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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to             

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the voting and non-voting stock of the registrant held by non-affiliates of the Registrant, based upon the closing sales price of the Common Stock on the Nasdaq National Market on June 30, 2004, was 106,741,145. The number of shares of the registrant’s Common Stock outstanding as of March 2, 2005 was 10,159,689.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III.

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TABLE OF CONTENTS

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PART I

Item 1. Business

Overview

Ambassadors International, Inc., a Delaware corporation, develops, markets and manages performance improvement programs and provides event management services for a nationwide roster of corporate clients, utilizing incentive travel, merchandise award programs and corporate meeting management services. Our performance improvement programs utilize debit cards, travel incentives and merchandise awards designed to achieve a multitude of specific corporate objectives. Through our event management services, we provide comprehensive hotel reservation, registration and travel services for meetings, conventions, expositions and trade shows and provide event portfolio management software solutions. The Company also has a specialty reinsurance business that participates in selective reinsurance programs. The terms “Company,” “our” and “we” are used to refer collectively to Ambassadors International, Inc. and its subsidiaries through which our various businesses are conducted.

The Company was originally incorporated in the State of Washington in 1967 under the name International Ambassador Programs, Inc. to provide international educational travel programs for students and professionals. The Company was reincorporated in the State of Delaware in 1995 under the name Ambassadors International, Inc. 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”) and registered it as a Class 3 Reinsurer pursuant to Section 4 of the Bermuda Monetary Authority Act to carry on business in that capacity subject to the provisions of the Bermuda Monetary Authority Act. In 2004, the Company consolidated the Performance Group, the Services Group and the Technology Group into one segment, called Ambassadors. In February 2005, we acquired BellPort Group, Inc., a marina operator located in Newport Beach, California (“BellPort”).

The Company’s principal executive offices are located at 1071 Camelback Street, Newport Beach, California, 92660-3228 and its telephone number is (949) 759-5900.

Business Operations

Ambassadors

Through our Ambassadors business segment, we develop, market and manage performance improvement programs and provide event management services for a nationwide roster of clients. The performance improvement programs utilize debit cards, travel incentives and merchandise awards, designed to achieve a multitude of specific corporate objectives, including achieving sales goals, improving productivity and attracting and retaining qualified employees. The event management services assist clients in planning, coordinating and producing business meetings and conferences. Our clients include both small and large businesses, including Fortune 1000 companies.

In offering performance improvement programs, Ambassadors follows a strategy aimed at developing and implementing programs tailored to each client’s objectives. These programs are generally designed to increase revenues and profits for the client. Our employees meet with the existing or potential clients to determine their business objectives and their performance enhancement opportunities. We then work with the client to determine the scope of the program by identifying concepts and parameters to meet the objectives of the incentive program. Our employees develop and customize services for the clients that fall within the identified parameters. Program rules are then developed that specifically address the campaign participants, key wholesalers or dealers involved in the client’s distribution channel.

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Ambassadors’ marketing team participates in various aspects of a client’s program development. The staff of creative writers and graphic designers generally deliver promotional campaigns and materials that are complete from concept through production, including design, printing, collating, labeling and mailing. Ambassadors also offers web based campaign performance tracking systems, with which clients can follow the period results of their programs, and determine and notify the incentive program winners. Based on the program structure, awards can be in the form of merchandise, travel, cash, recognition or any combination thereof. The Company then fulfills the award through a program coordinator that finalizes each aspect of the client’s event and delivers the awards directly to the client’s award winners.

In offering event management services, Ambassadors provides hotel reservation, registration and other services for conventions, tradeshows and large specialty events. The contracts for these services generally cover an annual meeting or event and may be for a term of one to several years. Our services include negotiating hotel room blocks, creating sub-blocks and fulfilling thousands of requests for hotel rooms for large citywide events. Hotel reservation requests are received by mail, fax and telephone by the Company’s call center staff. Ambassadors accepts reservation requests over the internet, by e-mail and through proprietary technology utilizing the internet to book hotel reservations. This technology also enables clients, attendees, and hotel partners to obtain real-time reports and information over the internet at any time.

Our registration technology assists planners in pre-registering attendees for multiple show events. The on-site registration technology operates through an efficient distribution network with the capability of registering thousands of attendees in a short period of time and in several locations. We also offer attendees and event exhibitors various forms of lead retrieval systems.

As a component of our event management services, we provide enterprise wide control software which allows marketers, meeting planners and tradeshow organizers to run efficient, less costly events, while focusing on sales and marketing strategies and results. In addition, through our acquisition of certain of the assets of Bluedot Virtual Event Organization, Inc. (such assets are referred to herein as “Bluedot Software” unless the context otherwise requires). Ambassadors provides event portfolio management software solutions, which provide software infrastructure of web-based and traditional business events to enhance customer experience and provide potential customer cost savings. Global corporations and large associations in technology, financial services, media and healthcare have used the Company’s products to automate marketing events.

Cypress Re

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

The assumed reinsurance transactions are reinsured through a quota share agreement in which Cypress Re agrees to accept a certain fixed percentage of premiums written from the ceding company and in general assumes the same percentage of purchased reinsurance, direct acquisition costs and ultimate incurred claims. Cypress Re purchases excess of loss and aggregate stop loss reinsurance to mitigate potential losses from severe adverse loss development.

