##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q





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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from _______ to _________

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Delaware                        |  | 91-1688605                          
|(State or Other Jurisdiction of |  | (I.R.S. Employer Identification No.)
|Incorporation or Organization)  |  |                                     

|                                         |  |           
|---------------------------------------- |  | ----------
|1071 Camelback Street                    |  |           
|Newport Beach, CA 92660                  |  | 92660     
|(Address of Principal Executive Offices) |  | (Zip Code)

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

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes        No [X]

Indicate number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date:

Common shares outstanding as of July 31, 2003: 9,912,130



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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART 1 - FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | Condensed Consolidated Balance Sheets               
|                               |                                                                                               | Condensed Consolidated Statements of Income         
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Ris                            
|                               | Item 4. Controls and Procedures                                                              
|PART II - OTHER INFORMATION   
|                               | Item 4. Submission of Matters to a Vote of Security Holders.                                 
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                    
|Signatures                    
|Exhibit Index                 
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

|                            |  |                       |  |                                                                                                                   |  |   
|--------------------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --
|PART I                      |  | FINANCIAL INFORMATION |  |                                                                                                                  
|                            |  | Item 1.               |  | Financial Statements                                                                                              |  |   
|                            |  |                       |  | Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and
December 31, 2002                          |  | 1 
|                            |  |                       |  | Condensed Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2003 and 2002 (unaudited) |  | 2 
|                            |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (unaudited)       |  | 3 
|                            |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                              |  | 4 
|                            |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations                             |  | 9 
|                            |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 14
|                            |  | Item 4.               |  | Controls and Procedures                                                                                           |  | 14
|PART II                     |  | OTHER INFORMATION     |  |                                                                                                                  
|                            |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                               |  | 15
|                            |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                  |  | 15
|SIGNATURES                  |  | 16                   
|Exhibit 31.1 Certifications |  | 18                   
|Exhibit 32.1 Certification  |  | 20                   





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##### Table of Contents






PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements







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

|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |              |        |         |         | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------ | -------------------- | ------ | ----------- | ------- | ------------ | ------ | ------- | ------- | 
|                              |                                                                                                                                                   |                                                               |                                            |                      |        | June 30,    |         | December 31,
|                              |                                                                                                                                                   |                                                               |                                            |                      |        | 2003        |         | 2002        
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               |                                            |                      |        | (unaudited) |         |              |        |        
|Assets:                       |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              | Current assets:                                                                                                                                   |                                                               |                                            |                      |        |             |         |              |       
|                              |                                                                                                                                                   | Cash and cash equivalents                                     |                                            | $                    | 50,399 |             |         | $            | 46,910 |        
|                              |                                                                                                                                                   | Available-for-sale securities                                 |                                            |                      | 53,329 |             |         |              | 59,822 |        
|                              |                                                                                                                                                   | Accounts receivable, net of allowance of $73 in 2003 and 2002 |                                            |                      | 4,916  |             |         |              | 2,550  |        
|                              |                                                                                                                                                   | Deferred income taxes                                         |                                            |                      | 902    |             |         |              | 965    |        
|                              |                                                                                                                                                   | Prepaid program costs and other current assets                |                                            |                      | 2,153  |             |         |              | 2,605  |        
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               |                                            | Total current assets |        |             | 111,699 |              |        |         | 112,852 | 
|                              | Property and equipment, net                                                                                                                       |                                                               |                                            | 1,228                |        |             |         | 1,507        |       
|                              | Goodwill                                                                                                                                          |                                                               |                                            | 6,817                |        |             |         | 6,817        |       
|                              | Other intangibles                                                                                                                                 |                                                               |                                            | 2,732                |        |             |         | 2,361        |       
|                              | Deferred income taxes                                                                                                                             |                                                               |                                            | 4,146                |        |             |         | 4,146        |       
|                              | Other assets                                                                                                                                      |                                                               |                                            | 572                  |        |             |         | 476          |       
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               |                                            | Total assets         |        | $           | 127,194 |              |        | $       | 128,159 | 
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |              |        |        
|Liabilities:                  |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              | Current liabilities:                                                                                                                              |                                                               |                                            |                      |        |             |         |              |       
|                              |                                                                                                                                                   | Accounts payable                                              |                                            | $                    | 2,030  |             |         | $            | 3,395  |        
|                              |                                                                                                                                                   | Accrued expenses                                              |                                            |                      | 3,571  |             |         |              | 3,759  |        
|                              |                                                                                                                                                   | Participants deposits and deferred revenue                   |                                            |                      | 5,600  |             |         |              | 5,989  |        
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               |                                            | Total liabilities    |        |             | 11,201  |              |        |         | 13,143  | 
|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;
9,907,780 and 9,916,614 shares issued and outstanding, in 2003
and 2002, respectively |                                                               |                                            | 99                   |        |             |         | 99           |       
|                              | Additional paid-in capital                                                                                                                        |                                                               |                                            | 88,693               |        |             |         | 88,940       |       
|                              | Retained earnings                                                                                                                                 |                                                               |                                            | 27,568               |        |             |         | 26,416       |       
|                              | Accumulated other comprehensive loss                                                                                                              |                                                               |                                            | (367                 | )      |             |         | (439         | )     
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               | Total stockholders equity                 |                      |        | 115,993     |         |              |        | 115,016 |        
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |             
|                              |                                                                                                                                                   |                                                               | Total liabilities and stockholders equity |                      | $      | 127,194     |         |              | $      | 128,159 |        
|                              |                                                                                                                                                   |                                                               |                                            |                      |        |             |         |              |        |        

See Notes to Condensed Consolidated Financial Statements.

