AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Ambassadors International, Inc.

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

Ambassadors International, Inc.

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

Ambassadors International, Inc.

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

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report. This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2007.

We are a cruise, marine and travel and events company. Our cruise operations include U.S.-flagged cruise ships that sail along the inland rivers and coastal waterways of North America and international-flagged ships that sail to destinations in the Caribbean, Europe, the Americas and the Greek Isles. Our cruise operations are conducted under our Majestic America Line brand and Windstar Cruises within Ambassadors Cruise Group, LLC. Majestic America Line is a domestic provider of overnight passenger cruises along the inland rivers and coastal waterways of North America. Windstar Cruises operates three motor-sail yachts that offer sailings in the Caribbean, Europe, the Americas and the Greek Isles.

Through our marine business, we are a global provider of marina design, manufacturing and construction services. Our marine business also offers marine operations, management and consulting services to marina owners.

Through our travel and events business, we provide event services to corporations, associations and trade show companies. In addition, we develop, market and manage performance improvement programs utilizing travel incentives and merchandise awards designed to achieve specific corporate objectives, including achieving sales goals, improving productivity and attracting and retaining qualified employees. Our clients include Fortune 1000 companies and other large and small businesses.

We also reinsure property and casualty risks written by licensed U.S. insurers in the categories of commercial auto liability, commercial physical damage and workers’ compensation associated with members of highly selective affinity groups or associations.

In 2006 and 2007, we completed several major acquisitions in the cruise and marine segments. In 2007, we successfully completed the integration of the marine acquisitions, as well the Windstar Cruises acquisition. The integration of the domestic cruise operations proved to be more challenging than anticipated.

On April 29, 2008, we announced our intention to sell Majestic America Line. We intend operating Majestic America Line through the 2008 season and are formalizing the plans necessary for conducting the exit of the business in an orderly and effective manner.

For 2008, we are focused on improving our business performance and have identified three major areas for improvement as follows:

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our 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 that affect our most critical accounting policies, on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, within the framework of current accounting literature.

Our businesses are seasonal. Historically, we have recognized the majority of our operating results in the first and second quarters of each fiscal year. As a result of our cruise-related acquisitions and the size of our cruise operations, the majority of our operating results will be recognized in the second and third three-month periods of our fiscal year which coincides with our cruising season. Our annual results would be adversely affected if our revenue were to be substantially below seasonal norms during the second and third quarters of our fiscal year.

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

Revenue Recognition

We recognize revenues in accordance with GAAP, including SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” and EITF 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent.” 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 recognize revenue when persuasive evidence of an arrangement exists, the service fee is fixed or determinable, collectibility is reasonably assured and delivery has occurred.

Passenger Ticket Revenue and Onboard and Other Cruise Revenues

We record passenger ticket revenue net of applicable discounts. We recognize passenger ticket revenue and related costs of revenue when the cruise is completed. We generally receive from our customers a partially refundable deposit within one week of booking a tour, with the balance typically remitted 60 days prior to the departure date. If customers cancel their trip, the nonrefundable portion of their deposit is recognized as revenue on the date of cancellation. Passenger revenue representing travel insurance purchased at the time of reservation is recognized upon the completion of the cruise or passenger cancellation, whichever is earlier and our obligation has been met. Onboard and other cruise revenue consisting of beverage and souvenir sales and optional shore excursions are deferred and recognized as revenue when the cruise is completed.

Marine Revenue

We recognize revenue for marine and related services and shipyard related revenues in accordance with the American Institute of Certified Public Accountants Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Production-Type Contracts.” Contract costs include direct labor, materials, subcontractors and other direct costs, plus estimated indirect costs such as equipment rental, repairs and depreciation and overhead. General and administrative costs are expensed as incurred.

We recognize revenues on fixed price marine construction contracts using the percentage of completion method, whereby a portion of the contract revenue, based on contract costs incurred to date compared with total estimated costs at completion (based on our estimates), is recognized as revenue each period. Revenues on cost-plus contracts are recognized on the basis of costs incurred, plus the estimated fee earned. Estimates of fees earned are based on negotiated fee amounts or our assessment of the fee amounts that are likely to be earned. Each of these methods approximate percentage of completion revenue recognition based on contract costs incurred to date compared with total estimated costs at completion. We use the completed-contract method for shipyard related contracts for which reasonably dependable estimates cannot be made.