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

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As of December 31, 2004, loss and loss adjustment expenses incurred have not exceeded Cypress Re’s aggregate reinsurance limit on any of its quota share reinsurance agreements. Cypress Re retains independent actuaries to determine the loss ratios to utilize in recording its best estimate of the loss and loss adjustment expense reserves.

BellPort

On February 1, 2005, the Company acquired 100% of the outstanding stock of BellPort Group, Inc. (“BellPort”). BellPort, located in Newport Beach, California, is a marina company operating luxury waterfront facilities in both the United States and Mexico. In connection with the acquisition, the Company was granted a twelve month option to purchase a 34% interest in BellPort Japan, a marina operator, owner and developer of waterfront real estate, including both residential communities and marina facilities, located in Japan.

The purchase was completed in February 2005 for consideration of $1,280,000 in cash and the issuance of 184,717 shares of the Company’s common stock. In addition to the cash and stock consideration, the Company assumed a credit facility of approximately $1,568,000 which the Company paid off in full on February 11, 2005.

Education Group Spin-Off

The Company spun-off its wholly owned subsidiary, Ambassadors Group, Inc. (“AGI”), by paying a special stock dividend to the stockholders of the Company on February 28, 2002. 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 spin-off impacted the Company’s balance sheet on February 28, 2002 by reducing total assets, liabilities, and stockholders’ equity by $34.8 million, $21.0 million and $13.8 million, respectively.

Corporate Investments

The Company has a 19.8% minority investment in Grand Prix Tours, Inc. (“GPT”), which provides packaged tours primarily to Formula One, Indy Car and NASCAR races in the United States and internationally.

In January 1999, the Company purchased a minority interest in a joint venture that owns the capital stock of Scheduled Airlines Traffic Offices, Inc. (“SatoTravel”). In June 2001, the Company sold its ownership stake in SatoTravel to Navigant International, Inc. (“Navigant”) (Nasdaq: FLYR). The Company received approximately $7.2 million in cash, approximately 237,000 shares of common stock of Navigant and recorded a gain of approximately $8.3 million in other income ($5.5 million net of income taxes) in 2001. The agreement also provided for an additional payment of cash and stock to be paid to the Company if SatoTravel, as a subsidiary of Navigant, had achieved certain revenue objectives by June 14, 2002. The additional payment was disputed by Navigant and both parties agreed to arbitration to settle the dispute. In June 2003, the arbitration was settled and the Company received approximately $0.7 million in cash, net of arbitration related expenses, and approximately 36,000 shares of common stock of Navigant. As of December 31, 2003, the Company recorded in other income the final component of the gain consideration on the sale of this investment in the amount of approximately $1.2 million ($0.7 million net of income taxes).

In October 2000, the Company purchased a minority interest in MilePoint, Inc., a development stage internet company which enables customers to convert accrued credits toward online purchasing. This investment was reported at the lower of cost or estimated net realizable value. During the quarter ended December 31, 2001, the Company recorded a loss of approximately $400,000 which the Company’s management believed to be other than a temporary decline in the market value of this investment. The recorded loss represented the balance of this investment and thus, the Company has no future financial exposure on this investment. In March 2004, MilePoint, Inc. was acquired by Points International, Ltd. (“Points”), a Canadian publicly traded company. In exchange for its interest, the Company received a nominal distribution of Points shares and contingent deferred payments. These distributions are recorded as other income as of December 31, 2004.

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In March 2002, APG acquired a 49% ownership interest in ITI. ITI develops, markets and manages meetings and incentive programs for a select roster of corporate clients utilizing incentive travel and corporate meeting management services.

In 2003, the Company invested in the financial results of a property and casualty insurance program mainly consisting of auto liability and auto physical damage risks for the accident years ended June 30, 2003 and 2004. In 2004, these investments were transferred to the Company’s newly formed reinsurance company, Cypress Re.

Business Strategy

Our strategy for our Ambassadors segment is to maintain our quality standards while increasing our overall volume of business by differentiating ourselves from our competitors and extending the array of services offered, including event management technology and software.

Our strategy for our Cypress Re segment is to participate in select property and casualty insurance programs and implement loss control incentives into the programs, when possible.

We continue to pursue selective acquisitions of businesses in the travel, performance improvement, leisure and service sectors that will increase stockholder value.

Competition

The travel industry in general is highly competitive. In the event management and incentives businesses many of our competitors are larger and have greater resources. We believe that, although some potential clients will focus on price alone, other clients will also be interested in the quality of the programs developed and the excellent customer service provided, which has the effect of increasing competition for us. Certain aspects of our business are within a highly competitive, technical segment of the travel industry. We compete with respect to price and service, and believe our technology is a key element of our service.

The Company believes the barriers to entry are relatively low for any future competitors. Additionally, certain organizations engaged in the travel business have substantially greater financial, marketing and sales resources than the Company. There can be no assurance that the Company’s present or future competitors will not exert significant competitive pressures on the Company.

Insurance

The Company maintains insurance coverage that it believes is adequate for its business, including but not limited to coverage for professional and general liability. The Company also maintains insurance coverage on real property and personal property, and as required on leased properties, on a replacement cost basis. The Company has not experienced difficulty in obtaining adequate insurance coverage. There is no assurance that the insurance maintained by the Company will be adequate in the event of a claim, or that such insurance will continue to be available in the future.

