UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                     to                    

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

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

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

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

     The number of shares of the registrant’s Common Stock outstanding as of July 27, 2004 was 9,840,019.

AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

PART 1 – FINANCIAL INFORMATION

Ambassadors International, Inc.

(in thousands, except share data)

See Notes to Consolidated Financial Statements.

1

Ambassadors International, Inc.

(in thousands, except per share data)

See Notes to Consolidated Financial Statements.

2

Ambassadors International, Inc.

(in thousands)

See Notes to Consolidated Financial Statements.

3

Ambassadors International, Inc.

1.

Description of the Company and Basis of Presentation

The Company

Ambassadors International, Inc. (the “Company”) was founded in 1967 as a travel services company and reincorporated in Delaware in 1995. Ambassadors Group, Inc. (“AGI”) represented the entire operations of the Company until 1996 when Ambassadors Performance Group, LLC (“APG” or the “Performance Group”) commenced operations. Ambassadors Services Group, Inc. (“ASG” or the “Services Group”) commenced operations in 1998 and Ambassadors Technology Corporation (“ATC” or the “Technology Group”) commenced operations in 2002. On February 28, 2002, the Company completed a spin-off of its wholly owned subsidiary, AGI, into a separate publicly traded company. In December 2003, the Company formed Cypress Reinsurance, Ltd (“Cypress Re”) as a complement to its primary business.

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

The following further describes the operations of the Company’s current business segments:

•		Ambassadors — Develops, markets and manages meetings and incentive programs for a nationwide roster of corporate clients utilizing incentive travel, merchandise award programs and corporate meeting management services. Provides comprehensive hotel reservation, registration and travel services for meetings, conventions, expositions and trade shows. Develops, markets and distributes event portfolio management technology solutions for corporations and large associations.
•		Cypress Re — Participates in selective specialty property and casualty reinsurance programs.

Basis of Presentation

The accompanying unaudited consolidated financial statement have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

The consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Accounting for Stock Options

As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Because all options granted under the Company’s plans had an exercise price equal to the market value of the underlying common stock on the date of grant, no stock-based compensation cost is reflected in net income under the Company’s application of APB Opinion No. 25.

4

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

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

Dividends Declared

On September 2, 2003, the Board of Directors authorized a new dividend policy paying shareholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. For the quarter ended March 31, 2004, a dividend of approximately $1,000,000 was paid on March 23, 2004 to shareholders of record on March 9, 2004. For the quarter ended June 30, 2004, a dividend of approximately $974,000 was paid on June 16, 2004 to shareholders of record on June 1, 2004.

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

2.

Business Acquisitions and Investments

In November 2002, APG acquired a 51% ownership interest in Innovations in Marketing, LLC (“IIM”). IIM was a start-up performance incentive and meeting management company. IIM’s initial capital consisted of $1,000 of which 51% was contributed by APG and 49% was contributed by the minority owner. The Operating Agreement specified that APG shall loan IIM up to $400,000, which eliminates in consolidation, for the working capital needs of IIM. On October 15, 2003, APG sold its 51% ownership interest to the minority owner and the outstanding balance of the loan was resolved prior to sale.

In December 2002, ATC acquired certain of the assets and business of Bluedot Virtual Event Organization, Inc. (“Bluedot Software”) out of Chapter 11 bankruptcy. Bluedot Software, located in San Francisco, California, develops, markets and distributes event portfolio management solutions for corporations and large associations. The purchase price consisted of debtor-in possession financing and other costs of $308,000, the assumption of liabilities and future contingent payments to the sellers covering the twenty-four months following the closing date. The Company allocated the excess purchase price to an intangible asset, purchased software, of $607,000. The amortization period for this intangible asset was five years. During 2003, the Company provided an additional investment of approximately $21,000 which was allocated to purchased software. As more fully described in Note 4, in the fourth quarter of 2003 the Company wrote off the unamortized balance of the intangible asset.

