##### Table of Contents



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



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FORM 10-Q

(Mark One)



|[X] | QUARTERLY report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2002

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.)

|                                                |  |           
|----------------------------------------------- |  | ----------
|1071 Camelback Street
Newport Beach, California |  | 92660     
|                                                |  |           
|(Address of principal
executive offices)        |  | (Zip code)

Registrants telephone number, including area code: (949) 759-5900

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

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

Common shares outstanding as of October 23, 2002: 9,853,070





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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART 1  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF 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
|                               | Item 4. Controls and Procedures.                                                             
|PART II  OTHER INFORMATION   
|SIGNATURES                    
|EXHIBIT 99.1                  



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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

Table of Contents

|                           |  |                                                                                                               |    |  |    |      |  | 
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------- | -- |  | -- | ---- |  | 
|                           |  |                                                                                                               |    |  |    | Page
|                           |  |                                                                                                               |    |  |    |     
|PART I                     |  | FINANCIAL INFORMATION                                                                                         |    |  |    |     
|                          
|                          
|                          
|                          
|Item 1.                    |  | Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001                           |    |  | 1  |     
|                          
|                          
|                          
|                          
|                           |  | Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited) |    |  | 3  |     
|                          
|                          
|                          
|                          
|                           |  | Consolidated Statements of Cash Flows for the NineMonths Ended September 30, 2002 and 2001 (unaudited)        |    |  | 5  |     
|                          
|                          
|                          
|                          
|                           |  | Notes to Consolidated Financial Statements                                                                    |    |  | 7  |     
|                          
|                          
|                          
|                          
|Item 2.                    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                         |    |  | 12 |     
|                          
|                          
|                          
|                          
|Item 4.                    |  | Controls and
Procedures                                                                                       |    |  | 18 |     
|                          
|                          
|                          
|                          
|PART II                    |  | OTHER INFORMATION                                                                                             |    |  |    |     
|                          
|                          
|                          
|                          
|Item 6.                    |  | Exhibits and
Reports on Form 8-K                                                                              |    |  | 19 |     
|                          
|                          
|                          
|                          
|SIGNATURES                 |  |                                                                                                               | 20 | 
|                          
|                          
|                          
|                          
|Exhibit 99.1 Certification |  |                                                                                                               | 23 | 





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PART 1  FINANCIAL INFORMATION
Item 1. Financial Statements

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

|                                                                                           |                                    |                      |       |               |         |              |       |         |         | 
|------------------------------------------------------------------------------------------ | ---------------------------------- | -------------------- | ----- | ------------- | ------- | ------------ | ----- | ------- | ------- | 
|                                                                                           |                                    |                      |       | September 30, |         | December 31,
|                                                                                           |                                    |                      |       | 2002          |         | 2001        
|                                                                                           |                                    |                      |       |               |         |             
|                                                                                           |                                    |                      |       | (UNAUDITED)   |         |              |       |        
|ASSETS                                                                                     |                                    |                      |       |               |         |              |       |        
|Current assets:                                                                            |                                    |                      |       |               |         |              |       |        
|                                                                                           | Cash and cash equivalents          |                      | $     | 43,916        |         |              | $     | 28,021  |        
|                                                                                           | Restricted cash equivalents        |                      |       |              |         |              |       | 12      |        
|                                                                                           | Available-for-sale securities      |                      |       | 61,578        |         |              |       | 107,303 |        
|                                                                                           | Accounts receivable                |                      |       | 3,219         |         |              |       | 4,487   |        
|                                                                                           | Prepaid program costs and expenses |                      |       | 5,077         |         |              |       | 5,250   |        
|                                                                                           | Deferred income taxes              |                      |       | 1,393         |         |              |       | 1,202   |        
|                                                                                           |                                    |                      |       |               |         |              |       |        
|                                                                                           |                                    | Total current assets |       |               | 115,183 |              |       |         | 146,275 | 
|Property and equipment, net                                                                |                                    |                      | 1,501 |               |         |              | 4,205 |        
|Other investments                                                                          |                                    |                      | 1,229 |               |         |              | 323   |        
|Goodwill and covenant not-to-compete,
net of $1,246 and $1,876 of
accumulated amortization |                                    |                      | 6,275 |               |         |              | 6,344 |        
|Deferred income taxes                                                                      |                                    |                      | 5,809 |               |         |              | 8,069 |        
|Other assets                                                                               |                                    |                      | 62    |               |         |              | 88    |        
|                                                                                           |                                    |                      |       |               |         |              |       |        
|                                                                                           |                                    | Total assets         |       | $             | 130,059 |              |       | $       | 165,304 | 
|                                                                                           |                                    |                      |       |               |         |              |       |        

See notes to consolidated financial statements.