Employees

On December 31, 2004, the Company employed 132 employees, of which 125 were full-time employees. Of the Company’s full-time employees, 63 are located in Newport Beach, California; 49 are located in Atlanta, Georgia; 6 are located in San Rafael, California; 3 are located in Chicago, Illinois; and 4 are located in other individual offices throughout the United States. The Company has full-time employees engaged in marketing and sales, operations, administration and finance. The Company also employs temporary labor on a periodic basis to assist with its program fulfillment efforts due to the seasonal nature of the Company’s travel programs. None of the Company’s employees are subject to collective bargaining agreements or are represented by a union. The Company believes that its labor relations are good.

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Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available without charge on our website, www.ambassadors.com/investor, as soon as reasonably practicable after they are filed electronically with the SEC. We are providing the address to our Internet site solely for the information of investors. We do not intend the address to be an active link or to otherwise incorporate the contents of the website into this report.

Seasonality

The Company’s primary business is seasonal. The Company recognizes program related revenues and expenses in the month a program operates. Insurance premiums are recognized as revenue over the period of the insurance contracts in proportion to the amount of the insurance coverage provided. The majority of the Company’s operating results are recognized in the first and second quarters of each fiscal year. The Company’s annual results would be adversely affected if the Company’s revenue were to be substantially below seasonal norms during the first and second quarters of the year.

Risk Factors

Our operations and financial condition may be adversely affected by events adversely affecting the travel industry, including the affects of general economic conditions.

Substantially all of the Company’s operations are directly associated with the travel industry. As a result, the Company’s operations are subject to special risks inherent in doing business in that industry. The travel industry, especially the performance improvement and convention sectors, is sensitive to changes in economic conditions. During general economic downturns and recessions, companies tend to reduce or eliminate improvement programs and attendance at conventions and trade shows. In addition, the travel industry is highly susceptible to unforeseen events, such as wars, acts of terrorism, civil disturbances, political instability, governmental activities and deprivation of contract rights. Demand for the Company’s programs and services may also be adversely affected by natural occurrences such as hurricanes, earthquakes, epidemics and flooding in regions in which the Company conducts its programs and provides its services. Periods of instability or uncertainty surrounding the travel industry may reduce the demand for the Company’s programs and services and could have an adverse effect on the Company’s business, financial condition and results of operations.

We are subject to risks associated with maintaining significant cash, cash equivalents and available-for-sale securities.

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 that 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.

We may not realize the anticipated benefits of the companies and businesses that we acquire, including our acquisition of BellPort Group, Inc.

Part of the Company’s business strategy is to acquire businesses that will assist in the overall growth of the Company. The Company will be competing for acquisition opportunities with other companies, many of which have greater name recognition, marketing support and financial resources, which may result in a diminished number of acquisition opportunities available to the Company and higher acquisition prices. No assurance can be given that the Company will be able to identify, pursue or acquire any targeted businesses. In addition, if any targeted businesses are acquired, such as BellPort, there can be no assurance that the Company will be able to

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profitably manage additional businesses or successfully integrate any acquired businesses into the Company without substantial costs, delays and/or other operational or financial problems. As a result, we may not realize the anticipated benefits of the companies or businesses that we acquire.

If the Company enters into any significant acquisition for cash, a substantial portion of the Company’s available cash could be used in order to consummate any such acquisition. The Company may also seek to finance such acquisitions through debt or equity financings. There can be no assurance that such financings will be available at all or on terms acceptable to the Company. If consideration for an acquisition includes equity securities, the Company’s stockholders could experience dilution.

Acquisitions involve a number of special risks in addition to those described above. These risks include:

No assurance can be given that any acquisitions by the Company will or will not occur, or that if an acquisition does occur, that it will not have an adverse effect on the Company or that we will realize the anticipated benefits of an acquisition.

Our financial performance is subject to seasonal and quarterly fluctuations.

The Company’s primary business is seasonal. The Company recognizes program related revenues and expenses in the month a program operates. Subsequent to the spin-off of AGI, the Company has recognized the majority of its operating results in the first and second quarters of each fiscal year. The Company’s annual results would be adversely affected if the Company’s revenue were to be substantially below seasonal norms during the first and second quarters of the year. Our operating results may fluctuate as a result of many factors, including:

As a result of these and other factors, our operations and financial condition could suffer, which could cause our annual or quarterly operating results to be below the expectations of public market analysts and investors. In such event, the price of the Company’s common stock could be adversely affected.

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If we are unable to effectively compete against our competitors, our financial conditions will suffer.

The travel industry in general, and the performance improvement, event management and convention services sectors in particular, are highly competitive. The Company’s performance improvement programs and event management services compete with other companies that provide similar programs and services. In addition, corporations and associations themselves may choose to provide these programs and services “in-house.” The Company believes the barriers to entry in each of the fields in which it operates are relatively low. Certain of the Company’s competitors have substantially greater financial, marketing, and sales resources than the Company. As a result, there can be no assurance that the Company’s present competitors or competitors that elect to enter the marketplace in the future will not exert significant competitive pressures on the Company. These competitive factors could have a material and adverse effect on our business, financial condition and results of operations.

Our business could be adversely affected by unanticipated casualty losses.