5

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

During the first twelve months following the closing, the Technology Group shall pay the greater of (i) 5% of the gross revenues actually received in each quarter allocable to the assets purchased, or (ii) $25,000 per quarter as the First Year Minimum Payments. During the second year following the closing, ATC shall pay the greater of (i) 5% of the gross revenues actually received in each quarter allocable to the assets purchased, or (ii) $15,000 per quarter as the Second Year Minimum Payments. As of June 30, 2004, ATC had paid $130,000 for the first and second year minimum contingent payments and recorded these payments as an adjustment to the purchase price.

In March 2002, APG acquired a 49% ownership interest in Incentive Travel, LLC (“ITI”). ITI develops, markets and manages meetings and incentive programs for a select roster of corporate clients utilizing incentive travel and corporate meeting management services. The terms of the purchase agreement call for contingent payments through 2005 based upon actual income before income taxes multiplied by APG’s 49% ownership interest calculated based on a predefined multiplier. Total payments related to ITI’s fiscal 2002 results were $2.5 million of which approximately $1.9 million was paid during 2003 and was allocated to intangible assets (license). Total payments related to ITI’s fiscal 2003 results were $0.6 million and was allocated to intangible assets (license). The remaining purchase price of $542,000 was paid during 2002 and was allocated to goodwill.

License fees earned from ITI are included in the operations of Ambassadors and represent approximately $32,000 and $46,000 for the three months ended June 30, 2004 and 2003, respectively, and $133,000 and $286,000 for the six months ended June 30, 2004 and 2003, respectively. The Company also recorded its proportional share of the earnings (loss) and management fees from ITI of approximately ($44,000) and $288,000 for the three months ended June 30, 2004 and 2003, respectively, and $46,000 and $473,000 for the six months ended June 30, 2004 and 2003, respectively, which are included in other income. At June 30, 2004 and 2003, the Company had approximately $169,000 and $97,000, respectively, in receivables related to license and management fees and approximately $401,000 and $356,000, respectively, in undistributed earnings from ITI.

3.

Reinsurance

The Company transferred its investment interest in two insurance programs to its wholly-owned subsidiary, Cypress Re. On March 29, 2004, Cypress Re entered into a reinsurance agreement which incorporated the terms and conditions of the above interest of these programs. The quota share reinsurance agreement covered a retroactive period from July 1, 2002 through March 29, 2004, as well as a prospective period from March 29, 2004 to June 30, 2004.

The reinsurance agreement meets the requirements of SFAS No. 113 “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” and has both prospective and retroactive elements.

Accounting for prospective reinsurance transactions results in premiums and related acquisition costs being recognized over the remaining period of the insurance contracts reinsured. As a result, unearned premium reserves, deferred acquisition costs and ceded prepaid reinsurance premiums of $2.7 million, $0.7 million and $0.6 million, respectively, were recorded on the balance sheet as of June 30, 2004.

Accounting for retroactive reinsurance transactions results in the reinsurer reimbursing the ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. Loss and loss adjustment expenses are initially recorded at the estimated ultimate payout amount and any gain from any such transaction is deferred and amortized to income. Loss and loss adjustment expense reserves are adjusted for changes in the estimated ultimate payout and the original deferred gain is re-calculated and amortized based on and in the period that the changes in estimated ultimate payout are made. As of June 30, 2004, premium receivable, reinsurance recoverable, loss and loss adjustment expense reserves and a deferred gain on retroactive reinsurance of $2.3 million, $0.5 million, $2.1 million and $0.7 million, respectively, were recorded on the Company’s balance sheet. Loss and loss adjustment expense reserves include $0.4 million for incurred but not reported claims as of June 30, 2004 and the Company has recognized $0.2 million of the deferred gain associated with its retroactive reinsurance activity.

6

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

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

Premiums receivable are comprised of funds withheld by the ceding company of approximately $4.4 million and deductible recoveries of $0.6 million. The funds withheld by the ceding company are held in trust and primarily consist of high grade government bonds and money market funds which are carried at fair market value.

