##### Table of Contents



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



---



FORM 10-Q

(Mark One)



|[X] |  | QUARTERLY report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|--- |  | ---------------------------------------------------------------------------------------
|   
|    |  | For the quarterly period ended September 30, 2001                                      

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 of organization)             |  | (I.R.S. Employer
Identification No.)
|                                                                          
|Dwight D. Eisenhower Building
110 South Ferrall Street
Spokane, Washington |  | 99202                               
|                                                                           |  |                                     
|(Address of principalexecutive offices)                                    |  | (Zip code)                          

Registrants telephone number, including area code: (509) 534-6200

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]         No [   ]

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

Common shares outstanding as of October 29, 2001: 9,836,393





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TABLE OF CONTENTS



|                            |                                                                                               |                                                 |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME              
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                            |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II  OTHER INFORMATION
|                            | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                 



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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

Table of Contents

|                                                                                              |                                                
|--------------------------------------------------------------------------------------------- | -----------------------------------------------
|PART I FINANCIAL INFORMATION                                                                 
|Item 1. Consolidated Financial Statements (unaudited)                                        
|                                                                                              | Consolidated Balance Sheets                    
|                                                                                              | Consolidated Statements of Income              
|                                                                                              | Consolidated Statements of Comprehensive Income
|                                                                                              | Consolidated Statements of Cash Flows          
|                                                                                              | Notes to Consolidated Financial Statements     
|Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
|PART II OTHER INFORMATION                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   





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AMBASSADORS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS


September 30, 2001 and December 31, 2000


(dollars in thousands)


|       |                                                                                            |                                    |                      |        |               |         |              |        |        |         | 
|------ | ------------------------------------------------------------------------------------------ | ---------------------------------- | -------------------- | ------ | ------------- | ------- | ------------ | ------ | ------ | ------- | 
|       |                                                                                            |                                    |                      |        | September 30, |         | December 31,
|       |                                                                                            |                                    |                      |        | 2001          |         | 2000        
|       |                                                                                            |                                    |                      |        |               |         |             
|       |                                                                                            |                                    |                      |        | (UNAUDITED)   |         |              |        |       
|ASSETS |                                                                                            |                                    |                      |        |               |         |              |       
|       | Current assets:                                                                            |                                    |                      |        |               |         |              |        |       
|       |                                                                                            | Cash and cash equivalents          |                      | $      | 34,325        |         |              | $      | 38,071 |        
|       |                                                                                            | Restricted cash equivalents        |                      |        | 112           |         |              |        | 112    |        
|       |                                                                                            | Available-for-sale securities      |                      |        | 103,796       |         |              |        | 87,240 |        
|       |                                                                                            | Accounts receivable                |                      |        | 4,549         |         |              |        | 4,146  |        
|       |                                                                                            | Prepaid program costs and expenses |                      |        | 8,264         |         |              |        | 6,839  |        
|       |                                                                                            | Deferred income taxes              |                      |        | 1,534         |         |              |        | 355    |        
|       |                                                                                            |                                    |                      |        |               |         |              |       
|       |                                                                                            |                                    | Total current assets |        |               | 152,580 |              |        |        | 136,763 | 
|       | Property and equipment, net                                                                |                                    |                      | 4,393  |               |         |              | 4,604  |       
|       | Other investments                                                                          |                                    |                      | 1,032  |               |         |              | 3,406  |       
|       | Goodwill and covenant not-to-compete,
net of $3,820 and $3,035 of
accumulated amortization |                                    |                      | 23,704 |               |         |              | 22,722 |       
|       | Deferred income taxes                                                                      |                                    |                      | 788    |               |         |              | 788    |       
|       | Other assets                                                                               |                                    |                      | 89     |               |         |              | 107    |       
|       |                                                                                            |                                    |                      |        |               |         |              |       
|       |                                                                                            |                                    | Total assets         |        | $             | 182,586 |              |        | $      | 168,390 | 
|       |                                                                                            |                                    |                      |        |               |         |              |       