Due to the nature of the Company’s travel business, the Company may be subject to liability claims arising out of accidents or disasters causing injury to participants or attendees to its programs or events, including claims for serious personal injury or death. Although the Company has never experienced a liability loss for which it did not have adequate insurance coverage, there can be no assurance that insurance coverage will be sufficient to cover one or more large claims or that the insurance carrier will be solvent at the time of any covered loss. There can be no assurance that the Company will be able to obtain sufficient insurance coverage at acceptable premium levels in the future. Successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding the Company’s insurance coverage, could have an adverse effect on the Company’s business, financial condition and results of operations.

Our business could be adversely affected by losses associated with Cypress Re’s reinsurance.

The Company currently reinsures property and casualty risks written by licensed U.S. insurers. The lines of business that are being reinsured include commercial auto liability, commercial physical damage and workers’ compensation. If a loss event occurs and the Company is required by its agreements to cover such losses, the amount of our cash and cash equivalents will be reduced, and the Company’s results of operations and financial condition would suffer.

Our success is highly dependent upon unaffiliated travel services suppliers.

In order to provide its services and products, the Company is dependent on airlines, hotels and other suppliers of travel services. The Company does not currently have any long-term agreements with its travel suppliers that obligate such suppliers to sell services or products through the Company. Restricted access to suppliers of travel services and a reduction in capacity or changes in pricing arrangements with travel suppliers could have an adverse effect on the Company’s business, financial condition and results of operations.

We are dependent upon key personnel.

The Company’s performance is substantially dependent on the continued services and performance of its senior management and certain other key personnel. The loss of the services of any of its executive officers or other key employees could have an adverse effect on the Company’s business, financial condition and results of operations. The Company does not have any long-term employment agreements with its executive officers. The Company’s future success also depends on its ability to identify, attract, hire, train, retain and motivate other highly skilled managerial, operational, marketing and customer service personnel. The failure to retain and attract necessary managerial, operational, marketing and customer service personnel could have an adverse effect on the Company’s business, financial condition and results of operations.

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Item 2. Properties

The principal executive offices of the Company occupy approximately 27,000 square feet of office space in Newport Beach, California, pursuant to a lease dated June 15, 1998, as amended, which expires in June 2010. The lease currently provides for monthly rental payments of approximately $36,400. The Company subleases approximately 4,000 square feet to a related party for approximately $7,500 per month, inclusive of common area charges.

The Company occupies offices totaling approximately 14,500 square feet in Atlanta, Georgia pursuant to a lease dated January 7, 2000, as amended, which expires in July 2005. The lease currently provides for monthly rental payments of approximately $22,000 per month.

The Company occupies office space totaling approximately 2,200 square feet in San Rafael, California pursuant to a lease dated December 9, 2003, as amended, which expires in December 2005. The lease currently provides for monthly rental payments approximating $3,300 per month.

The Company occupies office space totaling approximately 1,000 square feet in Chicago, Illinois, with current monthly rental payments of approximately $2,500. This lease can be cancelled with 90 days advance notice to the landlord and is contracted on a month-to-month basis.

The Company leases office space totaling approximately 8,100 square feet in San Francisco, California pursuant to a lease dated June 9, 2003, which expires in December 2008. The lease currently provides for current monthly rental payments of approximately $15,500. The Company may cancel the lease with penalty in July 2006 upon nine months written notice. In December 2003, the Company vacated the office space and began subleasing the space in May 2004 for approximately $15,000 per month. The sublease term expires in April 2005 with an optional term that would extend through June 2006. As of December 31, 2004, the Company has not been notified as to the intent of the sublessee with regards to the optional sublease term.

Management believes that its existing facilities are sufficient to meet its present needs and anticipated needs for the foreseeable future. However, additional facilities may be required in connection with future business acquisitions.

Item 3. Legal Proceedings

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

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

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Market and Other Information

The Company’s common stock is traded and prices are quoted on the Nasdaq National Market under the symbol “AMIE.” As of March 2, 2005, there were approximately 39 holders of record of the Company’s common stock not including beneficial owners holding shares through nominee or street name.

The following table sets forth the high and low bid prices of a share of the Company’s common stock as quoted on the Nasdaq National Market for the periods indicated:

Dividend Policy

On September 2, 2003, our Board of Directors authorized a new dividend policy paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. Accordingly, a dividend of approximately $1,000,000 was paid on March 23, 2004 to stockholders of record on March 9, 2004, a dividend of approximately $974,000 was paid on June 16, 2004 to stockholders of record on June 1, 2004, a dividend of approximately $987,000 was paid on September 14, 2004 to stockholders of record on August 30, 2004 and a dividend of approximately $996,000 was paid on December 15, 2004 to stockholders of record on November 30, 2004. During 2003, we paid two quarterly dividends for an aggregate amount of approximately $1,991,000. On February 16, 2005, we announced a dividend to be paid on March 15, 2005 to stockholders of record on February 28, 2005.

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

Transfer Agent and Registrar

Mellon Investor Services, LLC serves as transfer agent and registrar of the Company’s common stock.

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Equity Compensation Plan Information

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Item 6. Selected Financial Data

The following selected consolidated financial data of the Company is presented as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000. The spin-off of AGI was accounted for as a disposition of discontinued operations as of February 28, 2002, the date of the spin-off, and accordingly, previously reported results of operations of the Company have been restated to reflect the results of AGI in discontinued operations. The selected financial data should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We spun-off our wholly owned subsidiary, AGI, by paying a special stock dividend to our stockholders of the outstanding shares of AGI on February 28, 2002. 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 spin-off impacted our balance sheet on February 28, 2002 by reducing total assets, liabilities, and stockholders’ equity by $34.8 million, $21.0 million and $13.8 million respectively. Therefore, the following discussion is based upon continuing operations.

