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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-Q

(Mark One)



|[X] | QUARTERLY report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
|--- | ------------------------------------------------------------------------------------------------------------------------------------

OR



|[   ] | TRANSITION report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the transition period from _________________ to _________________
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission file number 0-26420

AMBASSADORS INTERNATIONAL, INC.

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(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 91-1688605                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation of organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|1071 Camelback Street
Newport Beach, California                |  | 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 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, 2002: 9,876,093





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TABLE OF CONTENTS



|                               |                                                                                               |                                                   |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------- |  |  |  |  |  | 
|PART 1  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS                      
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)    
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|                               | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|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 99.1                  



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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

Table of Contents

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|-------------------------- |  | ------------------------------------------------------------------------------------- | -- | ------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                           |  |                                                                                       |    |                                                                                                         |    | Page
|                           |  |                                                                                       |    |                                                                                                         |    |     
|PART I                     |  | FINANCIAL INFORMATION                                                                 |    |                                                                                                         |    |     
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|Item 1.                    |  | Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31, 2001        |    |                                                                                                         | 1  |     
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|                           |  |                                                                                       |    | Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2002 and
2001 (unaudited) |    |      | 3 | 
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|                           |  |                                                                                       |    | Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (unaudited)       |    |      | 5 | 
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|                           |  |                                                                                       |    | Notes to Consolidated Financial Statements                                                              |    |      | 7 | 
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|Item 2.                    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |    |                                                                                                         | 12 |     
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|PART II                    |  | OTHER INFORMATION                                                                     |    |                                                                                                         |    |     
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|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                   |    |                                                                                                         | 18 |     
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|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                      |    |                                                                                                         | 18 |     
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|SIGNATURES                 |  |                                                                                       | 19 |                                                                                                        
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|Exhibit 99.1 Certification |  |                                                                                       | 20 |                                                                                                        





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##### Table of Contents






PART 1  FINANCIAL INFORMATION




Item 1. Financial Statements




AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(dollars in thousands)

|       |                                                                                           |                                    |                      |       |             |         |              |       |         |         | 
|------ | ----------------------------------------------------------------------------------------- | ---------------------------------- | -------------------- | ----- | ----------- | ------- | ------------ | ----- | ------- | ------- | 
|       |                                                                                           |                                    |                      |       | June 30,    |         | December 31,
|       |                                                                                           |                                    |                      |       | 2002        |         | 2001        
|       |                                                                                           |                                    |                      |       |             |         |             
|       |                                                                                           |                                    |                      |       | (UNAUDITED) |         |              |       |        
|ASSETS |                                                                                           |                                    |                      |       |             |         |              |      
|       | Current assets:                                                                           |                                    |                      |       |             |         |              |       |        
|       |                                                                                           | Cash and cash equivalents          |                      | $     | 48,444      |         |              | $     | 28,021  |        
|       |                                                                                           | Restricted cash equivalents        |                      |       |            |         |              |       | 12      |        
|       |                                                                                           | Available-for-sale securities      |                      |       | 54,574      |         |              |       | 107,303 |        
|       |                                                                                           | Accounts receivable                |                      |       | 3,625       |         |              |       | 4,487   |        
|       |                                                                                           | Prepaid program costs and expenses |                      |       | 2,534       |         |              |       | 5,250   |        
|       |                                                                                           | Deferred income taxes              |                      |       | 1,393       |         |              |       | 1,202   |        
|       |                                                                                           |                                    |                      |       |             |         |              |      
|       |                                                                                           |                                    | Total current assets |       |             | 110,570 |              |       |         | 146,275 | 
|       | Property and equipment, net                                                               |                                    |                      | 1,673 |             |         |              | 4,205 |        
|       | Other investments                                                                         |                                    |                      | 1,342 |             |         |              | 323   |        
|       | Goodwill and covenant not-to-compete,
net of $1,246 and $1,876of accumulated
amortization |                                    |                      | 6,275 |             |         |              | 6,344 |        
|       | Deferred income taxes                                                                     |                                    |                      | 5,809 |             |         |              | 8,069 |        
|       | Other assets                                                                              |                                    |                      | 88    |             |         |              | 88    |        
|       |                                                                                           |                                    |                      |       |             |         |              |      
|       |                                                                                           |                                    | Total assets         |       | $           | 125,757 |              |       | $       | 165,304 | 
|       |                                                                                           |                                    |                      |       |             |         |              |      

See notes to consolidated financial statements.