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





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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 2001 and December 31, 2000
(dollars in thousands)

|                                     |                                     |                                             |         |               |         |              |         |        |         | 
|------------------------------------ | ----------------------------------- | ------------------------------------------- | ------- | ------------- | ------- | ------------ | ------- | ------ | ------- | 
|                                     |                                     |                                             |         | September 30, |         | December 31,
|                                     |                                     |                                             |         | 2001          |         | 2000        
|                                     |                                     |                                             |         |               |         |             
|                                     |                                     |                                             |         | (UNAUDITED)   |         |              |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                     |                                             |         |               |         |              |         |       
|Current liabilities:                 |                                     |                                             |         |               |         |              |         |       
|                                     | Accounts payable                    |                                             | $       | 5,439         |         |              | $       | 4,344  |        
|                                     | Accrued expenses                    |                                             |         | 16,386        |         |              |         | 5,489  |        
|                                     | Participants deposits              |                                             |         | 18,730        |         |              |         | 35,358 |        
|                                     | Note payable, current portion       |                                             |         |              |         |              |         | 200    |        
|                                     | Foreign currency exchange contracts |                                             |         | 608           |         |              |         | 928    |        
|                                     |                                     |                                             |         |               |         |              |         |       
|                                     |                                     | Total current liabilities                   |         |               | 41,163  |              |         |        | 46,319  | 
|Note payable, due after one year     |                                     |                                             | 200     |               |         |              | 200     |       
|                                     |                                     |                                             |         |               |         |              |         |       
|                                     |                                     | Total liabilities                           |         |               | 41,363  |              |         |        | 46,519  | 
|                                     |                                     |                                             |         |               |         |              |         |       
|Total stockholders equity           |                                     |                                             | 141,223 |               |         |              | 121,871 |       
|                                     |                                     |                                             |         |               |         |              |         |       
|                                     |                                     | Total liabilities and stock-holders equity |         | $             | 182,586 |              |         | $      | 168,390 | 
|                                     |                                     |                                             |         |               |         |              |         |       

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





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Ambassadors International, Inc.





CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


for the three and nine months ended September 30, 2001 and 2000
(in thousands, except per share data)


|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |       |  
|---------------------------------------- | ---------------------------- | - | ----------------- | ------ | ------------------ | - | ------ | ------ | ---- | - | ------ | ----- |  | - | ------ | ----- | -
|                                         |                              |   | Nine Months Ended |        | Three Months Ended
|                                         |                              |   | September 30,     |        | September 30,     
|                                         |                              |   |                   |        |                   
|                                         |                              |   | 2001              |        | 2000               |   | 2001   |        | 2000
|                                         |                              |   |                   |        |                    |   |        |        |     
|Revenues                                 |                              | $ | 55,189            |        |                    | $ | 48,150 |        |      | $ | 22,549 |       |  | $ | 23,219 |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Operating expenses:                      |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|                                         | Selling and tour promotion   |   |                   | 15,578 |                    |   |        | 15,687 |      |   |        | 6,283 |  |   |        | 6,940 |  
|                                         | General and administrative   |   |                   | 16,399 |                    |   |        | 13,966 |      |   |        | 5,223 |  |   |        | 4,723 |  
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|                                         |                              |   | 31,977            |        |                    |   | 29,653 |        |      |   | 11,506 |       |  |   | 11,663 |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Operating income                         |                              |   | 23,212            |        |                    |   | 18,497 |        |      |   | 11,043 |       |  |   | 11,556 |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Other income (expense):                  |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|                                         | Interest and dividend income |   |                   | 4,756  |                    |   |        | 4,183  |      |   |        | 1,319 |  |   |        | 1,421 |  
|                                         | Other, net                   |   |                   | 8,798  |                    |   |        | (1,225 | )    |   |        | 131   |  |   |        | (724  | )
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|                                         |                              |   | 13,554            |        |                    |   | 2,958  |        |      |   | 1,450  |       |  |   | 697    |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Income before income taxes               |                              |   | 36,766            |        |                    |   | 21,455 |        |      |   | 12,493 |       |  |   | 12,253 |      
|Provision for income taxes               |                              |   | 12,500            |        |                    |   | 7,509  |        |      |   | 4,247  |       |  |   | 4,380  |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Net income                               |                              | $ | 24,266            |        |                    | $ | 13,946 |        |      | $ | 8,246  |       |  | $ | 7,873  |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Net income per share  basic             |                              | $ | 2.52              |        |                    | $ | 1.46   |        |      | $ | 0.85   |       |  | $ | 0.82   |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Weighted-average common shares
 basic   |                              |   | 9,613             |        |                    |   | 9,535  |        |      |   | 9,672  |       |  |   | 9,556  |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Net income per share  diluted           |                              | $ | 2.44              |        |                    | $ | 1.45   |        |      | $ | 0.82   |       |  | $ | 0.81   |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      
|Weighted-average common shares
 diluted |                              |   | 9,952             |        |                    |   | 9,634  |        |      |   | 10,018 |       |  |   | 9,771  |      
|                                         |                              |   |                   |        |                    |   |        |        |      |   |        |       |  |   |        |      