We develop, market and manage performance improvement programs and provide event management services for a nationwide roster of corporate clients, utilizing incentive travel, merchandise award programs and corporate meeting management services. Our performance improvement programs utilize debit cards, travel incentives and merchandise awards designed to achieve a multitude of specific corporate objectives. Through our event management services, we provide comprehensive hotel reservation, registration and travel services for meetings, conventions, expositions and trade shows and provide event portfolio management software solutions. The Company also has a specialty reinsurance company that participates in selective reinsurance programs as a complement to its existing performance improvement business.

We recognize travel and incentive related program revenues and expenses in the month a program operates. Insurance premiums are recognized as revenue over the period of the insurance contracts in proportion to the amount of the insurance coverage provided. The majority of our operating results are recognized in the first and second quarters of each fiscal year.

In March 2002, we acquired a 49% ownership interest in San Diego, California based ITI and in November 2002, we acquired a 51% ownership interest in Newport Beach, California based IIM, the cumulative effect of which was to further expand our Performance Group. On October 15, 2003, we sold our 51% ownership interest in IIM to the minority owner.

In December 2002, we acquired Bluedot Software. Bluedot Software is a provider of event portfolio management software solutions.

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

In 2004, we consolidated the Performance Group, the Services Group and the Technology Group into one segment, called Ambassadors.

In February 2005, we acquired BellPort Group, Inc., a marina operator located in Newport Beach, California (“BellPort”).

Critical Accounting Policies

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

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

Revenue Recognition

Travel and Incentive Related

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

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

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

Software and Technology Related Sales

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

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Respect to Certain Transactions.” Revenue from development contracts is recognized in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Such development contracts pertain to a combination of customization and enhancement programs of our event management software performed at the request of clients. These contracts cover program periods of three to nine months and do not involve significant revisions to estimates due to their short-term nature. At December 31, 2004 and 2003, the Company did not have any long-term receivables or contracts outstanding in connection with any development contracts. Revenue from contracts relating to only maintenance or hosting of data is recognized on the straight-line basis over the period that the services are provided.

License Fees from Equity Investee

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

Net Insurance Premiums Earned

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

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

Deferred Policy Acquisition Costs

Deferred policy acquisition costs represent those costs, commissions and other costs of acquiring insurance, that vary with and are primarily related to the production of new and renewal insurance. These costs are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Deferred policy acquisition costs represent those costs directly related to the unearned premiums as of the balance sheet date. The Company considers anticipated investment income in determining the recoverability of these costs. At December 31, 2004, management believes its deferred policy acquisition costs are recoverable.

Reserve for Loss and Loss Adjustment Reserves

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

Reinsurance

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

With respect to retroactive reinsurance contracts, the amount by which the liabilities associated with the reinsured policies exceed the amounts paid is amortized to income over the estimated remaining settlement

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period. The effects of subsequent changes in estimated or actual cash flows are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.

Long-Lived Assets

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. We evaluate recoverability using both subjective and objective factors. Subjective factors include the evaluation of industry and product trends and our strategic focus. Objective factors include our best estimates of projected future earnings and cash flows. We use a discounted cash flow model to estimate the fair market value of each of our subsidiaries when performing our impairment tests. Assumptions used include growth rates for revenues and expenses, investment yields on deposits, any future capital expenditure requirements and appropriate discount rates. We established reporting units based on our current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it related to each reporting unit. Intangible assets with definite lives are amortized over their estimated useful lives and reviewed for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. We amortize our acquired intangible assets with definite lives over periods ranging from 5 to 6 years.

Income Taxes

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

Results of Operations

The following table reflects certain income and expense items as a percentage of revenue.

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Business Segment Information

Commencing in December of 2003, we performed a review of our existing business operations. During this review, we evaluated our reportable segments and considered the criteria as set forth in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), which requires the consideration of certain aggregation criteria, including economic characteristics, the nature of products and services, the nature of the production process, the type or class of customer for our products and services, the methods used to distribute products or provide services, and if applicable, the nature of the regulatory environment. We are not subject to any regulatory requirements in our operations. After our review, we concluded that our existing business operations met the aggregation requirements under SFAS No. 131 and planned to consolidate our reporting segments. Accordingly, in January 2004, we realigned our business operations and consolidated the Performance Group, the Services Group and the Technology Group into one segment, called Ambassadors. Furthermore, Cypress Re is reported as a stand alone segment from Corporate and Other. Corporate and Other consists of general corporate assets (primarily cash and cash equivalents and investments) and other activities which are not directly related to the Ambassadors or Cypress Re segments. The financial information for the prior periods have been reclassified into the current year segment presentation.

Selected financial information related to these segments is as follows (in thousands):

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Comparison of Continuing Operations for the Year Ended December 31, 2004 to the Year Ended December 31, 2003

Revenues

Travel and incentive related revenue increased to $12.2 million in 2004 from $11.6 million in 2003. The increase was a result of additional programs being operated in 2004 combined with an overall increase in program size due to corporate clients qualifying more incentive winners and operating more events. We also serviced a greater number of registration events, as well as experienced an increase in the convention revenue retained.

