##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number: 0-26420



AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 91-1688605                          
|(State or Other Jurisdiction of Incorporation or 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  x



The number of shares of the registrants Common Stock outstanding as of October 26, 2005 was 10,420,180.



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##### Table of Contents

AMBASSADORS INTERNATIONAL, INC.

FORM 10-Q QUARTERLY REPORT



TABLE OF CONTENTS



|              |  |                       |  |                                                                                                               |  |   
|------------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --
|PART I        |  | FINANCIAL INFORMATION |  |                                                                                                              
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements                                                                                          |  |   
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004                           |  | 1 
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004 (unaudited) |  | 2 
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (unaudited)       |  | 3 
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements (unaudited)                                                        |  | 4 
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 11
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 18
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                                       |  | 18
|              |  |                      
|PART II       |  | OTHER INFORMATION     |  |                                                                                                              
|              |  |                       | 
|              |  | Item 1.               |  | Legal Proceedings                                                                                             |  | 19
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits                                                                                                      |  | 19
|              | 
|SIGNATURES    |  | 20                   
|              | 
|EXHIBIT INDEX |  | 21                   



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##### Table of Contents



PART 1  FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------



Ambassadors International, Inc.

Consolidated Balance Sheets



(in thousands, except share data)



|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                  |  | September 30, 2005 |         |   | December 31, 2004 |  
|                                                                                                                                                  |  | (unaudited)        |         |   |                   |  
|Assets:                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                                                                   |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                         |  | $                  | 19,235  |   |                   | $ | 39,474  |  
|Available-for-sale securities                                                                                                                     |  |                    | 80,408  |   |                   |   | 58,441  |  
|Accounts receivable, net of allowance of $20 and $52 in 2005 and 2004, respectively                                                               |  |                    | 4,295   |   |                   |   | 4,128   |  
|Premiums receivable                                                                                                                               |  |                    | 13,329  |   |                   |   | 10,040  |  
|Deferred policy acquisition costs                                                                                                                 |  |                    | 1,638   |   |                   |   | 1,758   |  
|Reinsurance recoverable                                                                                                                           |  |                    | 1,201   |   |                   |   | 1,597   |  
|Prepaid reinsurance premiums                                                                                                                      |  |                    | 1,084   |   |                   |   | 1,207   |  
|Deferred income taxes                                                                                                                             |  |                    | 387     |   |                   |   | 335     |  
|Prepaid program costs and other current assets                                                                                                    |  |                    | 2,080   |   |                   |   | 2,592   |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                                                              |  |                    | 123,657 |   |                   |   | 119,572 |  
|Property and equipment, net                                                                                                                       |  |                    | 646     |   |                   |   | 664     |  
|Goodwill                                                                                                                                          |  |                    | 8,996   |   |                   |   | 6,275   |  
|Other intangibles                                                                                                                                 |  |                    | 1,391   |   |                   |   |        |  
|Deferred income taxes                                                                                                                             |  |                    | 2,473   |   |                   |   | 2,575   |  
|Other assets                                                                                                                                      |  |                    | 1,963   |   |                   |   | 575     |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                                                      |  | $                  | 139,126 |   |                   | $ | 129,661 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Liabilities:                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                                                              |  |                    |         |   |                   |   |         |  
|Accounts payable                                                                                                                                  |  | $                  | 2,014   |   |                   | $ | 2,144   |  
|Participant deposits                                                                                                                              |  |                    | 7,125   |   |                   |   | 6,797   |  
|Accrued and other expenses                                                                                                                        |  |                    | 5,237   |   |                   |   | 2,311   |  
|Loss and loss adjustment expense reserves                                                                                                         |  |                    | 8,557   |   |                   |   | 6,134   |  
|Unearned premiums                                                                                                                                 |  |                    | 5,665   |   |                   |   | 6,409   |  
|Deferred gain on retroactive reinsurance                                                                                                          |  |                    | 168     |   |                   |   | 522     |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                                         |  |                    | 28,766  |   |                   |   | 24,317  |  
|Non-current participant deposits                                                                                                                  |  |                    |        |   |                   |   | 404     |  
|Other liabilities                                                                                                                                 |  |                    |        |   |                   |   | 114     |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                                 |  |                    | 28,766  |   |                   |   | 24,835  |  
|Commitments and contingencies                                                                                                                     |  |                    |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                             |  |                    |         |   |                   |   |         |  
|Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued                                                                         |  |                    |        |   |                   |   |        |  
|Common stock, $.01 par value; 20,000,000 shares authorized; 10,420,180 and 9,974,922 shares issued and outstanding in 2005 and 2004, respectively |  |                    | 104     |   |                   |   | 100     |  
|Additional paid-in capital                                                                                                                        |  |                    | 93,643  |   |                   |   | 88,578  |  
|Retained earnings                                                                                                                                 |  |                    | 17,713  |   |                   |   | 17,514  |  
|Deferred compensation                                                                                                                             |  |                    | (890    | ) |                   |   | (1,199  | )
|Accumulated other comprehensive loss                                                                                                              |  |                    | (210    | ) |                   |   | (167    | )
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                        |  |                    | 110,360 |   |                   |   | 104,826 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                        |  | $                  | 139,126 |   |                   | $ | 129,661 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  



See Notes to Consolidated Financial
Statements (unaudited).



1



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##### Table of Contents



Ambassadors International, Inc.

Consolidated Statements of Income



(in thousands, except per share data)