1



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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30, 2002 and December 31, 2001
(dollars in thousands)

|                     |                                                                                                                     |                   |                                            |        |             |         |              |        |        |         | 
|-------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------------------ | ------ | ----------- | ------- | ------------ | ------ | ------ | ------- | 
|                     |                                                                                                                     |                   |                                            |        | June 30,    |         | December 31,
|                     |                                                                                                                     |                   |                                            |        | 2002        |         | 2001        
|                     |                                                                                                                     |                   |                                            |        |             |         |             
|                     |                                                                                                                     |                   |                                            |        | (UNAUDITED) |         |              |        |       
|LIABILITIES          |                                                                                                                     |                   |                                            |        |             |         |              |       
|Current liabilities: |                                                                                                                     |                   |                                            |        |             |         |              |       
|                     | Accounts payable                                                                                                    |                   | $                                          | 1,626  |             |         | $            | 6,396  |       
|                     | Accrued expenses                                                                                                    |                   |                                            | 3,113  |             |         |              | 5,438  |       
|                     | Participants deposits                                                                                              |                   |                                            | 6,839  |             |         |              | 26,527 |       
|                     | Note payable                                                                                                        |                   |                                            | 200    |             |         |              | 200    |       
|                     | Foreign currency exchange contracts                                                                                 |                   |                                            |       |             |         |              | 503    |       
|                     |                                                                                                                     |                   |                                            |        |             |         |              |       
|                     |                                                                                                                     | Total liabilities |                                            |        | 11,778      |         |              |        | 39,064 |        
|STOCKHOLDERS EQUITY |                                                                                                                     |                   |                                            |        |             |         |              |       
|                     | Preferred stock, $.01 par value;
2,000,000 shares authorized; none
issued and outstanding                           |                   |                                            |       |             |         |              |       |       
|                     | Common stock, $.01 par value;
authorized, 20,000,000 shares; issued and outstanding, 9,876,093 and 9,813,001 shares |                   |                                            | 99     |             |         |              | 98     |       
|                     | Additional paid-in capital                                                                                          |                   |                                            | 88,659 |             |         |              | 88,144 |       
|                     | Retained earnings                                                                                                   |                   |                                            | 25,186 |             |         |              | 39,018 |       
|                     | Accumulated other comprehensive
income (loss)                                                                       |                   |                                            | 35     |             |         |              | (1,020 | )     
|                     |                                                                                                                     |                   |                                            |        |             |         |              |       
|                     |                                                                                                                     |                   | Total stockholders equity                 |        |             | 113,979 |              |        |        | 126,240 | 
|                     |                                                                                                                     |                   |                                            |        |             |         |              |       
|                     |                                                                                                                     |                   | Total liabilities and
stockholders equity |        | $           | 125,757 |              |        | $      | 165,304 | 
|                     |                                                                                                                     |                   |                                            |        |             |         |              |       

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
for the three and six months ended June 30, 2002 and 2001
(dollars in thousands, except per share data)

|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |       |        | 
|----------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------ | ---------------- | --- | ------------------ | ------ | ------ | ------ | ---- | ----- | ----- | --- |  | ------ | ----- | ------ | 
|                                                                                                                              |                                   |            |        | Six Months Ended |     | Three Months Ended
|                                                                                                                              |                                   |            |        | June 30,         |     | June 30,          
|                                                                                                                              |                                   |            |        |                  |     |                   
|                                                                                                                              |                                   |            |        | 2002             |     | 2001               |        | 2002   |        | 2001
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |     
|Revenues:                                                                                                                     |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              | Travel and incentive related      |            | $      | 7,453            |     |                    | $      | 10,202 |        |      | $     | 3,608 |     |  | $      | 4,071 |       
|                                                                                                                              | License fees from equity investee |            |        | 414              |     |                    |        |       |        |      |       | 414   |     |  |        |      |       
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              |                                   |            | 7,867  |                  |     |                    | 10,202 |        |        |      | 4,022 |       |     |  | 4,071  |      
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|Operating expenses:                                                                                                           |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              | Selling and tour promotion        |            |        | 1,990            |     |                    |        | 2,885  |        |      |       | 1,029 |     |  |        | 1,354 |       
|                                                                                                                              | General and administrative        |            |        | 5,393            |     |                    |        | 7,389  |        |      |       | 2,559 |     |  |        | 3,514 |       
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              |                                   |            | 7,383  |                  |     |                    | 10,274 |        |        |      | 3,588 |       |     |  | 4,868  |      
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|Operating income (loss)                                                                                                       |                                   |            | 484    |                  |     |                    | (72    | )      |        |      | 434   |       |     |  | (797   | )    
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|Other income:                                                                                                                 |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              | Interest and dividend income      |            |        | 1,102            |     |                    |        | 2,045  |        |      |       | 502   |     |  |        | 922   |       
|                                                                                                                              | Gain on sale of other investment  |            |        |                 |     |                    |        | 8,306  |        |      |       |      |     |  |        | 8,306 |       
|                                                                                                                              | Other, net                        |            |        | 393              |     |                    |        | 363    |        |      |       | 361   |     |  |        | 29    |       
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              |                                   |            | 1,495  |                  |     |                    | 10,714 |        |        |      | 863   |       |     |  | 9,257  |      
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|Income from continuing operations
before income taxes                                                                         |                                   |            | 1,979  |                  |     |                    | 10,642 |        |        |      | 1,297 |       |     |  | 8,460  |      
|Provision for income taxes                                                                                                    |                                   |            | 445    |                  |     |                    | 3,591  |        |        |      | 339   |       |     |  | 2,857  |      
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|Income from continuing operations                                                                                             |                                   |            | 1,534  |                  |     |                    | 7,051  |        |        |      | 958   |       |     |  | 5,603  |      
|Income (loss) from discontinued operations
(less applicable income tax expense
(benefit) of ($703), $4,661, ($41) and $5,405) |                                   |            | (1,197 | )                |     |                    | 8,969  |        |        |      | (70   | )     |     |  | 10,436 |      
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      
|                                                                                                                              |                                   | Net income |        | $                | 337 |                    |        | $      | 16,020 |      |       | $     | 888 |  |        | $     | 16,039 | 
|                                                                                                                              |                                   |            |        |                  |     |                    |        |        |        |      |       |       |     |  |        |      