1



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

|                     |                                                                                                                     |  |                                            |        |               |         |              |        |   |         | 
|-------------------- | ------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | - | ------- | 
|                     |                                                                                                                     |  |                                            |        | September 30, |         | December 31,
|                     |                                                                                                                     |  |                                            |        | 2002          |         | 2001        
|                     |                                                                                                                     |  |                                            |        |               |         |             
|                     |                                                                                                                     |  |                                            |        | (UNAUDITED)   |         |              |        |  
|LIABILITIES          |                                                                                                                     |  |                                            |        |               |         |              |       
|                    
|                    
|                    
|                    
|Current liabilities: |                                                                                                                     |  |                                            |        |               |         |              |       
|                     | Accounts payable                                                                                                    |  | $                                          | 1,523  |               |         | $            | 6,396  |  
|                     | Accrued expenses                                                                                                    |  |                                            | 5,012  |               |         |              | 5,438  |  
|                     | Participants deposits                                                                                              |  |                                            | 10,355 |               |         |              | 26,527 |  
|                     | Note payable                                                                                                        |  |                                            |       |               |         |              | 200    |  
|                     | Foreign currency exchange contracts                                                                                 |  |                                            |       |               |         |              | 503    |  
|                     |                                                                                                                     |  |                                            |        |               |         |              |       
|                     |                                                                                                                     |  | Total liabilities                          |        |               | 16,890  |              |        |   | 39,064  | 
|                    
|                    
|                    
|                    
|STOCKHOLDERS EQUITY |                                                                                                                     |  |                                            |        |               |         |              |       
|                    
|                    
|                    
|                    
|                     | Preferred stock, $.01 par value;
2,000,000 shares authorized; none
issued and outstanding                           |  |                                            |       |               |         |              |       |  
|                     | Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding,
9,853,070 and 9,813,001 shares |  |                                            | 99     |               |         |              | 98     |  
|                     | Additional paid-in capital                                                                                          |  |                                            | 88,467 |               |         |              | 88,144 |  
|                     | Retained earnings                                                                                                   |  |                                            | 25,357 |               |         |              | 39,018 |  
|                     | Accumulated other comprehensive
income (loss)                                                                       |  |                                            | (754   | )             |         |              | (1,020 | )
|                     |                                                                                                                     |  |                                            |        |               |         |              |       
|                     |                                                                                                                     |  | Total stockholders equity                 |        |               | 113,169 |              |        |   | 126,240 | 
|                     |                                                                                                                     |  |                                            |        |               |         |              |       
|                     |                                                                                                                     |  | Total liabilities and
stockholders equity |        | $             | 130,059 |              |        | $ | 165,304 | 
|                     |                                                                                                                     |  |                                            |        |               |         |              |       

See notes to consolidated financial statements.

2



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

|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |       | 
|-------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | ----------------- | ------ | ------------------ | - | ------ | ------ | ---- | - | ----- | ----- | - | - | ------ | ----- | 
|                                                                                                                           |                                   |   | Nine Months Ended |        | Three Months Ended
|                                                                                                                           |                                   |   | September 30,     |        | September 30,     
|                                                                                                                           |                                   |   |                   |        |                   
|                                                                                                                           |                                   |   | 2002              |        | 2001               |   | 2002   |        | 2001
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |     
|Revenues:                                                                                                                  |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           | Travel and incentive related      |   | $                 | 10,115 |                    |   | $      | 13,413 |      |   | $     | 2,661 |   |   | $      | 3,211 | 
|                                                                                                                           | License fees from equity investee |   |                   | 408    |                    |   |        |       |      |   |       | (5    | ) |   |        |      | 
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           |                                   |   | 10,523            |        |                    |   | 13,413 |        |      |   | 2,656 |       |   |   | 3,211  |      
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Operating expenses:                                                                                                        |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           | Selling and tour promotion        |   |                   | 2,815  |                    |   |        | 4,080  |      |   |       | 825   |   |   |        | 1,195 | 
|                                                                                                                           | General and administrative        |   |                   | 7,647  |                    |   |        | 10,778 |      |   |       | 2,254 |   |   |        | 3,389 | 
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           |                                   |   | 10,462            |        |                    |   | 14,858 |        |      |   | 3,079 |       |   |   | 4,584  |      
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Operating income (loss)                                                                                                    |                                   |   | 61                |        |                    |   | (1,445 | )      |      |   | (423  | )     |   |   | (1,373 | )    
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Other income:                                                                                                              |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           | Interest and dividend income      |   |                   | 1,576  |                    |   |        | 2,931  |      |   |       | 474   |   |   |        | 886   | 
|                                                                                                                           | Gain on sale of other investment  |   |                   |       |                    |   |        | 8,306  |      |   |       |      |   |   |        |      | 
|                                                                                                                           | Other, net                        |   |                   | 420    |                    |   |        | 494    |      |   |       | 27    |   |   |        | 131   | 
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|                                                                                                                           |                                   |   | 1,996             |        |                    |   | 11,731 |        |      |   | 501   |       |   |   | 1,017  |      
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Income (loss) from continuing operations
before income taxes                                                               |                                   |   | 2,057             |        |                    |   | 10,286 |        |      |   | 78    |       |   |   | (356   | )    
|Provision (benefit) for income taxes                                                                                       |                                   |   | 352               |        |                    |   | 3,531  |        |      |   | (93   | )     |   |   | (60    | )    
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Income (loss) from continuing operations                                                                                   |                                   |   | 1,705             |        |                    |   | 6,755  |        |      |   | 171   |       |   |   | (296   | )    
|Income (loss) from discontinued operations
(less applicable income tax expense
(benefit) of ($703), $8,969, $0 and
$4,308) |                                   |   | (1,197            | )      |                    |   | 17,511 |        |      |   |      |       |   |   | 8,542  |      
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      
|Net income                                                                                                                 |                                   | $ | 508               |        |                    | $ | 24,266 |        |      | $ | 171   |       |   | $ | 8,246  |      
|                                                                                                                           |                                   |   |                   |        |                    |   |        |        |      |   |       |       |   |   |        |      