Software and technology related sales decreased to $0.5 million in 2004 from $1.5 million in 2003 due to the reduction of our custom configuration contracts which expired in 2003. We primarily provided licensing, hosting, support and maintenance in 2004.

License fees from equity investee decreased to $0.4 million in 2004 from $0.6 million in 2003 due to a decrease in revenues earned from the licensing source.

Net insurance premiums were $5.6 million in 2004 as a result of our addition of the insurance operations, Cypress Re, which began in 2004.

Cost of Software and Technology Related Sales

Cost of software and technology related sales decreased to $0.1 million in 2004 from $1.1 million in 2003. The decrease was due to reduced software and technology related sales and reduced labor costs associated with licensing, hosting, supporting and maintaining software and technology, as compared to software sales.

Selling and Tour Promotion

Selling and tour promotion expenses decreased to $3.1 million in 2004 from $4.4 million in 2003. The decrease in selling and tour promotion expenses was due to the reduction of personnel and other expense related to the businesses that were sold or consolidated in 2003.

General and Administrative

General and administrative expenses decreased to $10.7 million in 2004 from $11.2 million in 2003. The decrease in general and administrative expenses resulted from the reduction of personnel, overhead and other expenses related to the businesses that were sold or consolidated in 2003.

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Loss and Loss Adjustment Expenses

Loss and loss adjustment expenses were $2.5 million in 2004. We did not incur loss and loss adjustment expenses in 2003.

Insurance Acquisition Costs and Other Operating Expenses

Insurance acquisition costs and other operating expenses were $2.2 million in 2004. We did not incur insurance acquisition costs and other operating expenses in 2003.

Impairment Loss and Lease Exit Costs

In the fourth quarter of 2004, we performed an impairment test on the ITI goodwill and intangible asset (license) and concluded that due to declining operating results, including a significant decrease in projected revenues and other contributing factors of the investee, the assets were impaired. As a result of the impairment, we recorded a charge of $0.5 million to write off the entire goodwill balance and $2.1 million to write off the unamortized balance of the intangible asset. In December 2003, we consolidated the operations of the Technology Group into our corporate headquarters in Newport Beach, California in order to improve operating efficiencies and reduce future costs. Accordingly, we recorded a $0.9 million charge to write off the unamortized balance of the intangible asset, purchased software and recognized lease exit costs and employee relocation expenses due to the closure of an office.

Operating Loss

We reported an operating loss of $2.5 million in 2004 compared to an operating loss of $3.9 million in 2003. The changes in operating loss are the result of changes described above.

Other Income

Other income decreased to $0.9 million in 2004 from $3.8 million in 2003. Other income in 2004 consisted primarily of $1.5 million in interest and dividend income generated by cash, cash equivalents, and available-for-sale securities and $0.3 million in income and service fees earned on minority investments, which were substantially offset by a $0.9 million realized loss resulting from an other-than-temporary decline in the market value of an equity security. Other income during 2003 consisted primarily of $1.3 million in interest and dividend income generated by cash, cash equivalents, and available-for-sale securities, $1.2 million from the final component of contingent consideration received on the sale of SatoTravel and $1.4 million resulting from income and service fees earned on minority investments. The increase in interest income is due to the change in our investment portfolio such that a lower percentage of the Company’s investments are in tax-exempt securities.

Income Taxes

We recorded income tax expense of $0.4 million for 2004 compared to $1.0 million in 2003. The effective tax rate for 2004 was significantly higher than the U.S. statutory rate due to the recording of an additional valuation allowance of $1.3 million on our deferred tax assets. The effective tax rate for 2003 was significantly higher than the U.S. statutory rate due to recording approximately $1.6 million to establish a valuation allowance against net federal and state deferred tax assets as we deemed it more likely than not that a portion of the deferred tax asset would not be realized in the near term.

Net Loss From Continuing Operations

Loss from continuing operations was $1.9 million in 2004 compared a loss of $1.0 million in 2003. The changes between the two years were the result of changes described above.

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Comparison of Continuing Operations for the Year Ended December 31, 2003 to the Year Ended December 31, 2002

Revenues

Revenue decreased to $13.7 million in 2003 from $14.7 million in 2002. The decrease in revenue came from both the Performance Group and Services Group and was partially offset by the inclusion of software and technology related revenue from the Technology Group in 2003. The decrease in the Performance Group was a result of fewer programs being operated in 2003 combined with an overall decrease in program size due to corporate clients qualifying fewer incentive winners and operating fewer business meetings. The decrease in the Services Group was due to a lower number of registration events serviced, as well as a decrease in the convention revenue retained.

Cost of Software and Technology Related Sales

We incurred cost of software and technology related sales in 2003 of $1.1 million related to the business acquired from Bluedot Software in the fourth quarter of 2002. As there were no such sales in 2002, we did not incur this cost in the prior year.

Selling and Tour Promotion

Selling and tour promotion expenses increased to $4.4 million in 2003 from $4.0 million in 2002. The increase in selling and tour promotion expenses was due to the addition of expenses related to the Technology Group and additional sales personnel costs related to the Services Group. The increase in these segment expenses was partially offset by lower personnel expenses in the Performance Group.

