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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K





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

For the fiscal year ended December 31, 2002

OR

|       |  |                                                                                  
|------ |  | ---------------------------------------------------------------------------------
|[    ] |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE 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
(Address of Principal Executive Offices) |  | 92660
(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

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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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes    No [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 June 28, 2002, was $71,981,664. The
number of shares of the registrants Common Stock outstanding as of March 7,
2003 was 9,872,852.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement relating to the 2003
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                                      
|               | Item 14. Controls and Procedures                                                             
|               | Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K                   
|               | Schedule II  Consolidated Valuation and Qualifying Accounts                                 
|Signatures    
|Certifications
|EXHIBIT 21.1  
|EXHIBIT 23.1  
|EXHIBIT 23.2  
|EXHIBIT 99.1  



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TABLE OF CONTENTS

|                           |  |  |  |          |    |                                                                                       |  |  |    |  |  | 
|-------------------------- |  |  |  | -------- | -- | ------------------------------------------------------------------------------------- |  |  | -- |  |  | 
|PART I                    
|                           |  |  |  | Item 1.  |    | Business                                                                              |  |  | 1  | 
|                           |  |  |  | Item 2.  |    | Properties                                                                            |  |  | 9  | 
|                           |  |  |  | Item 3.  |    | Legal Proceedings                                                                     |  |  | 9  | 
|                           |  |  |  | Item 4.  |    | Submission of Matters to a Vote of Security
Holders                                   |  |  | 9  | 
|PART II                   
|                           |  |  |  | Item 5.  |    | Market for the Registrants Common Equity
and Related Stockholder Matters             |  |  | 10 | 
|                           |  |  |  | Item 6.  |    | Selected Financial Data                                                               |  |  | 12 | 
|                           |  |  |  | Item 7.  |    | Managements Discussion and Analysis
of Financial Condition and Results of Operations |  |  | 13 | 
|                           |  |  |  | Item 7A. |    | Quantitative and Qualitative Disclosures About
Market Risk                            |  |  | 20 | 
|                           |  |  |  | Item 8.  |    | Financial Statements and Supplementary Data                                           |  |  | 20 | 
|                           |  |  |  | Item 9.  |    | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |  | 20 | 
|PART III                  
|                           |  |  |  | Item 10. |    | Directors and Executive Officers of the Registrant                                    |  |  | 21 | 
|                           |  |  |  | Item 11. |    | Executive Compensation                                                                |  |  | 21 | 
|                           |  |  |  | Item 12. |    | Security Ownership of Certain Beneficial Owners
and Management                        |  |  | 21 | 
|                           |  |  |  | Item 13. |    | Certain Relationships and Related Transactions                                        |  |  | 21 | 
|                           |  |  |  | Item 14. |    | Controls and Procedures                                                               |  |  | 21 | 
|                           |  |  |  | Item 15. |    | Exhibits, Financial Statements, Schedules and
Reports on Form 8-K                     |  |  | 22 | 
|SIGNATURES                 |  |  |  |          | 49 |                                                                                      
|Exhibit Index              |  |  |  |          | 52 |                                                                                      
|Exhibit 99.1 Certification |  |  |  |          | 57 |                                                                                      





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FORWARD-LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K of Ambassadors
International, Inc. (the Company), which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements in Item 1., Business, and Item 7., Managements
Discussion and Analysis of Financial Condition and Results of Operations,
regarding intent, belief or current expectations of the Company or its officers
with respect to, among other things, trends in the travel industry, the
Companys business and growth strategies, the Companys use of technology, the
continued use of travel management companies by clients, the Companys ability
to integrate acquired businesses, and fluctuations in the Companys quarterly
results of operations.

Forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from anticipated results. These risks
and uncertainties include factors affecting the travel industry generally,
competition, the ability of the Company to successfully integrate the operations
of existing or acquired companies, and a variety of factors such as war with
Iraq, recession, weather conditions and concerns for passenger safety that could
cause a decline in travel demand, as well as the risk factors set forth in Item
1. Business  Risk Factors, and other factors as may be identified from time
to time in the Companys filings with the Securities and Exchange Commission or
in the Companys press releases.




PART I




Item 1.Business

Overview

Ambassadors International, Inc. (the Company), a Delaware corporation, is a
leading travel services Company with subsidiaries currently operating in the
businesses of (i) 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); (ii) providing comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions and
trade shows (the Services Group) and (iii) providing event portfolio
management software solutions (the Technology Group).

The Performance Group is comprised of: the Companys wholly owned subsidiary,
Ambassadors Performance Group, LLC (APG), a 51% ownership interest in
Innovations In Marketing, LLC (IIM), and a 49% ownership interest in Incentive
Travel, LLC (ITI). The Services Group is comprised of the Companys wholly
owned subsidiary, Ambassadors Services Group, Inc. (ASG). The Technology Group
is comprised of the Companys wholly owned subsidiary, Ambassadors Technology
Corporation (ATC). 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 under the name Ambassadors
International, Inc. 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.

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Business Segments

Performance Group

The Performance Group develops, markets and manages performance improvement
programs for a nationwide roster of clients. 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.; in May 1998, the Company acquired the stock of
Incentive Associates, Inc.; in March 2002, the Company acquired a 49% ownership
interest in Incentive Travel, LLC and in November 2002, the Company acquired a
51% ownership interest in Innovations In Marketing, LLC.

During 1999, pursuant to a restructuring plan, the component of the Performance
Group operations located in Minneapolis, Minnesota was closed, and all finance
and accounting functions were consolidated into the principal executive offices
located in Newport Beach, California. Additionally, the Company outsourced the
incentive-merchandising component of its incentives business.

The Performance Group offers 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.

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. These programs are
designed to increase revenues and profits for the client. The Companys
employees meet with the existing or potential clients to determine their
business objectives and their performance enhancement opportunities. The Company
then works with the client to determine the scope of the program by identifying
concepts and parameters to meet the objectives of the incentive program. The
Companys employees develop and customize services for the clients that fall
within the identified parameters. Program rules are then developed that
specifically address the campaign participants, key wholesalers or dealers
involved in the clients distribution channel.

The 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. Also, the Company offers web based campaign performance
tracking systems, with which clients can follow the period results of their
programs, and determine and notify the incentive program winners. 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.

Services Group

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

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The Services Group provides comprehensive hotel reservation, registration, and
other services for large event planners. The contracts for these services
generally cover an annual meeting or event and may be for a term of one to
several years. 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
telephone by the Companys call center staff. The Services Group accepts
reservation requests over the internet, by e-mail and through proprietary
technology utilizing 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
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.

Technology Group

The Technology Group provides enterprise wide control software which allows
marketers, meeting planners and tradeshow organizers to run efficient, less
costly events, while focusing on sales and marketing strategies and results. In
December 2002, ATC acquired certain of the assets and business of Bluedot
Virtual Event Organization, Inc. (such business and assets shall be referred to
herein as Bluedot Software unless the context otherwise requires). Bluedot
Software is a provider of event portfolio management software solutions which
provides software infrastructure of web based and traditional business events to
transform the customers events into key drivers of revenue growth, enhanced
customer experience and cost savings. Global corporations and large associations
in technology, financial services, media and healthcare have used the companys
products to automate marketing events.

Education Group Spin-Off

On January 25, 2002, the Companys Board of Directors approved the spin-off of
its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by declaring a
special stock dividend to the stockholders of the Company and distributing to
them all of the outstanding shares of AGI. The stock dividend was paid to the
Companys stockholders of record as of February 4, 2002, and was distributed to
such shareholders after the close of business on February 28, 2002, the date
that the spin-off was completed. Each stockholder of the Company received one
share of common stock of AGI for each share of common stock owned in the
Company. The distribution of AGIs common stock pursuant to the spin-off was
intended to be tax free to the Company and its stockholders. The Company
received a favorable Internal Revenue Service private letter ruling to that
effect. The trading of the common stock of AGI on the NASDAQ National Market
began on March 1, 2002 under the symbol EPAX.

The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing total
assets, liabilities, and stockholders equity by $34.8 million, $21.0 million
and $13.8 million, respectively.

The Company has entered into various agreements with AGI providing for the
separation of AGIs business operations from the Company. These agreements also
govern various interim and ongoing relationships. One of these agreements
provides for a credit facility in which the Company has agreed to provide loans
to AGI for certain purposes. AGI may borrow up to $20 million at any time with
three days written notice to the Company. All monies outstanding, including
principal and interest, mature no later than August 31, 2003. All borrowings
bear interest at the prime interest rate as reported in the Wall Street Journal
one business day after the request for a borrowing is received by the Company.
As of December 31, 2002, there were no borrowings under this agreement.

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Corporate Investments

The Company has a 20% minority investment in Grand Prix Tours, Inc. (GPT),
which provides packaged tours primarily to Formula One, Indy Car and NASCAR
races in the United States and internationally. GPT is the largest such travel
company in the United States.

The Company 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 of approximately $7.9
million.

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). In 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, had achieved certain revenue
objectives by June 14, 2002. The additional payment is currently being disputed
by Navigant and both parties have agreed to arbitration to settle the dispute.
The additional payment has not been recorded by the Company as of December 31,
2002.

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. During the quarter ended December 31, 2001,
the Company recorded a loss of approximately $400,000 which the Companys
management believed to be other than a temporary decline in the market value of
this investment. The recorded loss represented the balance of this investment
and thus, the Company has no future financial exposure on this investment.

In March 2002, the Performance Group acquired a 49% ownership interest in
Incentive Travel, LLC (ITI). ITI develops, markets and manages meetings and
incentive programs for a select roster of corporate clients utilizing incentive
travel and corporate meeting management services.

Business Strategy

The Companys strategy is to maintain its quality standards while increasing its
volume of business. In the Performance Group, the Companys strategy is to
increase business through acquiring majority and minority positions in well run
companies in which the owner or owners have growth potential but are limited due
to their capital base or ability to handle administrative functions required of
a larger company. The Company supplies the administrative functions as well as
financial capacity while the partner concentrates on increasing revenues and
market share.

In the Services Group, the Companys strategy is to increase business by
differentiating itself from other housing transaction providers by extending its
array of services. Some of these services include enhanced contracting, on-site
support, hotel audits and marketing services for customer events.

In the Technology Group, the acquisition of Bluedot Software allows the Company
to provide all customers, no matter the size and budget of their events, the
operational and strategic advantages gained by using Bluedot Softwares event
management software. The acquisition of Bluedot Software also positions the
Company to expand its customer base significantly, as greater numbers of
marketers, event planners and trade show organizers seek ways to quantify and
improve results from their portfolio of events and outsource functions not
essential to their core business. Furthermore, the Company believes that Bluedot
Software is a natural fit allowing it to cross-sell its software in the
Performance Group and Services Group.

The Company continues to pursue selective acquisitions of businesses in the
travel, performance improvement, leisure and service sectors that will increase
stockholder value.

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Competition

The travel industry in general is highly competitive. In the meeting management
and incentives businesses many of the Companys competitors are larger and have
greater resources. 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 and the excellent customer service provided by the
Company. The Company believes that its programs are not easily duplicated by its
competitors.

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

The Company believes the barriers to entry are relatively low for any future
competitors. However, 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.

Insurance

The Company maintains insurance coverage that it believes is 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 and personal property, and as required on leased
properties, 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 December 31, 2002, the Company employed 147 employees, of which 140 were
full-time employees. Of the Companys full-time employees, 66 are located in
Newport Beach, California; 36 are located in Atlanta, Georgia; 12 are located in
Novato, California; 21 are located in San Francisco, California; and 5 are
located in other individual offices throughout the United States. The Company
has full-time employees engaged in marketing and sales and full-time employees
in operations, administration and finance. The Company also employs temporary
labor on a seasonal basis to assist with its direct marketing efforts due to the
seasonal nature of the Companys travel programs. None of the Companys
employees are subject to collective bargaining agreements or are 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s 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 effect 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 an adverse effect
on the Companys business and results of operations. The war with Iraq or
terrorist attacks similar to those of September 11, 2001 are examples of events
that could have an adverse effect on the Companys operations. Demand for the
Companys programs and services may also be adversely effected 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 an adverse effect on the Companys business,
financial condition and results of operations.

Cash, Cash Equivalents, and Available-for-Sale Securities

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 that 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.

Acquisitions and Expansion of Business

Part of the Companys business strategy is to acquire selected travel,
performance improvement, leisure and service related businesses that may
complement its businesses. The Company will be competing for acquisition
opportunities with other companies, many of which have greater name recognition,
marketing support and financial resources, which may result in a diminished
number of acquisition opportunities available to the Company and higher
acquisition prices. No assurance can be given 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.

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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 acquisitions through
debt or equity financings. There can be no assurance that such financings will
be available at all or on terms acceptable to the Company. If consideration for
an acquisition includes equity securities, the Companys stockholders could
experience dilution.

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 effects on the Companys
reported operating results due to acquisition costs and expenses associated with
integrating and assimilating the operations of the acquired businesses. 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 an adverse
effect on the Company or that any such acquisition will 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 adversely effected.

Seasonality  Fluctuations in Quarterly Results

The Companys businesses are seasonal. The Company recognizes gross program
receipts, revenues and program related 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 spin-off of AGI,
the Company anticipates that the majority of its operating income will be
recognized in the first, second and fourth quarters. The Companys annual
results would be adversely effected if the Companys revenue were to be
substantially below seasonal norms during the first, second 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 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 that
provide similar programs and services. Many of these competitors are larger and
have greater resources than the Company. In addition, corporations and
associations themselves 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 than 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 an
adverse effect on the Company.

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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
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 an
adverse effect 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 suppliers of travel services
and a reduction in capacity or changes in pricing arrangements with travel
suppliers could have an adverse effect 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 an adverse effect on the Companys business, financial condition and
results of operations. The Company does not have any long-term employment
agreements with 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 an adverse effect on the
Companys business, financial condition and results of operations.

8



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##### Table of Contents






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 June 2005. The lease currently provides
for monthly rental payments of approximately $34,000. The Company subleases
approximately 3,000 square feet to two sublessees for approximately $5,500 per
month.

The Company occupies offices totaling approximately 18,100 square feet in
Atlanta, Georgia pursuant to a lease dated January 7, 2000, which expires in
July 2005. The lease currently provides for monthly rental payments of
approximately $24,000 per month.

The Company occupies office space totaling 2,400 square feet in Novato,
California pursuant to a lease dated September 1, 1998, which expires in August
2003. The lease currently provides for monthly rental payments approximating
$6,500 per month. The Company is currently evaluating the future use of this
office space and, as such, has not entered into any lease amendments for this
location.

The Company occupies office space totaling approximately 1,800 square feet in
Alexandria, Virginia, with current monthly rental payments of approximately
$2,600. This lease expires in October 2004.

The Company occupies office space totaling approximately 5,500 square feet in
San Francisco, California with current monthly rental payments of approximately
$9,000. This lease expires in March 2003 and reverts to a month to month lease
subsequent to the expiration date. The Company is currently evaluating the
future use of this office space and as such, has not entered into any lease
amendments for this location.

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

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.




Item 3.Legal Proceedings

The Company is not a party to any material pending legal proceedings. The
Company is from time to time threatened or involved in litigation incidental to
its business. The Company believes that the outcome of all current litigation
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.

9



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##### Table of Contents






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. As of March 11, 2003, there were
approximately 45 holders of record of the Companys Common Stock not including
beneficial owners holding shares through nominee or street name.

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

|                                 |  |      |       |     |  |   |       | 
|-------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                 |  | High |       | Low
|                                 |  |      |       |    
|2002:                            |  |      |       |     |  |   |       | 
|Quarter ended March 31, 2002 (1) |  | $    | 21.35 |     |  | $ | 7.75  | 
|Quarter ended June 30, 2002      |  |      | 10.15 |     |  |   | 8.06  | 
|Quarter ended September 30, 2002 |  |      | 10.24 |     |  |   | 7.95  | 
|Quarter ended December 31, 2002  |  |      | 9.10  |     |  |   | 8.00  | 
|2001:(1)                         |  |      |       |     |  |   |       | 
|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 | 



---

|(1) |  | The Company spun-off AGI effective February 28, 2002 (see Item 1
Business for further discussion). All prices before that date reflect
the stock price prior to the spin-off.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dividend Policy

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

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 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.

Changes in Securities

In March 2002, the Company issued 44,224 shares of its Common Stock in
connection with its purchase of a 49% ownership interest in ITI. No
commissions or remuneration were paid to any person in connection with the
issuance . The issuance of shares of common stock was exempt from the
registration provisions of the Securities Act of 1933 (the Act) pursuant to
Section 4(2) thereof.