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED), CONTINUED
for the three and six months ended June 30, 2002 and 2001
(dollars in thousands, except per share data)

|                              |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |      |       | 
|----------------------------- | ------------------------------------------ | ------------------------------------------ | - | ---------------- | ------ | ------------------ | - | ---- | ------ | ---- | - | ----- | ------ |  | - | ---- | ----- | 
|                              |                                            |                                            |   | Six Months Ended |        | Three Months Ended
|                              |                                            |                                            |   | June 30,         |        | June 30,          
|                              |                                            |                                            |   |                  |        |                   
|                              |                                            |                                            |   | 2002             |        | 2001               |   | 2002 |        | 2001
|                              |                                            |                                            |   |                  |        |                    |   |      |        |     
|Earnings per share  basic:   |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              | Income from continuing operations          |                                            | $ | 0.16             |        |                    | $ | 0.74 |        |      | $ | 0.10  |        |  | $ | 0.58 |      
|                              | Income (loss) from discontinued
operations |                                            |   | (0.12            | )      |                    |   | 0.93 |        |      |   | (0.01 | )      |  |   | 1.09 |      
|                              |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              |                                            | Net income                                 |   | $                | 0.04   |                    |   | $    | 1.67   |      |   | $     | 0.09   |  |   | $    | 1.67  | 
|                              |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              |                                            | Weighted-average common shares
outstanding |   |                  | 9,851  |                    |   |      | 9,583  |      |   |       | 9,863  |  |   |      | 9,596 | 
|Earnings per share  diluted: |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              | Income from continuing operations          |                                            | $ | 0.15             |        |                    | $ | 0.70 |        |      | $ | 0.10  |        |  | $ | 0.56 |      
|                              | Income (loss) from discontinued
operations |                                            |   | (0.12            | )      |                    |   | 0.90 |        |      |   | (0.01 | )      |  |   | 1.05 |      
|                              |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              |                                            | Net income                                 |   | $                | 0.03   |                    |   | $    | 1.60   |      |   | $     | 0.09   |  |   | $    | 1.61  | 
|                              |                                            |                                            |   |                  |        |                    |   |      |        |      |   |       |        |  |   |     
|                              |                                            | Weighted-average common shares
outstanding |   |                  | 10,268 |                    |   |      | 10,000 |      |   |       | 10,064 |  |   |      | 9,957 | 

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended June 30, 2002 and 2001
(dollars in thousands)