On occasion, we or our customers may seek to modify a contract to accommodate a change in the scope of the work, such as changes in specifications, method or manner of performance, equipment, materials, or period of performance, or to account for customer-caused delays, errors in specifications or design, contract terminations, or other causes of unanticipated additional costs. Such change orders or claims are evaluated according to their characteristics and the circumstances under which they occur, taking into consideration such factors as the probability of recovery, our experience in negotiating change orders and claims, and the adequacy of documentation substantiating the costs of such change order or claim. Costs attributable to unpriced change orders and claims are accounted for as costs of contract performance in the period in which the costs are incurred, and revenue is recognized to the extent of costs incurred. Revenue in excess of costs attributable to unpriced change orders is recorded when realization is assured beyond a reasonable doubt, based on our experience with the customer or when a bona fide pricing offer has been provided by the customer. Receivables related to unpriced change orders and claims are not material.

We follow these revenue recognition methods because reasonably dependable estimates of the revenue, costs and profits applicable to various stages of a contract can generally be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time, or satisfy our obligations under the contracts, then profit may be significantly and negatively affected or losses on contracts may need to be recognized. We review contract performance, costs incurred, and estimated costs to complete on a regular basis. Revisions to revenue and profit estimates are reflected in income in the period in which the facts that give rise to the revisions become known. Provisions for anticipated losses on contracts are reflected in income in the period in which the loss becomes known.

A contract may be regarded as substantially completed if remaining costs and potential risks are insignificant in amount. We consider a contract to be substantially completed upon delivery of the product, acceptance by the customer and compliance with contract performance specifications.

The asset, “costs plus earnings in excess of billings on construction contracts,” represents revenues recognized in excess of amounts billed. The liability, “billings in excess of costs plus earnings on construction contracts,” represents billings in excess of revenues recognized.

Travel, Incentive and Event Related

We bill travel participants, mainly consisting of large corporations, in advance, and record the cash received as a participant deposit. We pay for certain direct program costs such as airfare, hotel 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.

We recognize revenue from hotel reservation, registration and related travel services when the convention operates. We recognize revenue from the sale of merchandise when the merchandise is shipped, the service has been provided or when the redemption periods have expired. We defer revenue from pre-paid, certificate-based merchandise incentive programs until our obligations are fulfilled or upon management’s estimates (based upon historical trends) that it is remote that the certificate will be redeemed. We report these revenues on a net basis, reflecting the net effect of gross billings to the client less any direct program or merchandise costs.

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.

Property, Vessels and Equipment

Property, vessels and equipment are stated at cost, net of accumulated depreciation. We expense as incurred the cost of maintenance and repairs that do not improve or extend the lives of the respective assets. We capitalize major additions and betterments. Our ships are capitalized and depreciated using the straight-line method over the expected useful life ranging up to 30 years, net of a residual value that generally is approximately 15%. Ship replacement parts are capitalized and depreciated upon being placed in service. Office and shop equipment is capitalized and depreciated using the straight-line method over the expected useful life of the equipment, ranging up to 10 years. We amortize leasehold improvements using the straight-line method over the lesser of the expected useful life of the improvement or the term of the related lease.

We perform reviews for the impairment of property, vessels and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When property and equipment are sold or retired, we remove the related cost and accumulated depreciation from the accounts and recognize any gain or loss in the statement of operations. Judgments and estimates made related to property and equipment are affected by factors such as economic conditions, changes in resale values and changes in operating performance. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Drydocking

We capitalize drydocking costs as incurred and amortize such costs over the period to the next scheduled drydock. We believe that the deferral method provides a better matching of revenues and expenses. Drydocking costs are included in prepaid and other current assets and in long term assets in the accompanying balance sheet and are amortized over the cruising season between scheduled dry dockings.

Long-Lived Assets Including Intangibles

We test goodwill and intangible assets with indefinite useful lives for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. Management evaluates recoverability using both subjective and objective factors. Subjective factors include the evaluation of industry and product trends and our strategic focus. Objective factors include management’s 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 reporting units and indefinite lived intangibles 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, we allocated goodwill to these reporting units to the extent it related to each reporting unit. We amortize intangible assets with definite lives over their estimated useful lives and review them for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The majority of our intangible assets were assigned lives based on contract values associated with each intangible asset. We amortize our acquired intangible assets with definite lives over periods ranging from five to 20 years depending on the contract term where applicable.