Reinsurance recoverable and prepaid reinsurance premiums of $0.5 million and $0.6 million, respectively, relate to a single reinsurer. Cypress Re’s exposure to credit loss in the event of non-payment or nonperformance is limited to these amounts.

The effect of reinsurance on premiums written and earned as of June 30, 2004 was as follows:

4.

Impairment Loss and Lease Exit Costs

In December 2003, the Company consolidated the operations of the Technology Group into its corporate headquarters in Newport Beach, California in order to improve operating efficiencies and reduce future costs. At December 31, 2003, the Company performed its annual impairment test on the Technology Group’s intangible asset, purchased software, and concluded that due to the consolidation of operations, the asset was impaired. Accordingly, the Company recorded a charge related to the unamortized balance of the purchased software related to the acquisition of Bluedot Software in 2002 of approximately $502,000. The Company also recorded approximately $389,000 related to the write-down of assets, lease exit costs and employee relocation expenses due to the closure of the San Francisco office. The Company recorded approximately $317,000 in accounts payable and other liabilities at December 31, 2003 for the remaining unpaid balance of these expenses. The Company paid and charged against the liability, net of sublease income received, approximately $20,000 and $74,000 in the three and six months ended June 30, 2004, respectively. In addition, the Company recorded an adjustment to the lease exit costs in general and administrative expenses of approximately $89,000 in the quarter ended June 30, 2004 due to executing a sublease agreement which was more favorable than originally estimated. At June 30, 2004, approximately $154,000 remained unpaid and is included in accounts payable and other liabilities in the accompanying balance sheet.

7

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

5.

Comprehensive Income

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

6.

Earnings Per Share

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

For the three months ended June 30, 2004 and 2003 there were approximately 112,000 and 141,000 stock options outstanding, respectively, whereby the exercise price exceeded the average common stock market value. For the six months ended June 30, 2004 and 2003 there were approximately 95,000 and 180,000 stock options outstanding, whereby the exercise price exceeded the average common stock market value. The effects of the shares which would be issued upon the exercise of these options have been excluded from the calculation of diluted EPS because they are anti-dilutive.

7.

Common Stock Repurchase Plan

In November 1998, the Board of Directors of the Company authorized the repurchase of the Company’s common stock (up to an approved amount) in the open market or through private transactions. This repurchase program is ongoing and as of June 30, 2004, the Company has repurchased 1,051,500 shares for approximately $12.4 million. During the quarter ended June 30, 2004, the Company repurchased 300,000 shares for $3,675,000.

8

Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued

8.

Business Segments

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

9.

Summarized Income Statement Information of Affiliate

The Company has a 49% ownership interest in ITI and accounts for this investment using the equity method as discussed in Note 2. This investment was considered significant to the Company’s fiscal 2003 operations as defined by applicable Securities and Exchange Commission regulations. The following summarizes the unaudited income statement of the investee for the three and six months ended June 30, 2003 (in thousands):

9

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

Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the period. Management evaluates its estimates and judgments, including those which impact its most critical accounting policies, on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, within the framework of current accounting literature.

The following is a list of the accounting policies that management believes are the more significant judgments and estimates, and that could potentially result in materially different results under different assumptions or conditions.

Reinsurance Transactions

The Company’s wholly-owned subsidiary, Cypress Re, assumes and cedes reinsurance transactions relating to property and casualty risks in the ordinary course of business. The assumed reinsurance transactions are typically reinsured through a quota share agreement in which Cypress Re agrees to accept a certain fixed percentage of premiums written from the ceding company and assumes the same percentage of purchased reinsurance, direct acquisition costs and ultimate incurred claims. The purchased reinsurance relates to excess of loss and aggregate stop loss reinsurance purchased to mitigate potential losses from severe adverse loss development, in the aggregate, on an accident year basis.

Amounts recoverable from reinsurance companies are estimated in a manner consistent with the claim liability associated with the reinsured policies. For retroactive reinsurance contracts, the amount by which the liabilities associated with the reinsured policies are less than the amount due from the ceding company (i.e. the deferred gain) for reinsurance coverage is amortized into income over the estimated remaining settlement period of the liabilities assumed.