|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|-------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | ---- | ------ |  | - | ------
|                                                         |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30,
|                                                         |  | 2005                             |        |   | 2004                            |   |        | 2005 |  | 2004
|                                                         |  | (unaudited)                      |        |   | (unaudited)                    
|Revenues:                                                |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Travel, incentive and event management related           |  | $                                | 2,976  |   |                                 | $ | 2,613  |      |  | $    | 12,460 |  | $ | 10,201
|Net insurance premiums earned                            |  |                                  | 3,072  |   |                                 |   | 1,879  |      |  |      | 8,764  |  |   | 3,156 
|License fees and other                                   |  |                                  | 326    |   |                                 |   | 37     |      |  |      | 959    |  |   | 170   
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|                                                         |  |                                  | 6,374  |   |                                 |   | 4,529  |      |  |      | 22,183 |  |   | 13,527
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Costs and operating expenses:                            |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Cost of software and technology related sales            |  |                                  | 93     |   |                                 |   | 6      |      |  |      | 443    |  |   | 41    
|Selling and tour promotion                               |  |                                  | 735    |   |                                 |   | 707    |      |  |      | 2,348  |  |   | 2,291 
|General and administrative                               |  |                                  | 3,144  |   |                                 |   | 2,525  |      |  |      | 9,146  |  |   | 7,518 
|Loss and loss adjustment expenses                        |  |                                  | 1,699  |   |                                 |   | 753    |      |  |      | 4,562  |  |   | 1,210 
|Insurance acquisition costs and other operating expenses |  |                                  | 1,220  |   |                                 |   | 713    |      |  |      | 3,464  |  |   | 1,292 
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|                                                         |  |                                  | 6,891  |   |                                 |   | 4,704  |      |  |      | 19,963 |  |   | 12,352
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Operating income (loss)                                  |  |                                  | (517   | ) |                                 |   | (175   | )    |  |      | 2,220  |  |   | 1,175 
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Other income:                                            |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Interest and dividend income, net                        |  |                                  | 822    |   |                                 |   | 406    |      |  |      | 2,107  |  |   | 1,016 
|Realized gains on sale of available-for-sale securities  |  |                                  |       |   |                                 |   | 1      |      |  |      |       |  |   | 41    
|Other, net                                               |  |                                  | 391    |   |                                 |   | 54     |      |  |      | 1,093  |  |   | 164   
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|                                                         |  |                                  | 1,213  |   |                                 |   | 461    |      |  |      | 3,200  |  |   | 1,221 
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Income before income taxes                               |  |                                  | 696    |   |                                 |   | 286    |      |  |      | 5,420  |  |   | 2,396 
|Provision for income taxes                               |  |                                  | 268    |   |                                 |   | 84     |      |  |      | 2,129  |  |   | 857   
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Net income                                               |  | $                                | 428    |   |                                 | $ | 202    |      |  | $    | 3,291  |  | $ | 1,539 
|                                                         |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Earnings per share:                                      |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Basic                                                    |  | $                                | 0.04   |   |                                 | $ | 0.02   |      |  | $    | 0.32   |  | $ | 0.16  
|Diluted                                                  |  | $                                | 0.04   |   |                                 | $ | 0.02   |      |  | $    | 0.31   |  | $ | 0.15  
|Weighted-average common shares outstanding:              |  |                                  |        |   |                                 |   |        |      |  |      |        |  |   |       
|Basic                                                    |  |                                  | 10,407 |   |                                 |   | 9,849  |      |  |      | 10,286 |  |   | 9,870 
|Diluted                                                  |  |                                  | 10,668 |   |                                 |   | 10,064 |      |  |      | 10,573 |  |   | 10,124
|Dividends per common share                               |  | $                                | 0.10   |   |                                 | $ | 0.10   |      |  | $    | 0.30   |  | $ | 0.30  



See Notes to Consolidated Financial Statements (unaudited).



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Ambassadors International, Inc.

Consolidated Statements of Cash Flows



(in thousands)



|                                                                                            |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                            |  | Nine Months Ended September 30, |        
|                                                                                            |  | 2005                            |         |   | 2004 |  
|                                                                                            |  | (unaudited)                     |        
|Cash flows from operating activities:                                                       |  |                                 |         |   |      |   |         |  
|Net income                                                                                  |  | $                               | 3,291   |   |      | $ | 1,539   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                               |  |                                 | 1,057   |   |      |   | 701     |  
|Amortization of deferred compensation                                                       |  |                                 | 309     |   |      |   |        |  
|Undistributed earnings from equity investments                                              |  |                                 | 111     |   |      |   | 72      |  
|Change in assets and liabilities, net of effects of business acquisitions and dispositions: |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                                         |  |                                 | (157    | ) |      |   | (2,926  | )
|Premiums receivable                                                                         |  |                                 | (3,289  | ) |      |   | (7,670  | )
|Deferred policy acquisition costs                                                           |  |                                 | 120     |   |      |   | (1,271  | )
|Reinsurance recoverable                                                                     |  |                                 | 396     |   |      |   | (1,363  | )
|Prepaid insurance premiums                                                                  |  |                                 | 123     |   |      |   | (932    | )
|Prepaid program costs and other current assets                                              |  |                                 | 738     |   |      |   | (193    | )
|Other assets                                                                                |  |                                 | (168    | ) |      |   | 639     |  
|Accounts payable and accrued and other expenses                                             |  |                                 | 3,462   |   |      |   | 1,492   |  
|Current and non-current participant deposits                                                |  |                                 | (76     | ) |      |   | (1,083  | )
|Loss and loss adjustment expense reserves                                                   |  |                                 | 2,423   |   |      |   | 4,916   |  
|Unearned premiums                                                                           |  |                                 | (744    | ) |      |   | 4,714   |  
|Deferred gain on retroactive reinsurance                                                    |  |                                 | (354    | ) |      |   | 747     |  
|Other liabilities                                                                           |  |                                 | (114    | ) |      |   | (52     | )
|                                                                                            |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                                 | 7,128   |   |      |   | (670    | )
|                                                                                            |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities:                                                       |  |                                 |         |   |      |   |         |  
|Proceeds from sale of available-for-sale securities                                         |  |                                 | 30,455  |   |      |   | 64,690  |  
|Purchase of available-for-sale securities                                                   |  |                                 | (52,512 | ) |      |   | (53,477 | )
|Purchase of other investments                                                               |  |                                 | (497    | ) |      |   | (627    | )
|Cash paid for acquisitions of subsidiaries, net of cash received                            |  |                                 | (1,485  | ) |      |   | (30     | )
|Purchase of property and equipment                                                          |  |                                 | (119    | ) |      |   | (131    | )
|                                                                                            |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                         |  |                                 | (24,158 | ) |      |   | 10,425  |  
|                                                                                            |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities:                                                       |  |                                 |         |   |      |   |         |  
|Proceeds from exercise of stock options                                                     |  |                                 | 1,467   |   |      |   | 1,311   |  
|Dividends paid on common stock                                                              |  |                                 | (3,092  | ) |      |   | (2,961  | )
|Cash paid on current and non-current debt                                                   |  |                                 | (1,584  | ) |      |   |        |  
|Purchase and retirement of common stock                                                     |  |                                 |        |   |      |   | (3,675  | )
|                                                                                            |  |                                 |         |   |      |   |         |  
|Net cash used in financing activities                                                       |  |                                 | (3,209  | ) |      |   | (5,325  | )
|                                                                                            |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                                 | (20,239 | ) |      |   | 4,430   |  
|Cash and cash equivalents, beginning of year                                                |  |                                 | 39,474  |   |      |   | 43,609  |  
|                                                                                            |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of year                                                      |  | $                               | 19,235  |   |      | $ | 48,039  |  
|                                                                                            |  |                                 |         |   |      |   |         |  



See Notes to Consolidated Financial
Statements (unaudited).



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##### Table of Contents

Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited)



|1. | Description of the Company and Basis of Presentation
|-- | ----------------------------------------------------



The Company



Ambassadors International, Inc. (the Company) was founded in 1967 as a travel services company and reincorporated in Delaware in 1995.
Ambassadors Group, Inc. (AGI) represented the entire operations of the Company until 1996 when Ambassadors Performance Group, LLC (APG or the Performance Group) commenced operations. Ambassadors Services Group,
Inc. (ASG or the Services Group) commenced operations in 1998 and Ambassadors Technology Corporation (ATC or the Technology Group) commenced operations in 2002. On February 28, 2002, the Company
completed a spin-off of its wholly owned subsidiary, AGI, into a separate publicly traded company. Cypress Reinsurance, Ltd (Cypress Re) commenced operations in 2004.