10



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##### Table of Contents



Equity Compensation Plan Information

|                                                           |  |                         |           |                   |  |                          |      |                     |  |                     |         | 
|---------------------------------------------------------- |  | ----------------------- | --------- | ----------------- |  | ------------------------ | ---- | ------------------- |  | ------------------- | ------- | 
|                                                           |  | (a)                     |           | (b)               |  | (c)                     
|                                                           |  |                         |           |                   |  |                          |      |                     |  | Number of          
|                                                           |  |                         |           |                   |  |                          |      |                     |  | securities         
|                                                           |  |                         |           |                   |  |                          |      |                     |  | remaining available
|                                                           |  |                         |           |                   |  | Weighted-average         |      | for future issuance
|                                                           |  | Number of securities to |           | exercise price of |  | under equity            
|                                                           |  | be issued upon exercise |           | outstanding       |  | compensation plans      
|                                                           |  | of outstanding options, |           | options, warrants |  | (excluding securities   
|Plan category                                              |  | warrants and rights     |           | and rights        |  | reflected in column (a))
|                                                           |  |                         |           |                   |  |                         
|Equity compensation
plans approved by
security holders     |  |                         | 1,199,352 |                   |  | $                        | 7.40 |                     |  |                     | 638,648 | 
|Equity compensation
plans not approved
by security holders |  |                         |          |                   |  |                          |     |                     |  |                     |        | 
|                                                           |  |                         |           |                   |  |                          |      |                     |  |                     |         | 
|Total                                                      |  |                         | 1,199,352 |                   |  | $                        | 7.40 |                     |  |                     | 638,648 | 

11



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##### Table of Contents






Item 6.Selected Financial Data

The following selected consolidated financial data of the Company is presented
as of and for the years ended December 31, 2002, 2001, 2000, 1999 and
1998. The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the spin-off, and accordingly,
previously reported results of operations of the Company have been restated to
reflect the results of AGI in discontinued operations. The selected financial
data should be read in conjunction with the Companys audited Consolidated
Financial Statements and the notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations.

|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |        | 
|------------------------------------------------------ | ------------------------------------------------- | - | --------------------------------------------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | - | - | ------- | ------ | 
|                                                       |                                                   |   | 2002                                          |        | 2001 |   | 2000    |        | 1999 |   | 1998   
|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |        
|                                                       |                                                   |   | (dollars in thousands, except per share data)
|Selected Consolidated Statements of Income Data:       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|Revenue (A)                                            |                                                   | $ | 14,695                                        |        |      | $ | 17,041  |        |      | $ | 18,411  |        |  | $ | 17,455  |        |   | $ | 15,719  |       
|Operating expenses:                                    |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|                                                       | Selling and tour promotion                        |   |                                               | 4,014  |      |   |         | 5,544  |      |   |         | 6,029  |  |   |         | 7,266  |   |   |         | 6,841  | 
|                                                       | General and administrative                        |   |                                               | 10,343 |      |   |         | 15,531 |      |   |         | 13,340 |  |   |         | 13,565 |   |   |         | 10,527 | 
|                                                       | Restructuring and impairment of long-lived assets |   |                                               |       |      |   |         | 12,803 |      |   |         |       |  |   |         | 8,107  |   |   |         |       | 
|Operating income (loss)                                |                                                   |   | 338                                           |        |      |   | (16,837 | )      |      |   | (958    | )      |  |   | (11,483 | )      |   |   | (1,649  | )     
|Income (loss) from continuing operations before tax    |                                                   |   | 2,877                                         |        |      |   | (4,535  | )      |      |   | 9,903   |        |  |   | (7,731  | )      |   |   | 1,207   |       
|Income (loss) from continuing operations, net of tax   |                                                   |   | 2,763                                         |        |      |   | (2,939  | )      |      |   | 6,437   |        |  |   | (4,938  | )      |   |   | 815     |       
|Income (loss) from discontinued operations, net of tax |                                                   |   | (1,197                                        | )      |      |   | 10,437  |        |      |   | 11,289  |        |  |   | 6,777   |        |   |   | 7,547   |       
|Net income                                             |                                                   |   | 1,566                                         |        |      |   | 7,498   |        |      |   | 17,726  |        |  |   | 1,839   |        |   |   | 8,362   |       
|Earnings (loss) per share  basic:                     |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|                                                       | Continuing operations                             |   | $                                             | 0.28   |      |   | $       | (0.30  | )    |   | $       | 0.68   |  |   | $       | (0.51  | ) |   | $       | 0.09   | 
|                                                       | Discontinued operations                           |   |                                               | (0.12  | )    |   |         | 1.08   |      |   |         | 1.18   |  |   |         | 0.70   |   |   |         | 0.84   | 
|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|                                                       | Net income                                        |   | $                                             | 0.16   |      |   | $       | 0.78   |      |   | $       | 1.86   |  |   | $       | 0.19   |   |   | $       | 0.93   | 
|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|Earnings (loss) per share  diluted:                   |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|                                                       | Continuing operations                             |   | $                                             | 0.27   |      |   | $       | (0.30  | )    |   | $       | 0.66   |  |   | $       | (0.51  | ) |   | $       | 0.09   | 
|                                                       | Discontinued operations                           |   |                                               | (0.12  | )    |   |         | 1.05   |      |   |         | 1.17   |  |   |         | 0.70   |   |   |         | 0.83   | 
|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|                                                       | Net income                                        |   | $                                             | 0.15   |      |   | $       | 0.75   |      |   | $       | 1.83   |  |   | $       | 0.19   |   |   | $       | 0.92   | 
|                                                       |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|Selected Consolidated Balance Sheet Data:              |                                                   |   |                                               |        |      |   |         |        |      |   |         |        |  |   |         |        |   |   |         |       
|Cash and cash equivalents                              |                                                   | $ | 46,910                                        |        |      | $ | 28,021  |        |      | $ | 38,071  |        |  | $ | 18,461  |        |   | $ | 55,290  |       
|Total assets                                           |                                                   |   | 128,159                                       |        |      |   | 165,304 |        |      |   | 168,390 |        |  |   | 142,763 |        |   |   | 127,732 |       
|Long-term debt                                         |                                                   |   |                                              |        |      |   |        |        |      |   | 200     |        |  |   | 400     |        |   |   | 145     |       
|Total stockholders equity                             |                                                   |   | 115,016                                       |        |      |   | 126,240 |        |      |   | 121,871 |        |  |   | 108,269 |        |   |   | 107,049 |       



---

|(A) |  | 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, and ground transportation. Gross program receipts
during the years ended December 31, 2002, 2001, 2000, 1999 and 1998 were
$47.0 million, $59.9 million, $63.9 million, $67.8 million and $48.4
million, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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##### Table of Contents






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

General

On January 25, 2002, the Companys Board of Directors approved the spin-off of
its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by declaring a
special stock dividend to the stockholders of the Company and distributing to
them all of the outstanding shares of AGI. The stock dividend was paid to the
Companys stockholders of record as of February 4, 2002, and was distributed to
such shareholders after the close of business on February 28, 2002, the date
that the spin-off was completed. Each stockholder of the Company received one
share of common stock of AGI for each share of common stock owned in the
Company. The distribution of AGIs common stock pursuant to the spin-off was
intended to be tax free to the Company and its stockholders. The Company
received a favorable Internal Revenue Service private letter ruling to that
effect. The trading of the common stock of AGI on the NASDAQ National Market
began on March 1, 2002 under the symbol EPAX.

The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing total
assets, liabilities, and stockholders equity by $34.8 million, $21.0 million
and $13.8 million respectively. Therefore, the following discussion is based
upon continuing operations.

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

In March 2002, the Company acquired a 49% ownership interest in San Diego,
California based Incentive Travel, LLC and in November 2002, the Company
acquired a 51% ownership interest in Newport Beach, California based
Innovations In Marketing, LLC, the cumulative effect of which was to further
expand the Companys Performance Group.

In December 2002, the Companys wholly owned subsidiary Ambassadors Technology
Corporation (ATC) acquired Bluedot Software. Bluedot Software is a provider
of event portfolio management software solutions.

The Companys businesses are seasonal. The Company recognizes gross program
receipts, revenues and program related 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
spin-off of AGI, the Company anticipates that the majority of its operating
income will be recognized in the first, second and fourth quarters.

Critical Accounting Policies

The Companys financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and costs
and expenses during the period. Management evaluates its estimates and
judgments, including those which impact its most critical accounting policies
on an ongoing basis. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, within the framework of current accounting
literature.

13



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##### Table of Contents



The following is a list of the accounting policies that management believes are
the more significant judgments and estimates, and that could potentially result
in materially different results under different assumptions or conditions.

Revenue Recognition

Gross program receipts reflect the total payments received by the Company from
clients. Gross program receipts less program related expenses constitute the
Companys revenues. Program related expenses include all direct costs
associated with the Companys programs including costs related to airfare,
hotels, meals, ground transportation, changes in currency exchange rates and
merchandise costs. The Company recognizes travel revenue and related costs when
travel convenes. 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.

Revenue from hotel reservation, registration and related travel services are
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.

Revenue from the Technology Group is derived from a combination of license and
maintenance fees and services provided with its enterprise software tools. The
services provided include hosting of data, development and workflow
configuration. Revenue from contracts with multiple elements is recognized
using the residual method in accordance with Statement of Position (SOP)
97-2, Software Revenue Recognition as amended by SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.
Revenue from development contracts is recognized using the
percentage-of-completion method in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
Revenue from contracts relating to only maintenance or hosting of data is
recognized on a straight-line basis over the period that the services are
provided.

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. Securities with maturities of three months or less at the date of
purchase are classified as cash equivalents.

Available-for-Sale Securities

The Company classifies its marketable investments as available-for-sale
securities. Available-for-sale securities consist of debt securities with
maturities beyond three months 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.

Other Investments

The Company owns majority and minority investments in other operating
companies. All of these investment 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. The Company accounts for these
investments using the equity method when the Companys ownership is less than
50% and on a consolidated basis when the Companys ownership exceeds 50%.

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.

14



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##### Table of Contents



Long-Lived Assets

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangibles. Under SFAS No.
142, goodwill is no longer amortized, but is subject to annual impairment
tests. The Company uses a discounted cash flow model to estimate the fair
market value of each of its subsidiaries when performing its impairment tests.
Assumptions used include growth rates for revenues and expenses, investment
yields on deposits, future capital expenditure requirements and appropriate
discount rates. During the second quarter of 2002, the Company performed the
first of the required impairment tests of goodwill and indefinite lived
intangible assets associated with continuing operations (the transitional
test) and determined that no impairment charge was required as of January 1,
2002. The Company performed its annual test as of December 31, 2002 and
determined there was no indication of impairment.

Deferred Income Taxes

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

Results of Operations

The following table reflects certain income and expense items as a percentage
of revenue.

|                                                             |                                 |  |       |      |      |  |       |      |  |  |       |      | 
|------------------------------------------------------------ | ------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | 
|                                                             |                                 |  | 2002  |      | 2001 |  | 2000 
|                                                             |                                 |  |       |      |      |  |      
|Revenue                                                      |                                 |  | 100.0 | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|Operating expenses:                                          |                                 |  |       |      |      |  |       |      |  |  |       |     
|                                                             | Selling and tour promotion      |  |       | 27.3 |      |  |       | 32.6 |  |  |       | 32.7 | 
|                                                             | General and administrative      |  |       | 70.4 |      |  |       | 91.1 |  |  |       | 72.5 | 
|                                                             | Impairment of long-lived assets |  |       |     |      |  |       | 75.1 |  |  |       |     | 
|                                                             |                                 |  |       |      |      |  |       |      |  |  |       |     
|                                                             |                                 |  | 97.7  |      |      |  | 198.8 |      |  |  | 105.2 |     
|Operating income (loss)                                      |                                 |  | 2.3   |      |      |  | (98.8 | )    |  |  | (5.2  | )   
|Other income                                                 |                                 |  | 17.3  |      |      |  | 72.2  |      |  |  | 59.0  |     
|Income (loss) from continuing operations
before income taxes |                                 |  | 19.6  |      |      |  | (26.6 | )    |  |  | 53.8  |     
|Provision (benefit) for income taxes                         |                                 |  | 0.8   |      |      |  | (9.4  | )    |  |  | 18.8  |     
|                                                             |                                 |  |       |      |      |  |       |      |  |  |       |     
|Income (loss) from continuing operations                     |                                 |  | 18.8  |      |      |  | (17.2 | )    |  |  | 35.0  |     
|Income (loss) from discontinued operations                   |                                 |  | (8.1  | )    |      |  | 61.2  |      |  |  | 61.3  |     
|                                                             |                                 |  |       |      |      |  |       |      |  |  |       |     
|Net income                                                   |                                 |  | 10.7  | %    |      |  | 44.0  | %    |  |  | 96.3  | %   
|                                                             |                                 |  |       |      |      |  |       |      |  |  |       |     

15



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##### Table of Contents



Business Segment Information

The Company operated the Performance Group and Services Group segments during
2002, 2001 and 2000. The Technology Group segment was added in December 2002.
On February 28, 2002, the Company spun-off the Education Group and recorded the
effect of the transaction as a disposition of discontinued operations.
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 Performance, Services and Technology Groups. Selected
financial information related to these segments is as follows (in thousands):

|                                                                                                      |  |             |        |          |            |           |       |              |  |            |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ------ | -------- | ---------- | --------- | ----- | ------------ |  | ---------- | --- | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                      |  | Performance |        | Services | Technology | Corporate |       | Discontinued |  |            |    
|                                                                                                      |  | Group       |        | Group    |            | Group     |       | and Other    |  | Operations |     | Total
|                                                                                                      |  |             |        |          |            |           |       |              |  |            |     |      
|2002:                                                                                                 |  |             |        |          |            |           |       |              |  |            |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 9,224  |          |            | $         | 5,471 |              |  | $          |    |       |  | $ |        |   |  | $ |       |   |  | $ | 14,695  |  
|Depreciation and amortization expense                                                                 |  |             | 422    |          |            |           | 301   |              |  |            |    |       |  |   | 32      |   |  |   |       |   |  |   | 755     |  
|Operating income (loss)                                                                               |  |             | 1,545  |          |            |           | 496   |              |  |            | (88 | )     |  |   | (1,615  | ) |  |   |       |   |  |   | 338     |  
|Interest and dividend income                                                                          |  |             | 145    |          |            |           | 19    |              |  |            |    |       |  |   | 1,890   |   |  |   |       |   |  |   | 2,054   |  
|Income tax expense (benefit)                                                                          |  |             | 816    |          |            |           | 263   |              |  |            | (36 | )     |  |   | (929    | ) |  |   | (703   | ) |  |   | (589    | )
|Equity in net income and management
fees received from investments
accounted for by the equity method |  |             | 410    |          |            |           |      |              |  |            |    |       |  |   |        |   |  |   |       |   |  |   | 410     |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 637    |          |            |           | 171   |              |  |            | 717 |       |  |   | 66      |   |  |   |       |   |  |   | 1,591   |  
|Total assets                                                                                          |  |             | 13,992 |          |            |           | 2,857 |              |  |            | 784 |       |  |   | 110,526 |   |  |   |       |   |  |   | 128,159 |  
|2001:                                                                                                 |  |             |        |          |            |           |       |              |  |            |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 10,334 |          |            | $         | 6,707 |              |  | $          |    |       |  | $ |        |   |  | $ |       |   |  | $ | 17,041  |  
|Depreciation and amortization expense                                                                 |  |             | 463    |          |            |           | 291   |              |  |            |    |       |  |   | 793     |   |  |   |       |   |  |   | 1,547   |  
|Operating income (loss) prior to
impairment of long-lived assets                                      |  |             | 510    |          |            |           | 216   |              |  |            |    |       |  |   | (4,760  | ) |  |   |       |   |  |   | (4,034  | )
|Impairment of long-lived assets                                                                       |  |             |       |          |            |           |      |              |  |            |    |       |  |   | 12,803  |   |  |   |       |   |  |   | 12,803  |  
|Operating income (loss)                                                                               |  |             | 510    |          |            |           | 216   |              |  |            |    |       |  |   | (17,563 | ) |  |   |       |   |  |   | (16,837 | )
|Interest and dividend income                                                                          |  |             | 374    |          |            |           | 24    |              |  |            |    |       |  |   | 3,189   |   |  |   |       |   |  |   | 3,587   |  
|Income tax expense (benefit)                                                                          |  |             | 290    |          |            |           | 129   |              |  |            |    |       |  |   | (2,015  | ) |  |   | 5,633  |   |  |   | 4,037   |  
|Compensation charge related to the
acceleration of vesting
of restricted stock                        |  |             |       |          |            |           |      |              |  |            |    |       |  |   | 2,072   |   |  |   |       |   |  |   | 2,072   |  
|Gain on sale of investment                                                                            |  |             |       |          |            |           |      |              |  |            |    |       |  |   | 8,306   |   |  |   |       |   |  |   | 8,306   |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 716    |          |            |           | 2,233 |              |  |            |    |       |  |   | 7       |   |  |   | 882    |   |  |   | 3,838   |  
|Total assets                                                                                          |  |             | 13,230 |          |            |           | 2,456 |              |  |            |    |       |  |   | 105,862 |   |  |   | 43,756 |   |  |   | 165,304 |  
|2000:                                                                                                 |  |             |        |          |            |           |       |              |  |            |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 10,728 |          |            | $         | 7,433 |              |  | $          |    |       |  | $ | 250     |   |  | $ |       |   |  | $ | 18,411  |  
|Depreciation and amortization expense                                                                 |  |             | 497    |          |            |           | 224   |              |  |            |    |       |  |   | 733     |   |  |   |       |   |  |   | 1,454   |  
|Operating income (loss)                                                                               |  |             | 1,207  |          |            |           | 387   |              |  |            |    |       |  |   | (2,552  | ) |  |   |       |   |  |   | (958    | )
|Interest and dividend income                                                                          |  |             | 174    |          |            |           | 5     |              |  |            |    |       |  |   | 2,488   |   |  |   |       |   |  |   | 2,667   |  
|Income tax expense                                                                                    |  |             | 380    |          |            |           | 43    |              |  |            |    |       |  |   | 3,043   |   |  |   | 6,079  |   |  |   | 9,545   |  
|Gain on sale of investment                                                                            |  |             |       |          |            |           |      |              |  |            |    |       |  |   | 5,134   |   |  |   |       |   |  |   | 5,134   |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 202    |          |            |           | 363   |              |  |            |    |       |  |   | 956     |   |  |   | 991    |   |  |   | 2,512   |  
|Total assets                                                                                          |  |             | 13,963 |          |            |           | 2,416 |              |  |            |    |       |  |   | 77,212  |   |  |   | 74,799 |   |  |   | 168,390 |  