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





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Ambassadors International, Inc. 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


for the three and nine months ended September 30, 2001 and 2000
(dollars in thousands)


|                                                                                                                                              |  |                   |        |                    |  |      |        |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                              |  | Nine Months Ended |        | Three Months Ended
|                                                                                                                                              |  | September 30,     |        | September 30,     
|                                                                                                                                              |  |                   |        |                   
|                                                                                                                                              |  | 2001              |        | 2000               |  | 2001 |        | 2000
|                                                                                                                                              |  |                   |        |                    |  |      |        |     
|Net income                                                                                                                                    |  | $                 | 24,266 |                    |  | $    | 13,946 |      |  | $ | 8,246 |   |  | $ | 7,873 |  
|Change in unrealized gain
(loss) on marketable equity
security, net of income tax
benefit (provision) of $698,
$418, $523 and $(1,314)        |  |                   | (1,189 | )                  |  |      | (709   | )    |  |   | (891  | ) |  |   | 2,238 |  
|Change in unrealized gains
(losses) on foreign currency
exchange contracts, net
of income tax benefit
(provision) of $481, $90,
$(78) and $85 |  |                   | (819   | )                  |  |      | (152   | )    |  |   | 133   |   |  |   | (144  | )
|                                                                                                                                              |  |                   |        |                    |  |      |        |      |  |   |       |   |  |   |       |  
|Comprehensive income                                                                                                                          |  | $                 | 22,258 |                    |  | $    | 13,085 |      |  | $ | 7,488 |   |  | $ | 9,967 |  
|                                                                                                                                              |  |                   |        |                    |  |      |        |      |  |   |       |   |  |   |       |  

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





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AMBASSADORS INTERNATIONAL, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


for the nine months ended September 30, 2001 and 2000
(in thousands)


|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |         |       |        |        | 
|------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------ | ------------------------------------- | --------------------------------------------------- | ------ | ------- | ------- | ------- | ----- | ------ | ------ | 
|                                      |                                                                                      |                                      |                                       |                                                     |        | 2001    |         | 2000   
|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|Cash flows from operating activities: |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|                                      | Net income                                                                           |                                      | $                                     | 24,266                                              |        |         | $       | 13,946  |      
|                                      | Adjustments to reconcile net income
to net cash provided by operating
activities:    |                                      |                                       |                                                     |        |         |         |         |      
|                                      |                                                                                      | Depreciation and amortization        |                                       |                                                     | 1,819  |         |         |         | 1,783 |       
|                                      |                                                                                      | Gain on sale of other investments    |                                       |                                                     | (8,306 | )       |         |         |      |       
|                                      |                                                                                      | Compensation expense on stock
grants |                                       |                                                     | 443    |         |         |         | 136   |       
|                                      |                                                                                      | Other, net                           |                                       |                                                     |       |         |         |         | 1,558 |       
|                                      |                                                                                      | Change in assets and liabilities:    |                                       |                                                     |        |         |         |         |       |       
|                                      |                                                                                      |                                      | Accounts receivable                   |                                                     |        | (403    | )       |         |       | 1,160  |       
|                                      |                                                                                      |                                      | Prepaid program costs and expenses    |                                                     |        | (3,044  | )       |         |       | (1,053 | )     
|                                      |                                                                                      |                                      | Accounts payable and accrued
expenses |                                                     |        | 11,679  |         |         |       | 1,870  |       
|                                      |                                                                                      |                                      | Participants deposits                |                                                     |        | (16,628 | )       |         |       | (45    | )     
|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|                                      |                                                                                      |                                      |                                       | Net cash provided by
operating activities           |        |         | 9,826   |         |       |        | 19,355 | 
|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|Cash flows from investing activities: |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|                                      | Purchase of property and equipment                                                   |                                      |                                       | (823                                                | )      |         |         | (785    | )    
|                                      | Proceeds from the sale of equipment                                                  |                                      |                                       |                                                    |        |         |         | 6       |      
|                                      | Purchase of available-for-sale
securities                                            |                                      |                                       | (88,331                                             | )      |         |         | (55,843 | )    
|                                      | Proceeds from sale or maturities of
available-for-sale securities                    |                                      |                                       | 73,682                                              |        |         |         | 63,250  |      
|                                      | Proceeds from the sale of other investments                                          |                                      |                                       | 7,205                                               |        |         |         |        |      
|                                      | Purchase of other investments                                                        |                                      |                                       | (320                                                | )      |         |         |        |      
|                                      | Net cash paid for acquisition of
subsidiaries and covenant-not-to-compete agreements |                                      |                                       | (1,454                                              | )      |         |         | (708    | )    
|                                      | Change in other assets                                                               |                                      |                                       | 18                                                  |        |         |         |        |      
|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |        
|                                      |                                                                                      |                                      |                                       | Net cash provided by (used
in) investing activities |        |         | (10,023 | )       |       |        | 5,920  | 
|                                      |                                                                                      |                                      |                                       |                                                     |        |         |         |        