Reserves for Losses and Loss Adjustment Expenses

Cypress Re has identified the following estimates as critical, in that they involve a higher degree of judgment and are subject to a significant degree of variability: loss reserves, loss adjustment expense reserves and reserves for incurred but not reported claims. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available as of June 30, 2004.

The liabilities for unpaid claims and loss adjustment expenses of unpaid claims are based upon: (a) estimates received from ceding reinsurers; (b) the accumulation of case estimates for losses reported prior to the close of the accounting period; (c) estimates based on experience of expense for adjusting claims; (d) estimates of unreported losses based on industry and past experience; and (e) the current state of law and coverage litigation. Using these items as well as historical industry trends adjusted for changes in various external and internal factors, such as underwriting standards, policy provisions and product mix, Cypress Re’s actuary determines a point estimate which management utilizes in recording its best estimate of the liabilities.

10

While Cypress Re utilizes its best efforts in estimating its future loss reserves, there can be no assurance that Cypress Re’s ultimate losses will not adversely develop and materially exceed Cypress Re’s loss reserves as of June 30, 2004. In the future, if net loss reserves develop deficiently, such deficiency would have an adverse impact on future results of operations. A 1% difference in the ultimate value of reserves, net of reinsurance recoverable, would increase or decrease future pretax earnings by approximately $27,000.

Revenue Recognition

The Company bills travel participants, mainly consisting of large corporations, in advance, of which the cash received is recorded as a participant deposit. The Company pays for certain direct program costs such as airfare, hotel, rail passes and other program costs in advance of travel, which are recorded as prepaid program costs. The Company recognizes travel revenue and related costs when travel convenes and classifies such revenue as travel and incentive related.

Revenue from hotel reservation, registration and related travel services are recognized when the convention operates. 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 certificates will not be redeemed. These revenues are classified as travel and incentive related.

Revenue from software and technology related sales is derived from a combination of license and maintenance fees and services provided with enterprise software tools. The services provided include hosting of data, development and workflow configuration. Revenue from contracts with multiple elements is recognized using the “residual method” in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” Revenue from development contracts is recognized using the percentage-of-completion method in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue from contracts relating to only maintenance or hosting of data is recognized on the straight-line basis over the period that the services are provided.

In May 2003, the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). The EITF addresses how to account for multiple-deliverable revenue arrangements and focuses on when a revenue arrangement should be separated into different revenue-generating deliverables or “units of accounting” and if so, how the arrangement considerations should be allocated to the different deliverables or units of accounting. The provisions of EITF 00-21 are effective for revenue arrangements entered into at the beginning of the first interim period after June 15, 2003. The adoption of the EITF did not have a material effect on the Company’s financial position or results of operations.

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

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

The purchased or ceded reinsurance relates to excess of loss and aggregate stop loss reinsurance purchased to mitigate potential losses from severe adverse loss development, in the aggregate, on an accident year basis. These ceded reinsurance transactions are recognized as a reduction of premium revenue in the same manner in which the insurance contract is recognized as premium revenue.

11

Claim Cost Recognition

Loss and loss adjustment expenses paid are recognized in the period payment is made. A liability for unpaid claim costs relating to insurance contracts including estimates of costs relating to incurred but not reported claims and claims adjustment expenses expected to be incurred in connection with the settlement of unpaid claims are recognized when insured events occur. Anticipated deductible recoveries from insureds are recorded as receivables at the time the liability for unpaid claims is established. Other estimated recoveries on unsettled claims, such as salvage and subrogation are recorded upon collection.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs represent those costs that vary with and are directly related to the acquisition of the insurance contracts and are charged to expense in proportion to premium revenue recognized. Significant acquisition costs include commissions, policy issuance costs, claims administration, fronting fees and premium taxes. Deferred policy acquisition costs represent those costs directly related to the unearned premiums as of the balance sheet date. Cypress Re evaluates the recoverability of its deferred policy acquisition costs by comparing the present value of future cash flows from its insurance programs to the loss and maintenance reserves being held, less its deferred policy acquisition costs. At June 30, 2004, management believes its deferred policy acquisition costs are recoverable.