See notes to consolidated financial statements.

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

|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |   |       |        | 
|----------------------------- |  | ------------------------------------------ | ------------------------------------------ | - | ----------------- | ------ | ------------------ | - | ---- | ----- | ---- | - | ---- | ------ |  | - | ----- | ------ | 
|                              |  |                                            |                                            |   | Nine Months Ended |        | Three Months Ended
|                              |  |                                            |                                            |   | September 30,     |        | September 30,     
|                              |  |                                            |                                            |   |                   |        |                   
|                              |  |                                            |                                            |   | 2002              |        | 2001               |   | 2002 |       | 2001
|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |     
|Earnings per share  basic:   |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  | Income (loss) from continuing
operations   |                                            | $ | 0.17              |        |                    | $ | 0.70 |       |      | $ | 0.02 |        |  | $ | (0.03 | )     
|                              |  | Income (loss) from discontinued
operations |                                            |   | (0.12             | )      |                    |   | 1.82 |       |      |   |     |        |  |   | 0.88  |       
|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  |                                            | Net income                                 |   | $                 | 0.05   |                    |   | $    | 2.52  |      |   | $    | 0.02   |  |   | $     | 0.85   | 
|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  |                                            | Weighted-average common shares
outstanding |   |                   | 9,853  |                    |   |      | 9,613 |      |   |      | 9,876  |  |   |       | 9,672  | 
|Earnings per share  diluted: |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  | Income (loss) from continuing
operations   |                                            | $ | 0.17              |        |                    | $ | 0.68 |       |      | $ | 0.02 |        |  | $ | (0.03 | )     
|                              |  | Income (loss) from discontinued
operations |                                            |   | (0.12             | )      |                    |   | 1.76 |       |      |   |     |        |  |   | 0.85  |       
|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  |                                            | Net income                                 |   | $                 | 0.05   |                    |   | $    | 2.44  |      |   | $    | 0.02   |  |   | $     | 0.82   | 
|                              |  |                                            |                                            |   |                   |        |                    |   |      |       |      |   |      |        |  |  
|                              |  |                                            | Weighted-average common shares
outstanding |   |                   | 10,199 |                    |   |      | 9,952 |      |   |      | 10,059 |  |   |       | 10,018 | 

See notes to consolidated financial statements.