Reserve for Loss and Loss Adjustment Expenses

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. Such liabilities are based on estimates and, while we believe that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. Anticipated deductible recoveries from insureds are recorded as reinsurance recoverables at the time the liability for unpaid claims is established. Other recoveries on unsettled claims, such as salvage and subrogation, are estimated by management and adjusted upon collection.

Reinsurance

In the normal course of our reinsurance business, we seek 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 period. We account for the effects of subsequent changes in estimated or actual cash flows 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.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the fair value approach in SFAS No. 123R is similar to the fair value approach described in SFAS No. 123. In 2005, we used the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. We adopted SFAS No. 123R, using the modified-prospective method, beginning January 1, 2006. Based on the terms of our plans, we did not have a cumulative effect of accounting change related to our plans. We also elected to continue to estimate the fair value of stock options using the Black-Scholes-Merton formula.

Using the Black-Scholes-Merton formula to estimate the fair value of stock-based compensation requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, risk free interest rates, our dividend yield and the volatility of our common stock price over the expected term. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on our consolidated statements of operations.

On November 10, 2005 the FASB issued FSP SFAS No. 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” We have elected to adopt the alternative transition method provided in SFAS No. 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee stock-based compensation expense, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that were outstanding at our adoption of SFAS No. 123R. In addition, in accordance with SFAS No. 123R, SFAS No. 109, “Accounting for Income Taxes,” and EITF Topic D-32, “Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations,” we have elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to us. We measure the tax benefit associated with excess tax deductions related to stock-based compensation expense by multiplying the excess tax deductions by the statutory tax rates.

Income Taxes

We account for income taxes in accordance with the provisions of SFAS No. 109, which requires an asset and liability approach that 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.

Statistical Terminology and Information for Cruise Operations

Available Passenger Cruise Days (“APCD”)

APCD’s are our measurement of capacity and represent double occupancy per cabin multiplied by the number of cruise days for the period.

Occupancy

Occupancy, in accordance with the cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.

Passenger Cruise Days

Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days in their respective cruises.

Selected cruise operations statistical information is as follows:

COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2008 TO THE THREE MONTHS ENDED JUNE 30, 2007

Revenue

Total revenue for the three months ended June 30, 2008 was $80.6 million, compared to $80.3 million for the three months ended June 30, 2007. For the quarter ended June 30, 2008, the increase in revenue was primarily related to increases within our marine operations. Our marine revenues increased $2.7 million due to increased sales in our marina operations at Bellingham Marine that we acquired in July 2006. Our travel, incentive and events related revenue increased $0.1 million primarily due to an increase in program volume. Our cruise revenue decreased $2.4 million due to the $1.6 million decline in revenue from Windstar Cruises which was acquired in April 2007 and $0.8 million decline in revenue from Majestic America Line. Additionally, a decrease of $0.2 million in premiums earned on existing insurance programs as a result of not entering into new programs in 2008 also offset the increase in revenue for the three months ended June 30, 2008.

Cruise Operating Expenses

Cruise operating expenses were $36.4 million for the three months ended June 30, 2008 compared to $35.7 million for the three months ended June 30, 2007. As a percentage of cruise revenue, cruise operating expenses increased to 81.5% during the three months ended June 30, 2008 from 75.8% during the three months ended June 30, 2007. This increase was primarily due to increases in fuel costs, freight and logistics costs and other direct operating expenses.

Cost of Marine Revenue

Cost of marine revenue was $24.1 million for the three months ended June 30, 2008 compared to $22.0 million for the three months ended June 30, 2007. As a percentage of marine revenue, cost of marine revenue increased slightly to 77.1% during the three months ended June 30, 2008 from 77.0% during the three months ended June 30, 2007.

Selling and Tour Promotion Expenses

Selling and tour promotion expenses decreased to $2.6 million for the three months ended June 30, 2008 from $6.3 million for the three months ended June 30, 2007. As a percentage of total revenue, selling and tour promotion decreased to 3.2% during the three months ended June 30, 2008 from 7.8% during the three months ended June 30, 2007, primarily due to the slow down in sales and marketing efforts for the Majestic America Line division.