Other Investments

The Company owns majority and minority investments in other operating companies. All of these investment acquisitions were accounted for under the purchase method of accounting. The statements of operations of the majority investments are included in the Company’s statements of income since their respective dates of acquisition. The Company accounts for equity investments with ownership ranging from 20% to 50% using the equity method and equity investments with ownership of less than 20% using the cost method.

Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value.

Long-Lived Assets

Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever changes in circumstances indicate that they may be impaired. For purposes of testing goodwill for impairment, goodwill has been allocated to the reporting units from which it originated. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 5 to 6 years.

As of December 31, 2003, the Company completed its annual impairment tests and recorded approximately $573,000 to write off the unamortized balance of an intangible asset, purchased software, and equipment related to the 2002 asset purchase within the Technology Group. See Note 4 to the consolidated financial statements for further discussion.

Deferred Income Taxes

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances will be established when necessary to reduce deferred tax assets to the amount expected to be realized.

12

COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED JUNE 30, 2003:

Revenue

Total revenue for the three months ended June 30, 2004 was $4.0 million compared to $3.6 million for the three months ended June 30, 2003. For the quarter ended June 30, 2004, the Company realized insurance related revenue of approximately $1.3 million. The addition of this new revenue stream was partially offset by a decrease in the volume of business generated during the current quarter by the Ambassadors segment, as well as lower software and technology related revenue.

Cost of Software and Technology Related Sales

Cost of software and technology related sales decreased $0.4 million due to the decrease in software and technology related sales combined with the change in the type of revenue generated being less labor intensive than in the prior year. In 2004, the Company has changed its technology focus from custom configuration in 2003 to primarily licensing, hosting, support and maintenance.

Selling and Tour Promotion Expenses

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

Selling and tour promotion expense decreased $0.4 million due to the decrease in personnel and other expenses related to the businesses that were sold or consolidated in the fourth quarter of 2003.

General and Administrative Expenses

General and administrative expenses decreased $0.3 million due to the decrease in personnel and other expenses related to the businesses that were sold or consolidated in the fourth quarter of 2003.

Loss and Loss Adjustment Expenses

Loss and loss adjustment expenses relate to the insurance operations of Cypress Re, the Company’s new business segment, which began operations in 2004. Loss and loss adjustment expenses represent actual payments made and changes in estimated future payments to be made, including expenses required to settle claims, under Cypress Re’s reinsurance treaties and amortization of the deferred gain related to Cypress Re’s retroactive reinsurance activity.

Insurance Acquisition Costs and Other Operating Expenses

Insurance acquisition costs and other operating expenses relate to the insurance operations of Cypress Re. Insurance acquisition costs consist of commissions, premium taxes and other ceding fees incurred under Cypress Re’s reinsurance treaties and are amortized to expense on the same basis as premiums are earned. Other operating expenses represent general operating expenses and are expensed as incurred.

Operating Loss

The Company recorded an operating loss of $0.1 million for the quarter ended June 30, 2004 compared to a loss of $0.7 million in the comparable quarter of 2003, an increase of $0.6 million. The increase is the result of the changes described above.

13

Other Income

Other income for the three months ended June 30, 2004 was $0.3 million compared to $1.8 million for the three months ended June 30, 2003. Other income for the three months ended June 30, 2003 included $1.2 million from contingent consideration received on the sale of Scheduled Airlines Traffic Offices, Inc. (“SatoTravel”) in June 2001. The Company also experienced a decrease in other income due to a decrease in income and service fees earned on equity investments combined with lower yields on its investment portfolio.

Income Taxes

The Company recorded income tax expense of $0.1 million for the quarter ended June 30, 2004 compared to $0.3 million for the quarter ended June 30, 2003, a decrease of $0.2 million. The effective tax rate for the quarter ended June 30, 2004 was 33.6% compared to 30.9% for the quarter ended June 30, 2003. The increase in the effective tax rate is primarily due to the change in the Company’s investment portfolio such that the tax-exempt interest income represents approximately 8% of the Company’s investment income for the quarter ended June 30, 2004 compared to 96% for the quarter ended June 30, 2003.