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

|                                                                                            |            |                                                                                      |                                       |     |         |        |         |        |         |         |  
|------------------------------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------------------------ | ------------------------------------- | --- | ------- | ------ | ------- | ------ | ------- | ------- | -
|                                                                                            |            |                                                                                      |                                       |     | 2002    |        | 2001   
|                                                                                            |            |                                                                                      |                                       |     |         |        |        
|Cash flows from operating activities:                                                       |            |                                                                                      |                                       |     |         |        |         |       
|                                                                                            | Net income |                                                                                      | $                                     | 508 |         |        | $       | 24,266 |        
|Adjustments to reconcile net income
to net cash provided by (used in)
operating activities: |            |                                                                                      |                                       |     |         |        |         |       
|                                                                                            |            | Depreciation and amortization                                                        |                                       |     | 686     |        |         |        | 1,819   |        
|                                                                                            |            | Gain on sale of other investments                                                    |                                       |     |        |        |         |        | (8,306  | )      
|                                                                                            |            | Deferred income taxes                                                                |                                       |     | (449    | )      |         |        |        |        
|                                                                                            |            | Compensation expense on stock grants                                                 |                                       |     |        |        |         |        | 443     |        
|                                                                                            |            | Change in assets and liabilities
excluding effect of business
disposition:           |                                       |     |         |        |         |        |         |        
|                                                                                            |            |                                                                                      | Accounts receivable                   |     |         | 1,125  |         |        |         | (403    | )
|                                                                                            |            |                                                                                      | Prepaid program costs and expenses    |     |         | (1,328 | )       |        |         | (3,044  | )
|                                                                                            |            |                                                                                      | Accounts payable and accrued
expenses |     |         | (1,014 | )       |        |         | 11,679  |  
|                                                                                            |            |                                                                                      | Participants deposits                |     |         | 379    |         |        |         | (16,628 | )
|                                                                                            |            |                                                                                      | Other                                 |     |         | (205   | )       |        |         |        |  
|                                                                                            |            |                                                                                      |                                       |     |         |        |         |       
|Net cash provided by (used in)
operating activities                                         |            |                                                                                      | (298                                  | )   |         |        | 9,826   |       
|                                                                                            |            |                                                                                      |                                       |     |         |        |         |       
|Cash flows from investing activities:                                                       |            |                                                                                      |                                       |     |         |        |         |       
|                                                                                            |            | Purchase of property and equipment                                                   |                                       |     | (317    | )      |         |        | (823    | )      
|                                                                                            |            | Purchase of available-for-sale
securities                                            |                                       |     | (61,106 | )      |         |        | (88,331 | )      
|                                                                                            |            | Proceeds from sale or maturities of
available-for-sale securities                    |                                       |     | 83,467  |        |         |        | 73,682  |        
|                                                                                            |            | Purchase of other investments                                                        |                                       |     | (304    | )      |         |        | (320    | )      
|                                                                                            |            | Proceeds from sale of other investments                                              |                                       |     |        |        |         |        | 7,205   |        
|                                                                                            |            | Net cash paid for acquisition of
subsidiaries and covenant-not-to-compete agreements |                                       |     |        |        |         |        | (1,454  | )      
|                                                                                            |            | Change in other assets                                                               |                                       |     |        |        |         |        | 18      |        
|                                                                                            |            |                                                                                      |                                       |     |         |        |         |       
|Net cash provided by (used in) investing
activities                                         |            | $                                                                                    | 21,740                                |     |         | $      | (10,023 | )     
|                                                                                            |            |                                                                                      |                                       |     |         |        |         |       

See notes to consolidated financial statements.

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

|                                                     |                                                    |   |        |        |      |   |        |        |  
|---------------------------------------------------- | -------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                                     |                                                    |   | 2002   |        | 2001
|                                                     |                                                    |   |        |        |     
|Cash flows from financing activities:                |                                                    |   |        |        |      |   |        |        |  
|                                                     | Dividends paid on common stock                     |   | $      |       |      |   | $      | (5,133 | )
|                                                     | Distribution resulting from spin-off
of subsidiary |   |        | (5,299 | )    |   |        |       |  
|                                                     | Purchase and retirement of common stock            |   |        | (305   | )    |   |        |       |  
|                                                     | Proceeds from exercise of stock
options            |   |        | 257    |      |   |        | 1,784  |  
|                                                     | Payment on note payable                            |   |        | (200   | )    |   |        | (200   | )
|                                                     |                                                    |   |        |        |      |   |        |        |  
|Net cash used in financing activities                |                                                    |   | (5,547 | )      |      |   | (3,549 | )     
|                                                     |                                                    |   |        |        |      |   |        |        |  
|Net increase (decrease) in cash and
cash equivalents |                                                    |   | 15,895 |        |      |   | (3,746 | )     
|Cash and cash equivalents, beginning
of period       |                                                    |   | 28,021 |        |      |   | 38,071 |       
|                                                     |                                                    |   |        |        |      |   |        |        |  
|Cash and cash equivalents, end of
period             |                                                    | $ | 43,916 |        |      | $ | 34,325 |       
|                                                     |                                                    |   |        |        |      |   |        |        |  

See notes to consolidated financial statements.

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AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION



|   |  | In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal
recurring accruals necessary to present fairly the consolidated financial
position of Ambassadors International, Inc. and its subsidiaries as of
September 30, 2002,the consolidated results of operations for the three and
nine months ended September 30, 2002 and 2001 and cash flows for the nine
months ended September 30, 2002 and 2001. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The
results of operations for the three and nine months ended September 30,
2002 are not necessarily indicative of those to be expected for the entire
year. The accompanying consolidated financial statements should be read in
conjunction with our Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                            
|  
|2. |  | COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The components of comprehensive income (loss) are as follows (dollars in
thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                                                                                            |  |                   |     |                    |  |      |        |      |  |   |      |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --- | ------------------ |  | ---- | ------ | ---- |  | - | ---- | - |  | - | ----- | -
|                                                                                                                                            |  | Nine Months Ended |     | Three Months Ended
|                                                                                                                                            |  | September 30,     |     | September 30,     
|                                                                                                                                            |  |                   |     |                   
|                                                                                                                                            |  | 2002              |     | 2001               |  | 2002 |        | 2001
|                                                                                                                                            |  |                   |     |                    |  |      |        |     
|Net income                                                                                                                                  |  | $                 | 508 |                    |  | $    | 24,266 |      |  | $ | 171  |   |  | $ | 8,246 |  
|Change in unrealized loss
on marketable equity
securities, net of income
tax benefit of $48, $698,
$463, and $523                           |  |                   | (74 | )                  |  |      | (1,189 | )    |  |   | (789 | ) |  |   | (891  | )
|Change in unrealized gains
(losses) on foreign
currency exchange
contracts, net of income
tax expense (benefit) of
$163, ($481), $0 and $78 |  |                   | 340 |                    |  |      | (819   | )    |  |   |     |   |  |   | 133   |  
|                                                                                                                                            |  |                   |     |                    |  |      |        |      |  |   |      |   |  |   |       |  
|Comprehensive income (loss)                                                                                                                 |  | $                 | 774 |                    |  | $    | 22,258 |      |  | $ | (618 | ) |  | $ | 7,488 |  
|                                                                                                                                            |  |                   |     |                    |  |      |        |      |  |   |      |   |  |   |       |  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