|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |        |         |        |         |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------- | ------- | ---- | ------ | ------ | ------- | ------ | ------- | -
|                                                                                            |                                                                                      |                                                                             |                                       |         | 2002 |        | 2001  
|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |       
|Cash flows from operating activities:                                                       |                                                                                      |                                                                             |                                       |         |      |        |        |        
|                                                                                            | Net income                                                                           |                                                                             | $                                     | 337     |      |        | $      | 16,020  |       
|Adjustments to reconcile net income
to net cash provided by (used in)
operating activities: |                                                                                      |                                                                             |                                       |         |      |        |        |        
|                                                                                            |                                                                                      | Depreciation and amortization                                               |                                       |         | 494  |        |        |         | 1,180  |        
|                                                                                            |                                                                                      | Gain on sale of other investments                                           |                                       |         |     |        |        |         | (8,306 | )      
|                                                                                            |                                                                                      | Deferred income taxes                                                       |                                       |         | (449 | )      |        |         |       |        
|                                                                                            |                                                                                      | Compensation expense on stock
grants                                        |                                       |         |     |        |        |         | 296    |        
|                                                                                            |                                                                                      | Change in assets and liabilities
excluding effect of business
dispositions: |                                       |         |      |        |        |         |        |        
|                                                                                            |                                                                                      |                                                                             | Accounts receivable                   |         |      | 719    |        |         |        | (2,382  | )
|                                                                                            |                                                                                      |                                                                             | Prepaid program costs and expenses    |         |      | 1,215  |        |         |        | (22,021 | )
|                                                                                            |                                                                                      |                                                                             | Accounts payable and accrued
expenses |         |      | (3,272 | )      |         |        | 13,887  |  
|                                                                                            |                                                                                      |                                                                             | Participants deposits                |         |      | (3,137 | )      |         |        | 24,304  |  
|                                                                                            |                                                                                      |                                                                             | Other                                 |         |      | (236   | )      |         |        |        |  
|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |        |        
|Net cash provided by (used in)
operating activities                                         |                                                                                      |                                                                             | (4,329                                | )       |      |        | 22,978 |        
|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |        |        
|Cash flows from investing activities:                                                       |                                                                                      |                                                                             |                                       |         |      |        |        |        
|                                                                                            | Purchase of property and equipment                                                   |                                                                             |                                       | (297    | )    |        |        | (557    | )     
|                                                                                            | Purchase of available-for-sale
securities                                            |                                                                             |                                       | (41,612 | )    |        |        | (54,832 | )     
|                                                                                            | Proceeds from sale or maturities of
available-for-sale securities                    |                                                                             |                                       | 72,228  |      |        |        | 53,224  |       
|                                                                                            | Purchase of other investments                                                        |                                                                             |                                       | (412    | )    |        |        | (320    | )     
|                                                                                            | Proceeds from sale of other investments                                              |                                                                             |                                       |        |      |        |        | 7,205   |       
|                                                                                            | Net cash paid for acquisition of
subsidiaries and covenant-not-to-compete agreements |                                                                             |                                       |        |      |        |        | (1,129  | )     
|                                                                                            | Change in other assets                                                               |                                                                             |                                       |        |      |        |        | 17      |       
|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |        |        
|Net cash provided by investing activities                                                   |                                                                                      | $                                                                           | 29,907                                |         |      | $      | 3,608  |        
|                                                                                            |                                                                                      |                                                                             |                                       |         |      |        |        |        

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the six months ended June 30, 2002 and 2001
(dollars in thousands)

|                                               |                                                    |   |        |        |      |   |        |        |  
|---------------------------------------------- | -------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                               |                                                    |   | 2002   |        | 2001
|                                               |                                                    |   |        |        |     
|Cash flows from financing activities:          |                                                    |   |        |        |      |   |        |       
|                                               | Dividends paid on common stock                     |   | $      |       |      |   | $      | (5,133 | )
|                                               | Distribution resulting from spin-off
of subsidiary |   |        | (5,299 | )    |   |        |       |  
|                                               | Purchase and retirement of common stock            |   |        | (80    | )    |   |        |       |  
|                                               | Proceeds from exercise of stock
options            |   |        | 224    |      |   |        | 729    |  
|                                               |                                                    |   |        |        |      |   |        |       
|Net cash used in financing
activities          |                                                    |   | (5,155 | )      |      |   | (4,404 | )     
|                                               |                                                    |   |        |        |      |   |        |       
|Net increase in cash and cash equivalents      |                                                    |   | 20,423 |        |      |   | 22,182 |       
|Cash and cash equivalents, beginning
of period |                                                    |   | 28,021 |        |      |   | 38,071 |       
|                                               |                                                    |   |        |        |      |   |        |       
|Cash and cash equivalents, end of
period       |                                                    | $ | 48,444 |        |      | $ | 60,253 |       
|                                               |                                                    |   |        |        |      |   |        |       