In January 2004, the Company realigned its business operations and consolidated the Performance Group, the Services Group
and the Technology Group into one segment, called Ambassadors.



In December 2003, the Company formed Cypress Re and registered it as a Class 3 Reinsurer pursuant to Section 4 of the Bermuda Monetary Authority Act to carry on business in that capacity subject to the provisions of the Bermuda
Monetary Authority Act.



In February 2005, the Company
acquired BellPort Group, Inc. (BellPort). BellPort is a marina company operating facilities in both the United States and Mexico.



As of September 30, 2005, the following further describes the operations of the Companys business segments:



| |  |  | Ambassadors Develops, markets and manages meetings and incentive programs for a nationwide roster of corporate clients utilizing incentive travel, merchandise award
programs and corporate meeting management services. Provides comprehensive hotel reservation, registration and travel services for meetings, conventions, expositions and trade shows. Develops, markets and distributes event portfolio management
technology solutions for corporations and large associations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cypress Re  Reinsures property and casualty risks written by licensed U.S. insurers. The lines of business that are currently being reinsured include commercial auto
liability, commercial physical damage and workers compensation. These risks are associated with members of highly selective affinity groups or associations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate and Other  Consists of general corporate assets (primarily cash and cash equivalents and investments) and other activities which are not directly related to
the Ambassadors or Cypress Re segments. As of February 2005, Corporate and Other also includes the operations of BellPort.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by United States generally accepted
accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for future periods or the year ending December 31, 2005.



4



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##### Table of Contents

Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



The consolidated balance sheet at December 31, 2004 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. For further information refer to the
consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2004.



Accounting for Stock Options



As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock-based employee compensation plans under the intrinsic value method. Because all options granted under the Companys plans had an exercise price equal to the market value of the underlying common stock on the date
of grant, no stock-based compensation cost is reflected in net income.



The following table presents the effects on net income and earnings per share if the Company had recognized compensation expense under the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):



Three Months Ended September 30,


Nine Months Ended September 30,2005


2004


2005


2004Net income, as reported

$
428


$
202


$
3,291


$
1,539Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects


(53
)


(74
)


(381
)


(257
)Net income, pro forma

$
375


$
128


$
2,910


$
1,282Earnings per share  basicAs reported

$
0.04


$
0.02


$
0.32


$
0.16Pro forma


0.04



0.01



0.28



0.13Earnings per share  dilutedAs reported

$
0.04


$
0.02


$
0.31


$
0.15Pro forma


0.04



0.01



0.28



0.13




Dividends
Declared



On September 2, 2003, the Board of
Directors authorized a new dividend policy paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. During 2005, a dividend of approximately $1,016,000 was paid on March 15, 2005 to stockholders of
record on February 28, 2005, a dividend of approximately $1,034,000 was paid on June 15, 2005 to stockholders of record on May 31, 2005 and a dividend of approximately $1,042,000 was paid on September 8, 2005 to stockholders of
record on August 25, 2005.



The Company and its Board of
Directors intend to continually review the dividend policy to ensure compliance with capital requirements, regulatory limitations, the Companys financial position and other conditions which may affect the Companys desire or ability to
pay dividends in the future.



5



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##### Table of Contents

Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



Recent Accounting Pronouncements



In December 2004, FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (ABP No. 25) and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described is SFAS 123. However
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Upon adoption of SFAS No. 123R, pro forma disclosure of the impact of
share-based payments to employees is no longer permitted.



In
April 2005, the Securities and Exchange Commission (SEC) approved a new rule for public companies which delays the effective date of SFAS 123R. Under the SECs rule, SFAS 123R is now effective for public companies for
annual periods that begin after June 15, 2005. The Company expects to adopt SFAS No. 123R on January 1, 2006. SFAS 123R allows for two transition alternatives, the modified-prospective method and the retrospective method of
recognition of compensation expense related to share-based payments. The Company is currently evaluating these transition alternatives and the use of an appropriate valuation model, therefore the impact of SFAS No. 123R has not yet been
determined.



|2. | Business Acquisitions and Investments
|-- | -------------------------------------



In March 2002, APG acquired a 49% ownership interest in ITI. ITI develops, markets and manages meetings and incentive programs for a select roster of
corporate clients utilizing incentive travel and corporate meeting management services. The terms of the purchase agreement call for contingent payments through 2005 based upon actual income before income taxes multiplied by APGs 49% ownership
interest calculated based on a predefined multiplier. Total payments related to ITIs fiscal 2002 results were $2.5 million of which approximately $1.9 million was paid during 2003 and was allocated to intangible assets (license). The remaining
purchase price of $542,000 was paid during 2002 and was allocated to goodwill. Total payments related to ITIs fiscal 2003 results were $0.6 million and was allocated to intangible assets (license). Total payments related to ITIs fiscal
2004 results were $0.3 million and was allocated to intangible assets (license). In the fourth quarter of 2004, the Company wrote off the goodwill and unamortized balance of the intangible asset. As of September 30, 2005, the Company has paid
approximately $211,000 related to ITIs fiscal 2005 results and the Companys remaining obligation is estimated to be approximately $431,000 which has been included in accounts payable in the accompanying balance sheet.



License fees earned from ITI are included in the operations of Ambassadors
and represent approximately $105,000 and $37,000 for the three months ended September 30, 2005 and 2004, respectively, and $410,000 and $170,000 for the nine months ended September 30, 2005 and 2004, respectively. The Company also recorded
its proportional share of the earnings and management fees from ITI of approximately $353,000 and $93,000 for the three months ended September 30, 2005 and 2004, respectively, and $1,116,000 and $139,000 for the nine months ended
September 30, 2005 and 2004, respectively, which are included in other income. At September 30, 2005 and 2004, the Company had approximately $232,000 and $37,000, respectively, in receivables related to license and management fees and
approximately $237,000 and $72,000, respectively, in undistributed earnings from ITI.



In December 2002, ATC acquired certain of the assets and business of Bluedot Virtual Event Organization, Inc. (Bluedot Software) out of Chapter 11 bankruptcy. Bluedot Software, located in San Francisco,
California, develops, markets and distributes event portfolio management solutions for corporations and large associations. The purchase price consisted of debtor-in possession financing and other costs of $308,000, the assumption of liabilities and
future contingent payments to the sellers covering the twenty-four months following the closing date. The Company allocated the excess purchase price to an intangible asset, purchased software, of $607,000. The amortization period for this
intangible asset was five years. During 2003, the Company provided an



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Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



additional investment of approximately $21,000 which was allocated to purchased software. In December 2003, the Company consolidated the operations of the
Technology Group into its corporate headquarters in Newport Beach, California and accordingly wrote off the unamortized balance of the intangible asset and recorded approximately $389,000 related to the write-down of assets, lease exit costs and
employee relocation expenses due to the closure of the San Francisco office. At September 30, 2005, approximately $145,000 remained unpaid and is included in accounts payable in the accompanying balance sheet.