|3. |  | AMBASSADORS GROUP SPIN-OFF                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 25, 2002, the Companys Board of Directors approved the spin-off
of its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by
declaring a special stock dividend to the stockholders of the Company and
distributing to them all of the outstanding shares of AGI. The stock
dividend was paid to the Companys stockholders of record as of February 4,
2002, and was distributed to such shareholders after the close of business
on February 28, 2002, the date that the spin-off was completed. Each
stockholder of the Company received one share of common stock of AGI for
each share of common stock owned in the Company. The distribution of AGIs
common stock pursuant to the spin-off is intended to be tax free to the
Company and its stockholders. The Company received a favorable Internal
Revenue Service private letter ruling to that effect. The trading of the
common stock of AGI on the Nasdaq National Market began on March 1, 2002
under the symbol EPAX.
|  
|   |  | The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The impact of
the spin-off on the Companys balance sheet on February 28, 2002 reduced
total assets, liabilities, and stockholders equity by $34.8 million, $21.0
million and $13.8 million respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company has entered into various agreements with AGI providing for the
separation of AGIs business operations from the Company. These agreements
also govern various interim and ongoing relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | One of these agreements provides for a credit facility in which the Company
has agreed to provide loans to AGI for certain purposes. AGI may borrow up
to $20 million at any time with three days written notice to the Company.
All monies outstanding, including principal and interest, mature no later
than August 31, 2003. All borrowings bear interest at the prime interest
rate as reported in the Wall Street Journal one business day after the
request for a borrowing is received by the Company. As of September 30,
2002, there were no borrowings under this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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

|                         |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |       |       | 
|------------------------ | ------------------- | ----- | -- | ----------------- | ------ | ------------------ | ------ | ------ | ------ | ---- | ---- | ----- | ----- | - | ------ | ----- | ----- | 
|                         |                     |       |    | Nine Months Ended |        | Three Months Ended
|                         |                     |       |    | September 30,     |        | September 30,     
|                         |                     |       |    |                   |        |                   
|                         |                     |       |    | 2002              |        | 2001               |        | 2002   |        | 2001
|                         |                     |       |    |                   |        |                    |        |        |        |     
|Revenues:                |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      
|                         | Performance Group   |       | $  | 6,709             |        |                    | $      | 8,490  |        |      | $    | 1,753 |       |   | $      | 1,869 |      
|                         | Services Group      |       |    | 3,814             |        |                    |        | 4,923  |        |      |      | 903   |       |   |        | 1,342 |      
|                         |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      
|                         |                     | Total |    | $                 | 10,523 |                    |        | $      | 13,413 |      |      | $     | 2,656 |   |        | $     | 3,211 | 
|                         |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      
|Operating Income (Loss): |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      
|                         | Performance Group   |       | $  | 1,071             |        |                    | $      | 968    |        |      | $    | (16   | )     |   | $      | (341  | )    
|                         | Services Group      |       |    | 199               |        |                    |        | 54     |        |      |      | (48   | )     |   |        | (204  | )    
|                         | Corporate and Other |       |    | (1,209            | )      |                    |        | (2,467 | )      |      |      | (359  | )     |   |        | (828  | )    
|                         |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      
|                         |                     | $     | 61 |                   |        | $                  | (1,445 | )      |        | $    | (423 | )     |       | $ | (1,373 | )    
|                         |                     |       |    |                   |        |                    |        |        |        |      |      |       |       |   |        |      



|5. |  | SALE OF INVESTMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During June 2001, the Company sold its ownership interest in a joint
venture that owned capital stock in Scheduled Airlines Traffic Offices,
Inc. (SatoTravel) to Navigant International, Inc. (Navigant)(Nasdaq: FLYR).
The Company received approximately $7.2 million in cash, approximately
237,000 shares of common stock at $16 per share of Navigant and recorded a
pre-tax gain of approximately $8.3 million in other income in the quarter
ended June 30, 2001.                          
|  
|   |  | The agreement also provided for an additional payment of approximately $1.4
million consisting of cash and stock to be paid to the Company if
SatoTravel, as a subsidiary of Navigant, achieved certain revenue
objectives by June 14, 2002. The additional payment is being disputed by
Navigant and both parties have agreed to arbitration to settle the dispute.
The parties are in the process of selecting an arbitrator. Since
probability is uncertain, the additional payment has not been

