 29.25  |              |              |   | 29.15            |       |  |  | 6.0 |    
|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |    
|                               | Total exercisable |  |           | 432,817 |                |   |                | 8.25 - 29.25 |              |   |                  | 15.22 |  |  |     |     | 
|Unexercisable options          |                   |  | 44,075    |         |                |   | 8.79 - 11.70   |              |              |   | 10.28            |       |  |  | 5.7 |    
|Unexercisable options          |                   |  | 229,036   |         |                |   | 11.71 - 14.63  |              |              |   | 13.32            |       |  |  | 7.9 |    
|Unexercisable options          |                   |  | 28,126    |         |                |   | 14.64 - 17.55  |              |              |   | 15.56            |       |  |  | 6.8 |    
|Unexercisable options          |                   |  | 41,428    |         |                |   | 17.56 - 20.48  |              |              |   | 19.39            |       |  |  | 6.0 |    
|Unexercisable options          |                   |  | 181,750   |         |                |   | 20.49 - 23.40  |              |              |   | 21.65            |       |  |  | 9.5 |    
|Unexercisable options          |                   |  | 27,702    |         |                |   | 23.41 - 26.33  |              |              |   | 25.82            |       |  |  | 7.4 |    
|Unexercisable options          |                   |  | 12,427    |         |                |   | 26.34 - 29.25  |              |              |   | 29.15            |       |  |  | 6.0 |    
|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |    
|                               | Total all options |  |           | 997,361 |                |   | $              | 8.25 - 29.25 |              |   | $                | 16.40 |  |  |     | 7.3 | 
|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |    
|Exercisable, December 31, 2000 |                   |  | 364,068   |         |                |   |                |              |              | $ | 13.89            |       |  |  |     |    
|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |    
|Exercisable, December 31, 1999 |                   |  | 248,513   |         |                |   |                |              |              | $ | 13.19            |       |  |  |     |    
|                               |                   |  |           |         |                |   |                |              |              |   |                  |       |  |  |     |    

The weighted-average fair value of options granted during 2001, 2000 and 1999
was $11.49, $7.77, and $7.38, per share, respectively.

In addition to the stock options above, restricted stock awards were made
during 2000 to five Company officers and directors aggregating 110,000 shares,
at a weighted average price of $14.31. These awards were to fully vest within
the period from May 2003 to December 2004, provided the grantees are employees,
officers, or directors of the Company at that time. During December 2001,
these restricted stock awards were fully vested at the direction of the Board
of Directors. The Company incurred compensation expense of approximately
$2,072,000 and $238,000 related to these stock grants during 2001 and 2000,
respectively. During 1997, the Company granted an executive 50,000 shares of
the Companys stock, which vested over four years. The executive terminated his
employment during 1999 prior to 25,000 shares being vested. The Company
incurred compensation expense of approximately $98,000 in 1999 related to this
grant of shares.

9. Employee Benefit Plan:

Effective January 1, 1993, the Company established a noncontributory profit
sharing plan that covers substantially all employees. During 1996, the assets
of the plan were transferred into a new 401(k) Profit-Sharing Plan (the Plan).
With the spin-off transaction consummated (see Note 15), the Group is currently
establishing a separate 401(k) Profit Sharing Plan for the employees of the
Group. All Plan assets associated with the employees of the Group will be
transferred from the Companys Plan to the new plan established by the Group.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

Employees are eligible to participate in the Plan upon six months of service
and 21 years of age. Employees may contribute up to 15% of their salary,
subject to the maximum contribution allowed by the Internal Revenue Service.
The Companys matching contribution is discretionary based upon approval by
management. Employees are 100% vested in their contributions and vest in
Company matching contributions equally over four years. During the years ended
December 31, 2001, 2000, and 1999, the Company contributed approximately
$82,000, $86,000 and $72,000, to the Plan, respectively.

10. Common Stock:

In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the open
market or through private transactions. This repurchase program is ongoing and
as of December 31, 2001, the Company has repurchased 615,500 shares for
approximately $7.5 million. During the year ended December 31, 2001, no shares
were repurchased.

11. Business Acquisitions:

In June 1999, the Company acquired certain assets of a company primarily
engaged in providing youth sports travel programs. In September 1999, the
Company also acquired all of the capital stock of a company primarily involved
in registration services for conventions. The total purchase price for these
acquisitions in 1999 was $3.1 million plus the issuance of a note payable for
$600,000, shares totaling 69,405 of the Companys restricted common stock, and
certain contingent consideration as described below. Total assets acquired and
liabilities assumed in these acquisitions were approximately $3.2 million and
$5.9 million, respectively. Assets acquired consisted primarily of cash,
accounts receivables and prepaid expenses. Liabilities consisted primarily of
accounts payable and participant deposits. The common stock issued to effect
the transactions was recorded at its estimated fair value based upon quoted
market price adjusted for trading restrictions of $800,000. During the year
ended December 31, 2001, the Company recorded a write-down of goodwill relating
to the acquisition of certain assets of a company engaged in providing youth
sports travel programs. (See Note 16).