During the first twelve months following the closing of the Bluedot Software
transaction, the Technology Group was required to pay the greater of (i) 5% of the gross revenues actually received in each quarter allocable to the assets purchased, or (ii) $25,000 per quarter as the First Year Minimum Payments. During
the second year following the closing, ATC was required to pay the greater of (i) 5% of the gross revenues actually received in each quarter allocable to the assets purchased, or (ii) $15,000 per quarter as the Second Year Minimum
Payments. As of December 31, 2004, Ambassadors had paid $160,000 for the first and second year minimum contingent payments and recorded these payments as an adjustment to the purchase price.



On February 1, 2005, the Company acquired 100% of the outstanding stock
of BellPort. BellPort, located in Newport Beach, California, is a marina company operating facilities in both the United States and Mexico. The purchase was completed in February 2005 for consideration of $1,280,000 in cash and the issuance of
184,717 shares of the Companys common stock, of which 130,389 shares were issued to related parties. In addition to the cash and stock consideration, the Company assumed a credit facility of approximately $1,568,000 which the Company paid off
in full on February 11, 2005. In connection with the acquisition, the Company was granted a twelve month option to purchase a 34% interest in BellPort Japan, a marina operator, owner and developer of waterfront real estate, including both
residential communities and marina facilities, located in Japan. As of September 30, 2005, the Company has not exercised the purchase option in BellPort Japan.



BellPort has a 50% ownership interest in Deer Harbor WI, LLC (DHWI). DHWI owns a marina facility in Deer Harbor,
Orcas Island, Washington. The Company had recorded its proportional share of earnings (loss) from DHWI of approximately $31,000 and ($42,000) for the three and nine months ended September 30, 2005, respectively, which are included in other
income.



|3. | Reinsurance
|-- | -----------



The Company reinsures property and casualty risks written by licensed U.S. insurers through its subsidiary, Cypress Re. The lines of business that are
being reinsured include commercial auto liability, commercial physical damage, commercial property, general liability and workers compensation. These risks are associated with members of highly selective affinity groups or associations.
Members whose risk is reinsured under a program must meet certain loss control program qualifications. A member of a group must pass certain pre-qualification criteria that are part of the underwriting review by a third party.



The assumed reinsurance transactions are typically reinsured through a quota
share agreement in which Cypress Re agrees to accept a certain fixed percentage of premiums written from the ceding company and in general assumes the same percentage of purchased reinsurance, direct acquisition costs and ultimate incurred claims.



Cypress Re retains the first layer of risk on a per policy
basis, which ranges from $250,000 to $500,000, and the third party reinsurer (through excess of loss reinsurance) retains the next layer up to the policy limits of $1.0 million. Cypress Re retains losses up to the aggregate reinsurance limit, which
varies with each quota share reinsurance agreement and the third party reinsurer then pays losses in excess of Cypress Res aggregate reinsurance limit up to $5.0 million. Cypress Re is responsible for any additional losses in excess of the
aggregate reinsurance limit.



In 2004, the Company transferred
its investment interest in two insurance programs to its wholly-owned subsidiary, Cypress Re. On March 29, 2004, Cypress Re entered into a reinsurance agreement which



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Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



incorporated the terms and conditions of the above interest of these programs. The quota share reinsurance agreement covered a retroactive period from
July 1, 2002 through March 29, 2004, as well as a prospective period from March 29, 2004 to June 30, 2004. The reinsurance agreement meets the requirements of SFAS No. 113 Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts and has both prospective and retroactive elements.



During 2004, Cypress Re entered into additional quota share reinsurance agreements. These reinsurance agreements represent participation in selective
property and casualty programs. The reinsurance agreements meet the requirements of SFAS No. 113. One of the quota share reinsurance agreements covers a retroactive period from January 1, 2003 through May 31, 2004 and a prospective
period from June 1, 2004 through December 31, 2004. The other agreements contain only prospective components.



During the third quarter of 2005, Cypress Re entered into additional quota share reinsurance agreements. These agreements represent participation in
selective property and casualty programs. The reinsurance agreements meet the requirements of SFAS No. 113. One of the quota share reinsurance agreements covers a retroactive period from May 7, 2004 through May 31, 2005 and a
prospective period from June 1, 2005 through June 7, 2006. The other agreements contain only prospective components.



Accounting for prospective reinsurance transactions results in premiums and related acquisition costs being recognized over the remaining period of the
insurance contracts reinsured. As a result, unearned premium reserves, deferred policy acquisition costs and ceded prepaid reinsurance premiums of $5.7 million, $1.6 million and $1.1 million, respectively, were recorded on the balance sheet as of
September 30, 2005.



Accounting for retroactive
reinsurance transactions results in the reinsurer reimbursing the ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. Loss and loss adjustment expenses are initially recorded at
the estimated ultimate payout amount and any gain from any such transaction is deferred and amortized into income. Loss and loss adjustment expense reserves are adjusted for changes in the estimated ultimate payout and the original deferred gain is
recalculated and reamortized to the balance that would have existed had the changes in estimated ultimate payout been available at the inception of the transaction, resulting in a corresponding charge or credit to income in the period that the
changes in estimated ultimate payout are made. As of September 30, 2005, the deferred gain on retroactive reinsurance was $0.2 million and Cypress Re recognized in income $0.4 million and $0.4 million of the previously deferred gain in
September 30, 2005 and 2004, respectively.



As of
September 30, 2005, premiums receivable, reinsurance recoverable and loss and loss adjustment expense reserves of $1.8 million, $0.6 million and $1.7 million, respectively, related to retroactive reinsurance were recorded on the Companys
balance sheet. The September 30, 2005 loss and loss adjustment expense reserves balance includes $0.5 million for incurred but not reported claims.



Cypress Re retrocedes risk to the ceding company under specific excess and aggregate loss treaties. Cypress Re remains obligated for amounts ceded in the
event that the reinsurer does not meet its obligations.



Premiums receivable at September 30, 2005 is comprised of funds held in trust, by the ceding company, of approximately $10.4 million and deferred and not yet due premiums, from the ceding company of approximately $2.9 million. The
funds held in trust primarily consist of high grade corporate bonds, government bonds and money market funds.



As of September 30, 2005, reinsurance recoverable and prepaid reinsurance premiums of $1.2 million and $1.1 million, respectively, relate to a single
reinsurer. Cypress Res exposure to credit loss in the event of non-payment or nonperformance is limited to these amounts.