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In the opinion of management, the accompanying unaudited 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, 2002,the consolidated results of operations for the three and six
months ended June 30, 2002 and 2001 and cash flows for the six months ended
June 30, 2002 and 2001. 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.
|  
|   |  | 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, 2002 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, 2001 filed with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                 
|  
|2. |  | COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The components of comprehensive income are as follows (dollars in
thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                                                                                                               |  |                  |       |                    |  |      |        |      |  |   |       |  |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ------------------ |  | ---- | ------ | ---- |  | - | ----- |  |  | - | ------ | -
|                                                                                                                                               |  | Six Months Ended |       | Three Months Ended
|                                                                                                                                               |  | June 30,         |       | June 30,          
|                                                                                                                                               |  |                  |       |                   
|                                                                                                                                               |  | 2002             |       | 2001               |  | 2002 |        | 2001
|                                                                                                                                               |  |                  |       |                    |  |      |        |     
|Net income                                                                                                                                     |  | $                | 337   |                    |  | $    | 16,020 |      |  | $ | 888   |  |  | $ | 16,039 |  
|Change in unrealized gain
on marketable equity
securities, net of income
tax expense (benefit) of
$415, ($175), $124, and
($175)               |  |                  | 715   |                    |  |      | (299   | )    |  |   | 217   |  |  |   | (299   | )
|Change in unrealized gains
(losses) on foreign
currency exchange
contracts, net of income
tax expense (benefit) of
($163), ($557), $0 and $418 |  |                  | 340   |                    |  |      | (952   | )    |  |   |      |  |  |   | 708    |  
|                                                                                                                                               |  |                  |       |                    |  |      |        |      |  |   |       |  |  |   |        |  
|Comprehensive income                                                                                                                           |  | $                | 1,392 |                    |  | $    | 14,769 |      |  | $ | 1,105 |  |  | $ | 16,448 |  
|                                                                                                                                               |  |                  |       |                    |  |      |        |      |  |   |       |  |  |   |        |  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|3. |  | AMBASSADORS GROUP SPIN-OFF                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 25, 2002, the Companys Board of Directors approved the spin-off
of its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by
declaring a special stock dividend to the stockholders of the Company and
distributing to them all of the outstanding shares of AGI. The stock
dividend was paid to the Companys stockholders of record as of February 4,
2002, and was distributed to such shareholders after the close of business
on February 28, 2002, the date that the spin-off was completed. Each
stockholder of the Company received one share of common stock of AGI for
each share of common stock owned in the Company. The distribution of AGIs
common stock pursuant to the spin-off is 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 impact of
the spin-off on the Companys balance sheet on February 28, 2002 reduced
total assets, liabilities, and stockholders equity by $34.8 million, $21.0
million and $13.8 million respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company has entered into various agreements with AGI providing for the
separation of AGIs business operations from the Company. These agreements
also govern various interim and ongoing relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | One of these agreements provides for a credit facility in which the Company
has agreed to provide loans to AGI in the event that AGI requires capital.
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, 2002, there were no borrowings under this agreement.                                                                                                                                                                                                                                                                                                                                                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|4. |  | BUSINESS SEGMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operates the Performance Group and Services Group segments. On
March 29, 2002, Ambassadors Performance Group, a wholly owned subsidiary of
the Company, acquired a 49% ownership interest in Incentive Travel, LLC
(ITI). The license fees of ITI are included in the operations of the
Performance Group. Corporate and other consists of general corporate
assets (primarily cash and cash equivalents and investments) and other
activities which are not directly related to these Groups. Selected
financial information related to these segments is as follows (dollars in
thousands):

|                         |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |       |       | 
|------------------------ | ------------------- | ----- | --- | ---------------- | ----- | ------------------ | --- | ------ | ------ | ---- | --- | ----- | ----- | - | ---- | ----- | ----- | 
|                         |                     |       |     | Six Months Ended |       | Three Months Ended
|                         |                     |       |     | June 30,         |       | June 30,          
|                         |                     |       |     |                  |       |                   
|                         |                     |       |     | 2002             |       | 2001               |     | 2002   |        | 2001
|                         |                     |       |     |                  |       |                    |     |        |        |     
|Revenues:                |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      
|                         | Performance Group   |       | $   | 4,956            |       |                    | $   | 6,621  |        |      | $   | 2,903 |       |   | $    | 2,491 |      
|                         | Services Group      |       |     | 2,911            |       |                    |     | 3,581  |        |      |     | 1,119 |       |   |      | 1,580 |      
|                         |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      
|                         |                     | Total |     | $                | 7,867 |                    |     | $      | 10,202 |      |     | $     | 4,022 |   |      | $     | 4,071 | 
|                         |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      
|Operating Income (Loss): |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      
|                         | Performance Group   |       | $   | 1,087            |       |                    | $   | 1,309  |        |      | $   | 975   |       |   | $    | 2     |      
|                         | Services Group      |       |     | 247              |       |                    |     | 258    |        |      |     | (179  | )     |   |      | 9     |      
|                         | Corporate and Other |       |     | (850             | )     |                    |     | (1,639 | )      |      |     | (362  | )     |   |      | (808  | )    
|                         |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      
|                         |                     | $     | 484 |                  |       | $                  | (72 | )      |        | $    | 434 |       |       | $ | (797 | )    
|                         |                     |       |     |                  |       |                    |     |        |        |      |     |       |       |   |      |      



|5. |  | SALE OF INVESTMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During June 2001, the Company sold its ownership stake in a joint venture
that owned capital stock in Scheduled Airlines Traffic Offices, Inc.
(SatoTravel) to Navigant International, Inc. (Navigant)(Nasdaq: FLYR). The
Company received approximately $7.2 million in cash, approximately 237,000
shares of common stock at $16 per share of Navigant and recorded a gain of
approximately $8.3 million in other income in the quarter ended June 30,
2001.                                                                                          
|  
|   |  | The agreement also provided for an additional payment of approximately $1.4
million consisting of cash and stock to be paid to the Company if
SatoTravel, as a subsidiary of Navigant, achieved certain revenue
objectives by June 14, 2002. The Company is having discussions with
Navigant International, Inc. regarding whether or not the conditions for
the additional payment have been satisfied. Since probability is uncertain,
the additional payment has not been recorded in the statement of income for
the six months ended June 30, 2002.