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



| |  |  | recorded in the statement of income for the nine months ended September 30,
2002.                                      
| |  |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | Excluding this gain, income from continuing operations and fully diluted
earnings per share would have been as follows:

|                                                             |  |                   |       |                    |  |      |       |      |  |   |     |  |  |   |      |  
|------------------------------------------------------------ |  | ----------------- | ----- | ------------------ |  | ---- | ----- | ---- |  | - | --- |  |  | - | ---- | -
|                                                             |  | Nine Months Ended |       | Three Months Ended
|                                                             |  | September 30,     |       | September 30,     
|                                                             |  |                   |       |                   
|                                                             |  | 2002              |       | 2001               |  | 2002 |       | 2001
|                                                             |  |                   |       |                    |  |      |       |     
|Income (loss) from
continuing operations,
as reported        |  | $                 | 1,705 |                    |  | $    | 6,755 |      |  | $ | 171 |  |  | $ | (296 | )
|Less gain on sale of
SatoTravel, net of
income tax of $2,824 |  |                   |      |                    |  |      | 5,482 |      |  |   |    |  |  |   |     |  
|                                                             |  |                   |       |                    |  |      |       |      |  |   |     |  |  |   |      |  
|Income (loss)from
continuing operations 
proforma           |  | $                 | 1,705 |                    |  | $    | 1,273 |      |  | $ | 171 |  |  | $ | (296 | )
|                                                             |  |                   |       |                    |  |      |       |      |  |   |     |  |  |   |      |  

|                                                      |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |       |  
|----------------------------------------------------- |  | ---------------- | ---- | ------------------ |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ----- | -
|                                                      |  | Six Months Ended |      | Three Months Ended
|                                                      |  | September 30,    |      | September 30,     
|                                                      |  |                  |      |                   
|                                                      |  | 2002             |      | 2001               |  | 2002 |      | 2001
|                                                      |  |                  |      |                    |  |      |      |     
|Income (loss) from
continuing operations,
as reported |  | $                | 0.17 |                    |  | $    | 0.68 |      |  | $ | 0.02 |  |  | $ | (0.03 | )
|Less gain on sale of
SatoTravel                       |  |                  |     |                    |  |      | 0.55 |      |  |   |     |  |  |   |      |  
|                                                      |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |       |  
|Income (loss) from
continuing operations 
proforma   |  | $                | 0.17 |                    |  | $    | 0.13 |      |  | $ | 0.02 |  |  | $ | (0.03 | )
|                                                      |  |                  |      |                    |  |      |      |      |  |   |      |  |  |   |       |  



|6. |  | RECENT PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 1, 2002, the Company adopted FASB Statement No. 142 Goodwill and
Other Intangibles (Statement 142). Under Statement 142, goodwill is no longer
amortized, but is subject to annual impairment tests. Application of the
non-amortization provisions resulted in an increase in income from continuing
operations before income taxes of approximately $0.3 million and $0.9 million
for the three and nine months ended September 30, 2002. During the second
quarter of 2002, the Company performed the first of the required impairment
tests of goodwill and indefinite lived intangible assets associated with
continuing operations and determined that no impairment charge was required as
of January 1, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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

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

Statements contained in this Quarterly Report on Form 10-Q of Ambassadors
International, Inc. (the Company) which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. A forward-looking statement may contain words
such as will continue to be, will be, continue to, expect to,
anticipates that, believes that, to be, or can impact. Forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from anticipated results. A more complete
discussion of these risks and uncertainties, as well as other factors, may be
identified from time to time in the Companys filings with the Securities and
Exchange Commission, including the Companys Annual Report on Form 10-K, or in
the Companys press releases.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. The Company believes that the following are some of the more
critical areas in the application of its accounting policies that affect its
consolidated financial condition and results of operations.

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

The Company owns minority investments in other operating companies and joint
ventures. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments.

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

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##### Table of Contents



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

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

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

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

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

GROSS PROGRAM RECEIPTS

Gross program receipts for the three months ended September 30, 2002 and 2001
were $9.7 million for each period.

NET REVENUE

Net revenue for the three months ended September 30, 2002 was $2.7 million
compared to $3.2 million for the three months ended September 30, 2001, a
decrease of $0.5 million. The decrease in net revenue resulted from a
combination of a change in mix of business in Ambassadors Performance Group
(APG) and lower gross revenue in Ambassadors Services Group (ASG).