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Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



The effect of reinsurance on premiums written and earned for the three and nine months ended
September 30, 2005 was as follows (in thousands):



|             |  |                                  |       |   |                                 |   |       |         |  |   |        |   |  |   |        |  
|------------ |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ------- |  | - | ------ | - |  | - | ------ | -
|             |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|             |  | Written                          |       |   | Earned                          |   |       | Written |  |   | Earned |  
|Assumed      |  | $                                | 2,997 |   |                                 | $ | 3,837 |         |  | $ | 10,196 |   |  | $ | 10,940 |  
|Ceded        |  |                                  | (565  | ) |                                 |   | (765  | )       |  |   | (2,052 | ) |  |   | (2,176 | )
|             |  |                                  |       |   |                                 |   |       |         |  |   |        |   |  |   |        |  
|Net premiums |  | $                                | 2,432 |   |                                 | $ | 3,072 |         |  | $ | 8,144  |   |  | $ | 8,764  |  
|             |  |                                  |       |   |                                 |   |       |         |  |   |        |   |  |   |        |  



As of
September 30, 2005, the Company has issued approximately $11,018,000 in letters of credit related to property and casualty insurance programs which expire at various dates through 2006.



|4. | Comprehensive Income (Loss)
|-- | ---------------------------



The components of comprehensive income (loss) are as follows (in thousands):



|                                                                                                                                 |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | -----
|                                                                                                                                 |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30,
|                                                                                                                                 |  | 2005                            |      |   | 2004                           |   |      | 2005 |  |   | 2004 
|Net income                                                                                                                       |  | $                               | 428  |   |                                | $ | 202  |      |  | $ | 3,291 |   |  | $ | 1,539
|Change in unrealized gain on marketable equity securities, net of income tax expense (benefit) of ($290), ($124), ($34) and
$207 |  |                                 | (435 | ) |                                |   | (179 | )    |  |   | (50   | ) |  |   | 301  
|                                                                                                                                 |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      
|                                                                                                                                 |  | $                               | (7   | ) |                                | $ | 23   |      |  | $ | 3,241 |   |  | $ | 1,840
|                                                                                                                                 |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      



|5. | Earnings Per Share
|-- | ------------------



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



|                                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|--------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                              |  | 2005                            |        | 2004                           |   | 2005   |  | 2004
|Net income                                    |  | $                               | 428    |                                | $ | 202    |  | $    | 3,291  |  | $ | 1,539 
|                                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Denominator:                                  |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted-average shares outstanding  basic   |  |                                 | 10,407 |                                |   | 9,849  |  |      | 10,286 |  |   | 9,870 
|Effect of dilutive common stock options       |  |                                 | 261    |                                |   | 215    |  |      | 287    |  |   | 254   
|                                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted-average shares outstanding  diluted |  |                                 | 10,668 |                                |   | 10,064 |  |      | 10,573 |  |   | 10,124
|                                              |  |                                 |        |                                |   |        |  |      |        |  |   |       



For the three months
ended September 30, 2005 and 2004 there were approximately 25,000 and 112,000 stock options outstanding, respectively, for which the exercise price exceeded the average common stock market value. For the nine months ended September 30,
2005 and 2004 there were approximately 8,000 and 101,000 stock options outstanding, respectively, for which the exercise price exceeded the average common stock market value. The effects of the shares which would be issued upon the exercise of these
options have been excluded from the calculation of diluted EPS because they are anti-dilutive.



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Ambassadors International, Inc.

Notes to Consolidated Financial Statements (unaudited), Continued



|6. | Common Stock Repurchase Program
|-- | -------------------------------



In November 1998, the Board of Directors of the Company authorized the repurchase of the Companys common stock in the open market or through private
transactions, up to $20.0 million in the aggregate. This repurchase program is ongoing and as of September 30, 2005, the Company has repurchased 1,051,500 shares for approximately $12.4 million. During the quarter ended June 30, 2004, the
Company repurchased 300,000 shares for $3,675,000. The Company made no additional repurchases during fiscal 2004 or in the three or nine months ended September 30, 2005.



|7. | Business Segments
|-- | -----------------



In January 2004, the Company realigned its business operations and consolidated the Performance Group, the Services Group and the Technology Group into
one segment, called Ambassadors. Also, during the first quarter of 2004, the Company launched its reinsurance business segment, Cypress Re. Corporate and Other consists of general corporate assets (primarily cash and cash equivalents, investments
and goodwill) and the operations of BellPort. Selected financial information related to these segments is as follows (in thousands):



|                              |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|----------------------------- |  | ------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                              |  | Three Months EndedSeptember 30, |       |   | Nine Months Ended September 30, |  
|                              |  | 2005                            |       |   | 2004                            |   |       | 2005 |  |   | 2004   |  
|Revenue:                      |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Ambassadors                   |  | $                               | 3,081 |   |                                 | $ | 2,650 |      |  | $ | 12,870 |   |  | $ | 10,371 |  
|Cypress Re                    |  |                                 | 3,072 |   |                                 |   | 1,879 |      |  |   | 8,764  |   |  |   | 3,156  |  
|Corporate and Other           |  |                                 | 221   |   |                                 |   |      |      |  |   | 549    |   |  |   |       |  
|                              |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total revenue                 |  | $                               | 6,374 |   |                                 | $ | 4,529 |      |  | $ | 22,183 |   |  | $ | 13,527 |  
|                              |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Operating income (loss):      |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Ambassadors                   |  | $                               | 199   |   |                                 | $ | (67   | )    |  | $ | 3,660  |   |  | $ | 2,012  |  
|Cypress Re                    |  |                                 | 153   |   |                                 |   | 413   |      |  |   | 738    |   |  |   | 654    |  
|Corporate and Other           |  |                                 | (869  | ) |                                 |   | (521  | )    |  |   | (2,178 | ) |  |   | (1,491 | )
|                              |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total operating income (loss) |  | $                               | (517  | ) |                                 | $ | (175  | )    |  | $ | 2,220  |   |  | $ | 1,175  |  
|                              |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  



|8. | Summarized Income Statement Information of Affiliate
|-- | ----------------------------------------------------



The Company has a 49% ownership interest in ITI and accounts for this investment using the equity method as discussed in Note 2. As of September 30,
2005, this investment is considered significant to the Companys fiscal 2005 operations as defined by applicable Securities and Exchange Commission regulations. The following summarizes the unaudited income statement of the investee for the
three and nine months ended September 30, 2005 (in thousands):



|                              |  |                   |       |                  |   |      
|----------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                              |  | Three MonthsEnded |       | Nine MonthsEnded
|Revenue                       |  | $                 | 1,016 |                  | $ | 3,407
|Operating expenses            |  |                   | 449   |                  |   | 1,623
|                              |  |                   |       |                  |   |      
|Operating income              |  |                   | 567   |                  |   | 1,784
|Other income                  |  |                   | 13    |                  |   | 38   
|                              |  |                   |       |                  |   |      
|Net income                    |  | $                 | 580   |                  | $ | 1,822
|                              |  |                   |       |                  |   |      
|Companys share of net income |  | $                 | 284   |                  | $ | 893  
|                              |  |                   |       |                  |   |      



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



The following discussion of the Companys financial condition and the results of operations should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause the
Companys actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under Cautionary Note Regarding
Forward-Looking Statements and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2004.