1



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##### Table of Contents



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




|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |        |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------ | - | ------------------ | ------ | ---------------- | - | ----- | ------ | ---- | - | ----- | ------ |  | - | ------ | ------ | -
|                                                                                           |                                                        |   | Three Months Ended |        | Six Months Ended
|                                                                                           |                                                        |   | June 30,           |        | June 30,        
|                                                                                           |                                                        |   |                    |        |                 
|                                                                                           |                                                        |   | 2003               |        | 2002             |   | 2003  |        | 2002
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |     
|                                                                                           |                                                        |   | (unaudited)        |        | (unaudited)     
|Revenue:                                                                                   |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Travel and incentive related                           |   | $                  | 3,236  |                  |   | $     | 3,608  |      |   | $     | 6,650  |  |   | $      | 7,453  |  
|                                                                                           | Software and technology related                        |   |                    | 351    |                  |   |       |       |      |   |       | 942    |  |   |        |       |  
|                                                                                           | License fees from equity investee                      |   |                    | 46     |                  |   |       | 414    |      |   |       | 286    |  |   |        | 414    |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           |                                                        |   | 3,633              |        |                  |   | 4,022 |        |      |   | 7,878 |        |  |   | 7,867  |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Cost and operating expenses:                                                               |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Cost of software and technology related revenue        |   |                    | 448    |                  |   |       |       |      |   |       | 787    |  |   |        |       |  
|                                                                                           | Selling and tour promotion                             |   |                    | 1,125  |                  |   |       | 1,029  |      |   |       | 2,237  |  |   |        | 1,990  |  
|                                                                                           | General and administrative                             |   |                    | 2,730  |                  |   |       | 2,559  |      |   |       | 5,609  |  |   |        | 5,393  |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           |                                                        |   | 4,303              |        |                  |   | 3,588 |        |      |   | 8,633 |        |  |   | 7,383  |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Operating income (loss)                                                                    |                                                        |   | (670               | )      |                  |   | 434   |        |      |   | (755  | )      |  |   | 484    |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Other income:                                                                              |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Realized gain on sale of available-for-sale securities |   |                    | 1,152  |                  |   |       |       |      |   |       | 1,152  |  |   |        |       |  
|                                                                                           | Interest and dividend income                           |   |                    | 326    |                  |   |       | 502    |      |   |       | 720    |  |   |        | 1,102  |  
|                                                                                           | Other, net                                             |   |                    | 297    |                  |   |       | 361    |      |   |       | 441    |  |   |        | 393    |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           |                                                        |   | 1,775              |        |                  |   | 863   |        |      |   | 2,313 |        |  |   | 1,495  |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Income from continuing operations before income taxes                                      |                                                        |   | 1,105              |        |                  |   | 1,297 |        |      |   | 1,558 |        |  |   | 1,979  |       
|Provision for income taxes                                                                 |                                                        |   | 341                |        |                  |   | 339   |        |      |   | 406   |        |  |   | 445    |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Income from continuing operations                                                          |                                                        |   | 764                |        |                  |   | 958   |        |      |   | 1,152 |        |  |   | 1,534  |       
|Loss from discontinued operations, net of income tax
benefit of $41 and $703, respectively |                                                        |   |                   |        |                  |   | (70   | )      |      |   |      |        |  |   | (1,197 | )     
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Net income                                                                                 |                                                        | $ | 764                |        |                  | $ | 888   |        |      | $ | 1,152 |        |  | $ | 337    |       
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Earnings (loss) per share  basic:                                                         |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Continuing operations                                  |   | $                  | 0.08   |                  |   | $     | 0.10   |      |   | $     | 0.12   |  |   | $      | 0.16   |  
|                                                                                           | Discontinued operations                                |   |                    |       |                  |   |       | (0.01  | )    |   |       |       |  |   |        | (0.12  | )
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Net income                                             |   | $                  | 0.08   |                  |   | $     | 0.09   |      |   | $     | 0.12   |  |   | $      | 0.04   |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Weighted-average common shares outstanding  basic     |   |                    | 9,891  |                  |   |       | 9,863  |      |   |       | 9,875  |  |   |        | 9,851  |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|Earnings (loss) per share  diluted:                                                       |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Continuing operations                                  |   | $                  | 0.08   |                  |   | $     | 0.10   |      |   | $     | 0.11   |  |   | $      | 0.15   |  
|                                                                                           | Discontinued operations                                |   |                    |       |                  |   |       | (0.01  | )    |   |       |       |  |   |        | (0.12  | )
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Net income                                             |   | $                  | 0.08   |                  |   | $     | 0.09   |      |   | $     | 0.11   |  |   | $      | 0.03   |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       
|                                                                                           | Weighted-average common shares outstanding  diluted   |   |                    | 10,129 |                  |   |       | 10,064 |      |   |       | 10,091 |  |   |        | 10,268 |  
|                                                                                           |                                                        |   |                    |        |                  |   |       |        |      |   |       |        |  |   |        |       

See Notes to Condensed Consolidated Financial Statements.