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 $.8 million in the quarter
ended September 30, 2002 from $1.2 million in the comparable quarter of 2001, a
decrease of $0.4 million. The decrease was principally due to lower personnel
expenses in both APG and ASG.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased during the third quarter of 2002
to $2.3 million from $3.4 million in the third quarter of 2001, a decrease of
$1.1 million. The decrease was primarily the result of lower personnel expenses
and the adoption of FASB Statement

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##### Table of Contents



No. 142 Goodwill and Other Intangibles effective January 1, 2002, which
resulted in the elimination of $0.3 million of goodwill amortization.

OPERATING INCOME (LOSS)

Operating loss decreased to $0.4 million in the quarter ended September 30,
2002 from a loss of $1.4 million in the comparable quarter of 2001, a decrease
of $1.0 million. The decrease is the result of changes as described above.

OTHER INCOME

Other income for the three months ended September 30, 2002 was $0.5 million
compared to $1.0 million for the three months ended September 30, 2001, a
decrease of $0.5 million. The decrease in other income relates to lower
investment income due to lower yields earned on short-term investments.

INCOME TAXES

The Company has recorded an income tax benefit of $93,000 for the third quarter
of 2002 in comparison to $60,000 for the third quarter of 2001, an increase of
$33,000. The effective tax rate for the quarter was (120.0%) compared to 17.1%
for the same period last year. The decrease in the effective tax rate is
attributable to investment income, which represented 607.9% of the Companys
pre-tax income for the quarter ended September 30, 2002 compared to 248.8% for
the same quarter of 2001. Tax-exempt interest income represented approximately
74.5% and 75.8% of the Companys investment income in the quarters ended
September 30, 2002 and 2001, respectively.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations increased to $0.2 million in the quarter
ended September 30, 2002 from a loss of $0.3 million in the comparable quarter
of 2001, an increase of $0.5 million. The increase is the result of changes as
described above.

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##### Table of Contents



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

GROSS PROGRAM RECEIPTS

Gross program receipts decreased to $34.0 million in the nine month period
ended September 30, 2002 from $46.1 million in the nine month period ended
September 30, 2001, a decrease of $12.1 million. The decrease in gross program
receipts resulted from a lower level of business in both APG and ASG resulting
from a slowdown in corporate spending, a decrease in convention services and
the impact of September 11th. The decrease in gross program receipts is
partially offset by the inclusion of licensing revenue generated from Incentive
Travel, LLC.

NET REVENUE

Net revenue decreased to $10.5 million in the nine month period ended September
30, 2002 from $13.4 million in the nine month period ended September 30, 2001,
a decrease of $2.9 million. The decrease in net revenue resulted from the same
factors that impacted gross revenue.

SELLING AND TOUR PROMOTION EXPENSES

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

Selling and tour promotion expenses decreased to $2.8 million in the nine month
period ended September 30, 2002 from $4.1 million in the nine month period
ended September 30, 2001, a decrease of $1.3 million. The decrease was
principally due to lower personnel expenses in both APG and ASG.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased during the nine month period
ended September 30, 2002 to $7.6 million from $10.8 million in the nine month
period ended September 30, 2001, a decrease of $3.2 million. The decrease was
primarily the result of lower personnel expenses and the adoption of FASB
Statement No. 142 Goodwill and Other Intangibles effective January 1, 2002,
which resulted in the elimination of $0.9 million of goodwill amortization.

OPERATING INCOME (LOSS)

Operating income increased to $0.1 million in the nine months ended September
30, 2002 from a loss of $1.4 million in the nine month period ended September
30, 2001, an increase of $1.5 million. The increase is the result of changes as
described above.

OTHER INCOME

Other income for the nine months ended September 30, 2002 was $2.0 million
compared to $11.7 million for the nine month period ended September 30, 2001, a
decrease of $9.7 million. The decrease in other income relates to lower
investment income due to lower yields and the prior year included: 1) $0.4
million of management fees from SatoTravel and 2) an $8.3 million gain on the
sale of the Companys

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##### Table of Contents



investment in SatoTravel. This decrease was partially offset by management fees
and earnings in equity investments of $0.4 million.

INCOME TAXES

The Company has recorded an income tax provision of $0.4 million for the nine
month period ended September 30, 2002 in comparison to $3.5 million for the
nine month period ended September 30, 2001, a decrease of $3.1 million. The
effective tax rate was 17.1% for the nine months ended September 30, 2002
compared to 34.3% for the same period last year. The decrease in the effective
tax rate is attributable to investment income, which represented 76.6% of the
Companys pre-tax income for the nine months ended September 30, 2002 compared
to 28.5% for the same period last year. Tax-exempt interest income represented
approximately 75.3% and 70.8% of the Companys investment income for the nine
months ended September 30, 2002 and 2001, respectively.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations decreased to $1.7 million for the nine month
period ended September 30, 2002 from $6.8 million in the comparable nine month
period of 2001, a decrease of $5.1 million. The decrease is the result of
changes as described above.