Critical Accounting Policies



Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the period. We evaluate our estimates
and judgments, including those which impact our most critical accounting policies on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances, within the framework of current accounting literature.



Our
businesses are seasonal. The majority of our operating results are recognized in the first and second quarters of each fiscal year. Our annual results would be adversely affected if our revenue were to be substantially below seasonal norms during
the first and second quarters of the year.



The following is a list of the
accounting policies that we believe require the most significant judgments and estimates, and that could potentially result in materially different results under different assumptions or conditions.



Revenue Recognition



We recognize revenue when persuasive evidence of an arrangement exists, the service fee is fixed or determinable, collectibility is
reasonably assured and delivery has occurred.



Travel, Incentive and Event
Management Related



We bill travel participants, mainly consisting of
large corporations, in advance, and when cash is received it is recorded as a participant deposit. We pay for certain direct program costs such as airfare, hotel, rail passes and other program costs in advance of travel, which are recorded as
prepaid program costs. We recognize travel revenue and related costs when travel convenes and classify such revenue as travel, incentive and event management related. This revenue is reported on a net basis, reflecting the net effect of gross
billings to the client less any direct program costs.



Revenue from hotel
reservation, registration and related travel services are recognized when the convention commences. Revenue from the sale of incentive merchandise is recognized when the merchandise is shipped, the service has been provided or when the redemption
periods have expired. Revenue from pre-paid certificate-based merchandise incentive programs is deferred until our obligations are fulfilled or upon our estimates (based upon historical trends) that it is remote that the certificates will be
redeemed. These revenues are classified as travel, incentive and event management related. These revenues are reported on a net basis, reflecting the net effect of gross billings to the client less any direct program or merchandise costs.



Event management related revenue also includes software and technology related
sales which is derived from a combination of license and maintenance fees and services provided with enterprise software tools. The services provided include hosting of data, development and workflow configuration. Revenue from contracts with
multiple elements is recognized using the residual method in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue



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Recognition, With Respect to Certain Transactions. Revenue from development contracts is recognized in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Such development contracts pertain to a combination of customization and enhancement programs of our event management software performed at the request of clients. These
contracts cover program periods of three to nine months and do not involve significant revisions to estimates due to their short-term nature. At September 30, 2005 and 2004, the Company did not have any receivables or contracts outstanding in
connection with any long-term development contracts. Revenue from contracts relating to only maintenance or hosting of data is recognized on the straight-line basis over the period that the services are provided.



Net Insurance Premiums Earned



Insurance premiums are recognized as revenue over the period of the insurance contracts in
proportion to the amount of the insurance coverage provided. The insurance contracts are typically twelve months in duration and are considered short-duration contracts. Unearned premiums represent the unearned portion of the insurance contracts as
of the balance sheet date.



Ceded reinsurance premiums relate to reinsurance
purchased (excess of loss and aggregate stop loss) to mitigate potential losses from severe adverse loss development, both on a per accident claim basis and in the aggregate. These ceded reinsurance transactions are recognized as a reduction of
premium revenue in the same manner in which the insurance contract is recognized as premium revenue.



License Fees and Other



Revenue from
license fees is recognized based on a contracted percentage of total program receipts recorded from the licensing source.



The Company recognizes revenue for marina management and related services in accordance with the respective management contracts.



Deferred Policy Acquisition Costs



Deferred policy acquisition costs represent those costs, commissions and other costs of
acquiring insurance, that vary with and are primarily related to the production of new and renewal insurance. These costs are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Deferred policy
acquisition costs represent those costs directly related to the unearned premiums as of the balance sheet date. The Company considers anticipated investment income in determining the recoverability of these costs. At September 30, 2005,
management believes its deferred policy acquisition costs are recoverable.



Loss and Loss Adjustment Reserves



The liability for losses
and loss-adjustment expenses includes an amount determined from loss reports and individual cases and an amount for losses incurred but not reported. We use an independent actuarial firm to provide ultimate projected loss ratios on the insurance
programs that we participate in. Such liabilities are based on estimates and, while we believe that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. Anticipated deductible recoveries from insureds
are recorded as reinsurance recoverables at the time the liability for unpaid claims is established. Other recoveries on unsettled claims, such as salvage and subrogation are recorded upon collection.



Reinsurance



In the normal course of business, Cypress Re seeks to reduce the loss that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy.



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With respect to retroactive reinsurance contracts, the amount by which the liabilities associated with the reinsured
policies exceed the amounts paid is amortized to income over the estimated remaining settlement period. The effects of subsequent changes in estimated or actual cash flows are accounted for by adjusting the previously deferred amount to the balance
that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.



Long-Lived Assets



Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually or sooner whenever events or changes in circumstances indicate
that they may be impaired. We evaluate recoverability using both subjective and objective factors. Subjective factors include the evaluation of industry and product trends and our strategic focus. Objective factors include our best estimates of
projected future earnings and cash flows. We use a discounted cash flow model to estimate the fair market value of each of our subsidiaries when performing our impairment tests. Assumptions used include growth rates for revenues and expenses,
investment yields on deposits, any future capital expenditure requirements and appropriate discount rates. We established reporting units based on our current reporting structure. For purposes of testing goodwill for impairment, goodwill has been
allocated to these reporting units to the extent it related to each reporting unit. Intangible assets with definite lives are amortized over their estimated useful lives and reviewed for impairment at least annually or sooner whenever events or
changes in circumstances indicate that they may be impaired. We amortize our acquired intangible assets with definite lives over periods ranging from 2 to 20 years.



Provision for Income Taxes



We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In making such determination, a review of all available positive and negative
evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.



COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004:



Revenue



Total revenue for the three months ended September 30, 2005 was $6.4 million, compared to $4.5 million for the three months ended
September 30, 2004. For the quarter ended September 30, 2005, the increase in revenue was primarily attributable to two factors: (i) net insurance premiums earned increased by $1.2 million, as a result of increased premiums earned
generated from additional insurance programs that were added in the second half of 2004; and (ii) improved travel, incentive and event management related revenue of $0.4 million as a result of operating larger programs in the third quarter of
2005 compared to the third quarter of 2004.



Cost of Software and Technology
Related Sales



Cost of software and technology related sales were $93,000
for the quarter ended September 30, 2005, compared to $6,000 for the quarter ended September 30, 2004. The increase was due to costs incurred to support the increase in event management related sales.



Selling and Tour Promotion Expenses



Selling and tour promotion expenses were $0.7 million for the quarter ended
September 30, 2005, and were relatively consistent to the comparable quarter of 2004.



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General and Administrative Expenses



General and administrative expenses were $3.1 million for the quarter ended September 30, 2005, compared to $2.5 million for the
quarter ended September 30, 2004. The increase was predominately due to increased personnel, professional services, travel and amortization expenses.