General and Administrative Expenses

General and administrative expenses were flat at $14.4 million for the three months ended June 30, 2008 compared to $14.3 million for the three months ended June 30, 2007. As a percentage of total revenues, general and administrative expenses were flat at 17.8% for the three months ended June 30, 2008 as well as for the three months ended June 30, 2007.

Depreciation and Amortization

Depreciation and amortization expenses were $3.9 million for the three months ended June 30, 2008 compared to $3.1 million for the three months ended June 30, 2007. The increase is related to the additional depreciation expense during the three months ended June 30, 2008 due to the increase in property, vessels and equipment.

Loss and Loss Adjustment Expenses, Insurance Acquisition Costs and Other Operating Expenses

Loss and loss adjustment expenses, insurance acquisition costs and other operating expenses were $0.1 million for the three months ended June 30, 2008, compared to $0.3 million for the three months ended June 30, 2007. The decrease is related to the decrease in net insurance premiums earned in 2008 compared to 2007.

Operating Loss

We recorded an operating loss of $0.9 million for the three months ended June 30, 2008, compared to $1.4 million for the three months ended June 30, 2007. The change is the result of the changes described above.

Other Income (Expense)

Other expense for the three months ended June 30, 2008 increased $0.9 million to $1.4 million, from $0.5 million for the three months ended June 30, 2007. Other income (expense) for the quarter ended June 30, 2008 consisted primarily of $1.1 million in interest expense related to our convertible debt and $0.5 million in interest expense related to our ship financing, partially offset by interest and dividend income of $0.3 million. Other expense for the three months ended June 30, 2007 consisted of $1.0 million in interest expense related to our convertible debt and $1.2 million in interest expense related to our ship financing offset by $1.1 million in interest and dividend income and $0.6 million in insurance recoveries under our business interruption insurance on the Mississippi Queen^® relating to the norovirus incident which occurred in October 2006.

Interest expense related to ship financing decreased during the three months ended June 30, 2008 compared to the same period in the prior year primarily due to the default of the Empress of the North debt. EN Boat, LLC (“EN Boat”), the owner of the Empress of the North, was unable to make its semi-annual payment on the note due July 17, 2008. EN Boat will be unable to cure the payment default within the 30 day cure period. The Company is actively working with MARAD toward an orderly transition of the Empress of the North to MARAD’s custodial control following its last scheduled sailing on August 9, 2008. The default under the note should have limited financial impact due to the fact that recourse is limited to the Empress of the North and EN Boat has no other assets.

Income Taxes

We recorded an income tax provision of $21,000 for the three months ended June 30, 2008, compared to a tax benefit of $7.7 million for the three months ended June 30, 2007. In accordance with SFAS No. 109, during the fourth quarter of 2007 we established a full valuation allowance on our domestic deferred tax assets. As a result of the valuation allowance, no tax benefit was provided for the three months ended June 30, 2008 for our consolidated domestic losses.

The Company will continue to assess its valuation allowance in future periods based on the provisions within SFAS No. 109. Future tax provision and benefits recorded will be affected by the presence of the valuation allowance.

Net Loss

Net loss for the three months ended June 30, 2008 was $2.4 million, compared to net income of $5.8 million for the comparable period in 2007. The change is the result of the changes described above.

COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED JUNE 30, 2007

Revenue

Total revenue for the six months ended June 30, 2008 was $137.4 million, compared to $113.1 million for the six months ended June 30, 2007. For the period ended June 30, 2008, the increase in revenue was primarily related to increases within our cruise and marine operations. Our cruise revenue increased $16.2 million due to a $17.9 million increase in revenue from Windstar Cruises which was acquired in April 2007. Our marine revenues increased $8.6 million due to increased sales in our marina operations at Bellingham Marine that we acquired in July 2006. Our travel, incentive and event related revenue increased $0.3 million primarily due to an increase in program volume. These increases were offset by a decrease of $0.8 million in premiums earned on existing insurance programs as a result of not entering into new programs in 2008.

Cruise Operating Expenses

Cruise operating expenses were $57.0 million for the six months ended June 30, 2008 compared to $42.7 million for the six months ended June 30, 2007. The increase in operating expenses was primarily due to full six months of Windstar Cruises operations in the first half of 2008 compared to three months of operation in the first half of 2007. As a percentage of cruise revenue, cruise operating expenses increased to 83.3% during the six months ended June 30, 2008 from 81.6% during the six months ended June 30, 2007. This increase was primarily due to increases in fuel costs, freight and logistics costs and other direct operating expenses.