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




|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |         |      |        |        |  
|------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ------ | ------- | ---- | ------ | ------ | -
|                                      |                                                                               |                                                                                             |                                                |                                           |        | Six Months Ended
|                                      |                                                                               |                                                                                             |                                                |                                           |        | June 30,        
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                 
|                                      |                                                                               |                                                                                             |                                                |                                           |        | 2003             |        | 2002   
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      |                                                                               |                                                                                             |                                                |                                           |        | (unaudited)     
|Cash flows from operating activities: |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      | Net income                                                                    |                                                                                             | $                                              | 1,152                                     |        |                  | $      | 337     |     
|                                      | Adjustments to reconcile net income to net cash used in operating activities: |                                                                                             |                                                |                                           |        |                  |        |         |     
|                                      |                                                                               | Depreciation and amortization                                                               |                                                |                                           | 630    |                  |        |         | 494  |       
|                                      |                                                                               | Gain on sale of available-for-sale securities                                               |                                                |                                           | (1,152 | )                |        |         |     |       
|                                      |                                                                               | Undistributed earnings from equity investment                                               |                                                |                                           | (105   | )                |        |         | (70  | )     
|                                      |                                                                               | Deferred income taxes                                                                       |                                                |                                           |       |                  |        |         | (449 | )     
|                                      |                                                                               | Change in assets and liabilities, net of effects of business acquisitions
and dispositions: |                                                |                                           |        |                  |        |         |      |       
|                                      |                                                                               |                                                                                             | Accounts receivable                            |                                           |        | (1,558           | )      |         |      | 719    |       
|                                      |                                                                               |                                                                                             | Prepaid program costs and other current assets |                                           |        | 452              |        |         |      | 1,215  |       
|                                      |                                                                               |                                                                                             | Accounts payable and accrued expenses          |                                           |        | (274             | )      |         |      | (3,272 | )     
|                                      |                                                                               |                                                                                             | Participants deposits and deferred revenue    |                                           |        | (389             | )      |         |      | (3,137 | )     
|                                      |                                                                               |                                                                                             | Other intangibles and other assets             |                                           |        | 9                |        |         |      | (166   | )     
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      |                                                                               |                                                                                             |                                                | Net cash used in operating activities     |        |                  | (1,235 | )       |      |        | (4,329 | )
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|Cash flows from investing activities: |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      | Proceeds from sale of available-for-sale securities                           |                                                                                             |                                                | 31,662                                    |        |                  |        | 72,228  |     
|                                      | Purchase of available-for-sale securities                                     |                                                                                             |                                                | (24,559                                   | )      |                  |        | (41,612 | )   
|                                      | Cash paid for other investments                                               |                                                                                             |                                                | (1,934                                    | )      |                  |        | (412    | )   
|                                      | Cash paid for acquisitions of subsidiaries                                    |                                                                                             |                                                | (71                                       | )      |                  |        |        |     
|                                      | Purchase of property and equipment                                            |                                                                                             |                                                | (127                                      | )      |                  |        | (297    | )   
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      |                                                                               |                                                                                             |                                                | Net cash provided by investing activities |        |                  | 4,971  |         |      |        | 29,907 |  
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|Cash flows from financing activities: |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      | Proceeds from exercise of stock options                                       |                                                                                             |                                                | 586                                       |        |                  |        | 224     |     
|                                      | Purchase and retirement of common stock                                       |                                                                                             |                                                | (833                                      | )      |                  |        | (80     | )   
|                                      | Distribution resulting from spin-off of subsidiary                            |                                                                                             |                                                |                                          |        |                  |        | (5,299  | )   
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      |                                                                               |                                                                                             |                                                | Net cash used in financing activities     |        |                  | (247   | )       |      |        | (5,155 | )
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      | Net increase in cash and cash equivalents                                     |                                                                                             |                                                | 3,489                                     |        |                  |        | 20,423  |     
|                                      | Cash and cash equivalents, beginning of period                                |                                                                                             |                                                | 46,910                                    |        |                  |        | 28,021  |     
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        
|                                      | Cash and cash equivalents, end of period                                      |                                                                                             | $                                              | 50,399                                    |        |                  | $      | 48,444  |     
|                                      |                                                                               |                                                                                             |                                                |                                           |        |                  |        |        

See Notes to Condensed Consolidated Financial Statements.

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##### Table of Contents






Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements



|1. |  | Description of the Company and Basis of Presentation                                                                                                                        
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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 Develops, markets and manages
meetings and incentive programs for a nationwide roster of corporate
clients utilizing incentive travel, merchandise award programs and
corporate meeting management services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Ambassadors Services Group Provides comprehensive hotel
reservation, registration and travel services for meetings, conventions,
expositions and trade shows.                                                                             
|
| |  |  | Ambassadors Technology Group 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 or the Education Group) 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, necessary to present fairly the consolidated
financial position of Ambassadors International, Inc. and its subsidiaries as
of June 30, 2003, the consolidated results of operations for the three and
six months ended June 30, 2003 and 2002 and cash flows for the six months
ended June 30, 2003 and 2002. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain reclassifications have been made to amounts
in 2002 to conform with the 2003 presentation.
|
| |  | It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The
results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of those to be expected for the entire year. The
accompanying consolidated financial statements should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2002
filed with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | As more fully described in Note 5, 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 Condensed Consolidated Statement of Cash
Flows for the three and six months ended June 30, 2002 include the effects of
discontinued operations on a consolidated basis, without separate
identification and classification of discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                          