Loss and Loss Adjustment Expenses



Loss and loss adjustment expenses were $1.7 million for the three months ended September 30, 2005, compared to $0.8 million for the quarter ended September 30,
2004. The increase is due to the additional insurance programs that were entered into during the second half of 2004.



Insurance Acquisition Costs and Other Operating Expenses



Insurance acquisition costs and other operating expenses were $1.2 million for the three months ended September 30, 2005, compared to $0.7 million for the three
months ended September 30, 2004. The increase in insurance acquisition costs and other operating expenses is attributable to our involvement in a greater number of insurance programs during the quarter ended September 30, 2005 compared to
the quarter ended September 30, 2004.



Operating Loss



We recorded an operating loss of $0.5 million for the quarter ended September 30,
2005, compared to an operating loss of $0.2 million in the comparable quarter of 2004.



Other Income



Other income for the three months ended
September 30, 2005 was $1.2 million, compared to $0.5 million for the three months ended September 30, 2004. The increase was a result of improved yields on our investment portfolio, increased investment income on insurance reserves and
increased income and service fees from minority investments.



Provision for
Income Taxes



We recorded income tax expense of $0.3 million for the
quarter ended September 30, 2005, compared to $0.1 million for the quarter ended September 30, 2004. The effective tax rate for the quarter ended September 30, 2005 was 38.5%, compared to a rate of 29.4% for the quarter ended
September 30, 2004. The increase in the effective tax rate is primarily due to the increase in interest income earned combined with the change in our investment portfolio such that tax-exempt interest income represents approximately 1% of our
investment income for the quarter ended September 30, 2005, compared to 8% for the quarter ended September 30, 2004. The quarter ended September 30, 2004 income tax expense was also favorably impacted as a result of reassessing the
statutory rate associated with income related to our Cypress Re operations.



Net Income



Net income for the quarter ended
September 30, 2005 was $0.4 million, compared to $0.2 million for the comparable quarter of 2004.



COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004:



Revenue



Total revenue for the nine months ended September 30, 2005 was $22.2 million, compared to $13.5 million for the nine months ended September 30, 2004. Cypress Re contributed to $5.6 million of the increase
resulting from a greater number of insurance programs operated during the full nine month period in 2005 compared to 2004. The



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operations of the Ambassadors segment, which includes travel, incentive and event management related revenue and license fees, increased $2.5 million due to
operating a greater number of programs combined with higher average-dollar programs in the first nine months of 2005 compared to 2004. The travel, incentive and event management related segment of our business historically operates more programs in
the first and second quarters of the year.



Cost of Software and Technology
Related Sales



Cost of software and technology related sales were $0.4
million for the nine months ended September 30, 2005, compared to $41,000 for the nine months ended September 30, 2004. The increase was due to costs incurred to support the increase in event management related sales.



Selling and Tour Promotion Expenses



Selling and tour promotion expenses were $2.3 million for the nine months ended
September 30, 2005, and were relatively consistent to the comparable period of 2004.



General and Administrative Expenses



General and administrative expenses were $9.1 million for the nine months ended September 30, 2005, compared to $7.5 million for the nine months ended September 30, 2004. The increase was predominately due to personnel and related
overhead associated with operating additional travel, incentive and event management related programs in 2005 versus 2004 combined with increased professional services, travel and amortization expenses.



Loss and Loss Adjustment Expenses



Loss and loss adjustment expenses were $4.6 million for the nine months ended
September 30, 2005, compared to $1.2 million for the nine months ended September 30, 2004. The increase is due to the additional insurance programs that were entered into during the second half of 2004.



Insurance Acquisition Costs and Other Operating Expenses



Insurance acquisition costs and other operating expenses were $3.5 million for the nine
months ended September 30, 2005, compared to $1.3 million for the nine months ended September 30, 2004. The increase in insurance acquisition costs and other operating expenses is attributable to our involvement in a greater number of
programs during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.



Operating Income



We recorded operating income of $2.2 million for the nine months ended September 30, 2005, compared to operating income of $1.2 million in the comparable period of 2004.



Other Income



Other income for the nine months ended September 30, 2005 was $3.2 million, compared to $1.2 million for the nine months ended
September 30, 2004. The increase was a result of improved yields on our investment portfolio, increased investment income on insurance reserves and increased income and service fees from minority investments.



Income Taxes



We recorded income tax expense of $2.1 million for the nine months ended September 30, 2005, compared to $0.9 million for the nine
months ended September 30, 2004. The effective tax rate for the nine months ended September 30, 2005 was 39.3%, compared to a rate of 35.8% for the nine months ended September 30, 2004. The increase in the effective tax rate is
primarily due to the increase in interest income earned combined with the change in our



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investment portfolio such that tax-exempt interest income represents approximately 1% of our investment income for the nine months ended September 30,
2005, compared to 27% for the nine months ended September 30, 2004.



Net Income



Net income for the nine months ended
September 30, 2005 was $3.3 million, compared to $1.5 million for the comparable period of 2004.



Liquidity and Capital Resources



Net
cash provided by operating activities for the nine months ended September 30, 2005 was approximately $7.1 million, compared to net cash used in operating activities for the nine months ended September 30, 2004 of $0.7 million. The change
in net cash primarily relates to timing differences in the collection of current assets and the payment of current liabilities combined with the increase in net income.



Net cash used in investing activities for the nine months ended September 30, 2005 was approximately $24.2 million, compared to cash
provided by investing activities for the nine months ended September 30, 2004 of $10.4 million. The change is due to the timing differences in reinvesting in available-for-sale securities and cash paid for the acquisition of BellPort Group,
Inc. (BellPort).



We do not have
any material capital expenditure commitments for 2005.



The terms of our
acquisition of Bluedot Software included minimum contingent consideration of $100,000 in 2003 and $60,000 in 2004. As of December 31, 2004, we paid $160,000, satisfying our minimum payments for 2003 and 2004. The terms of our investment in
Incentive Travel, Inc. (ITI) included contingent payments due in March 2005 based upon fiscal 2004 income. As of September 30, 2005, we paid approximately $497,000 based upon 2004 and 2005 income. We have also accrued a payment due
in March 2006 of approximately $431,000 based upon the Companys remaining obligation related to 2005 income recorded as of September 30, 2005.



On February 1, 2005, we acquired 100% of the outstanding stock of BellPort. BellPort, located in Newport Beach, California, is a marina company operating facilities
in both the United States and Mexico. The BellPort acquisition was completed for consideration of $1,280,000 in cash and the issuance of 184,717 shares of our common stock. In addition to the cash and stock consideration, we assumed a credit
facility of approximately $1,568,000, which we paid off in full on February 11, 2005. In connection with the acquisition, we were granted a twelve-month option to purchase a 34% interest in BellPort Japan, a marina operator, owner and
developer of waterfront real estate, including both residential communities and marina facilities, located in Japan.