9



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



| |  | Excluding this gain, income from continuing operations and fully diluted
earnings per share would have been as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------

|                                                             |  |                  |       |                    |  |      |       |      |  |   |     |  |  |   |       | 
|------------------------------------------------------------ |  | ---------------- | ----- | ------------------ |  | ---- | ----- | ---- |  | - | --- |  |  | - | ----- | 
|                                                             |  | Six Months Ended |       | Three Months Ended
|                                                             |  | June 30,         |       | June 30,          
|                                                             |  |                  |       |                   
|                                                             |  | 2002             |       | 2001               |  | 2002 |       | 2001
|                                                             |  |                  |       |                    |  |      |       |     
|Income from continuing
operations, as reported               |  | $                | 1,534 |                    |  | $    | 7,051 |      |  | $ | 958 |  |  | $ | 5,603 | 
|Less gain on sale of
SatoTravel, net of
income tax of $2,824 |  |                  |      |                    |  |      | 5,482 |      |  |   |    |  |  |   | 5,482 | 
|                                                             |  |                  |       |                    |  |      |       |      |  |   |     |  |  |   |       | 
|Income from continuing
operations  proforma                 |  | $                | 1,534 |                    |  | $    | 1,569 |      |  | $ | 958 |  |  | $ | 121   | 
|                                                             |  |                  |       |                    |  |      |       |      |  |   |     |  |  |   |       | 

|                                               |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |      | 
|---------------------------------------------- |  | ---------------- | ---- | ------------------ |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|                                               |  | Six Months Ended |      | Three Months Ended
|                                               |  | June 30,         |      | June 30,          
|                                               |  |                  |      |                   
|                                               |  | 2002             |      | 2001               |  | 2002 |      | 2001
|                                               |  |                  |      |                    |  |      |      |     
|Income from continuing
operations, as reported |  | $                | 0.15 |                    |  | $    | 0.70 |      |  | $ | 0.10 |  |  | $ | 0.56 | 
|Less gain on sale of
SatoTravel                |  |                  |     |                    |  |      | 0.55 |      |  |   |     |  |  |   | 0.55 | 
|                                               |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |      | 
|Income from continuing
operations  proforma   |  | $                | 0.15 |                    |  | $    | 0.15 |      |  | $ | 0.10 |  |  | $ | 0.01 | 
|                                               |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |      | 



|6. |  | RECENT PRONOUCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 1, 2002, the Company adopted FASB Statement No. 142 Goodwill and
Other Intangibles (Statement 142). Under Statement 142, goodwill is no
longer amortized, but is subject to annual impairment tests. Application of
the non-amortization provisions resulted in an increase in income from
continuing operations before income taxes of approximately $0.3 million and
$0.6 million for the three and six months ended June 30, 2002. During the
second quarter of 2002, the Company performed the first of the required
impairment tests of goodwill and indefinite lived intangible assets
associated with continuing operations and determined that no impairment
charge was required as of June 30, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



| |  | In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (Statement 144), which
supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (Statement
121), which is effective for fiscal years beginning after December 15,
2001. Statement 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed
of. However, Statement 144 retains certain fundamental provisions of
Statement 121 including recognition and measurement of the impairment of
long-lived assets to be held and used; and measurement of long-lived assets
to be disposed of by sale. The Company adopted the provisions of Statement
144 effective January 1, 2002.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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##### Table of Contents



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

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

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

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

COMPARISON OF RESULTS FROM CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2002 TO THE THREE MONTHS ENDED JUNE 30, 2001:

GROSS PROGRAM RECEIPTS

Gross program receipts for the three months ended June 30, 2002 was $12.6
million compared to $13.6 million for the three months ended June 30, 2001, a
decrease of $1.0 million. The decrease in gross revenue resulted from a lower
level of business in both Ambassadors Performance Group (APG) and Ambassadors
Services Group (ASG) resulting from a slowdown in corporate spending, a
decrease in convention services and the impact of September 11th. The decrease
in gross revenue is partially offset by the inclusion of licensing revenue
generated from Incentive Travel, LLC.