SEASONALITY

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

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash provided by (used in) operations for the nine month periods ended
September 30, 2002 and 2001 was approximately ($0.3) million and $9.8 million,
respectively, a decrease of $10.1 million. The decrease in operating cash
flows primarily relates to i) the decrease in net income, ii) a decrease in
accounts payable and accrued expenses and iii) a lower level of business
operated by APG and ASG. The operating cash flows were partially offset by an
increase in participant deposits.

Net cash provided by (used in) investing activities for the nine month periods
ended September 30, 2002 and 2001 was approximately $21.7 million and ($10.0)
million, respectively. The increase in cash flows from investing activities
relates to the Company liquidating investments in order to transfer funds to a
second money manager, to partially fund cash flow from operations and to
complete the acquisition of a minority interest in a corporate and incentive
meeting company.

Net cash used in financing activities for the nine month periods ended
September 30, 2002 and 2001 was ($5.5) million and ($3.5) million,
respectively. Cash used from financing activities for the current

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period mainly related to the spin-off of AGI that was completed on February 28,
2002 (see Note 3).

The Company has entered into various agreements with AGI that provide for the
separation of AGIs business operations from the Company. One of these
agreements provides for a credit facility in which the Company has agreed to
provide loans to AGI for certain purposes. AGI may borrow up to $20 million at
any time with three days written notice to the Company. All monies outstanding,
including principal and interest, mature no later than August 31, 2003. All
borrowings bear interest at the prime interest rate as reported in the Wall
Street Journal one business day after the request for a borrowing is received
by the Company. As of September 30, 2002, there were no borrowings under this
agreement.

The Company does not have any material capital expenditure commitments for
2002. However, the terms of the Companys acquisitions of certain businesses
include contingent consideration, which could range up to approximately $1.4
million in 2003. Additionally, the Company is continuing to pursue further
acquisitions of related travel and performance improvement, service and other
businesses that may require the use of cash and cash equivalents. No assurance
can be given that definitive agreements for any acquisitions will be entered
into, or, if they are entered into, that they will be on terms favorable to the
Company.

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

Management believes that current cash, cash equivalents, available-for-sale
securities and cash flows from operations will be sufficient to meet the
Companys anticipated operating cash needs for at least the next 12 months.
However, any projections of future cash flows are subject to substantial
uncertainty. Such uncertainty includes the impact of war with Iraq and the
Companys acquisition of or investment in complementary businesses. Management
believes a war with Iraq would have a material adverse impact on the travel
industry in general and would result in a reduction in cash flows
from operations, especially the operations of APG. The Company will also, from
time to time, consider the acquisition of or investment in businesses, services
and technologies which might affect the Companys liquidity requirements.

DISCONTINUED OPERATIONS

On January 25, 2002, the Companys Board of Directors approved the spin-off of
its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by declaring a
special stock dividend to the stockholders of the Company and distributing to
them all of the outstanding shares of AGI. The stock dividend was paid to the
Companys stockholders of record as of February 4, 2002, and was distributed to
such

17



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shareholders after the close of business on February 28, 2002, the date that
the spin-off was completed. Each stockholder of the Company received one share
of common stock of AGI for each share of common stock owned in the Company. The
distribution of AGIs common stock pursuant to the spin-off is intended to be
tax free to the Company and its stockholders. The Company received a favorable
Internal Revenue Service private letter ruling to that effect. The trading of
the common stock of AGI on the Nasdaq National Market began on March 1,
2002, under the symbol EPAX.




Item 4. CONTROLS AND PROCEDURES

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

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Companys
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph
above.

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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) Exhibits:
| |  |  | -------------

|     |  |                                                 
|---- |  | ------------------------------------------------
|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------
|
| |     |  | None                

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##### Table of Contents






SIGNATURES

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

AMBASSADORS INTERNATIONAL, INC.

|                        |     |                                            
|----------------------- | --- | -------------------------------------------
|Date: November 13, 2002 | By: | /s/ Timothy T. Fogarty                     
|                        |    
|                        |     | Timothy T. Fogarty,
Chief Financial Officer

CERTIFICATIONS

I, John Ueberroth, certify that:



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



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

20



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##### Table of Contents





| |  | c. | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

Date: November 13, 2002

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

I, Timothy Fogarty, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Ambassadors
International, Inc.;                                                                                                                                                                                                                                        
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   

21



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##### Table of Contents





| | 4. |    | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                      
| | -- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | a. | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
|
| |    | b. | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| |    | c. | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



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



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



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

Date: November 13, 2002

/s/ Timothy T. Fogarty
Timothy T. Fogarty,
Chief Financial Officer

22