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AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the nine months ended September 30, 2001 and 2000
(in thousands)

|                                                     |                                         |   |        |        |      |   |        |      |  
|---------------------------------------------------- | --------------------------------------- | - | ------ | ------ | ---- | - | ------ | ---- | -
|                                                     |                                         |   | 2001   |        | 2000
|                                                     |                                         |   |        |        |     
|Cash flows from financing activities:                |                                         |   |        |        |      |   |        |     
|                                                     | Dividends paid on common stock          |   | $      | (5,133 | )    |   | $      |     |  
|                                                     | Payments on long-term debt              |   |        | (200   | )    |   |        | (346 | )
|                                                     | Proceeds from exercise of stock
options |   |        | 1,784  |      |   |        | 127  |  
|                                                     | Purchase and retirement of common
stock |   |        |       |      |   |        | (235 | )
|                                                     |                                         |   |        |        |      |   |        |     
|                                                     | Net cash used in financing
activities   |   | (3,549 | )      |      |   | (454   | )   
|                                                     |                                         |   |        |        |      |   |        |     
|Net increase (decrease) in cash and
cash equivalents |                                         |   | (3,746 | )      |      |   | 24,821 |     
|Cash and cash equivalents, beginning
of period       |                                         |   | 38,071 |        |      |   | 18,461 |     
|                                                     |                                         |   |        |        |      |   |        |     
|Cash and cash equivalents, end of
period             |                                         | $ | 34,325 |        |      | $ | 43,282 |     
|                                                     |                                         |   |        |        |      |   |        |     

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





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##### Table of Contents






AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The consolidated financial statements included herein have been prepared by
Ambassadors International, Inc. (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted as permitted by such
rules and regulations. The Company believes the disclosures included
herein are adequate; however, these consolidated statements should be read
in conjunction with the financial statements and the notes thereto for the
year ended December 31, 2000 previously filed with the Securities and
Exchange Commission on Form 10-K/A.
|  
|   |  | In the opinion of management, these unaudited, consolidated financial
statements contain all of the adjustments (normal and recurring in nature)
necessary to present fairly the consolidated financial position of the
Company at September 30, 2001 and the consolidated results of operations
and comprehensive income for three and nine months ended September 30, 2001
and 2000, and cash flows for the nine months ended September 30, 2001 and
2000. The results of operations for the periods presented may not be
indicative of those which may be expected for the full year.                                                                                                                                                                                         
|  
|2. |  | PRINCIPLES OF CONSOLIDATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Ambassadors International, Inc. (the Company) is an educational travel,
travel services and performance improvement company. The Companys
operations are classified in the following segments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |  |  | Ambassadors Education Group Promotes and organizes
international educational travel and sports programs for students,
athletes and professionals.                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Ambassadors Performance Group Develops, markets and manages
meetings and incentive programs for a nationwide roster of corporate
clients utilizing incentive travel, merchandise award programs, and
corporate meeting management services.
|
| |  |  | Ambassadors Services Group Provides comprehensive hotel
reservation, registration and travel services for meetings,
conventions, expositions and trade shows.                                                                              



| |  | The Company was founded in 1967 and was reincorporated in Delaware in 1995.
The Education Group represented the entire operations of the Company until
1996 when the Performance Group commenced operations. The Services Group
commenced operations in 1998.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.                                                                      





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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|3. |  | INCOME PER SHARE:                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Net income per share  basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Net income per share  diluted is computed by increasing the
weighted-average number of common shares outstanding by the additional
common shares that would have been outstanding if the dilutive potential
common shares had been issued.
|  
|   |  | The following table presents a reconciliation of basic and diluted earnings
per share (EPS) computation (in thousands, except per share data):                                                                                                                                                                                                                                            