NET REVENUE

Net revenue decreased to $4.0 million in the second quarter of 2002 from $4.1
million in the second quarter of 2001, a decrease of $0.1 million. The
decrease in net revenue resulted from the same factors that impacted gross
revenue.

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 decreased to $1.0 million in the quarter
ended June 30, 2002 from $1.4 million in the comparable quarter of 2001, a
decrease of $0.4 million. The decrease was principally due to lower personnel
expenses in both APG and ASG.

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##### Table of Contents



GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased during the second quarter of 2002
to $2.6 million from $3.5 million in the second quarter of 2001, a decrease of
$0.9 million. The decrease was primarily the result of lower personnel expenses
and the adoption of FASB Statement No. 142 Goodwill and Other Intangibles
effective January 1, 2002, which resulted in the elimination of $0.3 million of
goodwill amortization.

OPERATING INCOME (LOSS)

Operating income increased to $0.4 million in the quarter ended June 30,
2002 from a loss of $0.8 million in the comparable quarter of 2001, an increase
of $1.2 million. The increase is the result of changes as described above.

OTHER INCOME

Other income for the three months ended June 30, 2002 was $0.9 million compared
to $9.3 million for the three months ended June 30, 2001, a decrease of $8.4
million. The decrease in other income relates to lower investment income due to
lower yields and the prior year included an $8.3 million gain on the sale of
the Companys investment in SatoTravel. This decrease was partially offset by
management fees and earnings in equity investments of $0.3 million.

INCOME TAXES

The Company has recorded an income tax provision of $0.3 million for the second
quarter of 2002 in comparison to $2.9 million for the second quarter of 2001, a
decrease of $2.6 million. The effective tax rate for the quarter was 26.1%
compared to 33.8% for the same period last year. The decrease in the effective
tax rate is attributable to investment income, which represented 31.5% of the
Companys pre-tax income for the quarter ended June 30, 2002 compared to 8.3%
for the same quarter of 2001. Tax-exempt interest income represented
approximately 81.3% and 76.5% of the Companys investment income in the
quarters ended June 30, 2002 and 2001, respectively.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations decreased to $1.0 million in the quarter
ended June 30, 2002 from $5.6 million in the comparable quarter of 2001, a
decrease of $4.6 million. The decrease is the result of changes as described
above.

14



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##### Table of Contents



COMPARISON OF RESULTS FROM CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 2002 TO THE SIX MONTHS ENDED JUNE 30, 2001:

GROSS PROGRAM RECEIPTS

Gross program receipts decreased to $24.2 million in the six month period ended
June 30, 2002 from $36.4 million in the six month period ended June 30, 2001, a
decrease of $12.2 million. The decrease in gross revenue resulted from a lower
level of business in both APG and ASG resulting from a slowdown in corporate
spending, a decrease in convention services and the impact of September 11th.
The decrease in gross revenue is partially offset by the inclusion of licensing
revenue generated from Incentive Travel, LLC.

NET REVENUE

Net revenue decreased to $7.9 million in the six month period ended June 30,
2002 from $10.2 million in the six month period ended June 30, 2001, a decrease
of $2.3 million. The decrease in net revenue resulted from the same factors
that impacted gross revenue.

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 decreased to $2.0 million in the six month
period ended June 30, 2002 from $2.9 million in the six month period ended June
30, 2001, a decrease of $0.9 million. The decrease was principally due to lower
personnel expenses in both APG and ASG.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased during the six month period ended
June 30, 2002 to $5.4 million from $7.4 million in the six month period ended
June 30, 2001, a decrease of $2.0 million. The decrease was primarily the
result of lower personnel expenses and the adoption of FASB Statement No. 142
Goodwill and Other Intangibles effective January 1, 2002, which resulted in
the elimination of $0.6 million of goodwill amortization.

OPERATING INCOME (LOSS)

Operating income increased to $0.5 million in the six months ended June 30,
2002 from a loss of $0.1 million in the six month period ended June 30, 2001,
an increase of $0.6 million. The increase is the result of changes as described
above.

OTHER INCOME

Other income for the six months ended June 30, 2002 was $1.5 million compared
to $10.7 million for the six month period ended June 30, 2001, a
decrease of $9.2 million. The decrease in other income relates to lower
investment income due to lower yields and the prior year included: 1)$0.3
million of management fees from SatoTravel and 2) an $8.3 million gain on the
sale of the Companys investment in

15



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##### Table of Contents



SatoTravel. This decrease was partially offset by management fees and earnings
in equity investments and of $0.3 million.