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##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements



| |  | Accounting for Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company accounts for its stock-based compensation in accordance with
Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure-only alternative of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure.
|
| |  | The following table illustrates the effect on net income (loss) and earnings
(loss) 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):                                                                                                                                                                                

|                                                                                                                                            |             |   |                    |      |                  |   |      |      |      |   |       |      |  |   |      |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ---- | ---------------- | - | ---- | ---- | ---- | - | ----- | ---- |  | - | ---- | ----- | -
|                                                                                                                                            |             |   | Three Months Ended |      | Six Months Ended
|                                                                                                                                            |             |   | June 30,           |      | June 30,        
|                                                                                                                                            |             |   |                    |      |                 
|                                                                                                                                            |             |   | 2003               |      | 2002             |   | 2003 |      | 2002
|                                                                                                                                            |             |   |                    |      |                  |   |      |      |     
|Net income, as reported                                                                                                                     |             | $ | 764                |      |                  | $ | 888  |      |      | $ | 1,152 |      |  | $ | 337  |      
|Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |             |   | (93                | )    |                  |   | (309 | )    |      |   | (205  | )    |  |   | (638 | )    
|                                                                                                                                            |             |   |                    |      |                  |   |      |      |      |   |       |      |  |   |      |      
|Net income (loss), as adjusted                                                                                                              |             | $ | 671                |      |                  | $ | 579  |      |      | $ | 947   |      |  | $ | (301 | )    
|                                                                                                                                            |             |   |                    |      |                  |   |      |      |      |   |       |      |  |   |      |      
|Earnings (loss) per share  basic                                                                                                           |             |   |                    |      |                  |   |      |      |      |   |       |      |  |   |      |      
|                                                                                                                                            | As reported |   | $                  | 0.08 |                  |   | $    | 0.09 |      |   | $     | 0.12 |  |   | $    | 0.04  |  
|                                                                                                                                            | As adjusted |   |                    | 0.07 |                  |   |      | 0.06 |      |   |       | 0.10 |  |   |      | (0.03 | )
|Earnings (loss) per share  diluted                                                                                                         |             |   |                    |      |                  |   |      |      |      |   |       |      |  |   |      |      
|                                                                                                                                            | As reported |   | $                  | 0.08 |                  |   | $    | 0.09 |      |   | $     | 0.11 |  |   | $    | 0.03  |  
|                                                                                                                                            | As adjusted |   |                    | 0.07 |                  |   |      | 0.06 |      |   |       | 0.09 |  |   |      | (0.03 | )



|2. |  | Business Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In December 2002, the Technology Group acquired certain of the assets and
business of Bluedot Virtual Event Organization, Inc. out of Chapter 11
bankruptcy. The purchase price consisted of debtor-in possession financing
and other costs of $308,000, the assumption of liabilities and future
contingent payments by the Technology Group 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. As
of June 30, 2003, the Company provided an additional investment of
approximately $21,000 which was allocated to purchased software and reduced
the asset for amortization of approximately $63,000. 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, 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) $15,000 per quarter
as the Second Year Minimum Payments. As of June 30, 2003, the Technology
Group paid $50,000 for the first and second quarter contingent payments and
recorded these payments as an adjustment to the purchase price.
|  
|   |  | In March 2002, the Performance Group acquired a 49% ownership interest in
Incentive Travel, LLC (ITI). The terms of the purchase agreement call for
contingent payments by the Performance Group 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 ITIs fiscal 2002 results were $2.4 million of which
approximately $1.9 million was paid during 2003 and was allocated to
intangible assets (license). The remaining purchase price of $0.5 million was
paid during 2002 and was allocated to goodwill. As of June 30,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements



|   |  | 2003, the Performance Groups obligation related to ITIs fiscal 2003 results
is estimated to be $394,000 which has been allocated to intangible assets
(license).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | License fees earned from ITI are included in the operations of the
Performance Group and represent approximately $46,000 and $286,000 for the
three and six months ended June 30, 2003, respectively, and $414,000 for the
three and six months ended June 30, 2002. The Company also recorded its
proportional share of the earnings and management fees from ITI of
approximately $288,000 and $473,000 for the three and six months ended June
30, 2003, respectively, and $167,000 for the three and six months ended June
30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|3. |  | Corporate Investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company is in the process of finalizing an agreement to invest in the
financial results of a property and casualty insurance program mainly
consisting of auto liability and auto physical damage risks as of June 30,
2003. The Company has issued a letter of credit of approximately $1.3 million
for its right to participate proportionately in the underwriting profits or
losses of the program. The Company believes this investment will lead to
additional business opportunities within the Performance Group. The Company
is currently evaluating the accounting treatment for this investment based on
current accounting standards and recent accounting pronouncements including
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities.                                                                                                                                                       
|  
|4. |  | Gain on Sale of Available-for-Sale Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | 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 and 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 provided for an additional 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 was disputed by
Navigant and both parties agreed to arbitration to settle the dispute.                                                                                                                         
|  
|   |  | In June 2003, the arbitration was settled and the Company received
approximately $0.7 million in cash, net of arbitration related expenses, and
approximately 36,000 shares of common stock of Navigant. For the quarter
ended June 30, 2003, the Company recorded in other income the final component
of the gain consideration on the sale of this investment for approximately
$1.2 million ($0.7 million net of income taxes).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|5. |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements



| |  | effect of the spin-off on the Companys income statement for the three and
six months ended June 30, 2002 is reflected as discontinued operations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The revenues and loss from discontinued operations before income taxes are as
follows (in thousands):                                             

|                                                            |  |                    |   |                  |  |      |      |      |  |   |   |  |  |   |        |  
|----------------------------------------------------------- |  | ------------------ | - | ---------------- |  | ---- | ---- | ---- |  | - | - |  |  | - | ------ | -
|                                                            |  | Three Months Ended |   | Six Months Ended
|                                                            |  | June 30,           |   | June 30,        
|                                                            |  |                    |   |                 
|                                                            |  | 2003               |   | 2002             |  | 2003 |      | 2002
|                                                            |  |                    |   |                  |  |      |      |     
|Revenue                                                     |  | $                  |  |                  |  | $    |     |      |  | $ |  |  |  | $ | 518    |  
|Loss from
discontinued
operations before
income tax benefit |  |                    |  |                  |  |      | (111 | )    |  |   |  |  |  |   | (1,900 | )



|6. |  | Comprehensive Income                                                 
|-- |  | ---------------------------------------------------------------------
|  
|   |  | The components of comprehensive income are as follows (in thousands):

|                                                                                                                   |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                                                                   |  | Three Months Ended |       | Six Months Ended
|                                                                                                                   |  | June 30,           |       | June 30,        
|                                                                                                                   |  |                    |       |                 
|                                                                                                                   |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                                                                                   |  |                    |       |                  |  |      |       |     
|Net income                                                                                                         |  | $                  | 764   |                  |  | $    | 888   |      |  | $ | 1,152 |  |  | $ | 337   | 
|Change in
unrealized gain on
marketable equity
securities, net of
income tax expense
of $226, $124, $63
and $415   |  |                    | 336   |                  |  |      | 217   |      |  |   | 72    |  |  |   | 715   | 
|Change in
unrealized gain on
foreign currency
exchange contracts,
net of income tax
expense of $0, $0,
$0 and $163 |  |                    |      |                  |  |      |      |      |  |   |      |  |  |   | 340   | 
|                                                                                                                   |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |       | 
|Comprehensive income                                                                                               |  | $                  | 1,100 |                  |  | $    | 1,105 |      |  | $ | 1,224 |  |  | $ | 1,392 | 
|                                                                                                                   |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |       | 



|7. |  | 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):

|             |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|------------ | --------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                                     |  | Three Months Ended |        | Six Months Ended
|             |                                                     |  | June 30,           |        | June 30,        
|             |                                                     |  |                    |        |                 
|             |                                                     |  | 2003               |        | 2002             |  | 2003 |        | 2002
|             |                                                     |  |                    |        |                  |  |      |        |     
|Numerator:   |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|             | Net income for basic and diluted earnings per
share |  | $                  | 764    |                  |  | $    | 888    |      |  | $ | 1,152  |  |  | $ | 337    | 
|             |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator: |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|             | Weighted-average shares outstanding  basic         |  |                    | 9,891  |                  |  |      | 9,863  |      |  |   | 9,875  |  |  |   | 9,851  | 
|             | Effect of dilutive common stock options             |  |                    | 238    |                  |  |      | 201    |      |  |   | 216    |  |  |   | 417    | 
|             |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |       
|             | Weighted-average shares outstanding  diluted       |  | $                  | 10,129 |                  |  | $    | 10,064 |      |  | $ | 10,091 |  |  | $ | 10,268 | 
|             |                                                     |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 



| |  | For the three months ended June 30, 2003 and 2002 there were approximately
141,000 and 189,000 stock options outstanding, respectively, whereby the
exercise price exceeded the average common stock market value. For the six
months ended June 30, 2003 and 2002 there were approximately 180,000 and zero
stock options outstanding, respectively, 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 Condensed Consolidated Financial Statements



|8. |  | Business Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operated the Performance Group and Services Group segments during
the three and six months ended June 30, 2003 and 2002. 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 Group, Services Group or Technology Group. Selected financial
information related to these segments for the three and six month periods
ended June 30, 2003 and 2002 are as follows (in thousands):