In February 1998, the Company acquired certain assets of a company located in
Boston, Massachusetts engaged in providing comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions and
trade shows. In February 1998, the Company also acquired all of the outstanding
stock of a performance incentive and meeting management company located in
Westlake Village, California. In April 1998, the Company acquired all of the
outstanding stock of a performance incentive and meeting management company
located in Laguna Hills, California. In May 1998, the Company acquired certain
assets of a specialized golf tour company located in Burbank, California. In
July 1998, the Company acquired certain assets of a company located in Atlanta,
Georgia, engaged in providing comprehensive hotel reservation, registration and
travel services for meetings, conventions, expositions and trade shows.

The total purchase price for these acquisitions in 1998 was $11.7 million plus
277,927 shares of the Companys restricted common stock and certain contingent
consideration as described below. Total assets acquired and liabilities assumed
in these acquisitions were approximately $10.5 million and $10.3 million,
respectively. Assets acquired consisted primarily of cash, accounts receivables
and prepaid expenses. Liabilities consisted primarily of accounts payable and
participant deposits. The common stock issued to effect the transactions was
recorded at its estimated fair value based upon quoted market price adjusted
for trading restrictions of $5.6 million. During the year ended December 31,
2001, the Company recorded a write-down of goodwill relating to the above
acquisitions. (See Note 16).

All of the above acquisitions have been accounted for using the purchase method
of accounting. The results of operations of these companies have been included
in the consolidated statements of income since their respective dates of
acquisition. The contingent consideration to be paid is dependent upon the
success of the acquired
46Table of Contents

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

companies programs. Additionally, contingent consideration for certain of the
acquisitions included provisions for additional stock or cash to be paid if the
market value of the Companys common stock declined below an established value
at a specified future date. All of the contingent consideration, except for any
associated with the market value of the Companys stock, has been accounted for
as goodwill and will be amortized through the adoption of FAS 142 (see Note 1).
Additional consideration paid related to market value contingencies are
recorded as an adjustment to stockholders equity. During the years ended
December 31, 2001 and 2000, the Company paid approximately $1,454,000 and
$790,000, respectively, and issued 17,588 and 70,808 shares of stock,
respectively, as contingent consideration related to prior acquisitions. As of
December 31, 2001, the Company incurred a liability in the amount of
approximately $930,000 for additional contingent consideration obligations to
be paid in 2002 related to acquisitions. As a result of these contingencies,
the original purchase price of these acquisitions was adjusted by approximately
$2,693,000 and $896,000 during the years ended December 31, 2001 and 2000,
respectively. The terms of the Companys acquisitions also include contingent
consideration which could range up to approximately $0.6 million in 2002.

The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the 1999 acquisitions had occurred at January
1, 1999 (in thousands except per share data):

|                               |  |      |        | 
|------------------------------ |  | ---- | ------ | 
|                               |  | 1999
|                               |  |     
|Revenue                        |  | $    | 44,866 | 
|                               |  |      |        | 
|Net income                     |  | $    | 1,165  | 
|                               |  |      |        | 
|Net income per share  basic   |  | $    | 0.12   | 
|                               |  |      |        | 
|Net income per share  diluted |  | $    | 0.12   | 
|                               |  |      |        | 

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

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 Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data and to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

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

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Ambassadors International, 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 the Companys investments in foreign currency
forward contracts is based on quoted market prices and the spot rate of the
foreign currencies subject to contracts at year end.

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

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

Notes Payable  The fair value of the notes payable is based on the discounted
value of contractual cash flows of the notes. The discount rate is estimated
using the rates currently offered for debt with similar remaining maturities.

The estimated fair values of the financial instruments as of December 31, 2001
and 2000 are as follows (in thousands):