INCOME TAXES

The Company has recorded an income tax provision of $0.4 million for the six
month period ended June 30, 2002 in comparison to $3.6 million for the six
month period ended June 30, 2001, a decrease of $3.2 million. The
effective tax rate was 22.5% for the six months ended June 30, 2002 compared to
33.7% for the same period last year. The decrease in the effective tax rate is
attributable to investment income, which represented 42.2% of the Companys
pre-tax income for the six months ended June 30, 2002 compared to 12.6% for the
same period last year. Tax-exempt interest income represented approximately
75.7% and 65.6% of the Companys investment income for the six months ended
June 30, 2002 and 2001, respectively.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations decreased to $1.5 million for the six month
period ended June 30, 2002 from $7.1 million in the comparable six month period
of 2001, a decrease of $5.6 million. The decrease is the result of changes as
described above.

SEASONALITY

The Companys businesses are seasonal and revenues and operating income are not
earned on a pro rata basis. The Company anticipates that this trend will
continue for the foreseeable future.

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.

Net cash provided by (used in) operations for the six month periods ended June
30, 2002 and 2001 was approximately ($4.3) million and $23.0 million,
respectively, a decrease of $27.4 million. The decrease in operating cash
flows primarily relates to i) the decrease in net income, ii) a decrease in
participant deposits resulting from the spin-off of AGI and iii) a lower level
of business operated by APG and ASG.

Net cash provided by investing activities for the six month periods ended June
30, 2002 and 2001 was approximately $29.9 million and $3.6 million,
respectively. The increase in cash flows from investing activities relates to
the Company liquidating investments in order to transfer funds to a second
money manager, to partially fund cash flow from operations and to complete the
acquisition of a minority interest in a corporate and incentive meeting
company.

Net cash used in financing activities for the six-month periods ended June 30,
2002 and 2001 was ($5.2) million and ($4.4) million, respectively. Cash used
from financing activities for the current period mainly related to the spin-off
of AGI that was completed on February 28, 2002 (see Note 3).

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##### Table of Contents



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 in the event that it requires capital. 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, 2002, there were no
borrowings under this agreement.

The Company does not have any material capital expenditure commitments for
2002. However, the terms of the Companys acquisitions of certain businesses
include contingent consideration, which could range up to approximately $1.4
million in 2003. Additionally, 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 such
acquisitions are currently pending and no assurance can be given that
definitive agreements for any such acquisitions will be entered into, or, if
they are entered into, that they will be on terms favorable to 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.
The Company does not believe that any such repurchases will have a significant
impact on the Companys liquidity.

Management believes that existing cash and cash equivalents and cash flows from
operations will be sufficient to fund the Companys anticipated operating
needs, capital expenditures, stock repurchases and acquisitions at least for
the ensuing year.

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 is
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.

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##### Table of Contents






PART II  OTHER INFORMATION

Items 1, 2, 3, and 5 are not presented, as they are not applicable.




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

At the annual meeting of shareholders of registrant on May 17, 2002, the
following matters were voted upon:



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

|                 |  |           |           |                |  |  |         | 
|---------------- |  | --------- | --------- | -------------- |  |  | ------- | 
|Nominee          |  | Votes For |           | Votes Withheld
|                 |  |           |           |               
|Brigitte M. Bren |  |           | 8,778,788 |                |  |  | 681,435 | 
|Rafer L. Johnson |  |           | 8,778,788 |                |  |  | 681,435 | 
|John C. Spence   |  |           | 8,778,788 |                |  |  | 681,435 | 



| | (b) |  | Ratification of amendment to registrants Amended and
Restated 1995 Equity Participation Plan to increase the number of
shares of registrants common stock available for issuance
thereunder from 1,400,000 to 2,200,000:
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |  |               |  |            
|--------- |  | ------------- |  | -----------
|Votes For |  | Votes Against |  | Abstentions
|          |  |               |  |            
|7,224,650 |  | 1,184,578     |  | 6,197      



| | (c) |  | Ratification of Ernst & Young LLP as registrants independent
accountants for the year ending December 31, 2002:
| | --- |  | ----------------------------------------------------------------------------------------------------------------

|          |  |               |  |            
|--------- |  | ------------- |  | -----------
|Votes For |  | Votes Against |  | Abstentions
|          |  |               |  |            
|9,452,266 |  | 7,600         |  | 357        




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



| | (a) |  | Exhibits:                                            
| | --- |  | -----------------------------------------------------
|
| |     |  | 99.1 Certification Pursuant to 18 U.S.C. Section 1350
|
| | (b) |  | Reports on Form 8-K:                                 
|
| |     |  | None                                                 

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                               |  |     |  |                                            
|------------------------------ |  | --- |  | -------------------------------------------
|AMBASSADORS INTERNATIONAL, INC |  |     |  |                                            
|                              
|Date: August 13, 2002          |  | By: |  | /s/   Timothy T. Fogarty                   
|                               |  |     |  |                                            
|                               |  |     |  | Timothy T. Fogarty,
Chief Financial Officer

19