|                         |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |       | 
|------------------------ | ------------------- | ----------------------------- | - | ------------------ | ----- | ---------------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | 
|                         |                     |                               |   | Three Months Ended |       | Six Months Ended
|                         |                     |                               |   | June 30,           |       | June 30,        
|                         |                     |                               |   |                    |       |                 
|                         |                     |                               |   | 2003               |       | 2002             |   | 2003  |       | 2002
|                         |                     |                               |   |                    |       |                  |   |       |       |     
|Revenue:                 |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |      
|                         | Performance Group   |                               | $ | 2,130              |       |                  | $ | 2,903 |       |      | $ | 4,480 |       |   | $ | 4,956 |      
|                         | Services Group      |                               |   | 1,152              |       |                  |   | 1,119 |       |      |   | 2,456 |       |   |   | 2,911 |      
|                         | Technology Group    |                               |   | 351                |       |                  |   |      |       |      |   | 942   |       |   |   |      |      
|                         | Corporate and Other |                               |   |                   |       |                  |   |      |       |      |   |      |       |   |   |      |      
|                         |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |      
|                         |                     | Total revenue                 |   | $                  | 3,633 |                  |   | $     | 4,022 |      |   | $     | 7,878 |   |   | $     | 7,867 | 
|                         |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |      
|Operating income (loss): |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |      
|                         | Performance Group   |                               | $ | 198                |       |                  | $ | 975   |       |      | $ | 440   |       |   | $ | 1,087 |      
|                         | Services Group      |                               |   | 64                 |       |                  |   | (179  | )     |      |   | 321   |       |   |   | 247   |      
|                         | Technology Group    |                               |   | (494               | )     |                  |   |      |       |      |   | (635  | )     |   |   |      |      
|                         | Corporate and Other |                               |   | (438               | )     |                  |   | (362  | )     |      |   | (881  | )     |   |   | (850  | )    
|                         |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |      
|                         |                     | Total operating income (loss) |   | $                  | (670  | )                |   | $     | 434   |      |   | $     | (755  | ) |   | $     | 484   | 
|                         |                     |                               |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |      



|9. |  | Recent Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability for the fair value of an obligation for guarantees issued or
modified after December 31, 2002 be recorded in the financial statements of
the guarantor. Guarantees pre-existing before the implementation of FIN 45
are required to be disclosed in financial statements issued after December
15, 2002.
|  
|   |  | In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective July 1,
2003. Disclosures are required currently if the Company expects to
consolidate any variable interest entities.                                        
|  
|   |  | The Company is currently evaluating the effects of FIN 45 and FIN 46 with
regards to its investment in the financial results of a property and casualty
insurance program. Additionally, the Company is currently evaluating the
effects of FIN 46 on its other equity investments.                                                                                                                                                                                                                                                        

8



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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in this Quarterly Report on Form 10-Q 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. A forward-looking statement may contain words
such as will continue to be, will be, continue to, expect to,
anticipates that, believes that, to be, or can impact. Forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from anticipated results. A more complete
discussion of these risks and uncertainties, as well as other factors, may be
identified from time to time in the Companys filings with the Securities and
Exchange Commission, including the Companys Annual Report on Form 10-K, or in
the Companys press releases.

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.

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

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.

Software and technology related revenue 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 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 that require significant production, modification or
customization of software is recognized using the percentage-of-completion
method based on contract costs incurred to date compared with total estimated
contract costs in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.

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.

9



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##### Table of Contents



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.

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.

Intangible 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. The Company determined that as of June 30, 2003 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 was 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.

COMPARISON OF RESULTS FROM CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2003 TO THE THREE MONTHS ENDED JUNE 30, 2002:

Revenue

Total revenue for the three months ended June 30, 2003 was $3.6 million
compared to $4.0 million for the three months ended June 30, 2002. As a result
of the general decline in the travel industry and overall business volume, the
Performance Group experienced a $0.4 million decrease in travel and incentive
related revenue and a $0.4 million decrease in license fees from an equity
investee during the second quarter of 2003 compared to 2002. The Technology
Group acquisition in the fourth quarter of 2002 contributed the software and
technology related revenue of $0.4 million.

Cost of Software and Technology Related Sales

The three months ended June 30, 2003 included cost of software and technology
related sales from the Technology Group of $0.4 million. As the Technology
Group acquisition was completed during the fourth quarter of 2002, the Company
had no cost of software and technology related sales for the second quarter of
2002.

Selling and Tour Promotion Expenses

The Companys policy is to expense all selling and tour promotion costs as they
are incurred.

Selling and tour promotion expense increased $0.1 million in 2003 due to the
addition of personnel expenses from the business acquisitions which occurred
after the second quarter of 2002, which were offset by lower personnel expenses
in the comparable prior year business operations of the Performance Group.

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General and Administrative Expenses

General and administrative expenses increased $0.2 million in 2003 due to the
addition of operating expenses from the business acquisitions which occurred
after the second quarter of 2002 and the addition of amortization of the
intangible assets resulting from these business acquisitions. These additional
expenses were partially offset by lower personnel expenses in the comparable
prior year business operations of the Performance Group and the Services Group
and by decreased travel and entertainment expenses and promotional and
marketing expenses due to overall cost reduction efforts.

Operating Income (Loss)

The Company incurred an operating loss of $0.7 million for the quarter ended
June 30, 2003 compared to operating income of $0.4 million in the comparable
quarter of 2002, a decrease of $1.1 million. The decrease is the result of
changes as described above.

Other Income

Other income for the three months ended June 30, 2003 was $1.8 million compared
to $0.9 million for the three months ended June 30, 2002, an increase of $0.9
million. Other income for the three months ended June 30, 2003 included $1.2
million from the final component of contingent consideration received on the
sale of Scheduled Airlines Traffic Offices, Inc. (SatoTravel) which occurred
in June 2001. This increase was partially offset by a decrease in investment
income of $0.2 million due to lower yields on short-term investments and by a
$0.1 million decrease in income and service fees earned on equity investments.