General and Administrative

General and administrative expenses increased to $11.2 million in 2003 from $10.3 million in 2002. The increase in general and administrative expenses resulted from the addition of expenses related to the Technology Group and the amortization of intangible assets resulting from acquisitions conducted in 2002 in the Performance Group and the Technology Group.

Impairment Loss and Lease Exit Costs

In December 2003, we consolidated the operations of the Technology Group into our corporate headquarters in Newport Beach, California in order to improve operating efficiencies and reduce future costs. Accordingly, we recorded a $0.9 million charge to write off the unamortized balance of the intangible asset, purchased software and recognized lease exit costs and employee relocation expenses due to the closure of the San Francisco office. No such impairment charge was recorded in 2002.

Operating Income (Loss)

We reported an operating loss of $3.9 million in 2003 compared to operating income of $0.3 million in 2002. Changes in operating income to an operating loss from 2002 to 2003 are the result of changes described above.

Other Income

Other income increased to $3.8 million in 2003 from $2.5 million in 2002. Other income during 2003 consisted primarily of $1.3 million in interest income generated by cash, cash equivalents, and available-for-sale securities, $1.2 million from the final component of contingent consideration received on the sale of SatoTravel and $1.4 million resulting from income and service fees earned on minority investments. Other income during

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2002 consisted primarily of $2.0 million in interest income generated by cash, cash equivalents, and available-for-sale securities and $0.5 million resulting from income and service fees earned on a minority investment. The decrease in interest income is due to the decrease in cash, cash equivalents and available-for-sale securities from $106.7 million at December 31, 2002 to $105.3 million at December 31, 2003 combined with lower investment yields.

Income Taxes

The effective tax rate for 2003 was significantly higher than the U.S. statutory rate due to recording approximately $1.6 million to establish a valuation allowance against net federal and state deferred tax assets. The effective tax rate for 2002 was lower than the U.S. statutory rate due to a high level of tax-exempt income in relation to operating income and the revaluation of state deferred tax assets to a higher rate as required by SFAS No. 109.

Income (Loss) From Continuing Operations

Loss from continuing operations was $1.0 million in 2003 compared to income of $2.8 million in 2002. The changes between the two years were the result of changes described above.

Liquidity and Capital Resources

Our business is not capital intensive. However, we do retain funds for operating purposes in order to conduct sales and marketing efforts for future programs and to facilitate acquisitions of other companies.

Net cash provided by operations for the years ended December 31, 2004, 2003 and 2002, was $0.5 million, $1.2 million and $0.6 million, respectively. The decrease in cash flows from operations in 2004 compared to 2003 is primarily due to the increased net loss from operations and the change in the timing differences related to the insurance operations of Cypress Re, which were partially offset by the effects of the non-cash charges recorded in 2004 related to impairment loss of ITI and the other-than-temporary loss on a marketable equity security. The increase in cash flows from operations in 2003 compared to 2002 is primarily due to the effects of the non-cash charges recorded in 2003 related to the amortization of the intangible assets, the impairment loss and lease exit costs related to the Technology Group and the deferred tax asset valuation allowance, which were partially offset by timing differences in the collection of current assets and the payment of current liabilities.

Net cash provided by (used in) investing activities for the years ended December 31, 2004, 2003 and 2002 was $1.6 million, ($2.8) million and $23.7 million, respectively. The cash provided by investing activities for 2004 was due to proceeds from securities in excess of purchases and purchases of investments. The cash used in investing activities for 2003 was primarily due to the contingent payments and residual purchases related to the 2002 business acquisitions of ITI and Bluedot Software. The cash provided by investing activities for 2002 resulted from funding the distribution of the spin-off of AGI on February 28, 2002 and the Company holding a higher level of cash equivalents than in 2001 due to the relative indifference in investment yields.

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

The terms of our acquisition of Bluedot Virtual Event Organization, Inc. included minimum contingent consideration of $100,000 to be paid in 2003 and $60,000 to be paid in 2004. As of December 31, 2004, we paid $160,000 of this minimum consideration. The terms of our investment in ITI included contingent payments due in March 2005 based upon fiscal 2004 income before income taxes. As of December 31, 2004, we accrued approximately $286,000 for the 2005 payment based upon 2004 income.

Net cash used in financing activities during 2004 totaled $6.2 million and primarily relates to four quarterly $0.10 per share cash dividends paid to common stockholders in 2004 and the purchase and retirement of 300,000

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shares of our common stock. These uses of cash were partially offset by the proceeds received from the exercise of stock options. Net cash used in financing activities during 2003 totaled $1.7 million and primarily relates to two quarterly $0.10 per share cash dividends paid to common stockholders in 2003 and the purchase and retirement of 98,000 shares of our common stock. These uses of cash were partially offset by the proceeds received from the exercise of stock options. Net cash used in financing activities during 2002 totaled $5.4 million and primarily related to cash paid, net of liabilities assumed, as a dividend resulting from the spin-off of AGI to the holders of the our common stock on February 28, 2002. As of December 31, 2004, the Company had no long-term debt.

In the ordinary course of business we may from time to time be required to enter into letters of credit related to our insurance programs and for our travel related programs with airlines, travel providers and travel reporting agencies. As of December 31, 2004, we have issued approximately $9,898,000 in letters of credit related to property and casualty insurance programs which expire at various dates through 2005. As of December 31, 2004, we have issued approximately $908,500 in letters of credit related to normal business operations which expire at various dates through 2006. We have a $15 million line of credit to support the outstanding letters of credit. Pursuant to the line of credit, we are subject to certain covenants, which include, among other things, a requirement for unencumbered liquid assets. As of December 31, 2004, we were in compliance with these covenants.