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Comparison of Continuing Operations for the Year Ended December 31, 2002 to the
Year Ended December 31, 2001

The Companys gross program receipts decreased to $47.0 million in 2002 from
$59.9 million in 2001. The decrease in gross revenue came from both the
Performance Group and Services Group. The decrease in the Performance Group was
a result of fewer programs being operated in 2002 combined with an overall
decrease in program size due to corporate clients qualifying fewer incentive
winners and operating fewer business meetings in order to cut their costs
because of the current economic uncertainties. The decrease in the Services
Group was due to a lower number of convention events serviced, as well as a
decrease in the participants at conventions operated.

Net revenue decreased to $14.7 million during 2002 from $17.0 million in 2001.
The decrease in net revenue came from both the Performance Group and Services
Group due to the factors described above which attributed to the decrease in
gross revenue. The decrease in gross revenue was partially offset by the
increase in gross margin of the Performance Group which was caused by higher
margins on programs operated and the inclusion of business produced from
current year acquisitions.

Selling and tour promotion expenses decreased to $4.0 million during 2002 from
$5.5 million in 2001. The decrease in selling and tour promotion expenses came
from both the Performance Group and Services Group. The decrease resulted from
reduced headcount as a direct result of the terrorist attack on September 11,
2001, salary reductions and lower commissions paid to account executives due to
lower business volume.

General and administrative expenses decreased during 2002 to $10.3 million from
$15.5 million in 2001. The decrease in general and administrative expenses
resulted from a stock compensation charge related to the acceleration of
vesting of restricted stock of $2.1 million recorded in 2001, lower personnel
costs in 2002 of approximately $1.8 million resulting from reduced headcount
and salary reductions taken in the fourth quarter of 2001 as a direct result of
the terrorist attacks on September 11, 2001, and the adoption of SFAS No. 142,
Goodwill and Other Intangibles effective January 1, 2002 which resulted in
the elimination of $0.8 million of goodwill amortization.

The impairment charge to the carrying value of long-lived assets of $12.8
million occurred during the fourth quarter of 2001 as a result of the impact to
operations of the terrorist attacks 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 long-lived assets
associated with all segments of the Company. No such impairment charge was
recorded in 2002.

During 2002, the Company reported operating income of $0.3 million compared to
an operating loss of $16.8 million in 2001. Excluding the pre tax impairment
charge to the carrying value of long-lived assets of $12.8 million and the pre
tax stock compensation charge related to the acceleration of vesting of
restricted stock of $2.1 million, the operating loss would have been $1.9
million for 2001. Changes in operating income and loss from 2002 to 2001 are
the result of changes as described above.

Other income in 2002 totaled $2.5 million in comparison to $12.3 million during
2001. Other income during 2002 consisted primarily of $2.0 million in interest
income generated by cash, cash equivalents, and available-for-sale securities
and $0.5 million resulting from income and service fees earned on an equity
investment. Other income during 2001 consisted primarily of $3.6 million in
interest income generated by cash, cash equivalents, and available-for-sale
securities, $0.4 million in management fees received on the SatoTravel
investment and an $8.3 million gain on the sale of the SatoTravel investment.
The decrease in interest income is due to the decrease in cash, cash
equivalents and available-for-sale securities from $135.3 million at December
31, 2001 to $106.7 million at December 31, 2002 as a direct result of the
spin-off of AGI on February 28, 2002, as well as lower investment yields.

The Companys effective income tax rate was 4% in 2002 compared to 35% in 2001.
The Company recorded an income tax provision of $0.1 million in 2002 compared
to a tax benefit of $1.6 million in 2001. The decrease in the effective tax
rate for 2002 resulted from a high level of tax-exempt income in relation to
operating income and the revaluation of state deferred tax assets to a higher
rate as required by SFAS No. 109, Accounting for Income Taxes.

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Income from continuing operations was $2.8 million in 2002 compared to a loss
of $2.9 million in 2001. Excluding the pre tax impairment charge to the
carrying value of long-lived assets of $12.8 million, pre tax stock
compensation charge related to the acceleration of vesting of restricted stock
of $2.1 million and the pre tax gain on sale of the Companys minority interest
in SatoTravel of $8.3 million, income from continuing operations would have
been $1.9 million for the year ended December 31, 2001. The changes between
years were the result of changes as described above.

Comparison of Continuing Operations for the Year Ended December 31, 2001 to the
Year Ended December 31, 2000

The Companys gross program receipts decreased to $59.9 million in 2001 from
$63.9 million in 2000. The decrease came from both the Performance Group and
the Services Group. The decrease resulted from lower business in both segments,
as well as lost business in the fourth quarter of 2001 due to business
cancellations directly related to the terrorist attacks on September 11, 2001.

Net revenue decreased to $17.0 million in 2001 from $18.4 million in 2000. The
decrease in net revenue came from both the Performance Group and Services Group
due to the same factors that affected gross program receipts.

Selling and tour promotion expenses decreased to $5.5 million in 2001 from $6.0
million in 2000. The decrease mainly resulted from lower commissions paid to
account executives due to lower business volume.

General and administrative expenses increased during 2001 to $15.5 million from
$13.3 million in 2000. The increase in general and administrative expenses was
primarily a result of a stock compensation charge related to the acceleration
of vesting of restricted stock of approximately $2.1 million which occurred in
2001.

The impairment charge to the carrying value of long-lived assets of $12.8
million occurred during the fourth quarter of 2001 as a result of the impact to
operations of the terrorist attacks 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 long-lived assets
associated with all segments of the Company. No such impairment charge was
taken in 2000.

During 2001, the Companys operating loss increased to $16.8 million from $1.0
million in 2000. Changes in operating income from 2001 to 2000 are the result
of changes as described above.

Other income in 2001 totaled $12.3 million in comparison to $10.9 million
during 2000. Other income during 2001 consisted primarily of $3.6 million in
interest income generated by cash, cash equivalents, and available-for-sale
securities, $0.4 million received in management fees from the SatoTravel
investment and an $8.3 million gain on the sale of the SatoTravel investment.
Other income during 2000 consisted primarily of $2.7 million in interest income
generated by cash, cash equivalents, and available-for-sale
securities, $7.9 million gain on the sale of minority investment in GetThere.com and $0.3 million
of management fees received from the SatoTravel investment, sublease and other
income.
On December 31, 2001, the Company had $135.3 million in cash, cash equivalents and
available-for-sale securities compared to $125.4 million on December 31, 2000.

The Companys effective income tax rate was approximately 35% for both 2001 and
2000. The Company recorded an income tax benefit of $1.6 million in 2001
compared to a tax provision of $3.5 million in 2000.

Loss from continuing operations for the year ended December 31, 2001 was $2.9
million compared to income from continuing operations of $6.4 million for the
year ended December 31, 2000. Excluding the pre tax impairment charge to the
carrying value of long-lived assets of $12.8 million, pre tax stock
compensation charge related to the acceleration of vesting of restricted stock
of $2.1 million and the pre tax gain on sale of the Companys minority interest
in SatoTravel of $8.3 million, income from continuing operations would have
been $1.9 million for the year ended December 31, 2001. Excluding the gain on
the sale of the GetThere.com investment during 2000, income from continuing
operations would have been $1.3 million during the year ended December 31,
2000.

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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, 2002, 2001 and
2000, was $0.6 million, $7.2 million and $29.4 million, respectively. The
decrease in cash flows from operations in 2002 versus 2001 and 2000 is
primarily due to the spin-off of AGI on February 28, 2002 in which the cash
flows from that operation are included in the Companys consolidated results
for the years ended December 31, 2001 and 2000.

Net cash provided by or (used in) investing activities for the years ended
December 31, 2002, 2001 and 2000 was $23.7 million, ($13.0) million and ($9.4)
million, respectively. The increase in cash flows from investing activities
during 2002 was a result of funding the distribution of the spin-off of AGI on
February 28, 2002 and the Company holding a higher level of cash equivalents
than in 2001 due to the relative indifference in investment yields.

The Company does not have any material capital expenditure commitments for
2003.

The terms of the Companys acquisitions of certain businesses also include
contingent consideration, which could range up to approximately $1.8 million in
2003. Additionally, the Company is continuing to pursue acquisitions of
similar 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 2002 totaled $5.4 million and
primarily relates to cash paid, net of liabilities assumed, as a dividend
resulting from the spin-off of AGI to the holders of the Companys common stock
on February 28, 2002. 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 stockholders, repurchase and retirement of common stock and
payments made on debt obligations which was partially offset by proceeds from
the exercise of stock options. Net cash used in financing activities during
2000 totaling $0.4 million primarily relates to payments made during the year
on the Companys debt obligation and the repurchase and retirement of common
stock. As of December 31, 2002, the Company had no long-term debt.

As of December 31, 2002, the Company had approximately $106.7 million of cash
and cash equivalents, available-for-sale securities, and restricted cash
equivalents, including program participant funds of $6.0 million. Cash
balances could be reduced significantly if the financial institutions, which
hold balances beyond that federally insured, 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 2003.

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Item 7A.Quantitative and Qualitative Disclosures About Market
Risk

Market Risk

The Company is exposed to changes in financial market conditions in the normal
course of business due to its use of certain financial instruments. Market
risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates and equity
prices.

The Companys available-for-sale securities included debt and marketable equity
securities of $56.9 million and $2.9 million, respectively, at December 31,
2002 and are subject to market risk. The potential change in the fair value of
these investments, assuming a 50 basis point increase in interest rates
relating to the debt securities and a 10% decline in price of the marketable
equity securities would be approximately $335,000 and $292,000, respectively.

The following table represents principal cash flows from available-for-sale
debt securities outstanding as of December 31, 2002 by contractual maturity
date, and the relative fair value and average interest rate (amounts in
thousands, except interest rates):

|                 |                                  |  |                   |        |                          |  |        |        |      |  |                        |        |   |  |        |        |  
|---------------- | -------------------------------- |  | ----------------- | ------ | ------------------------ |  | ------ | ------ | ---- |  | ---------------------- | ------ | - |  | ------ | ------ | -
|                 |                                  |  |                   |        |                          |  |        |        |      |  | Expected Maturity Date
|                 |                                  |  | December 31, 2002 |        | Year Ending December 31,
|                 |                                  |  |                   |        |                         
|                 |                                  |  | Cost              |        | Fair Value               |  | 2003   |        | 2004
|                 |                                  |  |                   |        |                          |  |        |        |     
|Debt securities: |                                  |  |                   |        |                          |  |        |        |      |  |                        |        |   |  |        |       
|                 | State and political subdivisions |  | $                 | 44,532 |                          |  | $      | 44,657 |      |  | $                      | 28,235 |   |  | $      | 16,422 |  
|                 | Corporate bonds                  |  |                   | 11,237 |                          |  |        | 11,279 |      |  |                        | 8,185  |   |  |        | 3,094  |  
|                 |                                  |  |                   |        |                          |  |        |        |      |  |                        |        |   |  |        |       
|                 |                                  |  | 55,769            |        |                          |  | 55,936 |        |      |  | 36,420                 |        |   |  | 19,516 |       
|                 | Interest receivable              |  |                   | 961    |                          |  |        | 961    |      |  |                        | 627    |   |  |        | 334    |  
|                 |                                  |  |                   |        |                          |  |        |        |      |  |                        |        |   |  |        |       
|                 | Total debt securities            |  | $                 | 56,730 |                          |  | $      | 56,897 |      |  | $                      | 37,047 |   |  | $      | 19,850 |  
|                 |                                  |  |                   |        |                          |  |        |        |      |  |                        |        |   |  |        |       
|                 | Interest rate on debt securities |  |                   |        |                          |  |        | 2.01   | %    |  |                        | 2.04   | % |  |        | 1.95   | %




Item 8.Financial Statements and Supplementary Data

The Consolidated Financial Statements are listed in Item 15 and are included
herein on pages 22 through 47.




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

Information regarding the change in the Companys independent accountants can
be found in the Companys Current Report on Form 8-K filed on April 8, 2002,
which is incorporated herein by reference.

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PART III




Item 10.Directors and Executive Officers of the Registrant

The information is incorporated by reference from the Registrants definitive
Proxy Statement for the fiscal year ended December 31, 2002 which is expected
to be filed with the Securities and Exchange Commission on or about April 15,
2003.




Item 11.Executive Compensation

The information is incorporated by reference from the Registrants definitive
Proxy Statement for the fiscal year ended December 31, 2002 which is expected
to be filed with the Securities and Exchange Commission on or about April 15,
2003.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information is incorporated by reference from the Registrants definitive
Proxy Statement for the fiscal year ended December 31, 2002 which is expected
to be filed with the Securities and Exchange Commission on or about April 15,
2003.




Item 13.Certain Relationships and Related Transactions

The information is incorporated by reference from the Registrants definitive
Proxy Statement for the fiscal year ended December 31, 2002 which is expected
to be filed with the Securities and Exchange Commission on or about April 15,
2003.




Item 14.Controls and Procedures

The Companys management, including the principal executive officer and
principal financial officer, conducted an evaluation of the Companys
disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this report. Based on their evaluation,
the Companys principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures are effective.

There have been no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced in paragraph above.

Available Information

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 that require the Company to file electronically reports,
proxy and information statements, and other information with the SEC. The
public may read and copy the Companys filings at the SECs Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public can obtain
information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC maintains an internet site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC at www.sec.gov. The Company maintains a
website at http://www.ambassadors.com. The Company does not make available
free of charge on this website, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports as soon as reasonably practical after such material is electronically
filed with or furnished to the SEC. The Company instead relies on a hyperlink
to the MSN Money Central website at
http://moneycentral.msn.com/investor/sec/getfilingtick.asp?Symbol=AMIE that
contains copies of the Companys filings. The Company is currently expanding
its web site to provide this information to the investor upon filing with the
SEC. The Company will provide electronic or paper copies of such filings free
of charge upon request.

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Item 15.Exhibits, Financial Statements, 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 Auditors                                                                                  |  |  | 23 | 
|Report of Independent Accountants                                                                               |  |  | 24 | 
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                       |  |  | 25 | 
|Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000                          |  |  | 26 | 
|Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2002, 2001 and 2000 |  |  | 27 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000                     |  |  | 28 | 
|Notes to Consolidated Financial Statements                                                                      |  |  | 29 | 



| | (2) |  | Consolidated Financial Statement Schedules:
| | --- |  | -------------------------------------------

|                                                                                                                  |  |  |    | 
|----------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Schedule II  Consolidated Valuation and Qualifying
Accounts for the years ended December 31, 2002,
2001 and 2000 |  |  | 48 | 



| |  |  | All other schedules are omitted because they are not
applicable or the required information is shown 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,
2002.