Income Taxes

The Company recorded income tax expense of $0.3 million for both the second
quarter of 2003 and 2002. The effective tax rate for the quarter ended June
30, 2003 was 30.9% compared to 26.1% for the quarter ended June 30, 2002. The
increase in the effective tax rate is due to the final contingent consideration
received on the sale of SatoTravel and the revaluation of the state deferred
tax assets to a higher rate as of December 31, 2002. These increases were
partially offset by an increase in tax-exempt interest income to approximately
96% of the Companys investment income for the quarter ended June 30, 2003 from
75% for the quarter ended June 30, 2002.

Income from Continuing Operations

Income from continuing operations decreased to $0.8 million in the quarter
ended June 30, 2003 from $1.0 million in the comparable quarter of 2002, a
decrease of $0.2 million. The decrease is the result of changes as described
above.

COMPARISON OF RESULTS FROM CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 2003 TO THE SIX MONTHS ENDED JUNE 30, 2002:

Revenue

Total revenue was $7.9 million for both the six months ended June 30, 2003 and
2002. Travel and incentive related revenue decreased $0.8 million due to a
decrease in business volume from the Performance Group and the Services Group.
The Performance Group also experienced a decrease in license revenue from an
equity investee of $0.1 million. The Technology Group acquisition in the
fourth quarter of 2002 contributed the software and technology related revenue
of $0.9 million.

Cost of Software and Technology Related Sales

The six months ended June 30, 2003 included cost of software and technology
related sales from the Technology Group of $0.8 million. As the Technology
Group acquisition was completed during the fourth quarter of 2002, the Company
had no cost of software and technology related sales as of the second quarter
of 2002.

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Selling and Tour Promotion Expenses

The Companys policy is to expense all selling and tour promotion costs as they
are incurred.

Selling and tour promotion expenses increased by $0.2 million in 2003 due to
the addition of personnel expenses from the business acquisitions which
occurred after the second quarter of 2002, which were offset by lower personnel
expenses in the comparable prior year business operations of the Performance
Group.

General and Administrative Expenses

General and administrative expenses increased $0.2 million in 2003 due to the
addition of personnel and other operating expenses from the business
acquisitions which occurred after the second quarter of 2002 and the addition
of amortization of the intangible assets resulting from these business
acquisitions. These additional expenses were partially offset by lower
personnel expenses in the comparable prior year business operations of the
Performance Group and the Services Group and by decreased travel and
entertainment expenses and promotional and marketing expenses due to overall
cost reduction efforts.

Operating Income (Loss)

The Company incurred an operating loss of $0.8 million for the six months ended
June 30, 2003 compared to operating income of $0.5 million in the comparable
period of 2002. The decrease is the result of changes as described above.

Other Income

Other income for the six months ended June 30, 2003 was $2.3 million compared
to $1.5 million for the six months ended June 30, 2002, an increase of $0.8
million. Other income for the six months ended June 30, 2003 included $1.2
million from the final component of contingent consideration received on the
sale of SatoTravel which occurred in June 2001. This increase was partially
offset by a decrease in investment income of $0.4 million due to lower yields
on short-term investments and by a slight decrease in income and service fees
earned on equity investments.

Income Taxes

The Company recorded income tax expense of $0.4 million for both the six months
ended June 30, 2003 and 2002. The effective tax rate for the six months ended
June 30, 2003 was 26.1% compared to 22.5% for the six months ended June 30,
2002. The increase in the effective tax rate is due to the final contingent
consideration received on the sale of SatoTravel and the revaluation of the
state deferred tax assets to a higher rate as of December 31, 2002. These
increases were partially offset by an increase in tax-exempt interest income to
approximately 94% of the Companys investment income for the six months ended
June 30, 2003 from 78% for the six months ended June 30, 2002.

Income from Continuing Operations

Income from continuing operations decreased to $1.2 million in the six months
ended June 30, 2003 from $1.5 million in the comparable period of 2002. The
decrease is the result of changes as described above.

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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 used in operating activities for the six months ended June 30, 2003
and 2002 was approximately $1.2 million and $4.3 million, respectively. The
reduction in net cash used primarily relates to the increase in net income and
timing differences in the collection of current assets and the payment of
current liabilities. The reduction was partially offset by the gain recorded
on the final contingent consideration on the sale of SatoTravel in which the
cash settlement was not received until July 2003.

Net cash provided by investing activities for the six months ended June 30,
2003 and 2002 was approximately $5.0 million and $29.9 million, respectively, a
decrease of $24.9 million. The decrease is due to activity during the quarter
ended June 30, 2002 in which the Company liquidated investments in order to
transfer funds to a second money manager. This decrease is also partially
attributable to contingent payments made in 2003 on prior year acquisitions.

Net cash used in financing activities for the six months ended June 30, 2003
and 2002 was $0.2 million and $5.2 million, respectively. Current period
activity consisted of the purchase and retirement of common stock partially
offset by the proceeds received from the exercise of employee stock options.
Cash used from financing activities for the six months ended June 30, 2002
mainly related to the spin-off of AGI that was completed on February 28, 2002
(see Note 5 to Condensed Consolidated Financial Statements).