|                       |                               |  |          |         |       |  |          |         |       |  |   |        |   |  |   |        |  
|---------------------- | ----------------------------- |  | -------- | ------- | ----- |  | -------- | ------- | ----- |  | - | ------ | - |  | - | ------ | -
|                       |                               |  | 2001     |         | 2000 
|                       |                               |  |          |         |      
|                       |                               |  | Carrying |         | Fair  |  | Carrying |         | Fair 
|                       |                               |  | Amount   |         | Value |  | Amount   |         | Value
|                       |                               |  |          |         |       |  |          |         |      
|Financial assets:      |                               |  |          |         |       |  |          |         |       |  |   |        |   |  |   |       
|                       | Cash and cash equivalents     |  | $        | 28,021  |       |  | $        | 28,021  |       |  | $ | 38,071 |   |  | $ | 38,071 |  
|                       | Derivatives                   |  |          | (503    | )     |  |          | (503    | )     |  |   | (928   | ) |  |   | (928   | )
|                       | Available-for-sale
securities |  |          | 107,303 |       |  |          | 107,303 |       |  |   | 87,240 |   |  |   | 87,240 |  
|                       | Other investments             |  |          | 323     |       |  |          | 323     |       |  |   | 3,406  |   |  |   | 3,406  |  
|Financial liabilities: |                               |  |          |         |       |  |          |         |       |  |   |        |   |  |   |       
|                       | Notes payable                 |  |          | 200     |       |  |          | 200     |       |  |   | 400    |   |  |   | 400    |  

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

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

13. Earnings Per Share:

The following table presents a reconciliation of basic and diluted earnings per
share (EPS) computations and the number of dilutive securities (stock options)
that were included in the dilutive EPS computation (in thousands except share
and per share data).

|                               |                                                     |   |      |           |      |   |      |           |  |   |      |           | 
|------------------------------ | --------------------------------------------------- | - | ---- | --------- | ---- | - | ---- | --------- |  | - | ---- | --------- | 
|                               |                                                     |   | 2001 |           | 2000 |   | 1999
|                               |                                                     |   |      |           |      |   |     
|Numerator:                     |                                                     |   |      |           |      |   |      |           |  |   |      |          
|                               | Net income for basic and diluted earnings
per share |   | $    | 7,498     |      |   | $    | 17,726    |  |   | $    | 1,839     | 
|                               |                                                     |   |      |           |      |   |      |           |  |   |      |          
|Denominator:                   |                                                     |   |      |           |      |   |      |           |  |   |      |          
|                               | Weighted-average shares outstanding  basic         |   |      | 9,641,712 |      |   |      | 9,541,814 |  |   |      | 9,717,627 | 
|                               | Effect of dilutive common stock options             |   |      | 208,153   |      |   |      | 97,999    |  |   |      | 52,396    | 
|                               | Effect of dilutive common stock grants              |   |      | 110,000   |      |   |      | 42,541    |  |   |      |          | 
|                               |                                                     |   |      |           |      |   |      |           |  |   |      |          
|                               | Weighted-average shares outstanding -
diluted       |   |      | 9,959,865 |      |   |      | 9,682,354 |  |   |      | 9,770,023 | 
|                               |                                                     |   |      |           |      |   |      |           |  |   |      |          
|Net income per share  basic   |                                                     | $ | 0.78 |           |      | $ | 1.86 |           |  | $ | 0.19 |          
|                               |                                                     |   |      |           |      |   |      |           |  |   |      |          
|Net income per share  diluted |                                                     | $ | 0.75 |           |      | $ | 1.83 |           |  | $ | 0.19 |          
|                               |                                                     |   |      |           |      |   |      |           |  |   |      |          

At December 31, 2001, 2000, and 1999, there were approximately 367,000,
173,000, and 434,000 stock options outstanding, whereby the exercise price
exceeded the average common stock market value. The effects of the shares which
would be issued upon the exercise of these options have been excluded from the
calculation of diluted earnings per share because they are anti-dilutive.

14. Business Segments:

All of the Companys assets are located in the United States. During the years
ended December 31, 2001, 2000, and 1999, the Companys revenues as a percentage
of total revenues were derived from travel programs conducted in the following
geographic areas:

|              |  |      |    |      |  |      |    |   |  |  |    |  
|------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|              |  | 2001 |    | 2000 |  | 1999
|              |  |      |    |      |  |     
|United States |  |      | 30 | %    |  |      | 32 | % |  |  | 38 | %
|Europe        |  |      | 35 | %    |  |      | 30 | % |  |  | 31 | %
|South Pacific |  |      | 26 | %    |  |      | 22 | % |  |  | 24 | %
|China         |  |      | 5  | %    |  |      | 8  | % |  |  | 4  | %
|Other         |  |      | 4  | %    |  |      | 8  | % |  |  | 3  | %