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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Ambassadors International, Inc.

We have audited the accompanying consolidated balance sheet of Ambassadors
International, Inc. as of December 31, 2002 and the related consolidated
statements of income, changes in stockholders equity, and cash flows for
the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ambassadors
International, Inc. at December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill and
other intangible assets.

| |  |                      
| |  | ---------------------
| |  | /s/ Ernst & Young LLP

Orange County, California
February 11, 2003

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Report of Independent Accountants

Board of Directors and Stockholders
Ambassadors International, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of 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 the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule 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 financial 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 3, which is as of February 28, 2002

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Ambassadors International, Inc.
Consolidated Balance Sheets
(in thousands, except share data)

|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |        |         |         |         | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | ------ | ------------ | ------- | ------ | ------- | ------- | ------- | 
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        | December 31,
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |             
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        | 2002         |         | 2001  
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|Assets:                       |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              | Current assets:                                                                                                                 |                                                                                     |                                            |                      |        |              |         |        |        
|                              |                                                                                                                                 | Cash and cash equivalents                                                           |                                            | $                    | 46,910 |              |         | $      | 28,021  |        
|                              |                                                                                                                                 | Available-for-sale securities                                                       |                                            |                      | 59,822 |              |         |        | 107,303 |        
|                              |                                                                                                                                 | Accounts receivable, net of allowance of
$73 and $16 in 2002 and 2001, respectively |                                            |                      | 2,550  |              |         |        | 4,487   |        
|                              |                                                                                                                                 | Deferred income taxes                                                               |                                            |                      | 965    |              |         |        | 1,202   |        
|                              |                                                                                                                                 | Prepaid program costs and other current assets                                      |                                            |                      | 2,605  |              |         |        | 5,262   |        
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              |                                                                                                                                 |                                                                                     |                                            | Total current assets |        |              | 112,852 |        |         |         | 146,275 | 
|                              | Property and equipment, net                                                                                                     |                                                                                     |                                            | 1,507                |        |              |         | 4,205  |        
|                              | Goodwill                                                                                                                        |                                                                                     |                                            | 6,817                |        |              |         | 6,344  |        
|                              | Other intangibles                                                                                                               |                                                                                     |                                            | 2,361                |        |              |         |       |        
|                              | Deferred income taxes                                                                                                           |                                                                                     |                                            | 4,146                |        |              |         | 8,069  |        
|                              | Other assets                                                                                                                    |                                                                                     |                                            | 476                  |        |              |         | 411    |        
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              |                                                                                                                                 |                                                                                     |                                            | Total assets         |        | $            | 128,159 |        |         | $       | 165,304 | 
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|Liabilities:                  |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              | Current liabilities:                                                                                                            |                                                                                     |                                            |                      |        |              |         |        |        
|                              |                                                                                                                                 | Accounts payable                                                                    |                                            | $                    | 3,395  |              |         | $      | 6,396   |        
|                              |                                                                                                                                 | Accrued expenses                                                                    |                                            |                      | 3,759  |              |         |        | 5,438   |        
|                              |                                                                                                                                 | Participants deposits and deferred revenue                                         |                                            |                      | 5,989  |              |         |        | 26,527  |        
|                              |                                                                                                                                 | Other current liabilities                                                           |                                            |                      |       |              |         |        | 703     |        
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              |                                                                                                                                 |                                                                                     |                                            | Total liabilities    |        |              | 13,143  |        |         |         | 39,064  | 
|Commitments and contingencies |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|Stockholders equity:         |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              | Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued                                                       |                                                                                     |                                            |                     |        |              |         |       |        
|                              | Common stock, $.01 par value; 20,000,000 shares authorized;
9,916,614 and 9,813,001 shares issued and outstanding,
respectively |                                                                                     |                                            | 99                   |        |              |         | 98     |        
|                              | Additional paid-in capital                                                                                                      |                                                                                     |                                            | 88,940               |        |              |         | 88,144 |        
|                              | Retained earnings                                                                                                               |                                                                                     |                                            | 26,416               |        |              |         | 39,018 |        
|                              | Accumulated other comprehensive loss                                                                                            |                                                                                     |                                            | (439                 | )      |              |         | (1,020 | )      
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              |                                                                                                                                 |                                                                                     | Total stockholders equity                 |                      |        | 115,016      |         |        |         | 126,240 |        
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       
|                              |                                                                                                                                 |                                                                                     | Total liabilities and stockholders equity |                      | $      | 128,159      |         |        | $       | 165,304 |        
|                              |                                                                                                                                 |                                                                                     |                                            |                      |        |              |         |       

See Notes to Consolidated Financial Statements.

25



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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Income
(in thousands, except per share data)

|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |        |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | - | ------ | ------ | - | ----------------------- | ------- | ------ | - | ---- | ------ | ------ |  |  |  | 
|                                                                                                                            |                                                        |   |        |        |   | Year Ended December 31,
|                                                                                                                            |                                                        |   |        |        |   |                        
|                                                                                                                            |                                                        |   |        |        |   | 2002                    |         | 2001   |   | 2000
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |     
|Revenue:                                                                                                                    |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Travel and incentive related                           |   | $      | 14,147 |   |                         | $       | 17,041 |   |      | $      | 18,411 | 
|                                                                                                                            | License fees from equity investee                      |   |        | 548    |   |                         |         |       |   |      |        |       | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            |                                                        |   | 14,695 |        |   |                         | 17,041  |        |   |      | 18,411 |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Operating expenses:                                                                                                         |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Selling and tour promotion                             |   |        | 4,014  |   |                         |         | 5,544  |   |      |        | 6,029  | 
|                                                                                                                            | General and administrative                             |   |        | 10,343 |   |                         |         | 15,531 |   |      |        | 13,340 | 
|                                                                                                                            | Impairment of long-lived assets                        |   |        |       |   |                         |         | 12,803 |   |      |        |       | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            |                                                        |   | 14,357 |        |   |                         | 33,878  |        |   |      | 19,369 |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Operating income (loss)                                                                                                     |                                                        |   | 338    |        |   |                         | (16,837 | )      |   |      | (958   | )     
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Other income:                                                                                                               |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Interest and dividend income                           |   |        | 2,054  |   |                         |         | 3,587  |   |      |        | 2,667  | 
|                                                                                                                            | Realized gain on sale of available-for-sale securities |   |        |       |   |                         |         | 8,306  |   |      |        | 7,933  | 
|                                                                                                                            | Other, net                                             |   |        | 485    |   |                         |         | 409    |   |      |        | 261    | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            |                                                        |   | 2,539  |        |   |                         | 12,302  |        |   |      | 10,861 |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Income (loss) from continuing operations before income taxes                                                                |                                                        |   | 2,877  |        |   |                         | (4,535  | )      |   |      | 9,903  |       
|Provision (benefit) for income taxes                                                                                        |                                                        |   | 114    |        |   |                         | (1,596  | )      |   |      | 3,466  |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Income (loss) from continuing operations                                                                                    |                                                        |   | 2,763  |        |   |                         | (2,939  | )      |   |      | 6,437  |       
|Income (loss) from discontinued operations (net of
income tax expense (benefit) of $(703), $5,633 and
$6,079, respectively) |                                                        |   | (1,197 | )      |   |                         | 10,437  |        |   |      | 11,289 |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Net income                                                                                                                  |                                                        | $ | 1,566  |        |   | $                       | 7,498   |        |   | $    | 17,726 |       
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Earnings (loss) per share  basic:                                                                                          |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Continuing operations                                  |   | $      | 0.28   |   |                         | $       | (0.30  | ) |      | $      | 0.68   | 
|                                                                                                                            | Discontinued operations                                |   |        | (0.12  | ) |                         |         | 1.08   |   |      |        | 1.18   | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Net income                                             |   | $      | 0.16   |   |                         | $       | 0.78   |   |      | $      | 1.86   | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Weighted-average common shares
outstanding  basic     |   |        | 9,854  |   |                         |         | 9,642  |   |      |        | 9,542  | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|Earnings (loss) per share  diluted:                                                                                        |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Continuing operations                                  |   | $      | 0.27   |   |                         | $       | (0.30  | ) |      | $      | 0.66   | 
|                                                                                                                            | Discontinued operations                                |   |        | (0.12  | ) |                         |         | 1.05   |   |      |        | 1.17   | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Net income                                             |   | $      | 0.15   |   |                         | $       | 0.75   |   |      | $      | 1.83   | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       
|                                                                                                                            | Weighted-average common shares
outstanding  diluted   |   |        | 10,162 |   |                         |         | 9,960  |   |      |        | 9,682  | 
|                                                                                                                            |                                                        |   |        |        |   |                         |         |        |   |      |        |       

See Notes to Consolidated Financial Statements.

26



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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Changes in Stockholders Equity
(in thousands, except share data)

|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |        |        |      |  
|------------------------------------------------------------------------ | ---------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------------------------------ | - | ------------ | - | ---------- | - | -------- | - | -------- | - | ------------- | - | ------- | ------ | ----- | - | ------ | - | - | - | ------ | - | ----------- | ---- | ------- | ------ | ------ | ---- | -
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   | Accumulated |      |         |        |       
|                                                                         |                                    |                                                     |                                                                                            |   | Common Stock |   | Additional |   |          |   |          |   |               |   |         |        | Other |   |        |   |  
|                                                                         |                                    |                                                     |                                                                                            |   |              |   | Paid-In    |   | Retained |   | Unearned |   | Comprehensive |   |         |        |      
|                                                                         |                                    |                                                     |                                                                                            |   | Shares       |   | Amount     |   | Capital  |   | Earnings |   | Compensation  |   | Loss    |        | Total
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |      
|Balance at December 31, 1999                                             |                                    |                                                     | 9,496,903                                                                                  |   |              | $ | 95         |   |          | $ | 83,771   |   |               | $ | 18,928  |        |       | $ |       |   |   | $ | 5,475  |   |             | $    | 108,269 |       
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income:                                                    |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|                                                                         | Net income                         |                                                     |                                                                                            |  |              |   |            |  |          |   |          |  |               |   |         | 17,726 |       |   |        |  |   |   |        |  |             |      |         | 17,726 |       
|                                                                         | Other comprehensive income (loss): |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |        |       
|                                                                         |                                    | Foreign currency translation,
net of taxes of $372  |                                                                                            |   |             |   |            |   |         |   |          |   |              |   |         |        |      |   |        |   |  |   |        |   | 633         |      |         |        | 633    |     
|                                                                         |                                    | Marketable securities, net of
tax benefit of $3,353 |                                                                                            |   |             |   |            |   |         |   |          |   |              |   |         |        |      |   |        |   |  |   |        |   | (5,707      | )    |         |        | (5,707 | )   
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income                                                     |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      | 12,652  |       
|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     |       
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Balance at December 31, 2000                                             |                                    |                                                     | 9,676,324                                                                                  |   |              |   | 97         |   |          |   | 86,055   |   |               |   | 36,654  |        |       |   | (1,336 | ) |   |   | 401    |   |             |      | 121,871 |       
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income:                                                    |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|                                                                         | Net income                         |                                                     |                                                                                            |  |              |   |            |  |          |   |          |  |               |   |         | 7,498  |       |   |        |  |   |   |        |  |             |      |         | 7,498  |       
|                                                                         | Other comprehensive loss:          |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |        |       
|                                                                         |                                    |                                                     | Foreign currency translation,
net of tax benefit of $399                                   |   |              |  |            |   |          |  |          |   |               |  |         |        |       |  |        |   |   |  |        |   |             | (741 | )       |        |        | (741 | )
|                                                                         |                                    |                                                     | Marketable securities, net of
tax benefit of $435                                          |   |              |  |            |   |          |  |          |   |               |  |         |        |       |  |        |   |   |  |        |   |             | (680 | )       |        |        | (680 | )
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income                                                     |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      | 6,077   |       
|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  | )     
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Balance at December 31, 2001                                             |                                    |                                                     | 9,813,001                                                                                  |   |              |   | 98         |   |          |   | 88,144   |   |               |   | 39,018  |        |       |   |       |   |   |   | (1,020 | ) |             |      | 126,240 |       
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income:                                                    |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|                                                                         | Net income                         |                                                     |                                                                                            |  |              |   |            |  |          |   |          |  |               |   |         | 1,566  |       |   |        |  |   |   |        |  |             |      |         | 1,566  |       
|                                                                         | Other comprehensive income:        |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |        |       
|                                                                         |                                    |                                                     | Foreign currency translation
included in dividend paid upon
spin-off, net of taxes of $163 |   |              |  |            |   |          |  |          |   |               |  |         |        |       |  |        |   |   |  |        |   |             | 340  |         |        |        | 340  |  
|                                                                         |                                    |                                                     | Marketable securities, net of
taxes of $135                                                |   |              |  |            |   |          |  |          |   |               |  |         |        |       |  |        |   |   |  |        |   |             | 241  |         |        |        | 241  |  
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Comprehensive income                                                     |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      | 2,147   |       
|Stock options exercised                                                  |                                    |                                                     | 97,389                                                                                     |   |              |   | 1          |   |          |   | 599      |   |               |   |        |        |       |   |       |   |   |   |       |   |             |      | 600     |       
|Issuance of stock                                                        |                                    |                                                     | 44,224                                                                                     |   |              |   |           |   |          |   | 371      |   |               |   |        |        |       |   |       |   |   |   |       |   |             |      | 371     |       
|Stock purchased and retired                                              |                                    |                                                     | (38,000                                                                                    | ) |              |   |           |   |          |   | (305     | ) |               |   |        |        |       |   |       |   |   |   |       |   |             |      | (305    | )     
|Tax benefit associated with stock grants
and exercise of stock options   |                                    |                                                     |                                                                                           |   |              |   |           |   |          |   | 131      |   |               |   |        |        |       |   |       |   |   |   |       |   |             |      | 131     |       
|Stock dividend upon spin-off                                             |                                    |                                                     |                                                                                           |   |              |   |           |   |          |   |         |   |               |   | (14,168 | )      |       |   |       |   |   |   |       |   |             |      | (14,168 | )     
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       
|Balance at December 31, 2002                                             |                                    |                                                     | 9,916,614                                                                                  |   |              | $ | 99         |   |          | $ | 88,940   |   |               | $ | 26,416  |        |       | $ |       |   |   | $ | (439   | ) |             | $    | 115,016 |       
|                                                                         |                                    |                                                     |                                                                                            |   |              |   |            |   |          |   |          |   |               |   |         |        |       |   |        |   |   |   |        |   |             |      |         |       

See Notes to Consolidated Financial Statements.