Net Income

Net income for the quarter ended June 30, 2004 was $0.2 million compared to $0.8 million for the comparable quarter of 2003, a decrease of $0.6 million. The decrease is the result of the changes as described above.

COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE 30, 2003:

Revenue

Total revenue for the six months ended June 30, 2004 was $9.0 million compared to $7.9 million for the six months ended June 30, 2003. In 2004, the Company realized insurance related revenue of approximately $1.3 million. The addition of this new revenue stream was partially offset by a decrease in the software and technology related revenue and license fees earned from an equity investee.

Cost of Software and Technology Related Sales

Cost of software and technology related sales decreased $0.8 million due to the decrease in software and technology related sales combined with the change in the type of revenue generated being less labor intensive than in the prior year. In 2004, the Company has changed its technology focus from custom configuration in 2003 to primarily licensing, hosting, support and maintenance.

Selling and Tour Promotion Expenses

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

Selling and tour promotion expense decreased $0.7 million due to the decrease in personnel and other expenses related to the businesses that were sold or consolidated in the fourth quarter of 2003.

General and Administrative Expenses

General and administrative expenses decreased $0.6 million due to the decrease in personnel and other expenses related to the businesses that were sold or consolidated in the fourth quarter of 2003.

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Loss and Loss Adjustment Expenses

Loss and loss adjustment expenses relate to the insurance operations of Cypress Re. Loss and loss adjustment expenses represent actual payments made and changes in estimated future payments to be made, including expenses required to settle claims, under Cypress Re’s reinsurance treaties and amortization of the deferred gain related to Cypress Re’s retroactive reinsurance activity.

Insurance Acquisition Costs and Other Operating Expenses

Insurance acquisition costs and other operating expenses relate to the insurance operations of Cypress Re. Insurance acquisition costs consist of commissions, premium taxes and other ceding fees incurred under Cypress Re’s reinsurance treaties and are amortized to expense on the same basis as premiums are earned. Other operating expenses represent general operating expenses and are expensed as incurred.

Operating Income (Loss)

The Company recorded operating income of $1.4 million for the six months ended June 30, 2004 compared to a loss of $0.8 million in the comparable period of 2003, an increase of $2.2 million. The increase is the result of the changes described above.

Other Income

Other income for the six months ended June 30, 2004 was $0.8 million compared to $2.3 million for the six months ended June 30, 2003. Other income for the period ended June 30, 2003 included $1.2 million from contingent consideration received on the sale of SatoTravel in June 2001. The realized gains recorded in 2004 are due to the Company’s sale of some of its available-for-sale securities for gains during the quarter ended March 31, 2004. The Company also experienced a decrease in other income due to a decrease in income and service fees earned on equity investments combined with lower yields on its investment portfolio.

Income Taxes

The Company recorded income tax expense of $0.8 million for the six months ended June 30, 2004 compared to $0.4 million for the six months ended June 30, 2003, an increase of $0.4 million. The effective tax rate for the six months ended June 30, 2004 was 36.6% compared to 26.1% for the six months ended June 30, 2003. The increase in the effective tax rate is primarily due to the change in the Company’s investment portfolio such that the tax-exempt interest income represents approximately 40% of the Company’s investment income for the six months ended June 30, 2004 compared to 94% for the six months ended June 30, 2003.

Net Income

Net income for the six months ended June 30, 2004 was $1.3 million compared to $1.2 million for the comparable quarter of 2003, an increase of $0.1 million. The increase is the result of the changes as described above.

Liquidity and Capital Resources

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

Net cash used in operating activities for the six months ended June 30, 2004 and 2003 was approximately $2.9 million and $1.2 million, respectively, an increase of $1.7 million. The increase in net cash used primarily relates to timing differences in the collection of current assets and the payment of current liabilities partially offset by the increase in net income.