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

The Company operated Ambassadors Group, the Performance Group, and the Service
Group segments during 2001, 2000, and 1999. Corporate and other consists of
general corporate assets (primarily cash and cash equivalents, investments and
goodwill) and other activities which are not directly related to the
Ambassadors, Performance and Service Groups. Selected financial information
related to these segments is as follows (in thousands):

|      |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |         |  
|----- | ---------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | -------- | ------ | --------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|      |                                                                                    |  | Ambassadors |        | Performance |  | Services |        | Corporate |  |       |        |  
|      |                                                                                    |  | Group       |        | Group       |  | Group    |        | and Other |  | Total
|      |                                                                                    |  |             |        |             |  |          |        |           |  |      
|2001: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |        
|      | Revenues                                                                           |  | $           | 43,414 |             |  | $        | 10,333 |           |  | $     | 6,707  |   |  | $ |        |   |  | $ | 60,454  |  
|      | Depreciation and amortization                                                      |  |             | 650    |             |  |          | 463    |           |  |       | 291    |   |  |   | 1,062   |   |  |   | 2,466   |  
|      | Operating income (loss) prior to
write-down of intangible assets                   |  |             | 20,569 |             |  |          | 510    |           |  |       | 216    |   |  |   | (5,476  | ) |  |   | 15,819  |  
|      | Write-down of intangible assets                                                    |  |             |       |             |  |          |       |           |  |       |       |   |  |   | 18,740  |   |  |   | 18,740  |  
|      | Operating income (loss)                                                            |  |             | 20,569 |             |  |          | 510    |           |  |       | 216    |   |  |   | (24,216 | ) |  |   | (2,921  | )
|      | Total additions to property,
equipment, goodwill and
covenant-not-to-compete       |  |             | 882    |             |  |          | 716    |           |  |       | 2,233  |   |  |   | 7       |   |  |   | 3,838   |  
|      | Total assets                                                                       |  |             | 43,756 |             |  |          | 13,230 |           |  |       | 2,456  |   |  |   | 105,862 |   |  |   | 165,304 |  
|2000: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |        
|      | Revenues                                                                           |  | $           | 40,322 |             |  | $        | 10,728 |           |  | $     | 7,433  |   |  | $ | 250     |   |  | $ | 58,733  |  
|      | Depreciation and amortization                                                      |  |             | 846    |             |  |          | 497    |           |  |       | 224    |   |  |   | 1,096   |   |  |   | 2,663   |  
|      | Operating income (loss)                                                            |  |             | 16,189 |             |  |          | 1,207  |           |  |       | 387    |   |  |   | (2,915  | ) |  |   | 14,868  |  
|      | Total additions to property,
equipment, goodwill and
covenant-not-to-compete       |  |             | 991    |             |  |          | 202    |           |  |       | 363    |   |  |   | 956     |   |  |   | 2,512   |  
|      | Total assets                                                                       |  |             | 74,799 |             |  |          | 13,963 |           |  |       | 2,416  |   |  |   | 77,212  |   |  |   | 168,390 |  
|1999: |                                                                                    |  |             |        |             |  |          |        |           |  |       |        |   |  |   |         |   |  |   |        
|      | Revenues                                                                           |  | $           | 26,532 |             |  | $        | 10,474 |           |  | $     | 6,982  |   |  | $ |        |   |  | $ | 43,988  |  
|      | Depreciation and amortization                                                      |  |             | 517    |             |  |          | 466    |           |  |       | 175    |   |  |   | 1,283   |   |  |   | 2,441   |  
|      | Operating income (loss) prior to
restructuring and write-down
of intangible assets |  |             | 10,085 |             |  |          | (700   | )         |  |       | (231   | ) |  |   | (3,033  | ) |  |   | 6,121   |  
|      | Restructuring and write-down
of intangible assets                                  |  |             |       |             |  |          | 487    |           |  |       | 782    |   |  |   | 6,838   |   |  |   | 8,107   |  
|      | Operating income (loss)                                                            |  |             | 10,085 |             |  |          | (1,187 | )         |  |       | (1,013 | ) |  |   | (9,871  | ) |  |   | (1,986  | )
|      | Total additions to property,
equipment, goodwill and
covenant-not-to-compete       |  |             | 790    |             |  |          | 615    |           |  |       | 263    |   |  |   | 10,375  |   |  |   | 12,043  |  
|      | Total assets                                                                       |  |             | 43,357 |             |  |          | 9,016  |           |  |       | 2,979  |   |  |   | 87,411  |   |  |   | 142,763 |  

15. Spin off of Ambassadors Group, Inc.:

As further discussed in Note 1, on January 25, 2002, the Board of Directors of
the Company approved the distribution of all the outstanding shares of Group
common stock to the holders of the Companys common stock, and on February 28,
2002, the Company distributed to each holder of its common stock a dividend of
one (1) share of Group common stock for every one (1) share of the Companys
common stock held on the record date of February 4, 2002.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

The spin off of Ambassadors Group, Inc. will be accounted for as a disposition
of discontinued operations as of February 28, 2002, the date of the spin, and
accordingly, in the future, previously reported results of operations of the
Company will report the results of Ambassadors Group, Inc. as income from
discontinued operations.