|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |       | 
|------------------- | ----------------------------------------------------- |  | ----------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ----- | 
|                    |                                                       |  | Nine months Ended |        | Three Months Ended
|                    |                                                       |  | September 30,     |        | September 30,     
|                    |                                                       |  |                   |        |                   
|                    |                                                       |  | 2001              |        | 2000               |  | 2001 |        | 2000
|                    |                                                       |  |                   |        |                    |  |      |        |     
|Numerator:          |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|                    | Net income for basic and
diluted earnings per share   |  | $                 | 24,266 |                    |  | $    | 13,946 |      |  | $ | 8,246  |  |  | $ | 7,873 | 
|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|Denominator:        |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|                    | Weighted-average shares
 basic                       |  |                   | 9,613  |                    |  |      | 9,535  |      |  |   | 9,672  |  |  |   | 9,556 | 
|                    | Effect of dilutive common
stock options and grants(A) |  |                   | 339    |                    |  |      | 99     |      |  |   | 346    |  |  |   | 215   | 
|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|                    | Weighted-average shares
 diluted                     |  |                   | 9,952  |                    |  |      | 9,634  |      |  |   | 10,018 |  |  |   | 9,771 | 
|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|Earnings Per Share: |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|                    | Net income per share  basic                          |  | $                 | 2.52   |                    |  | $    | 1.46   |      |  | $ | 0.85   |  |  | $ | 0.82  | 
|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      
|                    | Net
income per share  diluted                        |  | $                 | 2.44   |                    |  | $    | 1.45   |      |  | $ | 0.82   |  |  | $ | 0.81  | 
|                    |                                                       |  |                   |        |                    |  |      |        |      |  |   |        |  |  |   |      



| | (A) |  | For the three months ended September 30, 2001 and 2000,
respectively, there were approximately 117,000 and 144,000
additional stock options outstanding, respectively. For the
nine-months ended September 30, 2001 and 2000, there were
approximately 297,000 and 246,000 additional stock options
outstanding, respectively. The effects of the shares, which would be
issued upon the exercise of these options, have
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|3. |  | INCOME PER SHARE (continued):
|-- |  | -----------------------------

been excluded from the calculation of diluted earnings per share
because they are anti-dilutive.



|4. |  | BUSINESS SEGMENTS:                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operates the Education Group, Performance Group and Services
Group segments. Corporate and other consists of general corporate assets
(primarily cash and cash equivalents, investments and goodwill) and other
activities which are not directly related to the Education, Performance and
Services Groups. Selected financial information related to these segments
is as follows (in thousands):

|                         |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |        |        | 
|------------------------ | ------------------- | ----- | ------ | ----------------- | ------ | ------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                     |       |        | Nine Months Ended |        | Three Months Ended
|                         |                     |       |        | September 30,     |        | September 30,     
|                         |                     |       |        |                   |        |                   
|                         |                     |       |        | 2001              |        | 2000               |        | 2001   |        | 2000
|                         |                     |       |        |                   |        |                    |        |        |        |     
|Revenues:                |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       
|                         | Education Group     |       | $      | 41,777            |        |                    | $      | 34,765 |        |      | $      | 19,338 |        |   | $      | 19,114 |       
|                         | Performance Group   |       |        | 8,489             |        |                    |        | 8,053  |        |      |        | 1,869  |        |   |        | 2,332  |       
|                         | Services Group      |       |        | 4,923             |        |                    |        | 5,104  |        |      |        | 1,342  |        |   |        | 1,749  |       
|                         | Corporate and Other |       |        |                   |        |                    |        | 228    |        |      |        |        |        |   |        | 24     |       
|                         |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       
|                         |                     | Total |        | $                 | 55,189 |                    |        | $      | 48,150 |      |        | $      | 22,549 |   |        | $      | 23,219 | 
|                         |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       
|Operating Income (Loss): |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       
|                         | Education Group     |       | $      | 25,089            |        |                    | $      | 19,037 |        |      | $      | 12,379 |        |   | $      | 12,182 |       
|                         | Performance Group   |       |        | 967               |        |                    |        | 1,565  |        |      |        | (342   | )      |   |        | 112    |       
|                         | Services Group      |       |        | 54                |        |                    |        | (105   | )      |      |        | (204   | )      |   |        | (4     | )     
|                         | Corporate and Other |       |        | (2,898            | )      |                    |        | (2,000 | )      |      |        | (790   | )      |   |        | (734   | )     
|                         |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       
|                         |                     | $     | 23,212 |                   |        | $                  | 18,497 |        |        | $    | 11,043 |        |        | $ | 11,556 |       
|                         |                     |       |        |                   |        |                    |        |        |        |      |        |        |        |   |        |       