27



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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Cash Flows
(in thousands)

|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |         |        |        |        |  
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------ | -------- | ------ | ------ | ------- | ------- | ------ | ------ | ------ | -
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       | 2002   |        | 2001     |        | 2000  
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |       
|Cash flows from operating activities:             |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Net income                                                                        |                                                                                             | $                                              | 1,566                                               |       |        | $      | 7,498    |        |        | $       | 17,726  |       
|                                                  | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |         |       
|                                                  |                                                                                   | Depreciation and amortization                                                               |                                                |                                                     | 877   |        |        |          | 2,466  |        |         |         | 2,663  |       
|                                                  |                                                                                   | Deferred income tax provision (benefit)                                                     |                                                |                                                     | 1,641 |        |        |          | (7,267 | )      |         |         | (518   | )     
|                                                  |                                                                                   | Write-down of intangible assets                                                             |                                                |                                                     |      |        |        |          | 18,010 |        |         |         |       |       
|                                                  |                                                                                   | Write-down of other investments                                                             |                                                |                                                     |      |        |        |          | 730    |        |         |         |       |       
|                                                  |                                                                                   | Amortization of unearned compensation                                                       |                                                |                                                     |      |        |        |          | 2,072  |        |         |         | 238    |       
|                                                  |                                                                                   | Gain on sale of available-for-sale securities                                               |                                                |                                                     |      |        |        |          | (8,306 | )      |         |         | (7,933 | )     
|                                                  |                                                                                   | Unrealized gain on foreign currency exchange contracts                                      |                                                |                                                     |      |        |        |          | (1,565 | )      |         |         |       |       
|                                                  |                                                                                   | Loss on foreign currency exchange contracts                                                 |                                                |                                                     |      |        |        |          |       |        |         |         | 1,565  |       
|                                                  |                                                                                   | Other, net                                                                                  |                                                |                                                     |      |        |        |          | (70    | )      |         |         | (32    | )     
|                                                  |                                                                                   | Change in assets and liabilities, net of effects of business
acquisitions and dispositions: |                                                |                                                     |       |        |        |          |        |        |         |         |        |       
|                                                  |                                                                                   |                                                                                             | Accounts receivable                            |                                                     |       | 2,055  |        |          |        | (341   | )       |         |        | 751    |       
|                                                  |                                                                                   |                                                                                             | Prepaid program costs and other current assets |                                                     |       | 1,148  |        |          |        | 1,689  |         |         |        | (971   | )     
|                                                  |                                                                                   |                                                                                             | Other assets                                   |                                                     |       | (61    | )      |          |        |       |         |         |        |       |       
|                                                  |                                                                                   |                                                                                             | Accounts payable and accrued expenses          |                                                     |       | (2,445 | )      |          |        | 1,071  |         |         |        | 3,289  |       
|                                                  |                                                                                   |                                                                                             | Participants deposits                         |                                                     |       | (4,213 | )      |          |        | (8,831 | )       |         |        | 12,610 |       
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  |                                                                                   |                                                                                             |                                                | Net cash provided by operating activities           |       |        | 568    |          |        |        | 7,156   |         |        |        | 29,388 |  
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|Cash flows from investing activities:             |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Proceeds from sale of available-for-sale securities                               |                                                                                             |                                                | 106,089                                             |       |        |        | 94,225   |        |        |         | 78,946  |       
|                                                  | Purchase of available-for-sale securities                                         |                                                                                             |                                                | (81,474                                             | )     |        |        | (111,573 | )      |        |         | (94,341 | )     
|                                                  | Proceeds from the sale of other investments                                       |                                                                                             |                                                |                                                    |       |        |        | 7,205    |        |        |         | 8,771   |       
|                                                  | Purchase of other investments                                                     |                                                                                             |                                                | (173                                                | )     |        |        | (320     | )      |        |         | (399    | )     
|                                                  | Cash paid for acquisitions of subsidiaries, net of cash received                  |                                                                                             |                                                | (308                                                | )     |        |        | (1,454   | )      |        |         | (790    | )     
|                                                  | Purchase of property and equipment                                                |                                                                                             |                                                | (404                                                | )     |        |        | (1,141   | )      |        |         | (1,578  | )     
|                                                  | Payment for covenant-not-to-compete agreement                                     |                                                                                             |                                                |                                                    |       |        |        |         |        |        |         | (38     | )     
|                                                  | Proceeds from sale of property and equipment                                      |                                                                                             |                                                |                                                    |       |        |        | 24       |        |        |         | 31      |       
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  |                                                                                   |                                                                                             |                                                | Net cash provided by (used in) investing activities |       |        | 23,730 |          |        |        | (13,034 | )       |        |        | (9,398 | )
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|Cash flows from financing activities:             |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Distribution resulting from spin-off of subsidiary                                |                                                                                             |                                                | (5,299                                              | )     |        |        |         |        |        |         |        |       
|                                                  | Payments on note payable                                                          |                                                                                             |                                                | (200                                                | )     |        |        | (200     | )      |        |         | (346    | )     
|                                                  | Proceeds from exercise of stock options                                           |                                                                                             |                                                | 395                                                 |       |        |        | 1,934    |        |        |         | 202     |       
|                                                  | Purchase and retirement of common stock                                           |                                                                                             |                                                | (305                                                | )     |        |        | (772     | )      |        |         | (236    | )     
|                                                  | Dividends paid on common stock                                                    |                                                                                             |                                                |                                                    |       |        |        | (5,134   | )      |        |         |        |       
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  |                                                                                   |                                                                                             |                                                | Net cash used in financing activities               |       |        | (5,409 | )        |        |        | (4,172  | )       |        |        | (380   | )
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                                | 18,889                                              |       |        |        | (10,050  | )      |        |         | 19,610  |       
|                                                  | Cash and cash equivalents, beginning of year                                      |                                                                                             |                                                | 28,021                                              |       |        |        | 38,071   |        |        |         | 18,461  |       
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Cash and cash equivalents, end of year                                            |                                                                                             | $                                              | 46,910                                              |       |        | $      | 28,021   |        |        | $       | 38,071  |       
|                                                  |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|Supplemental disclosure of cash flow information: |                                                                                   |                                                                                             |                                                |                                                     |       |        |        |          |        |        |         |        
|                                                  | Cash paid for interest                                                            |                                                                                             | $                                              | 5                                                   |       |        | $      | 14       |        |        | $       | 25      |       
|                                                  | Cash paid for income taxes                                                        |                                                                                             |                                                | 798                                                 |       |        |        | 10,296   |        |        |         | 8,829   |       

See Notes 2 and 9 for non-cash investing and financing activities.

See Notes to Consolidated Financial Statements.

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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements

1. Description of the Company and Summary of Significant Accounting Policies



| |  |  | The Company                                                                                                                                                                 
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Ambassadors International, Inc. (the Company) is a travel services and
performance improvement company. The Companys operations are classified
in the following segments:



| |  |  | Ambassadors Performance Group(APG)  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(ASG)  Provides comprehensive
hotel reservation, registration and travel services for meetings,
conventions, expositions and trade shows.                                                                             
|
| |  |  | Ambassadors Technology Group(ATC)  Develops, markets and
distributes event portfolio management technology solutions for
corporations and large associations.                                                                                   



| |  |  | The Company was founded in 1967 and was reincorporated in Delaware in
1995. Ambassadors Group, Inc. (AGI) represented the entire operations
of the Company until 1996 when the Performance Group commenced
operations. The Services Group commenced operations in 1998 and the
Technology Group commenced operations in 2002.                                                                                                                                                                                                                  
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | As more fully described in Note 3, on January 25, 2002, the Companys
Board of Directors approved a spin-off distribution that separated the
Company into two publicly traded entities. The Consolidated Balance
Sheet at December 31, 2001 and related information in the notes to
consolidated financial statements and the Consolidated Statement of Cash
Flows for all years presented include the effects of discontinued
operations on a consolidated basis, without separate identification and
classification of discontinued operations.
|
| |  |  | Certain reclassifications have been made to amounts in 2000 and 2001 to
conform with the 2002 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Basis of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated. The equity method of accounting is
used for investment ownership ranging from 20 percent to 50 percent.
Investment ownership of less than 20 percent is accounted for using the
cost method.                                                                                                                                                                           
|
| |  |  | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ materially from those
estimates.                                                                                                                                                                               
|
| |  |  | Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The majority of trade accounts receivable are from large credit worthy
companies. Most programs are billed in advance and are normally collected
prior to program departure. The Company generally does not require
collateral. The Company maintains adequate reserves for potential credit
losses and such losses have been minimal and within managements
estimates.                                                                                                                                                                         

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##### Table of Contents



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



| |  |  | The Company believes that its primary trade accounts receivable credit
risk exposure in the Performance Group is limited because the entire
estimated program costs are normally collected prior to program departure
and customers are largely credit worthy corporations. Final billings are
issued after program operation for costs in excess of the estimated
program costs.                                                                                                                                                                                                                 
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Services Group bills its customers after hotel reservation,
registration, and travel services for meetings, conventions, expositions
and trade shows have operated. The Companys major trade accounts
receivable are principally with hotel chains and independent hotel
owners. This segment is exposed to credit risk in the event that the
hotel operator cannot meet its obligations.                                                                                                                                                                                                    
|
| |  |  | The Technology Group has contracts with major corporations that reflect
when payments are due based upon certain milestones or events occurring.
As of December 31, 2002, the Company had limited exposure to credit risk
since the acquisition of Bluedot Software occurred in December 2002.                                                                                                                                                                                                                                                                                                    
|
| |  |  | 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. Securities with maturities of three
months or less at the date of purchase are classified as cash
equivalents.                                                                                                                                                                                                                                                                                                            
|
| |  |  | Available-for-Sale Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | The Company classifies its marketable investments as available-for-sale
securities. Available-for-sale securities consist of debt securities with
maturities beyond three months 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 loss, 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.                                                                                                                                                                                                                         
|
| |  |  | Accumulated Other Comprehensive Loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Accumulated other comprehensive loss is comprised of unrealized losses on
marketable securities of $439,000 and $680,000, net of deferred income
taxes, at December 31, 2002 and 2001, respectively, and unrealized losses
on foreign currency exchange contracts of zero and $340,000, net of
deferred income taxes, at December 31, 2002 and 2001, respectively.                                                                                                                                                                                                                                
|
| |  |  | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Comprehensive income refers to the aggregate of net income and certain
other revenues, expenses, gains and losses recorded directly as
adjustments to stockholders equity, net of tax.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Other Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | The Company includes its minority investments in other operating
companies as other assets in the accompanying balance sheets. The cost of
these minority investments is allocated against the underlying fair value
of the net assets of the investee. Any cost of the investment over the
Companys portion of the underlying fair value of the net assets of the
investee is recorded as goodwill. The equity method of accounting is
used for investment ownership ranging from 20 percent to 50 percent.
Investment ownership of less than 20 percent is accounted for using the
cost method.

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##### Table of Contents



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



| |  |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Property and equipment are stated at cost, net of accumulated
depreciation. Cost of maintenance and repairs which do not improve or
extend the lives of the respective assets are expensed as incurred. Major
additions and betterments are capitalized. Property and equipment are
depreciated using the straight-line method generally over 5 to 7 years.
Leasehold improvements are amortized over the lesser of the useful life
or respective term of the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Long-Lived Assets Including Intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, effective January 1,
2002. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually or sooner whenever events or changes in
circumstances indicate that they may be impaired. Prior to fiscal 2002,
goodwill was amortized using the straight-line method over its estimated
useful life. The Company completed its transitional and annual goodwill
impairment tests as of June 30, 2002, and December 31, 2002,
respectively, and found no impairment. The Company established reporting
units based on its current reporting structure. For purposes of testing
goodwill for impairment, goodwill has been allocated to these reporting
units to the extent it related to each reporting unit.
|
| |  |  | SFAS No. 142 also requires that intangible assets with definite lives be
amortized over their estimated useful lives and reviewed for impairment
in accordance with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company is currently amortizing its acquired intangible assets with
definite lives over periods ranging from 5 to 6 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The following table reconciles the Companys net income (loss) and
earnings (loss) per share from continuing operations as reported, to the
amounts adjusted for the exclusion of goodwill amortization, net of
related income tax effect for the period prior to the adoption of SFAS
No. 142 (in thousands, except per share data):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                          |                                   |             |   |                          |       |      |   |        |        |   |   |       |       | 
|----------------------------------------- | --------------------------------- | ----------- | - | ------------------------ | ----- | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|                                          |                                   |             |   | Years Ended December 31,
|                                          |                                   |             |   |                         
|                                          |                                   |             |   | 2002                     |       | 2001 |   | 2000  
|                                          |                                   |             |   |                          |       |      |   |       
|Income (loss) from continuing operations: |                                   |             |   |                          |       |      |   |        |        |   |   |      
|                                          | As reported                       |             | $ | 2,763                    |       |      | $ | (2,939 | )      |   | $ | 6,437 |      
|                                          | Goodwill amortization, net of tax |             |   |                         |       |      |   | 495    |        |   |   | 456   |      
|                                          |                                   |             |   |                          |       |      |   |        |        |   |   |      
|                                          |                                   | As adjusted |   | $                        | 2,763 |      |   | $      | (2,444 | ) |   | $     | 6,893 | 
|                                          |                                   |             |   |                          |       |      |   |        |        |   |   |      
|Earnings (loss) per share  basic         |                                   |             |   |                          |       |      |   |        |        |   |   |      
|                                          | As reported                       |             | $ | 0.28                     |       |      | $ | (0.30  | )      |   | $ | 0.68  |      
|                                          | As adjusted                       |             | $ | 0.28                     |       |      | $ | (0.25  | )      |   | $ | 0.72  |      
|Earnings (loss) per share  diluted       |                                   |             |   |                          |       |      |   |        |        |   |   |      
|                                          | As reported                       |             | $ | 0.27                     |       |      | $ | (0.30  | )      |   | $ | 0.66  |      
|                                          | As adjusted                       |             | $ | 0.27                     |       |      | $ | (0.25  | )      |   | $ | 0.71  |      

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



| |  |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company bills travel participants, mainly consisting of large
corporations, in advance, of which the cash received is recorded as a
participant deposit. 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
are 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Revenue from the Technology Group is derived from a combination of
license and maintenance fees and services provided with its enterprise
software tools. The services provided include hosting of data,
development and workflow configuration. Revenue from contracts with
multiple elements is recognized using the residual method in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition
as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. Revenue from
development contracts is recognized using the percentage-of-completion
method in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Revenue from
contracts relating to only maintenance or hosting of data is recognized
on a straight-line basis over the period that the services are provided.
|
| |  |  | Selling and Tour Promotion Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Selling and tour promotion costs are expensed 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share 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. The dilutive effect of options outstanding is reflected in
dilutive earnings per share by application of the treasury method.                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Accounting for Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has elected to continue following the guidance of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, for measurement and recognition of stock-based transactions
with employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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



| |  |  | The following table illustrates the effect on net income and earnings per
share had compensation expense for the employee stock-based plans been
recorded based on the fair value method under SFAS No. 123 (in thousands,
except per share data):
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                            |             |   |                          |      |      |   |       |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------------ | ---- | ---- | - | ----- | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |             |   | Years Ended December 31,
|                                                                                                                                            |             |   |                         
|                                                                                                                                            |             |   | 2002                     |      | 2001 |   | 2000 
|                                                                                                                                            |             |   |                          |      |      |   |      
|Net income, as reported                                                                                                                     |             | $ | 1,566                    |      |      | $ | 7,498 |      |  | $ | 17,726 |     
|Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |             |   | (937                     | )    |      |   | (689  | )    |  |   | (1,385 | )   
|                                                                                                                                            |             |   |                          |      |      |   |       |      |  |   |        |     
|Net income, as adjusted                                                                                                                     |             | $ | 629                      |      |      | $ | 6,809 |      |  | $ | 16,341 |     
|                                                                                                                                            |             |   |                          |      |      |   |       |      |  |   |        |     
|Earnings per share  basic                                                                                                                  |             |   |                          |      |      |   |       |      |  |   |        |     
|                                                                                                                                            | As reported |   | $                        | 0.16 |      |   | $     | 0.78 |  |   | $      | 1.86 | 
|                                                                                                                                            | As adjusted |   | $                        | 0.06 |      |   | $     | 0.71 |  |   | $      | 1.71 | 
|Earnings per share  diluted                                                                                                                |             |   |                          |      |      |   |       |      |  |   |        |     
|                                                                                                                                            | As reported |   | $                        | 0.15 |      |   | $     | 0.75 |  |   | $      | 1.83 | 
|                                                                                                                                            | As adjusted |   | $                        | 0.06 |      |   | $     | 0.68 |  |   | $      | 1.69 | 



| |  |  | Business Segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company reports segment data based on the management approach which
designates the internal reporting used by management for making operating
decisions and assessing performance as the source of the Companys
reportable segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | In June 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS
No.146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No.
146 also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002.
Application of this statement is not expected to have a significant
effect on the Companys consolidated results of operations or financial
position.
|
| |  |  | In December 2002, the FASB issued SFAS No.148, Accounting for
Stock-Based Compensation  Transition and Disclosure. This statement
amends the disclosure requirements of SFAS No. 123 to require more
prominent disclosures in financial statements about the effects of
stock-based compensation. The Company adopted the provisions of SFAS No.
148 effective December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