Net cash used in financing activities for the nine months ended September 30, 2005 and 2004 was $3.2 million and $5.3 million, respectively. Current period activity
consisted of three $0.10 per share cash dividends paid to common stockholders and the repayment of all debt assumed in conjunction with the BellPort acquisition. These payments were partially offset by the proceeds received from the exercise of
employee stock options during the period. Net cash used in financing activities for the nine months ended September 30, 2004 consisted of three $0.10 per share cash dividends paid to common stockholders and the purchase and retirement of common
stock. These payments were partially offset by the proceeds received from the exercise of employee stock options.



On September 2, 2003, the Board of Directors authorized a new dividend policy paying stockholders $0.40 per share annually, distributable at $0.10 per share on a
quarterly basis. During 2005, a dividend of approximately $1,016,000 was paid on March 15, 2005 to stockholders of record on February 28, 2005, a dividend of approximately $1,034,000 was paid on June 15, 2005 to stockholders of record
on May 31, 2005 and a dividend of approximately $1,042,000 was paid on September 8, 2005 to stockholders of record on August 25, 2005.



We and our Board of Directors intend to continually review the dividend policy to ensure compliance with capital requirements, regulatory limitations, our financial
position and other conditions which may affect our desire or ability to pay dividends in the future.



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In the ordinary course of business we may from time to time be required to enter into letters of credit related to our
insurance programs and for our travel related programs with airlines, travel providers and travel reporting agencies. As of September 30, 2005, we have issued approximately $11,018,000 in letters of credit related to property and casualty
insurance programs which expire at various dates through 2006. As of September 30, 2005, we have issued approximately $775,000 in letters of credit related to normal travel related business operations which expire at various dates through 2006.
We have a $15 million line of credit to support the outstanding letters of credit. Pursuant to the line of credit, we are subject to certain covenants, which include, among other things, a requirement for unencumbered liquid assets. As of
September 30, 2005, we were in compliance with these covenants.



Under
Bermuda regulations, Cypress Re is required to maintain a surplus of 20% of gross written premiums or 10% of loss and loss adjustment expense reserves, whichever is greater. As of September 30, 2005, Cypress Re has $10.1 million of contributed
capital from us which is in excess of the required statutory capital and surplus of $2.0 million.



In November 1998, our Board of Directors authorized the repurchase of our common stock in the open market or through private transactions up to $20.0 million. In the second quarter of 2004, we repurchased 300,000
shares for $3,675,000. We do not believe that any future repurchases will have a significant impact on our liquidity.



Our cash, cash equivalents and available-for-sale securities totaled $99.6 million at September 30, 2005. We believe that cash, cash equivalents,
available-for-sale securities and cash flows from operations will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. We continue to pursue further acquisitions of related travel and performance
improvement, service and other businesses, although no assurance can be given that definitive agreements for any acquisition will be entered into or, if they are entered into, that any acquisition will be consummated on terms favorable to us. We
could use cash and financing sources discussed herein, or financing sources that subsequently become available, to fund additional acquisitions or investments. In addition, we may consider issuing debt or equity securities in the future to fund
potential acquisitions or investments, to refinance existing debt, or for general corporate purposes. If a material acquisition or investment is completed, our operating results and financial condition could change materially in future periods.
However, no assurance can be given that additional funds will be available on satisfactory terms, or at all, to fund such activities.



Trends and Uncertainties



The results of operations and financial position of our business may be affected by a number of trends or uncertainties that have, or we reasonably expect could have, a
material impact on income from continuing operations, cash flows and financial position. Such trends and uncertainties include the repercussions of war with Iraq or terrorist acts, our acquisition of or investment in complementary businesses and
significant changes in estimates for potential claims or other general estimates related to our reinsurance business. We will also, from time to time, consider the acquisition of or investment in businesses, services and technologies that might
affect our liquidity requirements.



Cautionary Note Regarding Forward
Looking Statements



Statements contained in this Quarterly Report on Form
10-Q of 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 expect,
anticipate, outlook, could, target, project, intend, plan, believe, seek, estimate, should, may,
assume, continue, and variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. We
caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward looking statements. We have based our forward looking statements on our managements beliefs and assumptions based on
information available to our management at the time the statements are made. Such risks and uncertainties include, among others:



| |  |  | general economic financial and business conditions;
| | - |  | ---------------------------------------------------



| |  |  | overall conditions in the travel services and insurance markets;
| | - |  | ----------------------------------------------------------------



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| |  |  | potential claims related to the Companys reinsurance business;
| | - |  | ---------------------------------------------------------------



| |  |  | the potentially volatile nature of the reinsurance business;
| | - |  | ------------------------------------------------------------



| |  |  | the impact of competition;
| | - |  | --------------------------



| |  |  | the Companys ability to successfully acquire and integrate companies;
| | - |  | ----------------------------------------------------------------------



| |  |  | a decline in corporate meeting demand caused by terrorism, war, weather conditions or health and safety concerns;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the cyclical nature of the travel industry, including business travel;
| | - |  | ----------------------------------------------------------------------



| |  |  | potential liability related to accidents or disasters causing injury to participants or attendees to the Companys programs or events;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our dependence upon travel suppliers and the risks associated with a deterioration in our relationships with these travel suppliers; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other factors discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------



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. We disclaim any obligation to publicly update
any forward-looking statements, whether as a result of new information, future events or otherwise.



|I
tem 3. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



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



There have been no material changes in the reported market risks or the overall credit risk of the Companys portfolio since December 31, 2004. See further
discussion of these market risks and related financial instruments in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



|Item 4. | Controls and Procedures
|------- | -----------------------



The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys Securities Exchange
Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The Companys disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Companys desired disclosure control objectives. Also, the Company
has investments in certain unconsolidated entities. As the Company does not control or manage these entities, the Companys disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those
the Company maintains with respect to the Companys consolidated subsidiaries.



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As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the
supervision and with the participation of management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of
the end of the quarter covered by this report. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective at the reasonable
assurance level.



There has been no changes in the Companys internal
controls over financial reporting during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



The Company is not a party to any material pending legal proceedings. The Company is from time to time threatened or involved in litigation incidental to its business. The Company believes that the outcome of all
current litigation will not have a material adverse effect on its business, financial condition, cash flows or results of operations.



|Item 6. | Exhibits
|------- | --------



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



31.1

Certification under Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification under Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification under Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification under Section 906 of the Sarbanes-Oxley Act of 2002




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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.
|                       |  |  |  | (Registrant)                   
|                       |  |  | 
|Date: November 3, 2005 |  |  |  | By:                             |  | /s/ Brian R. Schaefgen
|                       |  |  |  |                                 |  |                        |  | Brian R. Schaefgen,    
|                       |  |  |  |                                 |  |                        |  | Chief Financial Officer



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Exhibit Index



|            |  |                                                                  
|----------- |  | -----------------------------------------------------------------
|Exhibit No. |  | Description                                                      
|31.1        |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification under Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002



21