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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|5. |  | DIVIDEND:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On February 12, 2001, the Company declared a special dividend because of
the non-recurring profit achieved by the Company on the sale of its
investment in GetThere.com during the year ended December 31, 2000. The
$5.1 million dividend was paid during the first quarter of 2001 to
shareholders of record on February 28, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|6. |  | SALE OF INVESTMENT:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | During June 2001, the Company sold its ownership stake in a joint venture
that owned capital stock in Scheduled Airlines Traffic Offices, Inc.
(SatoTravel) to Navigant International, Inc. (Navigant)(Nasdaq: FLYR). The
Company received approximately $7.2 million in cash, approximately 237,000
shares of common stock of Navigant and recorded a gain of approximately
$8.3 million in other income ($5.5 million net of income taxes). The
agreement also provides for an additional $1.4 million payment of cash and
stock to be paid to the Company if SatoTravel, as a subsidiary of Navigant,
achieves certain revenue objectives by June 14,2002.                                                                                                             
|  
|7. |  | SUBSEQUENT EVENTS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company is considering a transaction in which it would spin-off its
wholly owned subsidiary, Ambassadors Group, Inc., formerly named
Ambassadors Education Group, Inc. (Education Group). Pursuant to this
potential spin-off, the stockholders of the Company would receive a
distribution of all of the common stock of the Education Group. If the
spin-off occurs, the Company expects that a public market would exist for
Education Groups common stock and, therefore, each stockholder would then
own shares of common stock of two publicly-held corporations. If the
spin-off occurs, the Education Group will file to register its shares with
the Securities and Exchange Commission and file an application to have its
common stock listed on Nasdaq.
|  
|   |  | The events of September 11, 2001 severely and negatively impacted the
Company in several ways. As a direct result, the Company undertook a major
reduction in force in early October 2001 and enacted a pay reduction for
senior management of the Company as well as its subsidiaries. The Company
also during October 2001 adjusted and revised virtually all of its
marketing plans for 2002, due to the significantly changed global
circumstances. (See further discussion in Managements Discussion and
Analysis of Financial Condition and Results of Operations).                                                                                                                                                                                                





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|8. |  | NEW ACCOUNTING PRONOUNCEMENTS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets.
SFAS 142 changes the accounting for goodwill and certain other intangible
assets from an amortization method to an impairment-only approach. Upon
Adoption of SFAS 142, goodwill and certain other intangible assets will be
tested at the reporting unit annually and whenever events or circumstances
occur indicating that goodwill and certain other intangible assets might
be impaired. Amortization of goodwill and certain other intangible
assets, including goodwill recorded in past business combinations, will
cease. The adoption date for the Company will be January 1, 2002. The
Company has not yet determined what the impact of SFAS 142 will be on the
Companys results of operations and financial position.
|  
|   |  | On July 20, 2001, the FASB issued SFAS No. 141, Business Combinations.
SFAS No. 141 establishes new standards for accounting and reporting
requirements for business combinations and will require that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001. Use of the pooling-of-interest method will be prohibited.
The Company adopted this statement during the third quarter of fiscal
2001. The adoption of SFAS No. 141 did not have a material impact on the
Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                 





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|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements. A
forward-looking statement may contain words such as will continue to be,
will be, continue to, expect to, anticipates that, to be or can
impact. Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Companys actual results to differ
materially from those projected in forward-looking statements.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000

GROSS PROGRAM RECEIPTS

Gross program receipts decreased to $58.2 million in the third quarter of 2001
from $65.8 million in the third quarter of 2000. The $7.5 million decrease is
the result of decreases in gross program receipts in the Performance, Education
and Services Groups. Performance and Services Groups gross program receipts
decreased by $4.2 and $0.5 million, respectively, due to operating fewer
programs in the third quarter of 2001 in comparison to the third quarter of
2000. In addition, gross program receipts of Education Group decreased by $2.8
million due to decreased participants traveling in the third quarter of 2001 in
comparison to the third quarter of 2000.

NET REVENUE

Net revenue decreased to $22.5 million in the third quarter of 2001 from $23.2
million in the third quarter of 2000, a decrease of $0.7 million. Performance
and Services Groups operated fewer programs which resulted in a decrease of
$0.5 million and $0.4 million, respectively. This decrease quarter over
quarter was offset by an increase in the Education Group totaling $0.2 million
due to increased margins on programs traveled during the third quarter of 2001.

SELLING AND TOUR PROMOTION EXPENSES

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

Selling and tour promotion expenses decreased to $6.3 million in the quarter
ended September 30, 2001 from $6.9 million in the comparable quarter of 2000.
The $0.6 million decrease was the result of reduced expenses in Services,
Education and Performance Groups.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased during the third quarter of 2001
to $5.2 million from $4.7 million in the third quarter of 2000. The increase of
$0.5 million was primarily the result of the Education Group to support
increased customer base.





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OPERATING INCOME

Operating income decreased to $11.0 million in the quarter ended September 30,
2001 from $11.6 million in the comparable quarter of 2000. The decrease of
$0.6 million is the result of changes as described above.