33



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##### Table of Contents



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



| | 2. |  | Business Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In November 2002, the Performance Group acquired a 51% ownership interest
in Innovations In Marketing, LLC (IIM). IIM is a start-up performance
incentive and meeting management company which operates out of the
Companys corporate headquarters in Newport Beach, California. IIMs
initial capital consisted of $1,000 of which 51% was contributed by APG
and 49% was contributed by the minority owner. Members share in IIMs
gains and losses in proportion to their membership interests. However,
loss allocations to a member shall be made only to the extent that such
loss allocations will not create a deficit capital account balance for
that member greater than the members share of the liquidation value of
the company. The Operating Agreement provides that any member may elect
to purchase all of the membership interest of any or all of the other
members at any time after December 31, 2005. The Operating Agreement also
specifies that APG shall loan IIM up to $400,000 for the working capital
needs of the company during its first six months of operation.
Furthermore, the agreement also states that after the first six months of
operation the minority shareholder may loan IIM up to $100,000. Both
loans shall bear interest at a rate of 2% per year and shall be repaid by
IIM prior to any distributions of earnings being made to any IIM
shareholder. The outstanding balance on APGs loan to IIM as of December
31, 2002 was approximately $176,000 which has been eliminated in
consolidation.
|
| |    |  | In December 2002, the Technology Group acquired certain of the assets and
business of Bluedot Virtual Event Organization, Inc. (Bluedot Software)
out of Chapter 11 bankruptcy. Bluedot Software, located in San Francisco,
California, develops, markets and distributes event portfolio management
solutions for corporations and large associations. The purchase price
consisted of debtor-in possession financing and other costs of $308,000,
the assumption of liabilities and future contingent payments to the
sellers covering the twenty-four months following the closing date. The
Company allocated the excess purchase price to an intangible asset,
purchased software, of $607,000. The amortization period for this
intangible asset is five years. During the first twelve months following
the closing, the Technology Group shall pay the greater of (i) 5% of the
gross revenues actually received in each quarter allocable to the assets
purchased, or (ii) $25,000 per quarter as the First Year Minimum Payments.
During the second year following the closing, ATC shall pay the greater
of (i) 5% of the gross revenues actually received in each quarter
allocable to the assets purchased, or (ii) $15,000 per quarter as the
Second Year Minimum Payments.                                                                                                                                                                                                                                                             
|
| |    |  | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |    |  | In addition to the business acquisitions described above, the Company
holds minority investments in other operating companies. Other
investments during the periods presented in the accompanying balance
sheets and income statements include the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |  |  | In October 1997, the Company purchased 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.                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company 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 of approximately $7.9
million.                                                        
|
| |  |  | 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

34



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##### Table of Contents



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



| |   |  | 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, had achieved certain
revenue objectives by June 14, 2002. The additional payment is
currently being disputed by Navigant and both parties have agreed
to arbitration to settle the dispute. Since probability is
uncertain, the additional payment has not been recorded in the
statement of income as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 was 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 which the Companys management believed to be other than
a temporary decline in the market value of this investment. The
recorded loss represented the balance of this investment and
thus, the Company has no future financial exposure on this
investment.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | In March 2002, the Performance Group acquired a 49%
ownership interest in Incentive Travel, LLC (ITI). ITI
develops, markets and manages meetings and incentive programs for
a select roster of corporate clients utilizing incentive travel
and corporate meeting management services. The terms of the
purchase agreement call for contingent payments through 2005
based upon actual income before income taxes multiplied by the
Performance Groups 49% ownership interest calculated based on a
predefined multiplier. Total payments related to fiscal 2002 are
estimated to be $2.3 million of which approximately $1.8 million
is due by March 31, 2003 and was allocated to intangible assets
(license). The remaining purchase price of $0.5 million was
allocated to goodwill. License fees of approximately $548,000
were earned from ITI during fiscal 2002 and are included in the
operations of the Performance Group. The Company also recorded
its proportional share of the earnings and management fees from
ITI of approximately $410,000.



| |  |  | At December 31, 2002 and 2001, the above other investments represented
approximately $413,000 and $323,000, respectively, and was included in
other assets in the accompanying balance sheet.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Discontinued Operations



| |  |  | On January 25, 2002, the Companys Board of Directors approved the
spin-off of its wholly owned subsidiary, AGI, by declaring a special stock
dividend to the stockholders of the Company and distributing to them all
of the outstanding shares of AGI. The stock dividend was paid to the
Companys stockholders of record as of
February 4, 2002, and was
distributed to such shareholders after the close of business on February
28, 2002, the date that the spin-off was completed. Each stockholder of
the Company received one share of common stock of AGI for each share of
common stock owned in the Company. The distribution of AGIs common stock
pursuant to the spin-off was intended to be tax free to the Company and
its stockholders. The Company received a favorable Internal Revenue
Service private letter ruling to that effect. The trading of the common
stock of AGI on the Nasdaq National Market began on March 1, 2002 under
the symbol EPAX.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing
total assets, liabilities, and stockholders equity by $34.8 million,
$21.0 million and $13.8 million respectively. The effect of the spin-off
on the Companys income statement for the years ended December 31, 2002,
2001 and 2000 are reflected as discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

35



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##### Table of Contents



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



| |  |  | The revenues and income (loss) from discontinued operations before income
taxes are as follows (in thousands):
| |  |  | --------------------------------------------------------------------------------------------------------------

|                                                               |  |                          |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 2002                     |        | 2001 |  | 2000
|                                                               |  |                          |        |      |  |     
|Revenue                                                        |  | $                        | 518    |      |  | $    | 43,413 |  |  | $ | 40,322 | 
|Income (loss) from discontinued operations
before income taxes |  | $                        | (1,900 | )    |  | $    | 16,070 |  |  | $ | 17,368 | 



| |  |  | The Company has entered into various agreements with AGI providing for the
separation of AGIs business operations from the Company. These agreements
also govern various interim and ongoing relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One of these agreements provides for a credit facility in which the
Company has agreed to provide loans to AGI for certain purposes. AGI may
borrow up to $20 million at any time with three days written notice to the
Company. All monies outstanding, including principal and interest, mature
no later than August 31, 2003. All borrowings bear interest at the prime
interest rate as reported in the Wall Street Journal one business day
after the request for a borrowing is received by the Company. As of
December 31, 2002, there were no borrowings under this agreement.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | The majority of AGI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, AGI was exposed to foreign currency risk
relative to changes in foreign currency exchange rates between those
currencies and the U.S. dollar. As such, the Company had a program to
provide a hedge against certain of these foreign currency risks. The
Company used forward contracts which allowed the Company to acquire the
foreign currency at a fixed price for a specified period of time. Some of
the Companys forward contracts included 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 were cash flow hedges of
forecasted transactions. The Company accounted for these derivative
financial instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
|
| |  |  | 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. Furthermore,
subsequent to the spin-off, the Company has not engaged in any derivative
financial instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

36



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##### Table of Contents



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

4.  Available-for-Sale Securities



| |  |  | At December 31, 2002 and 2001, 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, 2002: |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   | Debt securities:             |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |       |       
|                   |                              | State and political subdivisions       |                       | $     | 44,532 |         |       | $ | 126        |     |            | $      | (1          | )  |         | $     | 44,657 |        
|                   |                              | Corporate bonds                        |                       |       | 11,237 |         |       |   | 42         |     |            |        |            |    |         |       | 11,279 |        
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              |                                        | 55,769                |       |        |         | 168   |   |            |     | (1         | )      |             |    | 55,936  |      
|                   |                              | Interest receivable                    |                       |       | 961    |         |       |   |           |     |            |        |            |    |         |       | 961    |        
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              |                                        | Total debt securities |       |        | 56,730  |       |   |            | 168 |            |        |             | (1 | )       |       |        | 56,897  | 
|                   | Marketable equity securities |                                        |                       | 3,795 |        |         |       |  |            |     |            | (870   | )           |    |         | 2,925 |       
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              | $                                      | 60,525                |       |        | $       | 168   |   |            | $   | (871       | )      |             | $  | 59,822  |      
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|December 31, 2001: |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   | Debt securities:             |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |       |       
|                   |                              | U.S. government and agency
obligations |                       | $     | 11,394 |         |       | $ |           |     |            | $      |            |    |         | $     | 11,394 |        
|                   |                              | State and political subdivisions       |                       |       | 82,424 |         |       |   |           |     |            |        |            |    |         |       | 82,424 |        
|                   |                              | Corporate bonds                        |                       |       | 9,635  |         |       |   |           |     |            |        |            |    |         |       | 9,635  |        
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              |                                        | 103,453               |       |        |         |      |   |            |     |           |        |             |    | 103,453 |      
|                   |                              | Interest receivable                    |                       |       | 1,134  |         |       |   |           |     |            |        |            |    |         |       | 1,134  |        
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              |                                        | Total debt securities |       |        | 104,587 |       |   |            |    |            |        |             |   |         |       |        | 104,587 | 
|                   | Marketable equity securities |                                        |                       | 3,795 |        |         |       |  |            |     |            | (1,079 | )           |    |         | 2,716 |       
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      
|                   |                              | $                                      | 108,382               |       |        | $       |      |   |            | $   | (1,079     | )      |             | $  | 107,303 |      
|                   |                              |                                        |                       |       |        |         |       |   |            |     |            |        |             |    |         |      



| |  |  | The Company recorded no realized gains or losses during 2002 or 2001.                                                                                                                                                        
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The following table represents principal cash flows from
available-for-sale debt securities outstanding as of December 31, 2002 by
contractual maturity date and average interest rate (in thousands, except
interest rates):

|                 |                                  |                       |        |                          |        |      |        |        |        | 
|---------------- | -------------------------------- | --------------------- | ------ | ------------------------ | ------ | ---- | ------ | ------ | ------ | 
|                 |                                  |                       |        | Maturity Date           
|                 |                                  |                       |        | Year Ending December 31,
|                 |                                  |                       |        |                         
|                 |                                  |                       |        | 2003                     |        | 2004
|                 |                                  |                       |        |                          |        |     
|Debt securities: |                                  |                       |        |                          |        |      |        |       
|                 | State and political subdivisions |                       | $      | 28,235                   |        |      | $      | 16,422 |       
|                 | Corporate bonds                  |                       |        | 8,185                    |        |      |        | 3,094  |       
|                 |                                  |                       |        |                          |        |      |        |       
|                 |                                  |                       | 36,420 |                          |        |      | 19,516 |       
|                 | Interest receivable              |                       |        | 627                      |        |      |        | 334    |       
|                 |                                  |                       |        |                          |        |      |        |       
|                 |                                  | Total debt securities |        | $                        | 37,047 |      |        | $      | 19,850 | 
|                 |                                  |                       |        |                          |        |      |        |       
|                 | Interest rate on debt securities |                       |        | 2.04                     | %      |      |        | 1.95   | %     

37



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##### Table of Contents



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



| | 5. |  | Property and Equipment                                                                        
| | -- |  | ----------------------------------------------------------------------------------------------
|
| |    |  | Property and equipment consists of the following at December 31, 2002 and 2001 (in thousands):

|                                               |  |      |        |      |  |   |        |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                               |  | 2002 |        | 2001
|                                               |  |      |        |     
|Computer software and equipment                |  | $    | 1,897  |      |  | $ | 5,120  |  
|Office furniture, fixtures and equipment       |  |      | 1,855  |      |  |   | 4,399  |  
|Leasehold improvements                         |  |      | 678    |      |  |   | 1,546  |  
|                                               |  |      |        |      |  |   |        |  
|                                               |  |      | 4,430  |      |  |   | 11,065 |  
|Less accumulated depreciation and amortization |  |      | (2,923 | )    |  |   | (6,860 | )
|                                               |  |      |        |      |  |   |        |  
|                                               |  | $    | 1,507  |      |  | $ | 4,205  |  
|                                               |  |      |        |      |  |   |        |  



| |    |  | Depreciation and amortization expense from continuing operations related
to property and equipment was approximately $755,000, $761,000 and
$729,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 6. |  | Goodwill and Other Intangibles                                                                                                                                                                                          
|
| |    |  | Goodwill and other intangibles consists of the following at December 31, 2002 and 2001 (in thousands):                                                                                                                  

|                              |                    |                         |        |       |       |      |        |       |   | 
|----------------------------- | ------------------ | ----------------------- | ------ | ----- | ----- | ---- | ------ | ----- | - | 
|                              |                    |                         |        | 2002  |       | 2001
|                              |                    |                         |        |       |       |     
|Goodwill                      |                    | $                       | 8,063  |       |       | $    | 8,220  |      
|Less accumulated amortization |                    |                         | (1,246 | )     |       |      | (1,876 | )    
|                              |                    |                         |        |       |       |      |        |      
|                              | Goodwill, net      |                         | $      | 6,817 |       |      | $      | 6,344 |  
|                              |                    |                         |        |       |       |      |        |      
|Other Intangibles:            |                    |                         |        |       |       |      |        |      
|                              | License            |                         | $      | 1,754 |       |      | $      |      |  
|                              | Purchased software |                         |        | 607   |       |      |        |      |  
|                              |                    |                         |        |       |       |      |        |      
|                              |                    | Total other intangibles |        | $     | 2,361 |      |        | $     |  | 
|                              |                    |                         |        |       |       |      |        |      



| |  |  | Due to the adoption of SFAS No. 142, there was no goodwill amortization
for the year ended December 31, 2002. Amortization expense from continuing
operations related to goodwill was approximately $786,000 and $724,000 for
the years ended December 31, 2001 and 2000, respectively. There was no
accumulated amortization on the license and purchased software as these
amounts were recorded at year end.                                                                                                                                                                       
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The estimated aggregate amortization expense for other intangibles is
approximately $414,000 per year for fiscal years ended December 31, 2003
through December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Goodwill associated with discontinued operations was approximately
$700,000 and with an accumulated amortization balance of approximately
$630,000. The Company increased goodwill by approximately
$543,000 resulting from the investment in ITI in March 2002. During 2001,
the Company paid final consideration for the Performance Group and
Services Group acquisitions of $1,763,000 and $930,000, respectively, which was allocated to goodwill.                                                                                                                               
|
| |  |  | 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
$12.8 million in the fourth quarter of 2001, which represented the
impairment of such long-lived assets in the Corporate and Other

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



| |    |  | business segment; goodwill and other related intangible assets. This
charge was 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.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 7. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | The income tax provision (benefit) included in the Consolidated Statements
of Income is as follows (in thousands):                                                                                                                                                                                                                                  

|         |         |                                      |       |              |        |      |        |        |        |  |      |       |        | 
|-------- | ------- | ------------------------------------ | ----- | ------------ | ------ | ---- | ------ | ------ | ------ |  | ---- | ----- | ------ | 
|         |         |                                      |       | December 31,
|         |         |                                      |       |             
|         |         |                                      |       | 2002         |        | 2001 |        | 2000  
|         |         |                                      |       |              |        |      |        |       
|Current: |         |                                      |       |              |        |      |        |        |        |  |      |      
|         | Federal |                                      | $     | (2,395       | )      |      | $      | 10,722 |        |  | $    | 9,441 |       
|         | State   |                                      |       | (280         | )      |      |        | 581    |        |  |      | 622   |       
|         |         |                                      |       |              |        |      |        |        |        |  |      |      
|         |         | Total current                        |       |              | (2,675 | )    |        |        | 11,303 |  |      |       | 10,063 | 
|Deferred |         |                                      | 2,086 |              |        |      | (7,266 | )      |        |  | (518 | )    
|         |         |                                      |       |              |        |      |        |        |        |  |      |      
|         |         | Total income tax provision (benefit) |       | $            | (589   | )    |        | $      | 4,037  |  |      | $     | 9,545  | 
|         |         |                                      |       |              |        |      |        |        |        |  |      |      



| |  |  | The income tax provision (benefit) applicable to continuing operations
and discontinued operations is as follows (in thousands):
| |  |  | --------------------------------------------------------------------------------------------------------------------------------

|                                       |          |                                             |      |              |      |      |       |        |        |   |       |       |       | 
|-------------------------------------- | -------- | ------------------------------------------- | ---- | ------------ | ---- | ---- | ----- | ------ | ------ | - | ----- | ----- | ----- | 
|                                       |          |                                             |      | December 31,
|                                       |          |                                             |      |             
|                                       |          |                                             |      | 2002         |      | 2001 |       | 2000  
|                                       |          |                                             |      |              |      |      |       |       
|Provision for continuing operations:   |          |                                             |      |              |      |      |       |        |        |   |       |      
|                                       | Current  |                                             | $    | (1,977       | )    |      | $     | 3,726  |        |   | $     | 3,319 |      
|                                       | Deferred |                                             |      | 2,091        |      |      |       | (5,322 | )      |   |       | 147   |      
|                                       |          |                                             |      |              |      |      |       |        |        |   |       |      
|                                       |          | Total provision for continuing operations   |      |              | 114  |      |       |        | (1,596 | ) |       |       | 3,466 | 
|                                       |          |                                             |      |              |      |      |       |        |        |   |       |      
|Provision for discontinued operations: |          |                                             |      |              |      |      |       |        |        |   |       |      
|                                       | Current  |                                             |      | (698         | )    |      |       | 7,577  |        |   |       | 6,743 |      
|                                       | Deferred |                                             |      | (5           | )    |      |       | (1,944 | )      |   |       | (664  | )    
|                                       |          |                                             |      |              |      |      |       |        |        |   |       |      
|                                       |          | Total provision for discontinued operations |      |              | (703 | )    |       |        | 5,633  |   |       |       | 6,079 | 
|                                       |          |                                             |      |              |      |      |       |        |        |   |       |      
|Total income tax provision (benefit)   |          | $                                           | (589 | )            |      | $    | 4,037 |        |        | $ | 9,545 |      
|                                       |          |                                             |      |              |      |      |       |        |        |   |       |      