If the spin off of Ambassadors Group, Inc. had occurred as of December 31,
2001, the current assets, total assets, current liabilities and shareholders
equity of the Company at that date would have been approximately $104.6
million, $119.2 million, $17.8 million and $101.4 million, respectively.

The following is the unaudited pro forma condensed results of operations of the
Company had the spin off transaction occurred as of December 31, 2001:

|                                                |  |      |         |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                                                |  | 2001 |         | 2000
|                                                |  |      |         |     
|Revenue                                         |  | $    | 17,040  |      |  | $ | 18,411 |  
|Operating loss                                  |  |      | (15,475 | )    |  |   | (461   | )
|Income (loss) before income taxes               |  |      | (3,173  | )    |  |   | 10,399 |  
|Income from discontinued operations, net of tax |  |      | 9,488   |      |  |   | 11,056 |  
|Net income                                      |  |      | 7,498   |      |  |   | 17,726 |  

The financial information of Ambassadors Group, Inc. used to derive the above
pro forma financial information has been carved out from the consolidated
financial statements of the Company using the historical operation results and
historical bases of the assets and liabilities of the Companys business that
Ambassadors Group, Inc. comprises. Accordingly, the historical financial
information of Ambassadors Group, Inc., used to derive the above pro forma
financial information, does not necessarily reflect what the Companys
financial position and operating results would have been had Ambassadors Group,
Inc. been a separate, stand-alone entity during the periods presented.

16. Impairment of Intangible Assets

Principally as a result of the impact of the terrorist acts that occurred on
September 11, 2001, the response by the United States since October 7, 2001,
and the resulting negative impact these events have had on domestic and
international air travel, and the travel industry in general, the Company
reviewed the carrying value of long-lived assets associated with certain of its
acquisitions. The Company recorded a non-cash charge of $18.0 million in the
fourth quarter of 2001, which represented the impairment of such long-lived
assets; goodwill and other related intangible assets. This charge is based on
the amount by which the book value exceeded the current estimated fair market
value of the goodwill. The current estimated fair market value was determined
primarily using the anticipated cash flows of the operations of the related
acquired companies.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

17. Restructuring Plan  Fourth Quarter of 1999:

During the fourth quarter of 1999, in connection with managements decisions to
close certain offices to improve operating efficiencies and reduce costs and to
outsource the merchandising business, the Company recorded a restructuring
charge and a write-down of intangible assets totaling approximately $8.1
million. Cash spent on the restructuring was funded from operations during
2000 and 1999. The restructuring plan involved the elimination of
approximately 60 positions, the write-down of intangible assets and property
and equipment and the consolidation of offices as follows (in thousands):

|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 
|------------------------------------ |  | -------- |  | ---------- | ----- | ------------- | ----- | ------------ | ------ | -------- | ------ | ------------ | --- | - | --- | - | ---- | ---------- | ---- | - | - | - | - | 
|                                     |  |          |  |            |       | Restructuring |       |              |        |          |        | Reserve      |     |   |     |   |      | Reserve   
|                                     |  |          |  |            |       | and           |       |              |        |          |        | Balance at   |     |   |     |   |      | Balance at
|                                     |  | Cash/    |  | Impairment |       | 1999          |       | December 31, |        | 2000     |        | December 31,
|                                     |  | Non-Cash |  | Charge     |       | Activity      |       | 1999         |        | Activity |        | 2000        
|                                     |  |          |  |            |       |               |       |              |        |          |        |             
|Write-down of
intangible assets      |  | Non-cash |  | $          | 6,838 |               |       | $            | (6,838 | )        |        | $            |    |   |     | $ |     |            |      | $ |  |  
|Severance and related
charges        |  | Cash     |  |            | 700   |               |       |              | (134   | )        |        |              | 566 |   |     |   | (566 | )          |      |   |  |  
|Consolidation of offices             |  | Cash     |  |            | 299   |               |       |              | (27    | )        |        |              | 272 |   |     |   | (272 | )          |      |   |  |  
|Write-down of property
and equipment |  | Non-cash |  |            | 270   |               |       |              | (270   | )        |        |              |    |   |     |   |     |            |      |   |  |  
|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 
|Total                                |  |          |  |            |       | $             | 8,107 |              |        | $        | (7,269 | )            |     | $ | 838 |   |      | $          | (838 | ) |   | $ |  | 
|                                     |  |          |  |            |       |               |       |              |        |          |        |              |     |   |     |   |      |            |      |   |   |   |   | 

The total restructuring charges, excluding intangibles, incurred by the
Performance and Services Groups were approximately $487,000 and $782,000,
respectively. These charges consisted of severance and related charges,
expenses incurred in closing offices and the write-down of property and
equipment associated with the closure of those offices. The write-down of
intangible assets included goodwill and non-compete contracts and totaled
approximately $4.4 million in the Performance Group and approximately $2.4
million in the Services Group.