OTHER INCOME/EXPENSE

Other income in 2001 consisted primarily of interest income generated by cash
and short-term investments. As of September 30, 2001, the Company had $138.2
million in cash, cash equivalents and short-term investments, an increase of
$21.7 million from $116.5 million at December 31, 2000. The Company realized
interest income of $1.3 million in the third quarter of 2001, compared to $1.4
million in the comparable quarter of 2000. Although the Company cash and
investment balance has increased, interest income is comparable due to lower
rates of return in the quarter ended September 30, 2001 in comparison to the
quarter ended September 30, 2000.

Other income during the third quarter of 2000 included $0.9 million of
unrealized losses on certain foreign currency contracts. The Company enters
into forward foreign exchange contracts and foreign currency option contracts
to offset certain operational exposures from changes in foreign currency
exchange rates. These foreign exchange contracts and options are entered into
to support normal recurring purchases, and accordingly are not entered into for
speculative purposes. Forward foreign exchange contracts are utilized to
manage the risk associated with currency fluctuations on certain purchase
expectations. Certain of these contracts do not qualify for hedge accounting
and therefore unrealized gains and losses are recorded in other income/expense.

INCOME TAXES

The Company has recorded an income tax provision of approximately $4.2 million
for the third quarter of 2001 in comparison to $4.4 million for the third
quarter of 2000. The income tax provision has been recorded based upon the
estimated annual effective income tax rate applied to the pre-tax income.

NET INCOME

Net income increased to $8.2 million in the quarter ended September 30, 2001
from $7.9 million in the comparable quarter of 2000. The increase of $0.3
million is the result of changes as described above.





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COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000

GROSS PROGRAM RECEIPTS

Gross program receipts increased to $158.4 million in the nine month period
ended September 30, 2001 from $142.8 million in the same period of 2000, an
increase of $15.6 million, or 11%. The Education Group increased $16.6
million, or 17%, as a result of increased traveled participants. This increase
was partially offset by decreases within the Performance and Services Groups
approximating $0.7 million and $0.3 million, respectively.

NET REVENUE

Net revenue increased to $55.2 million in the nine month period ended September
30, 2001 from $48.2 million in the same period of 2000. This $7.0 million
increase is primarily the result of increased participants within the Education
Group in the nine month period ended September 30, 2001 as compared to the same
period of 2000.

SELLING AND TOUR PROMOTION EXPENSES

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

Selling and tour promotion expenses are comparable for the nine month periods
ended September 30, 2001 and 2000 totaling $15.6 million and $15.7 million,
respectively.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased to $16.4 million in the nine
month period ended September 30, 2001 from $14.0 million during the comparable
period in 2000, an increase of $2.4 million. Corporate related expense
increased costs totaling $1.6 million associated with the consideration of
spinning-off its wholly owned subsidiary, the Education Group (see Note 7), and
incurring unearned compensation expense related to stock grants. Additionally,
both the Education and Performance Groups increased $0.7 million and $0.3
million, respectively, partially due to increased personnel expenses to further
support the increased customer base. These increases were partially offset by
a decrease within the Services Group of approximately $0.2 million.

OPERATING INCOME

Operating income increased to $23.2 million in the nine month period ended
September 30, 2001 from $18.5 million in the comparable period of 2000. The
increase of $4.7 million is the result of changes as described above.





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##### Table of Contents



OTHER INCOME/EXPENSE

Other income in 2001 consisted primarily of interest income generated by cash
and short-term investments. As of September 30, 2001, the Company had $138.2
million in cash, cash equivalents and short-term investments, an increase of
$21.7 million from $116.5 million at December 31, 2000. As a result of
increased cash partially offset by lower rates of return of investments, the
Company realized interest income of $4.8 million in the nine month period ended
September 30, 2001, compared to $4.2 million in the comparable period of 2000.

Other income during 2001 also included realized gain on sale of the Companys
investment in SatoTravel of approximately $8.3 million (See Note 6).

Other income during 2000 also included $1.6 million of unrealized losses on
certain foreign currency contracts. The Company enters into forward foreign
exchange contracts and foreign currency option contracts to offset certain
operational exposures from changes in foreign currency exchange rates. These
foreign exchange contracts and options are entered into to support normal
recurring purchases, and accordingly are not entered into for speculative
purposes. Forward foreign exchange contracts are utilized to manage the risk
associated with currency fluctuations on certain purchase expectations.
Certain of these contracts do not qualify for hedge accounting and therefore
unrealized gains and losses are recorded in other income/expense.