| |  |  | The reconciliation of U.S. statutory federal income tax expense to income
tax provision (benefit) on income (loss) from continuing operations is as
follows (in thousands):
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |  |        |       |      |  |        |       |   |  |        |        |   |  |  |       |   |  |   |       |   |  |  |      |  
|---------------------------------------- |  | ------ | ----- | ---- |  | ------ | ----- | - |  | ------ | ------ | - |  |  | ----- | - |  | - | ----- | - |  |  | ---- | -
|                                         |  | 2002   |       | 2001 |  | 2000  
|                                         |  |        |       |      |  |       
|                                         |  | Amount |       | %    |  | Amount |       | % |  | Amount |        | %
|                                         |  |        |       |      |  |        |       |   |  |        |        |  
|Provision at the federal statutory rate  |  | $      | 1,007 |      |  |        | 35.0  | % |  | $      | (1,587 | ) |  |  | 35.0  | % |  | $ | 3,466 |   |  |  | 35.0 | %
|Nondeductible goodwill amortization      |  |        |      |      |  |        | 0.0   |   |  |        | 151    |   |  |  | (3.3  | ) |  |   | 146   |   |  |  | 1.5  |  
|Write-down of intangible assets          |  |        |      |      |  |        | 0.0   |   |  |        | 717    |   |  |  | (15.8 | ) |  |   |      |   |  |  |     |  
|State income tax, net of federal benefit |  |        | (512  | )    |  |        | (17.8 | ) |  |        | 170    |   |  |  | (3.7  | ) |  |   | 157   |   |  |  | 1.6  |  
|Tax exempt interest                      |  |        | (556  | )    |  |        | (19.3 | ) |  |        | (991   | ) |  |  | 21.9  |   |  |   | (821  | ) |  |  | (8.3 | )
|Other                                    |  |        | 175   |      |  |        | 6.1   |   |  |        | (56    | ) |  |  | 1.2   |   |  |   | 518   |   |  |  | 5.2  |  
|                                         |  |        |       |      |  |        |       |   |  |        |        |   |  |  |       |   |  |   |       |   |  |  |      |  
|                                         |  | $      | 114   |      |  |        | 4.0   | % |  | $      | (1,596 | ) |  |  | 35.3  | % |  | $ | 3,466 |   |  |  | 35.0 | %
|                                         |  |        |       |      |  |        |       |   |  |        |        |   |  |  |       |   |  |   |       |   |  |  |      |  

39



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



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

|                          |                                                        |                           |       |       |       |      |       |       |       | 
|------------------------- | ------------------------------------------------------ | ------------------------- | ----- | ----- | ----- | ---- | ----- | ----- | ----- | 
|                          |                                                        |                           |       | 2002  |       | 2001
|                          |                                                        |                           |       |       |       |     
|Deferred tax assets:      |                                                        |                           |       |       |       |      |       |      
|                          | Accrued vacation and compensation                      |                           | $     | 103   |       |      | $     | 156   |      
|                          | Unrealized loss on foreign currency exchange contracts |                           |       | 591   |       |      |       | 861   |      
|                          | Amortization of intangible assets                      |                           |       | 4,064 |       |      |       | 8,188 |      
|                          | Allowance for billing reserve                          |                           |       | 184   |       |      |       | 108   |      
|                          | Other                                                  |                           |       | 169   |       |      |       | 123   |      
|                          |                                                        |                           |       |       |       |      |       |      
|                          |                                                        | Total deferred tax assets |       |       | 5,111 |      |       |       | 9,436 | 
|Deferred tax liabilities: |                                                        |                           |       |       |       |      |       |      
|                          | Depreciation                                           |                           |       |      |       |      |       | (165  | )    
|                          |                                                        |                           |       |       |       |      |       |      
|Net deferred tax assets   |                                                        | $                         | 5,111 |       |       | $    | 9,271 |      
|                          |                                                        |                           |       |       |       |      |       |      



| |    |  | The Company currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. There is no valuation
allowance provided against the deferred tax assets as the Company believes
it is more likely than not that these assets will be realized.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | At December 31, 2002, the Company has a federal net operating loss (NOL)
carryforward of approximately $126,000 which expires in 2011. The federal
NOL is subject to an annual limitation under the provisions of IRC Section
382.                                                  
|
| | 8. |  | Commitments and Contingencies                                                                                                                                                                                                                                                       
|
| |    |  | The Company leases office facilities and office equipment under
non-cancelable operating leases. The Companys obligations under
non-cancellable lease commitments end in 2005 and are as follows (in
thousands):                                                                   

|                          |      |   |       |     | 
|------------------------- | ---- | - | ----- | --- | 
|Year Ending December 31,: |      |   |       |    
|                          | 2003 |   | $     | 939 | 
|                          | 2004 |   |       | 850 | 
|                          | 2005 |   |       | 403 | 
|                          |      |   |       |    
|                          |      | $ | 2,192 |    
|                          |      |   |       |    



| |  |  | Total rent expense from continuing operations for the years ended December
31, 2002, 2001 and 2000 was approximately $1,024,000, $1,149,000 and
$1,128,000, respectively.                                                                                                                                                                                                                                                       
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company entered into agreements to sublease office facilities in
Newport Beach, California and Boston, Massachusetts. Sublease rental
income from continuing operations for the years ended December 31, 2002,
2001 and 2000 was approximately $187,000, $353,000 and $366,000,
respectively. Future minimum rental income under the non-cancelable
subleases is approximately $53,000 for the year ended December 31, 2003.
|
| |  |  | 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.     

40



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##### Table of Contents



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



| | 9. |  | Stock Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The Company adopted the 1995 Equity Participation Plan (the Plan) during
1995 and amended and restated the Plan in 2002, 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 2,200,000 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. Vested options may be exercised for a period up to
10 years from the grant date.                       
|
| |    |  | In conjunction with the spin-off of AGI on February 28, 2002, 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 economic value. In
order for the economic value to remain constant, the aggregate difference
between market value and exercise price immediately prior to and
immediately after the spin-off had to be the same. No new measurement date
occurred upon modification of the stock options.
|
| |    |  | As discussed in Note 1, the Company follows APB Opinion No. 25 whereby no
compensation cost is recognized for the option plans where vesting
provisions are based only on the passage of time. Under the provisions of
SFAS No. 123, as disclosed in Note 1, 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
2002, 2001 and 2000:                                                                                                      

|                         |  |           |     |           |  |           |     |   |  |  |     |  
|------------------------ |  | --------- | --- | --------- |  | --------- | --- | - |  |  | --- | -
|                         |  | 2002      |     | 2001      |  | 2000     
|                         |  |           |     |           |  |          
|Dividend yield           |  |           | 0.0 | %         |  |           | 0.0 | % |  |  | 0.0 | %
|Expected volatility      |  |           | 61  | %         |  |           | 56  | % |  |  | 56  | %
|Risk free interest rates |  |           | 4.0 | %         |  |           | 5.8 | % |  |  | 6.4 | %
|Expected option lives    |  | 4.5 years |     | 4.7 years |  | 6.0 years

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##### Table of Contents



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



| |  |  | Stock option transactions are summarized as follows:
| |  |  | ----------------------------------------------------

|                           |                                |  |           |          |                  |   |       |       | 
|-------------------------- | ------------------------------ |  | --------- | -------- | ---------------- | - | ----- | ----- | 
|                           |                                |  | Number of |          | Weighted-Average
|                           |                                |  | Shares    |          | Exercise Price  
|                           |                                |  |           |          |                 
|Balance, December 31, 1999 |                                |  | 785,987   |          |                  | $ | 14.61 |      
|                           | Granted                        |  |           | 384,375  |                  |   |       | 13.38 | 
|                           | Forfeited                      |  |           | (87,362  | )                |   |       | 15.75 | 
|                           | Exercised                      |  |           | (18,613  | )                |   |       | 10.83 | 
|                           |                                |  |           |          |                  |   |       |      
|Balance, December 31, 2000 |                                |  | 1,064,387 |          |                  |   | 14.12 |      
|                           | Granted                        |  |           | 233,850  |                  |   |       | 21.54 | 
|                           | Forfeited                      |  |           | (145,097 | )                |   |       | 13.86 | 
|                           | Exercised                      |  |           | (155,779 | )                |   |       | 12.41 | 
|                           |                                |  |           |          |                  |   |       |      
|Balance, December 31, 2001 |                                |  | 997,361   |          |                  |   | 16.40 |      
|                           | Granted                        |  |           | 113,784  |                  |   |       | 8.12  | 
|                           | Spin-off conversion adjustment |  |           | 623,665  |                  |   |       | N/A   | 
|                           | Cancelled upon spin-off        |  |           | (381,839 | )                |   |       | 13.97 | 
|                           | Forfeited                      |  |           | (56,230  | )                |   |       | 10.17 | 
|                           | Exercised                      |  |           | (97,389  | )                |   |       | 6.16  | 
|                           |                                |  |           |          |                  |   |       |      
|Balance, December 31, 2002 |                                |  | 1,199,352 |          |                  | $ | 7.40  |      
|                           |                                |  |           |          |                  |   |       |      
|Options exercisable at:    |                                |  |           |          |                  |   |       |      
|                           | December 31, 2000              |  |           | 364,068  |                  |   | $     | 13.89 | 
|                           | December 31, 2001              |  |           | 997,361  |                  |   |       | 16.40 | 
|                           | December 31, 2002              |  |           | 699,840  |                  |   |       | 7.36  | 



| |  |  | The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2002:
| |  |  | -------------------------------------------------------------------------------------------------------------------

|               |  |                |           |             |  |           |     |                |  |                |       |  |  |  |         |           |  |   |       | 
|-------------- |  | -------------- | --------- | ----------- |  | --------- | --- | -------------- |  | -------------- | ----- |  |  |  | ------- | --------- |  | - | ----- | 
|               |  |                |           |             |  | Wtd. Avg. |     |                |  |                |       |  |  |  |         | Wtd. Avg.
|               |  | Number         |           | Remaining   |  | Wtd. Avg. |     | Number         |  | Exercise Price
|Range of       |  | Outstanding    |           | Contractual |  | Exercise  |     | Exercisable    |  | of Exercisable
|Exercise Price |  | as of 12/31/02 |           | Life        |  | Price     |     | as of 12/31/02 |  | Options       
|               |  |                |           |             |  |           |     |                |  |               
|$2.93-$4.41    |  |                | 170,331   |             |  |           | 4.4 |                |  | $              | 3.99  |  |  |  | 149,217 |           |  | $ | 3.94  | 
|$4.42-$6.61    |  |                | 341,662   |             |  |           | 6.9 |                |  |                | 5.51  |  |  |  | 188,375 |           |  |   | 5.55  | 
|$6.62-$9.91    |  |                | 504,475   |             |  |           | 7.0 |                |  |                | 8.34  |  |  |  | 208,219 |           |  |   | 8.31  | 
|$9.92-$14.64   |  |                | 182,884   |             |  |           | 6.0 |                |  |                | 11.42 |  |  |  | 154,029 |           |  |   | 11.62 | 
|               |  |                |           |             |  |           |     |                |  |                |       |  |  |  |         |           |  |   |       | 
|               |  |                | 1,199,352 |             |  |           | 6.5 |                |  | $              | 7.40  |  |  |  | 699,840 |           |  | $ | 7.36  | 
|               |  |                |           |             |  |           |     |                |  |                |       |  |  |  |         |           |  |   |       | 



| |  |  | The weighted-average fair value of options granted during 2002, 2001 and
2000 was $3.35, $11.49 and $7.77, per share, respectively.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------

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



| |     |  | In addition to the stock options above, restricted stock awards were
granted 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, the vesting of these restricted stock awards
was accelerated at the direction of the Board of Directors resulting in a
new measurement date. The Company incurred compensation expense of
approximately $1,305,000 and $150,000, net of income taxes, related to
these stock grants during 2001 and 2000, respectively.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10. |  | 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 401(k) Plan). In connection with the spin-off in February
2002, AGI established a separate 401(k) Profit Sharing Plan for the
employees of AGI. All of the assets associated with the employees of AGI
were transferred from the plan to AGIs new Plan. The transfer was
completed on June 30, 2002 and represented 88 participants and
approximately $1,385,000 of Plan assets.                                                                                                      
|
| |     |  | Employees are eligible to participate in the 401(k) 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, 2002, 2001 and 2000, the
Company contributed approximately $40,000, $82,000 and $86,000,
respectively, to the 401(k) Plan.                                                                                                      
|
| | 11. |  | Common Stock Repurchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |     |  | 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, 2002, the Company has repurchased 653,500
shares for approximately $7.8 million. During the year ended December 31,
2002, 38,000 shares for approximately $305,000 were repurchased.                                                                                                                                                                                                                                                                              

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



| | 12. |  | Fair Value of Financial Instruments                                                                                   
| | --- |  | ----------------------------------------------------------------------------------------------------------------------
|
| |     |  | The estimated fair values of the financial instruments as of December
31, 2002 and 2001 are as follows (in thousands):

|                       |                               |  |          |        |       |  |          |        |       |  |   |         |   |  |   |         |  
|---------------------- | ----------------------------- |  | -------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                       |                               |  | 2002     |        | 2001 
|                       |                               |  |          |        |      
|                       |                               |  | Carrying |        | Fair  |  | Carrying |        | Fair 
|                       |                               |  | Amount   |        | Value |  | Amount   |        | Value
|                       |                               |  |          |        |       |  |          |        |      
|Financial assets:      |                               |  |          |        |       |  |          |        |       |  |   |         |   |  |   |        
|                       | Cash and cash equivalents     |  | $        | 46,910 |       |  | $        | 46,910 |       |  | $ | 28,021  |   |  | $ | 28,021  |  
|                       | Derivatives                   |  |          |       |       |  |          |       |       |  |   | (503    | ) |  |   | (503    | )
|                       | Available-for-sale securities |  |          | 59,822 |       |  |          | 59,822 |       |  |   | 107,303 |   |  |   | 107,303 |  
|                       | Other investments             |  |          | 413    |       |  |          | 413    |       |  |   | 323     |   |  |   | 323     |  
|Financial liabilities: |                               |  |          |        |       |  |          |        |       |  |   |         |   |  |   |        
|                       | Notes payable                 |  |          |       |       |  |          |       |       |  |   | 200     |   |  |   | 200     |  



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

| |  |  | Cash and Cash Equivalents- The carrying value of cash and cash
equivalents approximates fair value due to the liquid 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. As of
December 31, 2002, the Company did not hold any derivative financial
instruments.                               
|
| |  |  | 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. As of December 31, 2002, the Company did
not have any outstanding note payable obligations.

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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).

|             |                                                     |  |      |        |      |  |      |       |  |  |   |        | 
|------------ | --------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | 
|             |                                                     |  | 2002 |        | 2001 |  | 2000
|             |                                                     |  |      |        |      |  |     
|Numerator:   |                                                     |  |      |        |      |  |      |       |  |  |   |       
|             | Net income for basic and diluted earnings per share |  | $    | 1,566  |      |  | $    | 7,498 |  |  | $ | 17,726 | 
|             |                                                     |  |      |        |      |  |      |       |  |  |   |       
|Denominator: |                                                     |  |      |        |      |  |      |       |  |  |   |       
|             | Weighted-average shares outstanding  basic         |  |      | 9,854  |      |  |      | 9,642 |  |  |   | 9,542  | 
|             | Effect of dilutive common stock options             |  |      | 308    |      |  |      | 208   |  |  |   | 98     | 
|             | Effect of dilutive unvested restricted common stock |  |      |       |      |  |      | 110   |  |  |   | 42     | 
|             |                                                     |  |      |        |      |  |      |       |  |  |   |       
|             | Weighted-average shares outstanding  diluted       |  |      | 10,162 |      |  |      | 9,960 |  |  |   | 9,682  | 
|             |                                                     |  |      |        |      |  |      |       |  |  |   |       



| |  |  | At December 31, 2002, 2001 and 2000 there were approximately 144,000,
367,000 and 173,000 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.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| | 14. |  | Business Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company operated the Performance Group and Services Group segments
during 2002, 2001 and 2000. The Technology Group segment was added in
December 2002. On February 28, 2002, the Company spun-off the Education
Group and recorded the effect of the transaction as a disposition of
discontinued operations. 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
Performance, Services and Technology Groups. Selected financial
information related to these segments is as follows (in thousands):

|                                                                                                      |  |             |        |          |  |            |       |           |  |              |  |       |  |  |     |   |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ------ | -------- |  | ---------- | ----- | --------- |  | ------------ |  | ----- |  |  | --- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                      |  | Performance |        | Services |  | Technology |       | Corporate |  | Discontinued
|                                                                                                      |  | Group       |        | Group    |  | Group      |       | and Other |  | Operations   |  | Total
|                                                                                                      |  |             |        |          |  |            |       |           |  |              |  |      
|2002:                                                                                                 |  |             |        |          |  |            |       |           |  |              |  |       |  |  |     |   |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 9,224  |          |  | $          | 5,471 |           |  | $            |  |       |  |  |    |   |  | $ |        |   |  | $ |       |   |  | $ | 14,695  |  
|Depreciation and amortization expense                                                                 |  |             | 422    |          |  |            | 301   |           |  |              |  |       |  |  |    |   |  |   | 32      |   |  |   |       |   |  |   | 755     |  
|Operating income (loss)                                                                               |  |             | 1,545  |          |  |            | 496   |           |  |              |  |       |  |  | (88 | ) |  |   | (1,615  | ) |  |   |       |   |  |   | 338     |  
|Interest and dividend income                                                                          |  |             | 145    |          |  |            | 19    |           |  |              |  |       |  |  |    |   |  |   | 1,890   |   |  |   |       |   |  |   | 2,054   |  
|Income tax expense (benefit)                                                                          |  |             | 816    |          |  |            | 263   |           |  |              |  |       |  |  | (36 | ) |  |   | (929    | ) |  |   | (703   | ) |  |   | (589    | )
|Equity in net income and management
fees received from investments
accounted for by the equity method |  |             | 410    |          |  |            |      |           |  |              |  |       |  |  |    |   |  |   |        |   |  |   |       |   |  |   | 410     |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 637    |          |  |            | 171   |           |  |              |  |       |  |  | 717 |   |  |   | 66      |   |  |   |       |   |  |   | 1,591   |  
|Total assets                                                                                          |  |             | 13,992 |          |  |            | 2,857 |           |  |              |  |       |  |  | 784 |   |  |   | 110,526 |   |  |   |       |   |  |   | 128,159 |  
|2001:                                                                                                 |  |             |        |          |  |            |       |           |  |              |  |       |  |  |     |   |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 10,334 |          |  | $          | 6,707 |           |  | $            |  |       |  |  |    |   |  | $ |        |   |  | $ |       |   |  | $ | 17,041  |  
|Depreciation and amortization expense                                                                 |  |             | 463    |          |  |            | 291   |           |  |              |  |       |  |  |    |   |  |   | 793     |   |  |   |       |   |  |   | 1,547   |  
|Operating income (loss) prior to
impairment of long-lived assets                                      |  |             | 510    |          |  |            | 216   |           |  |              |  |       |  |  |    |   |  |   | (4,760  | ) |  |   |       |   |  |   | (4,034  | )
|Impairment of long-lived assets                                                                       |  |             |       |          |  |            |      |           |  |              |  |       |  |  |    |   |  |   | 12,803  |   |  |   |       |   |  |   | 12,803  |  
|Operating income (loss)                                                                               |  |             | 510    |          |  |            | 216   |           |  |              |  |       |  |  |    |   |  |   | (17,563 | ) |  |   |       |   |  |   | (16,837 | )
|Interest and dividend income                                                                          |  |             | 374    |          |  |            | 24    |           |  |              |  |       |  |  |    |   |  |   | 3,189   |   |  |   |       |   |  |   | 3,587   |  
|Income tax expense (benefit)                                                                          |  |             | 290    |          |  |            | 129   |           |  |              |  |       |  |  |    |   |  |   | (2,015  | ) |  |   | 5,633  |   |  |   | 4,037   |  
|Compensation charge related to the
acceleration of vesting
of restricted stock                        |  |             |       |          |  |            |      |           |  |              |  |       |  |  |    |   |  |   | 2,072   |   |  |   |       |   |  |   | 2,072   |  
|Gain on sale of investment                                                                            |  |             |       |          |  |            |      |           |  |              |  |       |  |  |    |   |  |   | 8,306   |   |  |   |       |   |  |   | 8,306   |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 716    |          |  |            | 2,233 |           |  |              |  |       |  |  |    |   |  |   | 7       |   |  |   | 882    |   |  |   | 3,838   |  
|Total assets                                                                                          |  |             | 13,230 |          |  |            | 2,456 |           |  |              |  |       |  |  |    |   |  |   | 105,862 |   |  |   | 43,756 |   |  |   | 165,304 |  
|2000:                                                                                                 |  |             |        |          |  |            |       |           |  |              |  |       |  |  |     |   |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 10,728 |          |  | $          | 7,433 |           |  | $            |  |       |  |  |    |   |  | $ | 250     |   |  | $ |       |   |  | $ | 18,411  |  
|Depreciation and amortization expense                                                                 |  |             | 497    |          |  |            | 224   |           |  |              |  |       |  |  |    |   |  |   | 733     |   |  |   |       |   |  |   | 1,454   |  
|Operating income (loss)                                                                               |  |             | 1,207  |          |  |            | 387   |           |  |              |  |       |  |  |    |   |  |   | (2,552  | ) |  |   |       |   |  |   | (958    | )
|Interest and dividend income                                                                          |  |             | 174    |          |  |            | 5     |           |  |              |  |       |  |  |    |   |  |   | 2,488   |   |  |   |       |   |  |   | 2,667   |  
|Income tax expense                                                                                    |  |             | 380    |          |  |            | 43    |           |  |              |  |       |  |  |    |   |  |   | 3,043   |   |  |   | 6,079  |   |  |   | 9,545   |  
|Gain on sale of investment                                                                            |  |             |       |          |  |            |      |           |  |              |  |       |  |  |    |   |  |   | 5,134   |   |  |   |       |   |  |   | 5,134   |  
|Capital expenditures of property,
equipment, and intangible assets                                    |  |             | 202    |          |  |            | 363   |           |  |              |  |       |  |  |    |   |  |   | 956     |   |  |   | 991    |   |  |   | 2,512   |  
|Total assets                                                                                          |  |             | 13,963 |          |  |            | 2,416 |           |  |              |  |       |  |  |    |   |  |   | 77,212  |   |  |   | 74,799 |   |  |   | 168,390 |  

46



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##### Table of Contents



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

15. Quarterly Financial Data (unaudited)



| |  |  | Summarized quarterly financial data for 2002 and 2001 is as follows (in
thousands, except per share data):
| |  |  | ----------------------------------------------------------------------------------------------------------

|                                    |                         |   |                |       |          |   |               |       |              |   |       |      |  |   |       |      | 
|----------------------------------- | ----------------------- | - | -------------- | ----- | -------- | - | ------------- | ----- | ------------ | - | ----- | ---- |  | - | ----- | ---- | 
|                                    |                         |   | Quarters Ended
|                                    |                         |   |               
|                                    |                         |   | March 31,      |       | June 30, |   | September 30, |       | December 31,
|                                    |                         |   |                |       |          |   |               |       |             
|2002                                |                         |   |                |       |          |   |               |       |              |   |       |      |  |   |       |     
|Revenues                            |                         | $ | 3,846          |       |          | $ | 4,022         |       |              | $ | 2,656 |      |  | $ | 4,172 |     
|Income from continuing operations   |                         |   | 576            |       |          |   | 958           |       |              |   | 171   |      |  |   | 1,058 |     
|Loss from discontinued operations   |                         |   | (1,127         | )     |          |   | (70           | )     |              |   |      |      |  |   |      |     
|Net income (loss)                   |                         |   | (551           | )     |          |   | 888           |       |              |   | 171   |      |  |   | 1,058 |     
|Earnings (loss) per share  basic  
|Continuing operations               |                         |   | 0.06           |       |          |   | 0.10          |       |              |   | 0.02  |      |  |   | 0.11  |     
|                                    | Discontinued operations |   |                | (0.12 | )        |   |               | (0.01 | )            |   |       |     |  |   |       |     | 
|                                    | Net income (loss)       |   |                | (0.06 | )        |   |               | 0.09  |              |   |       | 0.02 |  |   |       | 0.11 | 
|Earnings (loss) per share  diluted
|Continuing operations               |                         |   | 0.06           |       |          |   | 0.10          |       |              |   | 0.02  |      |  |   | 0.11  |     
|                                    | Discontinued operations |   |                | (0.11 | )        |   |               | (0.01 | )            |   |       |     |  |   |       |     | 
|                                    | Net income (loss)       |   |                | (0.05 | )        |   |               | 0.09  |              |   |       | 0.02 |  |   |       | 0.11 | 



| |  |  | Gross program receipts totaled $11.6 million, $12.6 million, $9.7 million
and $13.1 million for the quarters ended March 31, June 30, September 30
and December 31, 2002, respectively.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |                         |   |                |       |          |   |               |      |              |   |       |       |   |   |         |       |  
|------------------------------------------ | ----------------------- | - | -------------- | ----- | -------- | - | ------------- | ---- | ------------ | - | ----- | ----- | - | - | ------- | ----- | -
|                                           |                         |   | Quarters Ended
|                                           |                         |   |               
|                                           |                         |   | March 31,      |       | June 30, |   | September 30, |      | December 31,
|                                           |                         |   |                |       |          |   |               |      |             
|2001                                       |                         |   |                |       |          |   |               |      |              |   |       |       |   |   |         |      
|Revenues                                   |                         | $ | 6,131          |       |          | $ | 4,071         |      |              | $ | 3,211 |       |   | $ | 3,628   |      
|Income (loss) from continuing operations   |                         |   | 1,448          |       |          |   | 5,603         |      |              |   | (296  | )     |   |   | (9,694  | )    
|Income (loss) from discontinued operations |                         |   | (1,466         | )     |          |   | 10,436        |      |              |   | 8,542 |       |   |   | (7,075  | )    
|Net income (loss)                          |                         |   | (18            | )     |          |   | 16,039        |      |              |   | 8,246 |       |   |   | (16,769 | )    
|Earnings (loss) per share  basic          |                         |   |                |       |          |   |               |      |              |   |       |       |   |   |         |      
|                                           | Continuing operations   |   |                | 0.15  |          |   |               | 0.58 |              |   |       | (0.03 | ) |   |         | (1.00 | )
|                                           | Discontinued operations |   |                | (0.15 | )        |   |               | 1.09 |              |   |       | 0.88  |   |   |         | (0.72 | )
|                                           | Net income (loss)       |   |                | 0.00  |          |   |               | 1.67 |              |   |       | 0.85  |   |   |         | (1.72 | )
|Earnings (loss) per share  diluted        |                         |   |                |       |          |   |               |      |              |   |       |       |   |   |         |      
|                                           | Continuing operations   |   |                | 0.15  |          |   |               | 0.56 |              |   |       | (0.03 | ) |   |         | (1.00 | )
|                                           | Discontinued operations |   |                | (0.15 | )        |   |               | 1.05 |              |   |       | 0.85  |   |   |         | (0.72 | )
|                                           | Net income (loss)       |   |                | 0.00  |          |   |               | 1.61 |              |   |       | 0.82  |   |   |         | (1.72 | )



| |  |  | Gross program receipts from continuing operations totaled $22.8 million,
$13.6 million, $9.7 million and $13.8 million for the quarters ended
March 31, June 30, September 30, and December 31, 2001, respectively. As
originally reported including discontinued operations, gross program
receipts totaled $27.8 million, $72.3 million, $58.2 million and $17.9
million and revenues totaled $8.1 million, $24.6 million, $22.5 million and $5.3 million for the quarters ended March 31, June 30, September 30 and
December 31, 2001, respectively.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47



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Ambassadors International, Inc




Schedule II  Consolidated Valuation and Qualifying Accounts  For the Years Ended December 31, 2002, 2001 and 2000


---

|                   |                                            |  |            |         |           |  |                |        |             |  |            |          |   |  |   |        | 
|------------------ | ------------------------------------------ |  | ---------- | ------- | --------- |  | -------------- | ------ | ----------- |  | ---------- | -------- | - |  | - | ------ | 
|                   |                                            |  | Balance at |         |           |  |                |        | Deductions, |  | Balance at
|                   |                                            |  | Beginning  |         |           |  |                |        | Recoveries  |  | End of    
|                   |                                            |  | of Year    |         | Additions |  | and Write-Offs |        | Year       
|                   |                                            |  |            |         |           |  |                |        |            
|December 31, 2002: |                                            |  |            |         |           |  |                |        |             |  |            |          |   |  |   |       
|                   | Allowance for doubtful accounts receivable |  | $          | 15,627  |           |  | $              | 57,077 |             |  | $          |         |   |  | $ | 72,704 | 
|December 31, 2001: |                                            |  |            |         |           |  |                |        |             |  |            |          |   |  |   |       
|                   | Allowance for doubtful accounts receivable |  | $          | 31,586  |           |  | $              |       |             |  | $          | (15,959  | ) |  | $ | 15,627 | 
|December 31, 2000: |                                            |  |            |         |           |  |                |        |             |  |            |          |   |  |   |       
|                   | Allowance for doubtful accounts receivable |  | $          | 135,744 |           |  | $              |       |             |  | $          | (104,158 | ) |  | $ | 31,586 | 

48



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##### Table of Contents






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 28, 2003 |  | 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. Ueberroth
John A. Ueberroth   |  | President and
Chief Executive Officer
(Principal Executive Officer)  |  | March 28, 2003
|                                         
|/s/ Peter V. Ueberroth
Peter V. Ueberroth |  | Chairman of the Board
of Directors                                   |  | March 28, 2003
|                                         
|/s/ Timothy T. Fogarty
Timothy T. Fogarty |  | Chief Financial Officer
(Principal Financial and
Accounting Officer) |  | March 28, 2003
|                                         
|/s/ Brigitte M. Bren                      |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|Brigitte M. Bren                          |  |                                                                      |  |               
|                                         
|/s/ James L. Easton                       |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|James L. Easton                           |  |                                                                      |  |               
|                                         
|/s/ Rafer L. Johnson                      |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|Rafer L. Johnson                          |  |                                                                      |  |               
|                                         
|/s/ John C. Spence                        |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|John C. Spence                            |  |                                                                      |  |               
|                                         
|/s/ Joseph J. Ueberroth                   |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|Joseph J. Ueberroth                       |  |                                                                      |  |               
|                                         
|/s/ Richard D.C. Whilden                  |  | Director                                                             |  | March 28, 2003
|                                          |  |                                                                      |  |               
|Richard D.C. Whilden                      |  |                                                                      |  |               

49



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##### Table of Contents






Certifications

I, John A. Ueberroth, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Ambassadors
International, Inc.;                                                                                                                                                                                                                                     
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                               
|

| |  | a. |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| |  | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 28, 2003.

/s/ John A. Ueberroth
John A. Ueberroth
Chief Executive Officer

50Table of ContentsI, Timothy T. Fogarty, certify that:1.
   
   I have reviewed this annual report on Form 10-K of Ambassadors
International, Inc.;2.
   
   Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;3.
   
   Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;4.
   
   The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:a.
   
   designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;b.
   
   evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); andc.
   
   presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;5.
   
   The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):a.
   
   all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; andb.
   
   any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and6.
   
   The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.Date: March 28, 2003./s/ Timothy T. Fogarty
Timothy T. Fogarty
Chief Financial Officer

51Table of Contents

|        |       |  |  |                                                                                                                                                                                                                                                                                                                                        
|------- | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Index  
|       
|        | 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 1998 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 Independent Auditors, Ernst & Young LLP (12)                                                                                                                                                                                                                                                                                
|        | 23.2  |  |  | Consent of PricewaterhouseCoopers LLP (12)                                                                                                                                                                                                                                                                                             
|        | 99.1  |  |  | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (12)                                                                                                                                                                                                            



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##### Table of Contents



|(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.  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
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|(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.                
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|    
|    
|    
|(3)  |  | Filed as Exhibit 2.5 to a Current Report on Form 8-K dated
January 3, 1997, and incorporated herein by reference.                                              
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|    
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|    
|(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.
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|    
|    
|    
|(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.             
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|    
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|    
|(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.                  
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|    
|    
|    
|(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.                                   
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|    
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|(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.                                 
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|    
|(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.             
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|    
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|    
|(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.               
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|    
|    
|    
|(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.             
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|    
|(12) |  | Filed herewith.                                                                                                                                                

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