The write-down of the Performance Groups intangible assets, approximating $4.4
million, consisted of the remaining goodwill balances relating to five previous
acquisitions that were being operated from the Minneapolis location that was
closed in December 1999 as a result of losing a majority of customers. All
administrative staff was terminated.

The write-down of Services Groups intangible asset, approximating $2.4
million, consisted of a partial write-down of goodwill on one acquisition that
was previously being operated from the Boston office. The Boston office was
closed in December of 1999 due to a significant number of clients not renewing
their contracts. Administrative staff was either terminated or relocated to the
Atlanta location.

18. Related Party Transactions:

In connection with one of its investments, the Company received a non-recurring
consulting fee during 1999 and receives quarterly management fees. Also, the
Companys Chairman of the Board of Directors is the Managing Director of a
business management company that the Company has paid consulting fees of
$114,000 for the year ended December 31, 1999. No fees were paid during 2001
or 2000.

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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

19. Quarterly Financial Data

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

|                                    |  |                |       |      |  |           |        |          |  |   |        |  |  |   |         |  
|----------------------------------- |  | -------------- | ----- | ---- |  | --------- | ------ | -------- |  | - | ------ |  |  | - | ------- | -
|                                    |  | Quarters Ended
|                                    |  |               
|                                    |  | March          |       | June |  | September |        | December
|                                    |  |                |       |      |  |           |        |         
|2001                                |  |                |       |      |  |           |        |          |  |   |        |  |  |   |         |  
|Revenues                            |  | $              | 8,069 |      |  | $         | 24,571 |          |  | $ | 22,549 |  |  | $ | 5,265   |  
|Net income (loss)                   |  |                | (18   | )    |  |           | 16,038 |          |  |   | 8,246  |  |  |   | (16,769 | )
|Earnings (loss) per share  basic   |  |                | (0.00 | )    |  |           | 1.67   |          |  |   | 0.85   |  |  |   | (1.72   | )
|Earnings (loss) per share  diluted |  |                | (0.00 | )    |  |           | 1.61   |          |  |   | 0.82   |  |  |   | (1.68   | )

Gross program receipts totaled $27.8 million, $72.3 million, $58.2 million, and
$17.9 million for the quarters ended March 31, June 30, and September 30, and
December 31, 2001 respectively. Proforma earnings per diluted share, excluding
the effects of the gain on the sale of an investment, was $1.06 for the quarter
ended June 30, 2001. Proforma loss per diluted share, excluding the effects of
the write down of intangible assets, was $0.43 per diluted share for the
quarter ended December 31, 2001.

|                                    |  |                |        |      |  |           |        |          |  |   |        |  |  |   |        | 
|----------------------------------- |  | -------------- | ------ | ---- |  | --------- | ------ | -------- |  | - | ------ |  |  | - | ------ | 
|                                    |  | Quarters Ended
|                                    |  |               
|                                    |  | March          |        | June |  | September |        | December
|                                    |  |                |        |      |  |           |        |         
|2000                                |  |                |        |      |  |           |        |          |  |   |        |  |  |   |        | 
|Revenues                            |  | $              | 5,541  |      |  | $         | 19,390 |          |  | $ | 23,219 |  |  | $ | 10,583 | 
|Net income (loss)                   |  |                | (1,502 | )    |  |           | 7,575  |          |  |   | 7,873  |  |  |   | 3,780  | 
|Earnings (loss) per share  basic   |  |                | (0.16  | )    |  |           | 0.79   |          |  |   | 0.82   |  |  |   | 0.40   | 
|Earnings (loss) per share  diluted |  |                | (0.16  | )    |  |           | 0.78   |          |  |   | 0.81   |  |  |   | 0.38   | 

Gross program receipts totaled $17.4 million, $59.6 million, $65.8 million, and
$28.9 million for quarters ended March 31, June 30, September 30, and December
31, 2000, respectively. Proforma loss per diluted share, excluding the effects
of the one-time gain on the sale of the investment in GetThere.com, was $0.14
per diluted share for the quarter ended December 31, 2000.