INCOME TAXES

The Company has recorded an income tax provision of approximately $12.5 million
for the nine-month period ended September 30, 2001 in comparison to $7.5
million for the comparable period in 2000. The income tax provision has been
recorded based upon the estimated annual effective income tax rate applied to
the pre-tax income.

NET INCOME

Net income increased to $24.3 million in the nine-month period ended September
30, 2001 from $13.9 million in the comparable period of 2000. The increase of
$10.3 million is the result of changes as described above.

SEASONALITY

The Companys businesses are seasonal. The majority of the Companys travel
programs occur in May through July of each year. The Company historically has
earned more than three-quarters of its annual revenues in the second and third
quarters, which has more than offset operating losses incurred during the rest
of the year. The Company anticipates that this trend will continue for the
foreseeable future.





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##### Table of Contents



FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS

At this point, due in part to the lack of predictability of future travel,
business mix and yields, the Company is unable to fully estimate the impact on
it of the events of September 11, 2001 and their consequences. However, given the magnitude of these unprecedented events and the
possible subsequent effects, the Company expects that the adverse impact to the
Companys financial condition, its operations and its prospects will be
material and could be highly material.

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash provided by operations for the nine month period ended September 30,
2001 and 2000 was approximately $9.8 million and $19.4 million, respectively.
The decrease of $9.5 million in operating cash flows primarily relates to a
decrease in Education Group participants deposits.

Net cash used in investing activities for the nine month period ended September
30, 2001 was $10.0 million compared to net cash provided by investing
activities for the comparable period in 2000 of $5.9 million, a decrease of
$15.9 million. The decrease was primarily due to the purchase of
available-for-sale securities from $55.8 million in 2000 to $88.3 million in
2001. The impact of such purchases on cash flows from investing activities was
reduced primarily by proceeds received from the sale or maturity of other
investments (including net proceeds from the sale of an investment in
SatoTravel in 2001 approximating $7.2 million). These proceeds aggregated
approximately $80.9 million and $63.3 million for the nine month periods ended
September 30, 2001 and 2000, respectively.

Net cash used in financing activities for the nine month period ended September
30, 2001 was $3.5 million compared to $0.5 million for the comparable period in
2000. The increase in cash used of $3.0 million was primarily due to the
dividend paid on common stock (See Note 5).

The Company does not have any material capital expenditure commitments for
2001. However, the terms of the Companys acquisitions of certain businesses
include contingent consideration, which could range up to approximately $1.5
million in 2002. Additionally, the Company is continuing to pursue further
acquisitions of related travel and performance improvement businesses that may
require the use of cash and cash equivalents. No such acquisitions are
currently pending and no assurance can be given that definitive agreements for
any such acquisitions will be entered into, or, if they are entered into, that
they will be on terms favorable to the Company.





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##### Table of Contents



The Company has a credit facility available with Bank of America, with a
current limit of up to $50.0 million for foreign currency purchases and forward
contracts. This credit facility is renewable annually.

In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the open
market or through private transactions. This repurchase program is ongoing.
The Company does not believe that any such repurchases will have a significant
impact on the Companys liquidity.

At September 30, 2001, the Company had approximately $138.2 million of cash,
cash equivalents, and available-for-sale securities, including program
participant funds of $18.7 million. Under the Companys cancellation policy, a
program participant may be entitled to a refund of a portion of his or her
deposit, less certain charges, depending on the time of cancellation.

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

FOREIGN CURRENCY; HEDGING POLICY

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

The Company accounts for these foreign exchange contracts and options with the
provisions of Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities. For qualifying
cash flow hedge transactions, the effective portion of any unrealized gains or
losses on foreign exchange contracts are recorded as other comprehensive income
or loss and are accumulated as a component of stockholders equity. The gains
and losses on the derivative instruments that are reported in other
comprehensive income are reclassified as earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portions of all hedges are recognized in current period
earnings. Unrealized gains and losses on foreign currency exchange contracts
that are not qualifying cash flow hedges as define by SFAS 133 are recorded in
the statements of income.





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##### Table of Contents






PART II  OTHER INFORMATION

Items 1, 2, 3, 4 and 5 are not presented, as they are not applicable.




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



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

No reports on Form 8-K were filed for the nine months
ended September 30, 2001.





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##### Table of Contents






SIGNATURES

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

AMBASSADORS INTERNATIONAL, INC.

|                       |     |                                           
|---------------------- | --- | ------------------------------------------
|Date: November 7, 2001 | By: | /s/Jeffrey D. Thomas                      
|                       |     |                                           
|                       |     | Jeffrey D. Thomas,
Chief Financial Officer