In November 1998, our Board of Directors authorized the repurchase of our common stock (up to $20.0 million) in the open market or through private transactions. This repurchase program is ongoing and in the first quarter of 2003 we repurchased 98,000 shares for approximately $833,000. In the second quarter of 2004, we repurchased 300,000 shares for $3,675,000. We do not believe that any future repurchases will have a significant impact on our liquidity.

On September 2, 2003, our Board of Directors authorized a new dividend policy paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. Accordingly, a dividend of approximately $1,000,000 was paid on March 23, 2004 to stockholders of record on March 9, 2004, a dividend of approximately $974,000 was paid on June 16, 2004 to stockholders of record on June 1, 2004, a dividend of approximately $987,000 was paid on September 14, 2004 to stockholders of record on August 30, 2004 and a dividend of approximately $996,000 was paid on December 15, 2004 to stockholders of record on November 30, 2004. During 2003, we paid two quarterly dividends for an aggregate amount of approximately $1,991,000. On February 16, 2005, we announced a dividend to be paid on March 15, 2005 to stockholders of record on February 28, 2005.

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

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

Our cash, cash equivalents and available-for-sale securities totaled $97.9 million at December 31, 2004. We believe that cash, cash equivalents, available-for-sale securities and cash flows from operations will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. We continue to pursue further acquisitions of related travel and performance improvement, service and other businesses, although no assurance

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can be given that definitive agreements for any acquisition will be entered into or, if they are entered into, that any acquisition will be consummated on terms favorable to us. We could use cash and financing sources discussed herein, or financing sources that subsequently become available, to fund additional acquisitions or investments. In addition, we may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt, or for general corporate purposes. If a material acquisition or investment is completed, our operating results and financial condition could change materially in future periods. However, no assurance can be given that additional funds will be available on satisfactory terms, or at all, to fund such activities.

Under Bermuda regulations, Cypress Re is required to maintain surplus greater than 20% of gross written premiums or 10% of loss and loss adjustment expense reserves. As of December 31, 2004, Cypress Re has $10.1 million of contributed capital from us which is in excess of the required statutory capital and surplus of $2.7 million.

Disclosures about Contractual Obligations and Commercial Commitments

The following table aggregates all contractual commitments and commercial obligations that affect our financial condition and liquidity position as of December 31, 2004:

Off-Balance Sheet Transactions

We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that will have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Forward-Looking Statements

Statements contained in this Annual Report on Form 10-K of the Company, which are not historical in nature, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A forward-looking statement may contain words such as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” “continue,” and variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward looking statements. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. Such risks and uncertainties include, among others:

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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 elsewhere in this Annual Report on Form 10-K, or in the Company’s press releases. We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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.

The Company’s available-for-sale securities included debt and marketable equity securities of $55.1 million and $3.3 million, respectively, at December 31, 2004 and are subject to market risk. The potential change in the fair value of these investments, assuming a 50 basis point increase in interest rates relating to the debt securities and a 10% decline in price of the marketable equity securities would be approximately $239,000 and $333,000, respectively.

The following table represents principal cash flows from available-for-sale debt securities outstanding as of December 31, 2004 by contractual maturity date, and the relative fair value and average interest rate (amounts in thousands, except interest rates):

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements are listed in Item 15 and are included herein on pages 29 through 56.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

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

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

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

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Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Ambassadors International, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Ambassadors International, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ambassadors International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In our opinion, management’s assessment that Ambassadors International, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Ambassadors International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ambassadors International, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 of Ambassadors International, Inc. and our report dated March 4, 2005 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

Irvine, California

March 4, 2005

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information is incorporated by reference from the Registrant’s definitive Proxy Statement for the fiscal year ended December 31, 2004 which is expected to be filed with the Securities and Exchange Commission on or about April 13, 2005.

Item 11. Executive Compensation

The information is incorporated by reference from the Registrant’s definitive Proxy Statement for the fiscal year ended December 31, 2004 which is expected to be filed with the Securities and Exchange Commission on or about April 13, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information is incorporated by reference from the Registrant’s definitive Proxy Statement for the fiscal year ended December 31, 2004 which is expected to be filed with the Securities and Exchange Commission on or about April 13, 2005.

Item 13. Certain Relationships and Related Transactions

The information is incorporated by reference from the Registrant’s definitive Proxy Statement for the fiscal year ended December 31, 2004 which is expected to be filed with the Securities and Exchange Commission on or about April 13, 2005.

Item 14. Principal Accounting Fees and Services

The information is incorporated by reference from the Registrant’s definitive Proxy Statement for the fiscal year ended December 31, 2004 which is expected to be filed with the Securities and Exchange Commission on or about April 13, 2005.

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Item 15. Exhibit, and Financial Statement Schedules

The following documents are filed as part of this Report:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Ambassadors International, Inc.

We have audited the accompanying consolidated balance sheets of Ambassadors International, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ambassadors International, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ambassadors International, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

Irvine, California

March 4, 2005

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Ambassadors International, Inc.

Consolidated Balance Sheets

(in thousands, except share data)