Cost of Marine Revenue

Cost of marine revenue was $46.7 million for the six months ended June 30, 2008 compared to $41.5 million for the six months ended June 30, 2007. As a percentage of marine revenue, cost of marine revenue decreased to 76.9% during the six months ended June 30, 2008 from 79.6% during the six months ended June 30, 2007.

Selling and Tour Promotion Expenses

Selling and tour promotion expenses decreased to $9.0 million for the six months ended June 30, 2008 from $12.8 million for the six months ended June 30, 2007. As a percentage of total revenue, selling and tour promotion decreased to 6.6% during the six months ended June 30, 2008 from 11.3% during the six months ended June 30, 2007, primarily due to the slow down in sales and marketing efforts for the Majestic America Line division.

General and Administrative Expenses

General and administrative expenses increased to $29.4 million for the six months ended June 30, 2008 compared to $25.6 million for the six months ended June 30, 2007. As a percentage of total revenues, general and administrative expenses decreased to 21.4% for the six months ended June 30, 2008 from 22.6% for the six months ended June 30, 2007.

Depreciation and Amortization

Depreciation and amortization expenses were $7.4 million for the six months ended June 30, 2008 compared to $4.7 million for the six months ended June 30, 2007. The increase is primarily due to the additional depreciation expense during the six months ended June 30, 2008 due to the increase in property, vessels and equipment from Windstar Cruises acquired in April 2007.

Loss and Loss Adjustment Expenses, Insurance Acquisition Costs and Other Operating Expenses

Loss and loss adjustment expenses, insurance acquisition costs and other operating expenses were $0.2 million for the six months ended June 30, 2008, compared to $1.0 million for the six months ended June 30, 2007. The decrease is related to the decrease in net insurance premiums earned in 2008 compared to 2007.

Operating Loss

We recorded an operating loss of $12.2 million for the six months ended June 30, 2008, compared to $15.1 million for the six months ended June 30, 2007. The change is the result of the changes described above.

Other Income (Expense)

Other expense for the six months ended June 30, 2008 was $2.2 million, compared to $1.1 million for the six months ended June 30, 2007. Other income (expense) for the six months ended June 30, 2008 consisted primarily of $2.1 million in interest expense related to our convertible debt and $1.5 million in interest expense related to our ship financing, partially offset by interest and dividend income of $0.8 million and insurance recoveries of $0.6 million for the Queen of the West and the Empress of the North related incidents in 2006 and 2007, respectively. Other expense for the six months ended June 30, 2007 consisted of $0.9 million in interest expense related to our convertible debt and $2.3 million in interest expense related to our ship financing offset by $1.8 million in interest and dividend income and $0.6 million in insurance recoveries under our business interruption insurance on the Mississippi Queen^® relating to the norovirus incident which occurred in October 2006.

Interest expense related to ship financing decreased during the six months ended June 30, 2008 compared to the same period in the prior year primarily due to the default of the Empress of the North debt. EN Boat, the owner of the Empress of the North, was unable to make its semi-annual payment on the note due July 17, 2008. EN Boat will be unable to cure the payment default within the 30 day cure period. The Company is actively working with MARAD toward an orderly transition of the Empress of the North to MARAD’s custodial control following its last scheduled sailing on August 9, 2008. The default under the note should have limited financial impact due to the fact that recourse is limited to the Empress of the North and EN Boat has no other assets.

Income Taxes

We recorded an income tax benefit of $0.1 million for the six months ended June 30, 2008, compared to $13.4 million for the six months ended June 30, 2007. In accordance with SFAS No. 109, during the fourth quarter of 2007 we established a full valuation allowance on our domestic deferred tax assets. As a result of the valuation allowance, no tax benefit was provided for the six months ended June 30, 2008 for our consolidated domestic losses.

The Company will continue to assess its valuation allowance in future periods based on the provisions within SFAS No. 109. Future tax provision and benefits recorded will be affected by the presence of the valuation allowance.

Net Loss

Net loss for the six months ended June 30, 2008 was $14.3 million, compared to $2.8 million for the comparable period in 2007. The change is the result of the changes described above.