|                                    |  |                |        |      |  |           |        |          |  |   |        |  |  |   |        |  
|----------------------------------- |  | -------------- | ------ | ---- |  | --------- | ------ | -------- |  | - | ------ |  |  | - | ------ | -
|                                    |  | Quarters Ended
|                                    |  |               
|                                    |  | March          |        | June |  | September |        | December
|                                    |  |                |        |      |  |           |        |         
|1999                                |  |                |        |      |  |           |        |          |  |   |        |  |  |   |        |  
|Revenues                            |  | $              | 4,980  |      |  | $         | 17,038 |          |  | $ | 16,440 |  |  | $ | 5,531  |  
|Net income (loss)                   |  |                | (1,183 | )    |  |           | 6,538  |          |  |   | 4,873  |  |  |   | (8,392 | )
|Earnings (loss) per share  basic   |  |                | (0.12  | )    |  |           | 0.67   |          |  |   | 0.50   |  |  |   | (0.87  | )
|Earnings
(loss) per share  diluted |  |                | (0.12  | )    |  |           | 0.67   |          |  |   | 0.50   |  |  |   | (0.87  | )

Gross program receipts totaled $16.5 million, $56.8 million, $47.6 million, and
$18.4 million for quarters ended March 31, June 30, September 30, and December
31, 1999, respectively. Proforma loss per diluted share, excluding the effects
of the write down of intangible assets, was $0.29 per diluted share for the
quarter ended December 31, 1999.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

|                     |                                                          |                        
|-------------------- | -------------------------------------------------------- | -----------------------
|                     | AMBASSADORS INTERNATIONAL, INC.(Registrant)             
|                    
|Date: March 25, 2002 | By:                                                      | /s/   John A. Ueberroth
|                     |                                                         
|                     | John A. Ueberroth,
President and Chief Executive Officer

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/ John A. UeberrothJohn A. Ueberroth        |  | President and Chief Executive Officer (Principal Executive Officer) |  | March 25, 2002
|                                             
|/s/ Peter V. UeberrothPeter V. Ueberroth      |  | Chairman of the Board of Directors                                  |  | March 25, 2002
|                                             
|/s/ Timothy T. FogartyTimothy T. Fogarty      |  | Chief Financial Officer (PrincipalFinancial and Accounting Officer) |  | March 25, 2002
|                                             
|/s/ Brigitte M. BrenBrigitte M. Bren          |  | Director                                                            |  | March 25, 2002
|                                             
|/s/ James L. EastonJames L. Easton            |  | Director                                                            |  | March 25, 2002
|                                             
|/s/ Rafer L. JohnsonRafer L. Johnson          |  | Director                                                            |  | March 25, 2002
|                                             
|/s/ John C. SpenceJohn C. Spence              |  | Director                                                            |  | March 25, 2002
|                                             
|/s/ Joseph J. UeberrothJoseph J. Ueberroth    |  | Director                                                            |  | March 25, 2002
|                                             
|/s/ Richard D. C. WhildenRichard D.C. Whilden |  | Director                                                            |  | March 25, 2002