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Net cash provided by investing activities for the six months ended June 30, 2004 and 2003 was approximately $11.6 million and $5.0 million, respectively, an increase of $6.6 million. The increase is due to the timing differences in reinvesting matured securities.

The Company does not have any material capital expenditure commitments for 2004.

The terms of the Company’s acquisition of certain of the assets and business of Bluedot Software included minimum contingent consideration of $100,000 in 2003 and $60,000 in 2004. During 2003, the Company paid $100,000 and as of June 30, 2004, the Company paid an additional $30,000 of this minimum consideration. The terms of the Company’s investment in ITI included contingent payments due in March 2004 based upon fiscal 2003 income before income taxes. As of June 30, 2004, the Company paid approximately $627,000 for the 2004 payment based upon 2003 income.

Net cash used in financing activities for the six months ended June 30, 2004 and 2003 was $5.0 million and $0.2 million, respectively, an increase of $4.8 million. Current period activity consisted of two $0.10 per share cash dividends paid to common shareholders in 2004 and the purchase and retirement of common stock. These payments were partially offset by the proceeds received from the exercise of employee stock options during the period. Cash used in financing activities for the six months ended June 30, 2003 consisted of the purchase and retirement of common stock partially offset by the proceeds received from the exercise of employee stock options.

In the ordinary course of business the Company may from time to time be required to enter into letters of credit with airlines, travel providers and travel reporting agencies. As of June 30, 2004, the Company has issued approximately $908,500 in letters of credit related to normal business operations which expire at various dates through 2006. As of June 30, 2004, the Company has issued approximately $6,488,500 in letters of credit related to property and casualty insurance programs which expire at various dates through 2005. On July 2, 2004, the Company issued an additional letter of credit of approximately $1,909,000 for a property and casualty insurance program which will expire in 2005. The Company has a $10 million credit line to support the outstanding letters of credit. Pursuant to the line of credit, the Company is subject to certain covenants, which include, among other things, a requirement for unencumbered liquid assets. As of June 30, 2004, the Company was in compliance with these covenants.

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

In November 1998, the Board of Directors of the Company authorized the repurchase of the Company’s common stock (up to an approved amount) in the open market or through private transactions. This repurchase program is ongoing and in the first quarter of 2003 the Company repurchased 98,000 shares for approximately $833,000. In the second quarter of 2004, the Company repurchased 300,000 shares for $3,675,000. The Company does not believe that any future repurchases will have a significant impact on the Company’s liquidity.

On September 2, 2003, the Board of Directors authorized a new dividend policy paying shareholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. Accordingly, a dividend of approximately $1,000,000 was paid on March 23, 2004 to shareholders of record on March 9, 2004 and a dividend of approximately $974,000 was paid on June 16, 2004 to shareholders of record on June 1, 2004. The Company and its Board of Directors intend to continually review the dividend policy to ensure compliance with capital requirements, regulatory limitations, the Company’s financial position and other conditions which may affect the Company’s desire or ability to pay dividends in the future.

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

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Trends and Uncertainties

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

There have been no material changes in the reported market risks or the overall credit risk of the Company’s portfolio since December 31, 2003. See further discussion of these market risks and related financial instruments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As of June 30, 2004, the end of the period covered by this report, the Company’s chief executive officer and its chief financial officer reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information the Company must disclose in its report filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported on a timely basis, and have concluded, based on that evaluation, that as of such date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting: For the three and six months ended June 30, 2004, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

Issuer Purchases of Equity Securities (1)

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

At the annual meeting of shareholders of registrant on May 14, 2004, the following matter was voted upon:

     Election of Directors (1):

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

     (a) Exhibits:

     (b) Reports on Form 8-K:

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Signatures

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

	AMBASSADORS INTERNATIONAL, INC. (Registrant)
Date: August 5, 2004	By:	/s/ Brian R. Schaefgen
		Brian R. Schaefgen,
		Chief Financial Officer

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Exhibit Index

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