Liquidity and Capital Resources

In making an assessment of our liquidity, we believe that the items in our financial statements that are most relevant are our cash and cash equivalents and cash generated from our operating and financing activities.

Net cash provided by operating activities for the six months ended June 30, 2008 was approximately $1.2 million, compared to $12.2 million for the six months ended June 30, 2007. The change in net cash relates primarily to timing differences in the collection of current assets and the payment of current liabilities, an increase in net loss and a decrease in accounts payable and accrued expenses and passenger deposits. This decrease was partially offset by an increase in the non-cash charges during the period and a decrease in accounts and other receivables.

Net cash used in investing activities for the six months ended June 30, 2008 was $11.4 million compared to $18.4 million for six months ended June 30, 2007. The change is primarily due to a decrease in proceeds from sale of securities, offset by decreases in restricted cash by our credit card processors and expenditures for purchase of property, vessels and equipment. In April 2008, our credit card processor increased our restricted cash by an additional $5 million which raised the target level of restricted cash for Majestic America Line to $20 million. This additional withholding was effective beginning in the second quarter of 2008. The exact timing of removal of this restriction and return of this restricted cash is under discussions with the credit card processor. A failure or a significant delay in removing the restrictions and returning this restricted cash could significantly impact our operations.

As of June 30, 2008, we have incurred significant capital expenditures and cost for improvements to and maintenance of our ships, and we anticipate that these expenditures and costs will not materially change during the remainder of 2008. We do not have any material commitments for capital expenditures in our marine, travel and events or insurance businesses in 2008.

On January 13, 2006, ACG acquired American West. Under the terms of the agreement, ACG acquired the membership interests of American West for one dollar, repaid debt of approximately $4.3 million and assumed approximately $41.5 million in fixed rate, 4.63% debt payable through 2028 and guaranteed by the United States Maritime Administration. In addition, the transaction consideration consisted of 250,000 shares of our restricted common stock, which is subject to forfeiture to us if certain future financial targets are not met during the four years following the close of the transaction.

On April 25, 2006, ACG acquired the cruise-related assets and liabilities of Delta Queen for $1.8 million in cash, the assumption of passenger deposits and the assumption of approximately $35.0 million of fixed rate, 6.50% debt payable through 2020 and guaranteed by the United States Maritime Administration. In addition, the transaction included contingent consideration of 100,000 shares of our common stock, to be granted to Delta Queen Steamboat Company, Inc. if certain future financial targets are met in any of the three years following the close of the transaction. No shares related to the contingent consideration were issued in 2006, 2007 or the six months ended June 30, 2008.

On February 13, 2006, BellPort purchased certain assets related to the Newport Harbor Shipyard for $0.5 million. Concurrent with the asset purchase, BellPort entered into a long term agreement to lease and operate the shipyard facility beginning April 1, 2006 and ending March 31, 2011.

In July 2006, we acquired Bellingham Marine through the acquisition by our Ambassadors Marine Group LLC subsidiary of 100% of the outstanding stock of Nishida Tekko America Corporation from its parent company, Nishida Tekko Corporation. In addition, Ambassadors Marine Group and Nishida Tekko Corporation entered into an option agreement pursuant to which Nishida Tekko Corporation was granted a five year option to acquire 49% of the outstanding stock of Nishida Tekko America Corporation for $3.4 million plus 7% simple interest. The effect of the option exercise would give Nishida Tekko Corporation an approximate 25% interest in Bellingham Marine.

In April 2007, we consummated our acquisition of Windstar cruises for a total consideration of $72.1 million of which $12.1 million was paid in cash and $60.0 million in seller financing.

On April 2, 2007, ACG, through its wholly-owned subsidiary, AICG acquired Windstar Cruises for $11.3 million in cash, $60 million in seller financing and assumed approximately $28.5 million in liabilities. The $60 million in seller financing was subsequently paid off on April 17, 2007, with the proceeds from the convertible note offering by which we had raised $97.0 million in April 2007.