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Index to Exhibits

|      |  |                                                                                                                                                                                                                                                                                                                                        
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Form of Reincorporation Agreement (l)                                                                                                                                                                                                                                                                                                  
|2.2   |  | Rescission Agreement (l)                                                                                                                                                                                                                                                                                                               
|2.3   |  | Stock Purchase Agreement (l)                                                                                                                                                                                                                                                                                                           
|2.4   |  | Redemption Agreement (l)                                                                                                                                                                                                                                                                                                               
|3.1   |  | Certificate of Incorporation of Ambassadors International, Inc.
(1)                                                                                                                                                                                                                                                                    
|3.2   |  | By-Laws of Ambassadors International, Inc. (l)                                                                                                                                                                                                                                                                                         
|4.1   |  | Specimen Stock Certificate (l)                                                                                                                                                                                                                                                                                                         
|10.1  |  | People to People Contract  Student Ambassador Program (l)                                                                                                                                                                                                                                                                             
|10.2  |  | People to People Contract  Citizen Ambassador Program (l)                                                                                                                                                                                                                                                                             
|10.3  |  | Form of Equity Participation Plan of Ambassadors International,
Inc. (1)                                                                                                                                                                                                                                                               
|10.4  |  | Form of Registration Rights Agreement among the Company, John and
Peter Ueberroth, and certain other stockholders (l)                                                                                                                                                                                                                  
|10.5  |  | Form of Indemnification Agreement for officers and directors (1)                                                                                                                                                                                                                                                                       
|10.6  |  | Commercial Lease dated December 21, 1992 between Portolese and
Sample Investments and International Ambassador Programs, Inc.
(1)                                                                                                                                                                                                      
|10.7  |  | First Amendment to Commercial Lease dated January 3, 1995 between
Portolese and Sample Investments and International Ambassador
Programs, Inc. (l)                                                                                                                                                                                     
|10.8  |  | Form of Employment Agreement with Executive Officers (l)                                                                                                                                                                                                                                                                               
|10.9  |  | Form of Note between the Company and the Ueberroths relating to
the Distribution (l)                                                                                                                                                                                                                                                   
|10.10 |  | General Contract between People to People and M.L. Bright
Associates dated July 1, 1995 and Assignment documents to the
Company dated February 6, 1996 (2)                                                                                                                                                                             
|10.11 |  | Agreement and Plan of Merger, effective as of December 11, 1996
by and among Ambassadors International, Inc., a Delaware
corporation, Ambassadors Performance Improvement, Inc., a
Delaware corporation and wholly owned subsidiary of Ambassadors,
Bitterman & Associates, Inc., a Minnesota corporation, and
Michael H. Bitterman (3)
|10.12 |  | Asset Purchase Agreement dated as of February 5, 1998 by and
among the company, Ambassador Performance Group, Inc., Rogal
America, Co. and Andrew Rogal (4)                                                                                                                                                                            
|10.13 |  | Lease dated December 20, 1996 between Rogal America, Inc. and
Ark-Les Corp. (5)                                                                                                                                                                                                                                                        
|10.14 |  | Industrial Lease dated 19- between the Company and the Irvine
Company (5)                                                                                                                                                                                                                                                              
|10.15 |  | The Amended and Restated 1995 Equity Participation Plan of
Ambassadors International, Inc. (6)                                                                                                                                                                                                                                         
|10.16 |  | The Atlanta Merchandise Mart Lease Agreement dated April 17, 1998
by and between AMC, Inc. and Destination, Inc. (6)                                                                                                                                                                                                                   
|10.17 |  | Agreement and Plan of Merger, dated May 22, 1998 by and among
Ambassadors International, Inc., Ambassador Performance Group,
Inc., Incentive Associates, Inc., Wayne Wright and Russ Medevic
(7)                                                                                                                                       
|10.18 |  | Asset Purchase Agreement, dated July 17, 1998 by and among
Ambassadors International, Inc., Ambassador Performance Group,
Inc., Destination, Inc. and Gregory S. Cunningham(8)                                                                                                                                                         
|10.19 |  | Lease dated July 24, 1998 by and between the Joseph Pell and Eda
Pell Revocable Trust dated August 19, 1989 and Ambassador
Performance Group, Inc.(9)                                                                                                                                                                                  
|10.20 |  | The Amended and Restated 1995 Equity Participation Plan of
Ambassador International, Inc., as amended by the Companys
Shareholders at the 1999 Annual Meeting of Shareholders held on
May 14, 1999.(10)                                                                                                                               
|10.21 |  | Amendment to General Contracts dated January 22, 2000 by and
among People to People International, Ambassadors International
Inc., and Ambassadors Programs, Inc.(11)                                                                                                                                                                  
|21.1  |  | Subsidiaries of Ambassadors International, Inc.(12)                                                                                                                                                                                                                                                                                    
|23.1  |  | Consent of PricewaterhouseCoopers LLP(12)                                                                                                                                                                                                                                                                                              

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---

|(1)  |  | Filed as an exhibit of the same number to the Companys
Registration Statement on Form S-1 (Registration No. 33-93586), and
incorporated herein by reference.  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Filed as an exhibit of the same number to the Companys Form
10-KSB for the year ended December 31, 1995, and incorporated herein
by reference.                
|    
|    
|    
|    
|(3)  |  | Filed as Exhibit 2.5 to a Current Report on Form 8-K dated
January 3, 1997, and incorporated herein by reference.                                              
|    
|    
|    
|    
|(4)  |  | Filed as Exhibit 2.6 to a Current Report Form 8-K dated
February 12, 1998 (as amended on Form 8-K/A dated April 2, 1998),
and incorporated herein by reference.
|    
|    
|    
|    
|(5)  |  | Filed as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 1997, and incorporated
herein by reference.             
|    
|    
|    
|    
|(6)  |  | Filed as an exhibit to the Companys Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1998, and incorporated herein by
reference.                  
|    
|    
|    
|    
|(7)  |  | Filed as Exhibit 2.5 to a Current Report on Form 8-K, which
was filed on June 5, 1998, and incorporated herein by reference.                                   
|    
|    
|    
|    
|(8)  |  | Filed as Exhibit 2.6 to a Current Report on Form 8-K, which
was filed on August 3, 1998, and incorporated herein by reference.                                 
|    
|    
|    
|    
|(9)  |  | Filed as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 1998, and incorporated
herein by reference.             
|    
|    
|    
|    
|(10) |  | Filed as Exhibit 4.1 to the Companys Registration statement
on Form S-8 (Registration No. 333-81023) and incorporated herein by
this reference.               
|    
|    
|    
|    
|(11) |  | Filed as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 1999, and incorporated
herein by reference.             
|    
|    
|    
|    
|(12) |  | Filed herewith.                                                                                                                                                

56