The Company has entered into various agreements with AGI that provide for the
separation of AGIs business operations from the Company. 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 June 30, 2003, there were no borrowings under this
agreement.

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

The terms of the Companys acquisition of Bluedot Virtual Event Organization,
Inc. included minimum contingent consideration of $100,000 to be paid in 2003.
As of June 30, 2003, the Company has paid $50,000 of this minimum
consideration. The terms of the Companys investment in Incentive Travel, LLC
included contingent payments due in March 2004 based upon fiscal 2003 income
before income taxes, as defined. As of June 30, 2003, the Company has accrued
approximately $394,000 for the 2004 payment based upon the current estimate of
2003 income.

The Company has issued a letter of credit of approximately $1.3 million for its
right to participate proportionately in the underwriting profits or losses of a
property and casualty insurance program mainly consisting of auto liability and
auto physical damage risk. The letter of credit is an irrevocable facility and
is deemed to be the Companys investment cost to participate in this program.

The Company is continuing to pursue further acquisitions of related travel and
performance improvement, service and other businesses that may require the use
of cash and cash equivalents. No assurance can be given that definitive
agreements for any acquisitions will be entered into, or, if they are entered
into, that they will be on terms favorable to the Company.

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 June 30, 2003, the Company repurchased 98,000 shares for approximately
$833,000. The Company does not believe that any future repurchases will have a
significant impact on the Companys liquidity.

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Management believes that cash, cash equivalents, available-for-sale securities
and cash flows from operations will be sufficient to meet the Companys
anticipated operating cash needs for at least the next twelve months.

Trends and Uncertainties

The results of operations and financial position of the Companys business may
be affected by a number of trends or uncertainties that have, or the Company
reasonably expects could have, a material impact on income from continuing
operations, cash flows and financial position. Such trends and uncertainties
include the repercussions of war with Iraq or terrorist acts, the impact of the
SARS epidemic and the Companys acquisition of or investment in complementary
businesses. The Company will also, from time to time, consider the acquisition
of or investment in businesses, services and technologies that might affect the
Companys liquidity requirements.

Discontinued Operations

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.




Item 3. Quantitative and Qualitative Disclosures About 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.

There have been no material changes in the reported market risks or the overall
credit risk of the Companys portfolio since December 31, 2002. See further
discussion of these market risks and related financial instruments in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002.




Item 4. 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 accounting officer
concluded that the Companys disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) 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 the paragraph
above.

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PART II - OTHER INFORMATION




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

At the annual meeting of shareholders of registrant on May 16, 2003, the
following matters were voted upon:



| | (a) |  | Election of Directors:
| | --- |  | ----------------------

|                    |  |           |           |                |  |  |         | 
|------------------- |  | --------- | --------- | -------------- |  |  | ------- | 
|Nominee             |  | Votes For |           | Votes Withheld
|                    |  |           |           |               
|James L. Easton     |  |           | 9,487,170 |                |  |  | 10,150  | 
|John A. Ueberroth   |  |           | 9,486,320 |                |  |  | 11,000  | 
|Joseph J. Ueberroth |  |           | 8,848,831 |                |  |  | 648,489 | 



| | (b) |  | Ratification of Ernst & Young LLP as registrants
independent accountants for the year ending December 31, 2003:
| | --- |  | ----------------------------------------------------------------------------------------------------------------

|          |  |               |     |             |  |  |    | 
|--------- |  | ------------- | --- | ----------- |  |  | -- | 
|Votes For |  | Votes Against |     | Abstentions
|          |  |               |     |            
|9,496,495 |  |               | 800 |             |  |  | 25 | 




Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits:
| | --- |  | ---------

|     |  |                                                                   |  |  |  | 
|---- |  | ----------------------------------------------------------------- |  |  |  | 
|31.1 |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|31.2 |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|32.1 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|32.2 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

|    |  |                                                                                                                                |  |  |  | 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|(1) |  | The Company filed a current report on Form 8-K on
April 29, 2003 in connection with the dissemination of an
earnings release.*
|    |  |                                                                                                                                |  |  |  | 
|(2) |  | The Company filed a current report on Form 8-K on
July 25, 2003 in connection with the dissemination of an
earnings release.* 



---



|* |  | Report containing information that is required to be furnished under Item
12 was instead furnished under Item 9 in accordance with Securities and
Exchange Commission Release No. 33-8176. Pursuant to General Instruction
B of Form 8-K and SEC Release No. 33-8176, the report submitted under Item
9 is not deemed to be filed for the purpose of Section 18 of the
Securities Exchange Act of 1934 and the Company is not subject to the
liabilities of that section. The Company is not incorporating, and will
not incorporate by reference this report into a filing under the
Securities Act or the Exchange Act.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Signatures

Pursuant to the requirements 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: August 8, 2003 |  | By:                                           |  | /s/ Timothy T. Fogarty  |  | 
|                     |  |                                               |  | Timothy T. Fogarty      |  | 
|                     |  |                                               |  | Chief Financial Officer |  | 

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Exhibit Index



| | 
| | 

|     |  |                                                                   |  |  |  | 
|---- |  | ----------------------------------------------------------------- |  |  |  | 
|31.1 |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|31.2 |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|32.1 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                  
|32.2 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002

17