The 3.75% senior convertible notes are due on April 15, 2027. Interest on the notes is payable semi-annually in arrears on April 15 and October 15 in each year, commencing October 15, 2007. The notes are convertible into shares of Ambassadors’ common stock, par value $0.01 per share, at an initial conversion rate of 17.8763 shares per $1,000 principal amount of the notes (which is equivalent to an initial conversion price of approximately $55.94 per share), subject to adjustment upon the occurrence of certain events. We may redeem the notes in whole or in part after April 15, 2012. We may also redeem all or a portion of the notes after April 20, 2010 and prior to April 15, 2012, only if the price of our common stock reaches certain thresholds for a specified period of time. Holders of the notes may require us to purchase all or a portion of the notes, in cash, on April 15, 2012, April 15, 2017 and April 15, 2022 or upon the occurrence of specified fundamental changes as defined in the purchase agreement dated March 28, 2007. If a holder elects to convert notes in connection with a specified fundamental change that occurs prior to April 15, 2012, we will in certain circumstances increase the conversion rate by a specified number of additional shares.

On April 29, 2008, we announced our intention to sell Majestic America Line. We intend on operating Majestic America Line through the 2008 season and are formalizing the plans necessary for conducting the exit of the business in an orderly and effective manner. Several credible parties have expressed a sincere interest in acquiring some or all the assets of Majestic America Line and building upon the efforts and investments we have made in delivering unique cruise experiences that celebrate American history, culture and our magnificent waterways.

We are currently seeking financing in which we can leverage the assets of Windstar Cruises. If we are successful in both the sale of Majestic America Line and the financing of Windstar Cruises, we will once again be in a position to allocate capital. We see investment opportunities in both international small ship cruising and in our marine segment. In addition to investing into these businesses, we want to be in the position which allows us the opportunity to repurchase our stock if it remains at its current prices and also have the ability to purchase our convertible bonds if they continue to trade at a significant discount.

Net cash used in financing activities for six months ended June 30, 2008 was $2.1 million, compared to net cash provided by financing activities of $28.8 million for the six months ended June 30, 2007. Activity for the six months ended June 30, 2008 included $2.6 million in payments on long-term debt compared to $2.2 million during the six months ended June 30, 2007. An additional $60.1 million was used to repay the seller financing debt incurred in the acquisition of Windstar Cruises and related accrued interest. Net cash provided by financing activity in 2007 included $97.0 million from our convertible debt offering offset by $3.3 million toward payment of convertible debt offering costs. Net cash used by financing activity during the six months ended June 30, 2007 also included $2.2 million of cash dividends totaling $0.20 per common share.

On September 2, 2003, the Company’s board of directors authorized a new dividend policy of paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. 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. Subsequent to the dividend declared in May 2007, our board of directors did not approve any additional dividends for 2007 or for the first quarter of 2008.

The following dividends were declared in 2007 on the dates indicated (in thousands):

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 June 30, 2008, we had outstanding approximately $7.4 million in letters of credit related to property and casualty insurance programs which are scheduled to expire at various dates through 2008. As of June 30, 2008, we had outstanding approximately $0.1 million in letters of credit related to travel and event business operations that expire at various dates through 2008.

Under Bermuda regulations, Cypress Re is required to maintain a surplus of 20% of gross written premiums or 15% of loss and loss adjustment expense reserves or a minimum total statutory capital and surplus required for a Class 3 Company of $1.0 million, whichever is greater. As of June 30, 2008, Cypress Re had $3.2 million in total statutory capital and surplus which is in excess of the required statutory capital and surplus of $1.0 million. In April 2008, we reduced our capital by $3.3 million based on authority from Bermuda.

In November 1998, our board of directors authorized the repurchase of up to an aggregate of $20.0 million of our common stock in the open market or through private transactions. In August 2006, our board of directors authorized an additional $10.0 million for the repurchase of our common stock in the open market or through private tractions, providing for an aggregate of $30.0 million. This repurchase program is ongoing and as of June 30, 2008, we had repurchased 1,102,650 shares for approximately $14.0 million. No shares were repurchased during the six months ended June 30, 2008 and 2007. We do not believe that any future repurchases will have a significant impact on our liquidity.

We believe that cash, cash equivalents, available-for-sale securities and cash flows from operations and from other potential investing and financing sources will enable us to meet our anticipated operating cash needs for at least the next twelve months. We continue to pursue financing alternatives for Windstar Cruises as well as finalizing plans for the sale of Majestic America Line.

Trends and Uncertainties

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

Cautionary Note Regarding Forward-Looking Statements

Statements contained in this quarterly report on Form 10-Q that 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: