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

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2008
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		91-1688605
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1071 Camelback Street Newport Beach, CA (Address of Principal Executive Offices)		92660 (Zip Code)

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

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


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, $.01 Par Value		Nasdaq Global Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 þ No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $40,806,204 based on the closing sale price as reported on the Nasdaq Global Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 7, 2009

Common Stock, $.01 par value per share		11,177,267

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2009 Annual Meeting of Stockholders to be filed no later than April 30, 2009.

PART I


Item 1.	*Business*

Overview

In 2008, we were a cruise, marine and travel and events company. Our cruise operations included U.S.-flagged cruise ships that sailed along the inland rivers and coastal waterways of North America and international-flagged ships that sailed to destinations in the Caribbean, Europe, the Americas and the Greek Isles.

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

Through our travel and events business, we provided event services to corporations, associations and trade show companies. In addition, we developed, marketed, and managed 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 included Fortune 1000 companies, and other large and small businesses.

We also earned a declining portion of our revenues by reinsuring property and casualty risks written by licensed United States (“U.S.”) based insurers. The lines of business that were being reinsured included commercial auto liability, commercial physical damage and workers’ compensation. These risks are associated with members of highly selective affinity groups or associations.

In April 2008, we announced our intention to sell the domestic cruise operations of Majestic America Line. In February 2009, we announced our intention to sell our non-cruise related operations including marine, travel and events and insurance divisions and operate solely as a cruise company through the international cruise operations of Windstar Sail Cruises Limited (“Windstar Cruises”).

Our principal executive offices are located at 1071 Camelback Street, Newport Beach, California, 92660-3228 and our telephone number is (949) 759-5900.

Business Strategy

In February 2009, we announced our intentions to focus solely on Windstar Cruises. We plan to sell all non-Windstar Cruises related assets, including the assets of Majestic America Line that was announced in April 2008, in order to concentrate our efforts on the small ship international luxury segment. We also plan on moving our corporate office from Newport Beach, California to Seattle, Washington. We believe that Windstar Cruises has the most potential long term growth for our shareholders and a successful sale of our other businesses would provide us with stability in a difficult economy.

Our strategy for Windstar Cruises is to become a leader in the luxury small ship cruise segment. A key part of our international business strategy will be making cruise acquisitions that we believe are complementary to our international cruise business. We believe that by acquiring or developing strong brands in the luxury small ship category, we can become a global provider of vacation experiences to unique and desirable destinations. We intend to continue evaluating and considering acquisition opportunities that are complementary to our Windstar Cruises operations.

Business Operations

As of December 31, 2008, and for purposes of this report, we reported the following business segments:


	•	cruise,

	•	marine,

	•	travel and events, and

	•	corporate and other, which consists of general corporate assets (primarily cash and cash equivalents and investments), our reinsurance operations and other activities that are not directly related to our cruise, marine, and travel and events operating segments.

See Note 19, “Business Segments” in the Notes to the Consolidated Financial Statements listed under Item 15 and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Segment Information” for financial information concerning our business segments.

Cruise Segment

We conducted our cruise operations under our Majestic America Line and Windstar Cruises brands within our Ambassadors Cruise Group, LLC (“ACG”) subsidiary.

Our Majestic America Line was a domestic provider of overnight passenger cruises along the inland rivers and coastal waterways of North America. During 2008, we owned seven U.S.-flagged cruise ships under the Majestic America Line brand, including the Empress of the North, Queen of the West, Columbia Queen, Contessa, American Queen^®, Delta Queen^® and Mississippi Queen^®.

In April 2007, we formed Ambassadors International Cruise Group, LLC (“AICG”) as a subsidiary of ACG and acquired Windstar Cruises, a luxury, small ship cruise line consisting of three international-flagged motor-sail yachts: Wind Surf, Wind Spirit and Wind Star. Windstar Cruises’ fleet of luxury yachts explore hidden harbors and secluded coves of the world’s most treasured destinations. Windstar Cruises offers sailings in the Caribbean, Europe, the Americas and the Greek Isles.

In April 2008, we announced our intention to sell the Majestic America Line. In 2008, we held the farewell season for the Delta Queen^®. The Mississippi Queen^® did not operate in 2007 and the Contessa and the Mississippi Queen^® did not operate in 2008. The Empress of the North and the American Queen^® were surrendered to the United States through the Department of Transportation Maritime Administration (“MARAD”) in August 2008 and November 2008, respectively. None of the remaining five ships under the Majestic America Line brand will sail in 2009.

In January 2009 DQ Boat, LLC, a wholly owned subsidiary of the Company and owner of the Delta Queen^® entered into Bareboat Charter Agreement with Delta Queen, LLC to lease the Delta Queen^® for use as a fixed location boutique hotel, restaurant and bar in Chattanooga, Tennessee.

We acquired our U.S. cruise operations through a series of acquisitions. In January 2006, ACG acquired American West Steamboat Company, LLC (“American West”), a cruise company that offered cruises through Alaska’s Inside Passage and on the Columbia and Snake rivers. In April 2006, we acquired the cruise-related assets of Delta Queen Steamboat Company, Inc. (“Delta Queen”).

Each of our U.S.-flagged ships offered a boutique experience unique to itself and intimate access to the scenic places, historical events and varied cultures that define regional America. Our attention to quality with deluxe comfort and warm attentive service from an American crew made voyage on the ships of Majestic America Line a truly unique experience. Our intimate ships ensured a comfortable, yet refined, cruise experience where guests could mingle with everyone aboard, from their fellow adventurers to our crew, including the ship’s captain.

For the period from 2006 through 2008, we offered cruises through Alaska’s Inside Passage onboard the Empress of the North, and on the Columbia and Snake rivers onboard the Empress of the North, Columbia Queen, Queen of the West and Contessa. We also offered cruises onboard the American Queen^®, Delta Queen^® and Mississippi Queen^® on many of America’s best known rivers, including the Mississippi, Ohio, Tennessee, Cumberland and Arkansas rivers, with stops at many of America’s most historic cities, battlegrounds and estates, including New Orleans, Memphis and St. Louis. Some of our cruises offered an onboard historian and naturalist and shore excursions to enhance our passengers’ understanding of the wildlife, history and cultures of the areas traveled.

To attract customers, we developed products that combined our river and coastal cruises with escorted tours and overnight stays at historic port cities. As a convenience to our passengers, we also arranged hotel accommodations and air and land transportation to and from our cruise embarkation and disembarkation points.

As of December 31, 2008, our U.S.-flagged cruise ships offered a total of 928 passenger berths and our international-flagged ships offered a total of 608 passenger berths. We utilize passenger berths as our measurement of capacity on our ships. Each passenger berth represents a bed that can be sold to customers for overnight accommodations on our cruises.

In 2008, we operated five of the seven U.S.-flagged ships under the Majestic America Line brand and all three international-flagged ships under the Windstar Cruises brand. In 2009, we will only operate our Windstar Cruise Line. As of December 31, 2008, the following is a listing of our U.S.-flagged and international-flagged cruise ships:


	Passenger		In-Service
Ship	Berths		Year		Itineraries

• Queen of the West		142		1993		Domestic
• Columbia Queen		150		2000		Domestic
• Delta Queen^®		176		1926		Domestic
• Mississippi Queen^®		412		1976		Domestic
• Contessa		48		1986		Domestic
• Wind Surf		312		1989		International
• Wind Star		148		1986		International
• Wind Spirit		148		1987		International

Marine Segment

Through our marine business, the Ambassadors Marine Group, LLC (“AMG”) subsidiary, provided marina design, manufacturing and construction services. We also offered marine operations, shipyard services, management and consulting services to marina owners. Our marine operations primarily consisted of the operations of Bellingham Marine Industries, Inc. (“Bellingham Marine”) and BellPort Group, Inc. (“BellPort”). Our marine business customer base was widespread and geographically diverse, and included corporations, government agencies and private individuals.

Bellingham Marine is a global marina builder, providing design and construction services to marina owners throughout the world. We designed, manufactured and installed dock and drystack systems from nine different plants worldwide. We also supplied manufactured dock systems that can be installed by others. We continually improved our products as each project is individually designed for its specific geographic location. In addition, we used a variety of consulting engineers who help us upgrade our products’ designs and material types to increase product longevity and minimize maintenance requirements. We believed that the future growth of our marine business would be driven primarily by the operations of Bellingham Marine given its current size and international presence.

During the first half of 2006, we conducted our marine operations through our wholly-owned subsidiary, BellPort Group, which we acquired in February 2005. In February 2006, we acquired BellJa Holding Company, Inc., through which we acquired our 34% interest in BellPort Japan Company, Ltd. (“BellPort Japan”), a marina operator, owner and developer of waterfront real estate in Japan, including both residential communities and marina facilities. In connection with this acquisition, we extended our license agreement with BellPort Japan through 2010. Pursuant to the license agreement, as amended in July 2008, we receive license fees in U.S. dollars of 0.5% of revenue generated using the BellPort brand in Japan with an annual minimum of $60,000. In July 2006, we formed AMG, which became the parent company to BellPort. On August 20, 2007, the majority shareholder of BellPort Japan increased its capital contribution in BellPort Japan resulting in dilution of our investment in BellPort Japan from 34% to 0.9%. We retained an option (not obligation) to contribute capital to increase our investment to 34%. In July 2008, by mutual agreement with the majority shareholder of BellPort Japan, we forfeited this option.

On July 21, 2006, we acquired Bellingham Marine through the acquisition of 100% of the outstanding stock of Nishida Tekko America Corporation from its parent company, Nishida Tekko Corporation. Concurrent

with the acquisition, AMG acquired 49% of the outstanding stock of Bellingham Marine in satisfaction of certain debt obligations. As a result of this stock purchase, we hold our ownership of Bellingham Marine through two wholly-owned subsidiaries, AMG, with its 49% interest, and Nishida Tekko America Corporation, with the remaining 51% ownership interest. In addition, AMG 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 have given Nishida Tekko Corporation an approximate 25% interest in Bellingham Marine. This option was terminated upon agreement by both parties in July 2008.

In addition, in March 2006, we acquired the assets related to the Newport Harbor Shipyard. 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 February 2008, BellPort purchased certain assets related to Anacapa Marine Services, a shipyard business located in Channel Islands Harbor in Oxnard, California, for $0.4 million. We completed the acquisition in order to further expand our shipyard operations.

We also have a 50% ownership interest in Deer Harbor WI, LLC. Deer Harbor WI, LLC owns a marina facility in Deer Harbor, Orcas Island, Washington.

In February 2009, we announced our plans to sell our non-Windstar assets including our marine segment. See note 20, “Subsequent Events” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. In 2008, we recorded an impairment charge of $21.3 million on the assets of AMG. See note 13, “Impairment or Disposal of Long-Lived Assets” of the Notes to Consolided Financial Statements in this Annual Report on Form 10-K.

Travel and Events Segment

Our travel and events segment operated under the Ambassadors, LLC brand. We provided event services to corporations, associations and trade show companies. In addition, we developed, marketed and managed 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 included Fortune 1000 companies and other large and small businesses.

In offering event services, our travel and events business provided conference and event strategy and creative, production and logistics management. Our professionals met with existing or potential clients to determine their business objectives in advance of their conference, event or meeting. As each client has unique requirements for services, we determined the scope of the project and work closely with their staff during the planning stage of the event and onsite production of the event.

In addition, our travel and events group offered hotel reservation, registration and other services for conventions, tradeshows and large specialty events. The contracts for these services generally covered an annual meeting or event and may be for a term of one to several years. Our services included negotiating hotel room blocks, creating sub-blocks and fulfilling requests for hotel rooms for large citywide events. Hotel reservation requests were received by mail, fax and telephone by our call center staff. We accepted 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.

In February 2009, we announced our plans to sell our travel and events segment. See note 20, “Subsequent Events” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Corporate and Other Segment

Our corporate and other segment includes general corporate assets (primarily cash and cash equivalents and investments), our reinsurance operations, which reinsures 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, and other activities that are not directly related to our cruise, marine, and travel and events operating segments.

In our reinsurance operations, we reinsure property and casualty risks written by licensed U.S. insurers through our subsidiary, Cypress Reinsurance, Ltd (“Cypress Re”). We formed Cypress Re in December 2003 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. The lines of business that we reinsure include commercial auto liability, commercial physical damage and workers’ compensation. These risks are associated with members of highly selective affinity groups or associations. Prior to entering into reinsurance arrangements, we require the members, whose risk is reinsured under a program, to meet certain loss control program qualifications and pass certain pre-qualification criteria as part of the underwriting review by a third party.

Our reinsurance transactions are made through quota share agreements in which we agree to accept a certain fixed percentage of premiums written from the ceding company (the original insurance carrier) and in general assume the same percentage of purchased reinsurance, direct acquisition costs and ultimate incurred claims. We purchase excess of loss and aggregate stop loss reinsurance to mitigate potential losses from a severe adverse loss development.

We typically retain the first layer of risk on a per policy basis, which ranges from $250,000 to $500,000, and a third party reinsurance company (through excess of loss reinsurance) retains the next layer up to the policy limits of $1.0 million. Above $1.0 million, we retain losses up to the aggregate reinsurance limit, which varies with each quota share agreement, and the third party reinsurance company pays losses in excess of our aggregate reinsurance limit up to $5.0 million. We are responsible for any additional losses in excess of the aggregate reinsurance limit.

As of December 31, 2008, loss and loss adjustment expenses incurred did not exceed our aggregate reinsurance limit on any of our quota share agreements. We have not entered into any quota share agreements since June 2005 and have scaled back any plans to enter any new reinsurance business due to current business conditions in the U.S. economy.

In February 2009, we announced our plans to sell our non-Windstar Cruises assets including the reinsurance business. See note 20, “Subsequent Events” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

We have a 19.8% minority investment in Grand Prix Tours, Inc., which provides packaged tours primarily to Formula One, Indy Car and NASCAR races in the U.S. and internationally. In 2007, we recognized an impairment loss of $0.2 million equal to the value of our investment in this entity.

Competition

The cruise industry is a highly competitive marketplace with several operators providing cruise offerings domestically and internationally. We compete in terms of price, itineraries, services and ship types. In addition, cruising is one of several options that people have when selecting a vacation. We face competition from other vacation operators that provide leisure and vacation alternatives including resorts, hotels and packaged tours. We believe that we provide a unique experience that is appealing to our target market, but other alternatives may become more appealing. There can be no assurance that our present or future competitors will not exert significant competitive pressures on us.

The marine industry is a competitive marketplace. We compete with other marina builders, service providers and general contractors in terms of quality, price, product and timing. We believe that we deliver products superior to those of our competition, and have created a development team, facilities and processes

that allow us to exceed our clients’ expectations. We believe that our brands are well known for quality within the industry. There can be no assurance that our present or future competitors will not exert significant competitive pressures on us.

The travel and events industry is highly competitive. Many of our competitors are larger and have greater resources than us. 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 excellence of the customer service provided. We believe that we provide a level of service that exceeds our competition. We compete with respect to price and service, and believe our technology is a key element of our service. We believe the barriers to entry are relatively low for any future competitors within the travel and events segment of our business due to the limited resources required. Additionally, certain organizations engaged in the travel and events industry have substantially greater financial, marketing and sales resources than we do. There can be no assurance that our present or future competitors will not exert significant competitive pressures on us.

Regulation

Ship Maintenance

Operation of our U.S.-flagged ships is subject to regulations established by the U.S. Department of Transportation that are enforced by the U.S. Coast Guard and other international class societies. Among these regulations is the requirement that the ships be taken out of operation and removed from the water for inspection of the exterior of the hull on a periodic basis, referred to as drydocking, as well as the performance of certain regularly scheduled maintenance service. We usually layup our domestic ships in the winter months when they are typically out of operation due to limited demand. As of December 31, 2008, the Queen of the West, Columbia Queen, Contessa, Delta Queen^® and the Mississippi Queen^® were layed up pending sale of these vessels. Our international ships must be drydocked at least twice every five years and therefore are typically drydocked at preplanned times of low demand.

Passenger Health, Safety and Security

We are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, safety standards applicable to our ships, health and sanitary standards applicable to our passengers, security standards onboard our ships and at the ship/port interface areas, and financial responsibilities to our passengers. These issues are, and we believe will continue to be, an area of focus by the relevant authorities. This could result in the enactment of more stringent regulation of cruise ships that would subject us to increasing compliance costs in the future.

Various government agencies within the Department of Homeland Security (“DHS”) including the Transportation Security Administration, the U.S. Coast Guard and the U.S. Bureau of Customs and Border Protection, have adopted, and may adopt in the future, new rules, policies or regulations or changes in the interpretation or application of existing laws, rules, policies or regulations, compliance with which could increase our costs or result in loss of revenue.

The Coast Guard’s maritime security regulations, issued pursuant to the Maritime Transportation Security Act of 2002, require us to operate our ships and facilities pursuant to both the maritime security regulations and approved security plans. Our ships and facilities are subject to periodic security compliance verification examinations by the Coast Guard. A failure to operate in accordance with the maritime security regulations or the approved security plan may result in the imposition of a fine or control and compliance measures, including the suspension or revocation of the security plan, thereby making the ship or facility ineligible to operate. We are also required to audit these security plans on an annual basis and, if necessary, submit amendments to the Coast Guard for their review and approval. Failure to timely submit the necessary amendments may lead to the imposition of the fines and control and compliance measures mentioned above.

regulations could adversely affect our ability to efficiently process passengers or could increase our operating costs.

The Federal Maritime Commission regulates passenger ships with 50 or more passenger berths departing from U.S. ports and requires that operators post surety bond to be used if the operator fails to provide cruise services, or otherwise satisfy certain financial standards. As of December 30, 2008, we have secured a $8.7 million surety bond as security under the Federal Maritime Commission. We may in the future be required to make additional financial deposits directly with the Federal Maritime Commission in proportion to advance passenger deposits received.

Environmental

We are subject to numerous environmental laws. Our marine projects can involve the handling of hazardous and other highly regulated materials which, if improperly handled or disposed of, could subject us to civil and criminal liabilities. It is impossible to reliably predict the full nature and effect of judicial, legislative or regulatory developments relating to health and safety regulations and environmental protection regulations applicable to our operations. The applicable regulations, as well as the technology and length of time available to comply with those regulations, continue to develop and change. In addition, regulations covering our past activities or those of our predecessors could adversely affect us.

U.S., Canadian and various state government or regulatory agencies have enacted or are considering new environmental regulations or policies that could adversely affect the cruise vacation industry. Some environmental groups have lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact. Current and future environmental laws and regulations, or liabilities arising from past or future releases of, or exposure to, hazardous substances or to ship discharges, could increase the cost of compliance or otherwise adversely affect the value of our domestic vessels.

Taxation

The following summary of the principal United States tax laws applicable to our cruise operations, as well as the conclusions regarding certain issues of tax law, are based on the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury Department regulations, administrative rulings, pronouncements and judicial decisions, all as of the date of this Annual Report. No assurance can be given that changes in or interpretation of existing laws will not occur or will not be retroactive or that anticipated future circumstances will in fact occur. Our views should not be considered official, and no assurance can be given that the conclusions discussed below would be sustained if challenged by taxing authorities.

We own and operate our Windstar Cruise fleet of three Bahamian registered cruise vessels through foreign corporations that are subsidiaries of AICG, a wholly owned subsidiary of ours incorporated in the Marshall Islands. As a result of special tax elections, these foreign subsidiary corporations are treated as “branches” of AICG. Therefore, for purposes of the following discussion, AICG and not the subsidiaries will be treated as the owner and operator of the Windstar Cruise fleet.

Taxation to AICG of its Cruise Income: In General

AICG derives substantially all of its gross income from the operation of the Windstar Cruises vessels in international transportation. This income principally consists of hire for the transportation of passengers, which is referred to herein as “cruise income.”

Cruise income that is attributable to transportation that begins or ends, but that does not both begin and end, in the U.S. will be considered to be 50% derived from sources within the United States. Cruise income attributable to transportation that both begins and ends in the United States, without an intervening non-U.S. port of call, will be considered to be 100% derived from sources within the United States. AICG will not engage in cruise operations that give rise to 100% U.S. source income. Cruise income attributable to

transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States. Cruise income derived from sources outside the U.S. will not be subject to any U.S. federal income tax. AICG’s vessels will operate in various parts of the world, including to or from U.S. ports.

Unless exempt from U.S. taxation under Section 883 of the Code, AICG’s U.S. source shipping income will be subject to U.S. federal income taxation under the net and branch tax regime described below.

Under Section 883 of the Code, AICG qualifies for exemption from U.S. federal tax on its U.S. source cruise income derived from its Windstar Cruises since for more than half the days of the years 2007 and 2008: (i) AICG was organized under the laws of the Republic of the Marshall Islands, a foreign country that grants the requisite equivalent exemption from tax on cruise income earned by U.S. corporations and (ii) AICG was a “controlled foreign corporation” as defined by Section 957 of the Code (“CFC”) and more than 50% of AICG’s stock was owned by a U.S. domestic “C” corporation, namely us.

Taxation in the Absence of an Exemption under Section 883

In the absence of an exemption under Section 883, a foreign corporation such as AICG would be subject to either the net income and branch profits tax regimes of Section 882 and Section 884 of the Internal Revenue Code (the “net tax regime”) or the four percent of gross income tax regime of Section 887 of the Internal Revenue Code (the “four percent tax regime”).

Where the relevant foreign corporation has, or is considered to have, a fixed place of business in the U.S. that is involved in the earning of U.S. source shipping income and substantially all of such U.S. source shipping income is attributable to regularly scheduled transportation, the net tax regime is applicable. If the foreign corporation does not have a fixed place of business in the U.S. or substantially all of its U.S. source shipping income is not derived from regularly scheduled transportation, the four percent tax regime will apply.

We believe AICG would be subject to the net tax regime in the absence of an exemption under Section 883. Under the net tax regime, U.S. source shipping income, net of applicable deductions, would be subject to a federal corporate income tax of up to 35% and the net after-tax income would be potentially subject to a further branch tax of 30%. In addition, interest paid by the foreign corporations, if any, would generally be subject to a branch interest tax.

Controlled Foreign Corporation Tax Regime

As the 100% U.S. Shareholder of AICG, which as indicated above is a CFC, we are subject to tax under the CFC regime on AICG’s “Subpart F income” whether or not AICG makes any distributions of such income to us.

For taxable years beginning on or after January 1, 2005, Subpart F income does not include income derived from the international operation of ships. Therefore, none of Windstar Cruises income is “Subpart F” income. However, Subpart F income does include, among other things, interest and other passive investment income, income from the sale or purchase of certain goods to or from a related party, certain income from the provision of services to a related party and any increase in our investments in certain property located in the U.S.

Inclusions of Subpart F income will increase our adjusted basis in our stock interests in AICG. Any subsequent distributions of earnings and profits attributable to previously included Subpart F income will be non-taxable to us and will reduce our adjusted basis in our AICG stock interests.

Our gain on the disposition of our AICG stock would be treated as a dividend to the extent of the AICG’s untaxed earnings and profits.

Reinsurance Capital Requirement

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 $1.0 million, whichever is greater. As of December 31, 2008, Cypress Re had $2.6 million in total statutory capital and surplus which exceeded 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.

Insurance

We maintain a variety of insurance coverage for the operations of our businesses, including but not limited to coverage for professional and general liability. We also maintain insurance coverage on our ships, real property and personal property, and as required on leased properties.

We carry marine liability insurance on our ships through various mutual protection and indemnity associations. Our marine liability insurance arrangements are typical of common marine industry practices and, subject to certain deductibles, provide coverage for losses, other than hull physical damage losses, including casualty damage by the ships and claims by crew members, passengers and other third parties. As a member of mutual protection and indemnity associations, we pay our annual premiums based largely on our risk characteristics and loss experience, and the loss experience of other members. In addition, because such associations and other maritime mutual indemnity associations around the world pool a portion of their loss experience in risk sharing arrangements, these associations also may be affected by the loss experience of other mutual protection and indemnity organizations. In addition to this pooling arrangement, these associations have additional independent reinsurance protection.

Our annual protection and indemnity insurance premium consists of annual mutual premiums. We may be liable for supplemental premiums in excess of the anticipated amount in the event that an association incurs heavy losses or experiences unusual circumstances.

We also carry a multi-line marine and non-marine package policy that is underwritten by various insurers. This package policy provides hull and machinery coverage that insures against physical loss and damage to the Windstar ships, subject to various deductibles. The ships are insured for their appraised value. Although we believe the risk of a total loss of our ships is remote, in all likelihood, the replacement costs would significantly exceed these coverage limits. Additionally, this package policy provides coverage against loss of revenue and extra expenses incurred in connection with a marine casualty or other covered interruption in service, subject to various deductibles.

We believe our insurance coverage is adequate based on our assessment of the risks to be insured, the probabilities of loss and the relative cost of available coverages. However, there can be no assurance that the insurance we maintain will be adequate in the event of a claim, or that such insurance will continue to be available in the future or at reasonable prices.

Environment

We are subject to federal, state and foreign environmental laws and regulations. We believe that our operations comply in all material respects with applicable environmental laws and regulations in each country where we have a business presence. Although we continue to make capital expenditures for environmental protection, we do not anticipate any significant expenditure in order to comply with such laws and regulations that would have a material impact on our earnings or competitive position. We are not aware of any pending litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse effect on our financial position. We cannot assure you, however, that environmental problems relating to properties owned or operated by us will not develop in the future, and we cannot predict whether any such problems, if they were to develop, could require significant expenditures on our part. In addition, we are unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal.

Employees

As of December 31, 2008, we employed 518 employees of whom 502 were full time employees and 16 were part time employees. Our employees are primarily located in the states of California, Florida, Georgia, Illinois, Oregon, Pennsylvania, Washington; the countries of Australia, England, New Zealand, France, Spain, Philippines and Indonesia; and various other individual offices throughout the U.S. and the world. We have full-time employees engaged in management, construction, marketing and sales, operations, administration and finance. We also employ temporary labor on a periodic basis to assist with our operations due to the seasonal nature of our cruise and travel and events businesses. None of our U.S. employees is subject to collective bargaining agreements or is represented by a union. We believe that our labor relations are good. Our international crews of Windstar Cruises are members of certain international unions established by their countries of origin.

Seasonality

Our businesses are seasonal. Prior to 2006, the majority of our operating results were recognized in the first and second quarters of each fiscal year, which corresponds to the busy season for our travel and events services. As a result of the acquisitions within our cruise segment and the size of our cruise operations in relation to our overall operations, beginning in 2006, a majority of our operating results are expected to be recognized in the second and third quarters of each fiscal year, which coincides with the cruising season. Our future annual results could be adversely affected if our revenue were to be substantially below seasonal norms during the second and third quarters of the year.

Available Information

Our annual reports 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 or furnished to the Securities and Exchange Commission. 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. The public may also read and copy any materials we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains at http://www.sec.gov an Internet website that contains reports, proxy and information statements, and other information regarding issuers such as us that file electronically with the Securities and Exchange Commission.

Item 1A. Risk Factors

You should consider carefully the specific risk factors set forth below and other information contained or incorporated by reference in this Annual Report on Form 10-K, as these are important factors, among others, that could cause our actual results to differ from our expected or historical results. You should note that the risks described below are not the only risks that we face. The risks listed below are only those risks relating to our operations that we consider to be material. There may be additional risks that we currently consider not to be material or that we are not currently aware of, that could harm our business, financial condition and results of operations. As a result, the trading price of our common stock could decline, and investors could lose the money they paid to buy our common stock.

Risks Related to Our Company and Our Industry

If we are not successful at a combination of selling our non-Windstar Cruises assets, raising additional financing and/or renegotiating existing debt obligations in order to raise funds for operations, we may not be able to continue as a going concern.

Due to the current global downturn in the economy, specifically the decrease in vacationers’ discretionary spending and the direct impact this has on the reduction in cruise bookings, decrease in corporate spending on incentive programs and the tightening effect of the credit market on financing for construction projects, we will need additional sources of cash in the immediate future in order to fund operations in 2009. Accordingly, in February 2009, we announced our intention to sell our non-Windstar Cruises related assets, including the operations of marine, travel and events, Majestic America Line and insurance operations. We hired an investment banking firm who is actively marketing the non-Windstar Cruise assets for immediate sale. In addition to the sale of assets, we are also seeking additional financing sources and renegotiating existing debt obligations. Based on the terms of the asset sales or additional financing, if any, our stockholders may have additional dilution. The amount of dilution could be attributed to the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.

Although we are in discussions with potential buyers and other prospects for additional funds, we currently have no completed funding commitments or sale transactions. If we are not able to sell our non-Windstar Cruises assets, raise additional financing and/or renegotiate existing debt obligations in order to raise funds for operations, we will be forced to extend payment terms with vendors where possible, and/or to suspend or curtail certain of our planned operations and possibly seek protection in bankruptcy. Any of these actions would harm our business, results of operations and future prospects, could cause our debt obligations to be accelerated and could result in potential damages on existing contracts within our marine and travel and events divisions.

If we cease to continue as a going concern, due to lack of available capital or otherwise, you may lose your entire investment in our company.

The change in strategic direction to focus on our cruise division requires us to execute the orderly divestiture of our marine and travel and events divisions in a difficult transactional atmosphere.

The current credit turmoil being experienced throughout the United States lending sector has reduced the ability of viable bidders to engage in mergers and acquisitions. We have stated our strategic focus on the Windstar Cruises portion of our cruise division and are currently in the process of selling our marine division, travel and events division, Majestic America Line and insurance business. Failure to consummate these divestitures will result in a reduction of liquidity for the cruise division and will prolong operational costs associated with consolidating our businesses.

The adverse impact of the continuing worldwide economic downturn on the demand for cruises could adversely impact our operating results, cash flows and financial condition.

The demand for cruises is affected by international, national and local economic conditions. The current worldwide economic downturn has had an adverse effect on vacationers’ discretionary spending and consumer confidence which has resulted in cruise booking slowdowns, decreased cruise prices and lower onboard revenues for us and for the others in the cruise industry. We cannot predict the extent or duration of this downturn or the timing or strength of a subsequent economic recovery. However, if the downturn continues for an extended period of time or worsens, we could experience a prolonged period of booking slowdowns, depressed cruise prices and reduced onboard revenues. This would adversely impact our operating results, cash flows and financial condition including the impairment of the value of our ships and other intangible assets.

In connection with our acquisitions within the cruise segment, we assumed or incurred a significant amount of indebtedness, which could adversely affect our cash flows and business.

In 2007, we obtained $60.0 million in seller financing from our acquisition of Windstar Cruises, payable at 7.0% through 2017. The Windstar Cruises seller financing was paid in full in April 2007 through the use of proceeds received from a $97.0 million offering of 3.75% senior convertible notes due April 15, 2027. Interest on the convertible notes is payable semi-annually in arrears on April 15 and October 15 in each year, commencing October 15, 2007. As a result of this debt, demands on our cash resources have increased. The increased levels of debt could, among other things:


	•	require us to dedicate the majority of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, dividends, acquisitions and other purposes;

	•	increase our vulnerability to, and limit flexibility in planning for, adverse economic and industry conditions;

	•	adversely affect our credit rating;

	•	limit our ability to obtain additional financing to fund future working capital, capital expenditures, additional acquisitions and other general corporate requirements;

	•	create competitive disadvantages compared to other companies with less indebtedness; and

	•	limit our ability to apply proceeds from an offering or asset sale to purposes other than the repayment of debt.

We may not be able to make interest payments on our senior convertible notes.

In connection with our 3.75% senior convertible notes, we are required to make scheduled interest payments amounting to $1.8 million semi-annually in arrears on April 15 and October 15 in each year, commencing October 15, 2007. We did not make a $1.8 million scheduled interest payment due and payable on April 15, 2009 on our 3.75% senior convertible notes. We have until May 15, 2009 to cure this default. If we are unable to make the scheduled interest payments an event of default will occur and the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding notes may declare the principal and accrued and unpaid interest on all the outstanding notes to be due and payable immediately.

Our financial performance is subject to seasonal and quarterly fluctuations which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us.

Our businesses are seasonal. We recognize cruise-related revenues at the completion of the cruise. We recognize revenue for marine and related services in accordance with the respective contracts. We recognize travel and event-related revenues in the month a program operates. We recognize insurance premiums as revenue over the period of the insurance contracts in proportion to the amount of the insurance coverage provided. Prior to 2006, the majority of our operating results were recognized in the first and second quarters of each fiscal year, which corresponds to the busy season in our travel and events segment. As a result of the acquisitions within our cruise segment and the size of our cruise operations in relation to our overall operations, a majority of our operating results will be recognized in the second and third quarters of each fiscal year, which coincides with the cruising season. Our future annual results could be adversely affected if our revenue were to be substantially below seasonal norms during the second and third quarters of each fiscal year. Our operating results may fluctuate as a result of many factors, including:


	•	our ability to effectively and efficiently operate our cruise operations;

	•	customer cancellation rates;

	•	competitive conditions in the industries in which we operate;

	•	marketing expenses;


	•	extreme weather conditions;

	•	timing of and costs related to acquisitions;

	•	the impact of new laws and regulations affecting our business;

	•	negative incidents involving cruise ships, including those involving the health and safety of passengers;

	•	cruise ship maintenance problems;

	•	reduced consumer demand for vacations and cruise vacations;

	•	changes in fuel, food, payroll, insurance and security costs;

	•	the availability of raw materials;

	•	our ability to enter into profitable marina construction contracts;

	•	changes in relationships with certain travel providers;

	•	changes in vacation industry capacity;

	•	the mix of programs and events, program destinations and event locations;

	•	the introduction and acceptance of new programs and program and event enhancements by us and our competitors;

	•	other economic factors and other considerations affecting the travel industry;

	•	potential claims related to our reinsurance business;

	•	the potentially volatile nature of the reinsurance business; and

	•	other factors discussed in this Annual Report on Form 10-K.

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 our common stock could be adversely affected. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

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

The cruise, marine and travel and events industries are highly competitive. We compete with a variety of other companies that provide similar products and services.

As a result of our cruise acquisitions, we operate in the vacation market, and cruising is one of many alternatives for people choosing a vacation. We therefore risk losing business not only to other cruise lines, but also to other vacation operators that provide other leisure options, including hotels, resorts and package holidays and tours. We face significant competition from other cruise lines, both on the basis of cruise pricing and also in terms of the nature of ships and services we offer to cruise passengers.

We believe the barriers to entry within some of the industries in which we operate are relatively low. Certain of our competitors have substantially greater financial, marketing and sales resources than we do. As a result, there can be no assurance that our present competitors or competitors that elect to enter the marketplace in the future will not exert significant competitive pressures on us. These competitive factors could adversely affect our business, financial condition and results of operations.

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

A substantial portion of our operations is directly associated with the travel industry. Demand for travel and vacation is dependent on the underlying strength of the economy. As a result, our operations are subject to special risks inherent in doing business in that industry. Adverse changes in the economic climate, such as higher fuel prices, higher interest rates and changes in governmental policies could reduce the discretionary income of our potential cruise passengers or companies scheduling conventions, trade shows or meetings. Consequently, this could negatively affect demand for vacations, including cruise vacations, and for travel, events or conventions, all of which are discretionary purchases. 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 our products and services may also be adversely affected by natural occurrences such as hurricanes, earthquakes, epidemics and flooding in regions in which we offer our products and provide our services. Periods of instability or uncertainty surrounding the travel industry may reduce the demand for our programs and services and could adversely affect our business, financial condition and results of operations.

Our success in our travel and events business is highly dependent upon unaffiliated travel services suppliers with whom we have limited agreements.

In order to provide our services and products, we depend on airlines, hotels and other suppliers of travel and processing services. We have limited agreements with our travel suppliers and vendors that obligate such suppliers or vendors to process or sell services or products through us. We rely to a large extent on scheduled commercial airline services to get our customers to our cruise ships and, therefore, increases in the price of, or major changes or reduction in commercial airline service, could undermine our ability to provide reasonably priced vacation packages. Restricted access to suppliers and vendors of travel services and processing, or a reduction in capacity or changes in pricing or collateral arrangements with travel suppliers or vendors could adversely affect our business, financial condition and results of operations.

Overcapacity within the cruise vacation industry, a reduction in demand or economic uncertainties could adversely affect our revenues and profitability and impair our asset values.

Cruising capacity has grown in recent years, and we expect it to increase further as cruise vacation companies introduce new ships. Demand for cruises has been and is expected to continue to be dependent on economic conditions. Economic changes may reduce demand for cruise vacations and may lead to reduced occupancy and/or price discounting which, in turn, could adversely affect our results of operations and financial condition and impair our asset values.

Our business could be adversely affected by unanticipated casualty losses.

Due to the nature of our businesses, we may be subject to liability claims arising out of accidents or disasters causing injury to our customers, including claims for serious personal injury or death. Although we have never experienced a liability loss for which we 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 we will be able to obtain sufficient insurance coverage at acceptable premium levels in the future. Successful assertion against us of one or a series of large uninsured claims, or of one or a series of claims exceeding our insurance, could adversely affect our business, financial condition and results of operations.

No assurance can be given that our insurance costs will not escalate.

Our protection and indemnity insurance is provided by various mutual protection and indemnity associations. As associations, they rely on member premiums, investment reserves and income, and reinsurance to manage liability risks on behalf of their members. Increased investment losses, underwriting losses or reinsurance costs could cause domestic or international marine insurance associations to substantially raise the

cost of premiums, resulting not only in higher premium costs, but also higher levels of deductibles. Increases in our premiums or deductible levels could adversely affect our operating costs.

We are dependent upon key personnel.

Our performance is substantially dependent on the continued services and performance of our senior management and certain other key personnel. The loss of the services of any of our executive officers or other key employees could adversely affect our business, financial condition and results of operations. Our future success also depends on our 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 adversely affect our business, financial condition and results of operations.

Our success in our international cruise business is highly dependent on our third party vessel management company.

In conjunction with our acquisition of Windstar Cruises, we engaged the services of V.Ships Leisure (“V.Ships”) for the vessel management of our internationally flagged ships. Management services consist of deck, engine and hotel crew management, procurement and technical and hotel operations. We rely on the expertise of our third party provider and the failure to adequately integrate, manage and monitor the operations of V.Ships could adversely affect our business, financial condition and results of operations.

International political and other world events affecting safety and security could adversely affect the demand for cruises, which could harm our future sales and profitability.

Demand for cruises and other vacation options has been, and is expected to continue to be, affected by the public’s attitude towards the safety and security of travel. Events such as the terrorist attacks in the U.S. on September 11, 2001 and the threats of additional attacks in the U.S. and elsewhere, concerns of an outbreak of additional hostilities and national government travel advisories, together with the resulting political instability and concerns over safety and security aspects of traveling, have had a significant adverse effect on demand and pricing in the travel and vacation industry and may continue to do so in the future. Decreases in demand could lead to price discounting which, in turn, could reduce the profitability of our business.

Incidents or adverse publicity concerning the cruise vacation industry or unusual weather conditions could adversely affect our reputation and harm our future sales and profitability.

The operation of cruise ships involves the risk of accidents, including those caused by the improper operation of our ships, passenger and crew illnesses such as the spread of contagious diseases, mechanical failures, fires, collisions, inappropriate crew or passenger behavior, weather events, security breaches and other incidents which may bring into question passenger safety, health, security and vacation satisfaction and thereby adversely affect future industry performance and expose us to claims by those that may be harmed. For example, our Queen of the West experienced an engine fire in April 2008 which resulted in nine cancelled sailings and our Empress of the North ran aground in May 2007 during a cruise, requiring us to cancel twelve non-consecutive cruises and end the sailing season early. Our Empress of the North also ran aground in March 2006 during a cruise, requiring us to cancel three cruises. In addition, we experienced an outbreak of Norovirus on our Mississippi Queen^® in October 2006, requiring us to cancel three cruises. It is possible that we could be forced to alter itineraries or cancel a cruise or a series of cruises due to these or other factors, which would adversely affect our results of operations and financial condition due to loss of revenue from cancellations passenger relocation, crew expenses, ship repairs and passenger refunds or other accommodations. Incidents involving cruise ships, adverse media publicity concerning the cruise vacation industry, events such as terrorist attacks, war and other hostilities, or unusual weather patterns or natural disasters, such as storms and earthquakes, could impact demand and consequently adversely affect our profitability.

If we do not complete drydocking on schedule or if ship mechanical faults result in unscheduled drydockings and repairs, we will incur additional expenses and may also lose revenues by canceling planned cruises.

When we drydock one of our cruise ships as is required for inspection of the exterior of the hull on a periodic basis, we lose the revenue from that ship’s operations for the period it is out of service. We also incur the additional cost of the drydocking. Also, our cruise ships from time to time experience mechanical problems or extended or extraordinary maintenance. Mechanical faults or extended maintenance may result in delays or cancellation of cruises or necessitate unscheduled drydocks and repairs. For example, in November 2007 our Wind Star was placed into a scheduled drydock that required more repairs than originally anticipated, which caused a significant budget overrun. Our Wind Spirit experienced an oil leak due to a broken seal in the controllable pitch propeller in December 2007, which caused us to cancel one sailing. These, events together with any related adverse publicity, could adversely affect our financial results.

Unavailability of ports of call may adversely affect our profits by reducing our sales of cruise vacations.

We believe that port destinations are a major reason why passengers choose to go on a particular cruise or on a cruise vacation. The availability of ports is affected by a number of factors, including, but not limited to, existing capacity constraints, security concerns, adverse weather conditions and natural disasters, financial limitations on port development, local government regulations and local community concerns about port development and other adverse impacts on their communities. Any limitations on the availability of our ports of call could adversely affect our profits by reducing our sales of cruise vacations.

The nature of our engineering and construction business exposes us to potential liability claims and contract disputes, which may reduce our profits and cash available for operations.

We engage in construction activities for marina facilities where design, construction or systems failures can result in substantial injury or damage to third parties. We and/or our subsidiaries have been and may in the future be named as defendants in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters. These claims generally arise in the normal course of our business. When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which claims may reduce our profits and cash available for operations.

An inability to obtain bonding could limit the number of projects our marine division is able to pursue.

As is customary in the marina construction industry, we often are required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market and the financial condition of our overall enterprise. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. Since 2001, the surety industry has undergone significant changes, with several companies withdrawing completely from the industry or significantly reducing their bonding commitment. In addition, certain reinsurers of surety risk have limited their participation in this market. Therefore, we could be unable to obtain or meet our current obligations under existing surety bonds when required, which could adversely affect our future results of operations and revenues by limiting the number of projects we are able to pursue.

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

Our ability to conduct and expand our marina construction operations is dependent on access to construction materials and skilled labor. Increased prices or shortages of materials such as cement, aluminum and wood would cause increases in construction costs and construction delays. Labor disputes or increased costs or shortages of skilled labor could also cause increases in costs and delays. Prices and supplies may be further adversely affected by natural disasters and adverse weather conditions. We estimate and forecast costs as part of our business, and attempt to plan for possible cost increases due to changes in prices or availability of materials or labor. However, generally we are unable to pass on unanticipated increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the project at the time the contract is signed, which may be well in advance of the construction work. Significant unexpected increases in costs of materials or labor may adversely affect our results of operations.

The demand, timing and funding of marina construction awards and other factors could lead to unpredictable operating results.

Our marina construction operations are subject to risks and uncertainties associated with changing demand for marina construction projects, the timing and funding of new projects, the length of time over which construction contracts are to be performed, the ability to meet performance schedules, cost overruns and cancellations or changes in the scope of existing contracts. As a result of these uncertainties, the operating results related to our marine business could be unpredictable and inconsistent from period to period.

We may incur costs related to repairing defects in marinas we design and construct, which could adversely affect our profitability.

Our marina construction operations are subject to warranty and other claims related to design and construction defects and related issues, including compliance with construction codes. The costs we incur to resolve those warranties and other claims could reduce our profitability, and if we were to experience an unusually high level of claims, or unusually severe claims, our profitability could be adversely affected.

Natural disasters, severe weather conditions and forces in nature beyond our control could adversely affect our marina construction and management operations.

Our marina construction and management operations are conducted in many areas that are subject to natural disasters and severe weather, such as hurricanes, tornadoes, earthquakes, floods, tsunamis and fires. We also may be affected by unforeseen engineering, environmental, or geological problems. These conditions could delay or increase the cost of construction projects, damage or reduce the availability of materials, and negatively impact the demand for marinas in affected areas. If our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity and capital resources could be adversely affected.

Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded revenues or profits.

Under our accounting procedures, we measure and recognize our marina construction profits and revenues under the percentage-of-completion accounting methodology. This methodology allows us to recognize revenues and profits ratably over the life of a contract by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The effect of revisions to revenues and estimated costs is recorded when the amounts are known and can be reasonably estimated, and these revisions can occur at any time and could be material. Given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenues and profits.

Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased costs and potential losses.

Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions beyond our control. In our marine operations, we currently operate in Australia, Spain, New Zealand, France, United Kingdom, Mexico, Canada, Bahamas, Malaysia, China and Singapore. With the addition of Windstar Cruises, we began offering itineraries with destinations in Costa Rica, Greece, Spain, Portugal, Turkey, Italy, France, British Virgin Islands, Barbados, French West Indies, Grenada and other foreign ports of call. We anticipate that our foreign destinations will change and expand over time. Operating in the international marketplace exposes us to a number of risks including:


	•	abrupt changes in foreign government policies and regulations;

	•	embargoes;

	•	trade restrictions;

	•	tax treatment;

	•	U.S. government policies relating to foreign operations; and

	•	international hostilities.

We also face significant risks due to civil strife, acts of war, terrorism and insurrection. Our level of exposure to these risks varies with respect to each project, depending on the particular stage of each project. For example, our risk exposure with respect to a marina construction project in an early development stage will generally be less than our risk exposure with respect to a project in the middle of construction. To the extent that our international business is affected by unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses. Project disruptions and losses could significantly reduce our revenues and profits.

Our international operations expose us to foreign currency fluctuations that could increase our U.S. dollar costs or reduce our U.S. dollar revenues.

Our international contracts are typically denominated in foreign currencies, which results in our foreign operations facing the additional risk of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could adversely affect our profits.

We expect to face significant and increasing costs to maintain our ships as they age and may have difficulty replacing our ships when needed, which could adversely affect our result of operations and financial condition.

We believe that the costs to maintain our fleet of ships will increase over time. The average age of our ships is approximately 20 years. We expect to incur increasing expenses to operate and maintain our ships in good condition as they age. Eventually, our ships will need to be replaced. We may not be able to replace our ships with new ships based on uncertainties related to financing, timing and shipyard availability.

If we experience delays and/or defaults in customer payments, we could suffer liquidity problems or be unable to recover all expenditures.

Because of the nature of our marina construction contracts, at times we commit resources to marina projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on client projects as they are incurred. Delays in customer payments may require us to make a working capital investment. Customer defaults in making payments on a project in which we have devoted significant resources could adversely affect our results of operations.

Our business could be adversely affected by losses associated with our reinsurance operations.

We currently reinsure 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 that we are required by our agreements to cover, the amount of our cash and cash equivalents will be reduced, and our results of operations and financial condition would suffer.

Environmental, health and safety, financial responsibility, tax and maritime and homeland security legislation and other laws and regulations could adversely affect us by restricting our operations increasing our operating costs.

As described in Item 1, “Business — Regulation”, we are subject to numerous laws and regulations covering various aspects of our businesses. Compliance or failure to comply with those or future laws and regulations could be costly and could restrict our operations.

For example, the U.S., Canada and various state government or regulatory agencies have enacted or are considering new environmental regulations or policies that could adversely affect the cruise vacation industry. Some environmental groups have lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact. Current and future environmental laws and regulations, or liabilities arising from past or future releases of, or exposure to, hazardous substances or to ship discharges, could increase our cost of compliance, subject us to civil and criminal liabilities or otherwise adversely affect our businesses, results of operations and financial condition.

In addition, regulations and treaties that govern safety standards applicable to our ships, health and sanitary standards applicable to our passengers, security standards onboard our ships and at the ship/port interface areas, and financial responsibilities to our passengers continue to be, an area of focus by the relevant authorities, which could result in the enactment of more stringent regulation of cruise ships that would subject us to increasing compliance costs in the future.

The Federal Maritime Commission requires that operators of ships with 50 or more passenger berths departing from U.S. ports post surety bonds to be used if the operator fails to provide cruise services, or otherwise satisfy certain financial standards. We have secured a $8.7 million surety bond as security under the Federal Maritime Commission. Our ability to continue to secure such a security instrument in the future may result in undue burden on us and may require that we make additional financial deposits directly with the Federal Maritime Commission in proportion to advance passenger deposits received.

Since January 31, 2008, U.S. citizens have been required to carry a passport or, when available, a PASS card, for travel by land or sea to or from certain countries and areas that previously were exempt from passport requirements, such as the Caribbean, Canada and Mexico. Since many cruise customers visiting these destinations may not currently have passports or may not obtain a PASS card when available, it is likely that this will have some negative effect on our bookings and future net revenue yields.

A failure to operate in accordance with the Coast Guard’s maritime security regulations or an approved security plan may result in the imposition of a fine or control and compliance measures, including the suspension or revocation of the security plan, thereby making the ship or facility ineligible to operate. We are also required to audit these security plans on an annual basis and, if necessary, submit amendments to the Coast Guard for their review and approval. Failure to timely submit the necessary amendments may lead to the imposition of the fines and control and compliance measures mentioned above.

DHS may adopt additional security-related regulations, including new requirements for screening of passengers and our reimbursement to the agency for the cost of security services. These new security-related regulations could adversely affect our ability to efficiently process passengers or could increase our operating costs.

In addition, we may be subject to fines or other penalties for failure to comply with laws and regulations of one or more states requiring licensing, qualification or other action. Increases in taxes and regulatory

compliance costs could adversely affect our results of operations because we may not be able to recover these increased costs through price increases of our cruise vacations.

We may be subject to significantly higher U.S. income taxes if we do not qualify for exemption from tax or for deferral of tax under U.S. tax laws in respect of Windstar Cruises income.

Changes under the Code may adversely affect the U.S. federal income taxation of our U.S. source shipping income derived from our Windstar Cruises. In addition, changes in other countries’ or states’ income or other tax laws, regulations or treaties in respect of our Windstar Cruises could also adversely affect our net income.

We believe that substantially all of the U.S. source shipping income of our Windstar Cruises qualifies for exemption under Section 883 of the Code. We further believe that substantially all of the income derived by our Windstar Cruises qualifies for deferral from tax, until repatriated by dividend or otherwise, back to the United States under the “controlled foreign corporation” (“CFC”) regime of the Code.

However, if as a result of changes in the law, we do not qualify for exemption from tax under Section 883, or qualify for deferral of tax under the CFC regime, in respect of our Windstar Cruises income, we would have significantly higher U.S. income tax expenses. In addition, changes in the income or other tax laws affecting our cruise businesses elsewhere could result in higher income and/or other taxes, such as value added taxes, being levied on our cruise operations, thus resulting in lower net income.

For additional information see “Taxation” under Part I, Item 1. Business.

Additional Risks Related to Our Stock

If we fail to continue to meet all applicable continued listing requirements of The NASDAQ Global Market and NASDAQ determines to delist our common stock, the market liquidity and market price of our common stock could decline.

Our common stock is listed on the NASDAQ Global Select Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements. For example, NASDAQ rules require that we maintain a minimum bid price of $1.00 per share for our common stock. Our common stock is currently and has in the past fallen below this minimum bid price requirement and it may do so again in the future. NASDAQ has currently suspended this bid price requirement through July 19, 2009. However, if NASDAQ does not further extend this suspension and our stock price is below $1.00 at the time the suspension is lifted or falls below $1.00 after that time or if we in the future fail to meet other requirements for continued listing on the NASDAQ Global Select Market, our common stock could be delisted from The NASDAQ Global Select Market if we are unable to cure the events of noncompliance in a timely or effective manner. If our common stock were threatened with delisting from The NASDAQ Global Market, we may, depending on the circumstances, seek to extend the period for regaining compliance with NASDAQ listing requirements by moving our common stock to the NASDAQ Capital Market. For example, if appropriate, we may request, approval by our stockholders to implement a reverse stock split in order to regain compliance with NASDAQ’s minimum bid price requirement. If our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate quotations for the price of our common stock, and there would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further. In addition, in the event that our common stock is delisted, we would be in default under the terms and conditions of our convertible debt.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Certain anti-takeover provisions of Delaware law and our certificate of incorporation and bylaws, as currently in effect, could make it more difficult for stockholders to effect certain corporate actions. These provisions may delay or prevent the acquisition of us, even if the acquisition may be considered beneficial by some of our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management.

Provisions in our charter documents may make a change of control of our company more difficult, even if a change in control would be beneficial to our stockholders. Our certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. These rights may have the effect of delaying or deterring a change of control of our company.

In addition, a change of control of our company may be delayed or deterred as a result of our having three classes of directors. Our certificate of incorporation provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for re-election each year. Having a staggered board of directors makes it more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our board of directors.

Additionally, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits stockholders owning 15% or more of our outstanding voting stock from merging or combining with us in certain circumstances. Section 203 of the Delaware General Corporation Law provides that, subject to specified exceptions, a Delaware corporation may not engage in business combinations with any entity that acquires enough shares of our common stock without the consent of our board of directors to be considered an “interested stockholder” under Delaware law for a three-year period following the time that the stockholder became an interested stockholder. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Neither our certificate of incorporation or bylaws contains an election, as permitted by Delaware law, to be exempt from the requirements of Section 203.

U.S. ownership requirements and transferability limitations may adversely affect the liquidity of our common stock.

We have added restrictions to our certificate of incorporation limiting the transferability of our common stock or control to non-U.S. citizens to preserve our U.S.-flagged status. We believe that such limitations may have the effect of decreasing the liquidity of our common stock, thereby making it more difficult for investors to dispose of their shares in an orderly manner. We may also add legends to our stock certificates to indicate the citizenship of our stockholders to facilitate our ability to monitor and control our U.S. citizenship. Such provisions and the level of ownership by insiders and our largest stockholders, we believe, may deter a change in control and limit non-U.S. citizens’, including corporations’ and individuals’, purchases of our common stock.

Future sales of shares of our common stock underlying derivative securities could cause our stock price to decline.

We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. As of April 7, 2009, we had outstanding 11,177,267 shares of common stock. A substantial number of these shares are

eligible or registered for public resale. Sales of these underlying shares of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.

The market price for our common stock has experienced significant price and volume volatility and is likely to continue to experience significant volatility in the future. This volatility may impair our ability to finance strategic transactions with our stock and otherwise harm our business

The closing price of our common stock fluctuated from a high of $13.77 per share to a low of $0.65 per share during the year ended December 31, 2008. On March 17, 2009 our closing stock price was $0.27 which was the lowest level in our Company’s history. Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside our control. Significant declines in our stock price may interfere with our ability to raise additional funds through equity financing or to finance strategic transactions with our stock. We have historically used equity incentive compensation as part of our overall compensation arrangements. The effectiveness of equity incentive compensation in retaining key employees may be adversely impacted by volatility in our stock price. In addition, there may be increased risk of securities litigation following periods of fluctuations in our stock price. These and other consequences of volatility in our stock price could have the effect of diverting management’s attention and could materially harm our business, and could be exacerbated by the current worldwide financial crisis.

Item 1B. Unresolved Staff Comments

Not applicable.


Item 2.	*Properties*

Our principal executive offices 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. This office is shared with our travel and events segment. Our cruise segment occupies an office totaling approximately 10,000 square feet in Seattle, Washington pursuant to a lease dated April 26, 2005, as amended, which expires in August 2013. In February 2009, we announced our plans to relocate our corporate offices to our offices in Seattle, Washington.

Our travel and events segment occupies an additional office totaling approximately 12,000 square feet in Atlanta, Georgia pursuant to a month-to-month lease.

Information about our cruise ships, including their size and primary areas of operation may be found within Item 1, “Business — Business Operations, Cruise Segment.”

Our marine segment’s primary office location is in Bellingham, Washington, pursuant to a lease dated January 1, 2000 which expires in December 2009. Our U.S. marina construction facilities consist of both owned and leased facilities located in Dixon, California; Callahan, Florida; Jacksonville, Florida; York, Pennsylvania and Ferndale, Washington. In addition, we maintain office and construction facilities in the countries of Australia, England, Mexico, New Zealand, France and Spain in which we operate. Our marina management and shipyard operations are conducted at a facility in Newport Beach, California, pursuant to a lease dated April 1, 2006 which expires in March 2011.

We believe that our existing facilities are sufficient to meet our 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*

On February 26, 2008, we and several of our subsidiaries were named in a complaint by David Giersdorf, the former President of ACG in the Superior Court of Washington for King County. Mr. Giersdorf has alleged, based on verbal agreements, he was improperly terminated and has claimed damages which appear to be in excess of $70.0 million. Mr. Giersdorf’s claims include the following: (i) he left a tenured position with

Holland America Line (“HAL”), which well-positioned him to be the President of HAL earning a multi-million dollar annual salary until retirement; (ii) he was denied the opportunity to vest in 87,500 option shares and 30,000 restricted stock grants, which should be valued at a $47 per share stock price; (iii) his assistance in acquiring Windstar Cruises and his work in the transition of its vendors and employees entitles him to approximately $54.0 million; (iv) he is owed compensation for future acquisitions; and (v) he is owed sums for reputation and emotional damage. We believe all of Mr. Giersdorf’s claims lack merit and will defend them vigorously, but are not able at this time to estimate the outcome of this proceeding.

On October 28, 2008, we entered into a settlement agreement with HAL Antillen N.V., whereby we received on October 31, 2008, approximately $2.6 million related to a dispute that arose from the purchase of Windstar Cruises, which amount has been recorded as “Other income” in the fourth quarter ended December 31, 2008.


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

None.

PART II


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

Stock Market and Other Information

Our common stock is traded and prices are quoted on the Nasdaq Global Market under the symbol “AMIE.” As of March 16, 2009, there were approximately 49 holders of record of our common stock not including beneficial owners holding shares through nominee or street name.

The following table sets forth the high and low sales prices of a share of our common stock as quoted on the Nasdaq Global Market for the periods indicated:


	High		Low
2008:
Quarter ended March 31, 2008	$	13.77	$	7.10
Quarter ended June 30, 2008		7.76		3.76
Quarter ended September 30, 2008		4.64		1.78
Quarter ended December 31, 2008		2.10		0.65
2007:
Quarter ended March 31, 2007	$	47.50	$	40.82
Quarter ended June 30, 2007		46.81		30.65
Quarter ended September 30, 2007		32.81		22.90
Quarter ended December 31, 2007		26.73		11.65

Dividend Policy


Record Date	Payment Date		Dividend Amount

2007:
March 12, 2007		March 19, 2007	$	1,084
May 21, 2007		May 31, 2007		1,084

Subsequent to the dividend declared in May 2007, our board of directors has not approved any additional dividends. We and our board of directors continually review the dividend policy to evaluate conditions that may affect our desire or ability to pay dividends, which are declared at the discretion of the board of directors. We currently have no intention of declaring any dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

Number of Securities

Remaining Available for

Number of Securities

Future Issuance Under

to Be Issued Upon

Weighted Average

Equity Compensation

Exercise of

Exercise Price of

Plans (Excluding

Outstanding Options,

Securities Reflected in

Plan Category

Warrants and Rights(a)

Warrants and Rights

Column (a))

Equity compensation plans approved by security holders

1,604,293

(1)

8.99

338,735

(2)

Equity compensation plans not approved by security holders

N/A

Total

1,604,293

8.99

338,735


(1)	Represents outstanding options and restricted stock to be issued upon exercise and/or vesting under our Amended and Restated 1995 Equity Participation Plan and our 2005 Incentive Award Plan.

(2)	Represents securities remaining available for issuance under our Amended and Restated 1995 Equity Participation Plan and our 2005 Incentive Award Plan.

Recent Sales of Unregistered Securities

None.

Transfer Agent and Registrar

BNY Mellon Shareowner Services serves as transfer agent and registrar of our common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.


Item 6.	*Selected Financial Data*

Not applicable.


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

Overview

Throughout 2007 and 2008, we operated as a cruise, marine and travel and events company. Our cruise operations included U.S.-flagged cruise ships that sailed 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.

In April 2008, we announced our intention to sell the Majestic America Line operations and not operate any of the ships under the Majestic America Line brand in 2009. In February 2009, we announced our intention to focus solely on Windstar Cruises. We plan to sell all non-Windstar Cruises related assets including our Majestic America Line Assets that we announced in April 2008, in order to concentrate our efforts on our international small ship luxury segment. We believe that Windstar Cruises has the most potential long term growth for our shareholders and believe that a successful sale of our other businesses would provide us with

stability in a difficult economy. We have engaged third party firms to facilitate the sale of our non-Windstar Cruises assets.

Through our marine business, in 2007 and 2008, we were a global provider of marina design and construction services. Our marine business also offered marine operations, shipyard services, management and consulting services to marina owners.

We also reinsured property and casualty risks written by licensed U.S. insurers. The lines of business that were 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.

In 2006 and 2007, we completed several major acquisitions in the cruise and marine segments. In 2007, we successfully integrated both the marine acquisitions, as well as the acquisition of Windstar Cruises. The integration of our domestic cruise operations proved to be more challenging than anticipated and resulted in a significant loss for the years ended December 31, 2007 and 2008.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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.

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 in relation to our overall operations, the majority of our operating results will be recognized in the second and third quarters of each fiscal year, which coincide 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 a 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.

Passenger Ticket Revenue and Onboard and Other Cruise Revenues

Passenger ticket revenue is recorded net of applicable discounts. Passenger ticket revenue and related costs of revenue are recognized 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 trips, 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 are comprised 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. On a regular basis, we review contract performance, costs incurred, and estimated costs to complete. 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 and Event Related

We bill travel participants, mainly consisting of large corporations, in advance, of which the cash received is recorded 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.

Revenue from hotel reservation, registration and related travel services is recognized when the convention operates. Revenue from the sale of 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 management’s estimates (based upon historical trends) that it is remote that the certificate will be redeemed. 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.

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.

License Fees

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

Property, Vessel and Equipment

Property, vessel and equipment are stated at cost, net of accumulated depreciation. Cost of maintenance and repairs which do not improve or extend the lives of the respective assets are expensed as incurred. Major additions and betterments are capitalized. 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 which 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. Leasehold improvements are amortized using the straight-line method over the lesser of the expected useful life of the improvement or the term of the related lease.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our assets based on our estimate of their undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value. When property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized 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. All of our property, vessels and equipment were subject to impairment testing as of December 31, 2008, and only the assets related to the marine division were deemed to be impaired.

Goodwill and Intangible Assets

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, goodwill has been allocated to these reporting units to the extent it related to each reporting unit. Intangible assets with finite 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. 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 finite lives over periods ranging from three to 20 years depending on the contract term where applicable. In connection with our December 31, 2008 impairment testing, the trade name and goodwill associated with our marine division reporting unit were deemed to be impaired and written off.

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. 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. 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.

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.

Income Taxes

We account for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances 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. However, due to the cumulative three-year historical losses generated as of the conclusion of 2007 and 2008, SFAS No. 109 largely precludes us from taking into consideration future outlook or forecasted income due to our limited operating history in our domestic cruise business. We concluded that SFAS No. 109 required that the valuation allowance equal 100% of our deferred tax assets at December 31, 2008 and 2007. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from utilizing loss carry-forwards on our deferred tax assets in the future.

We provide for income taxes based on our estimate of federal and state liabilities. Our estimates may include, among other items, effective rates for state and local income taxes, allowable tax credits, estimates related to depreciation and amortization expense allowable for tax purposes and the tax deductibility of certain other items.

Our estimates are based on the information available to us at the time that we prepare our income tax provision. We generally file our annual income tax returns several months after our year end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

Windstar Cruises is primarily engaged in the international operations of ships. Generally, income from the international operation of ships is subject to preferential tax regimes in the countries where the ship owning companies are incorporated and exempt from income tax in other countries where the ships call due to the application of income tax treaties or, in the case of the United States, Section 883 of the Internal Revenue Code. Income earned by the Company that is not associated with the international operation of ships (“non-Section 883 income”), primarily from the air and ground transportation, hotel and tour business related to Windstar Cruises, is subject to income tax in the countries where such income is earned. In the case of the United States, AICG has retained certain U.S. affiliates of the Company to conduct this business on its behalf and the non-Section 883 income so earned, net of applicable deductions, is fully subject to U.S. federal tax and applicable state and local taxes.

We believe that substantially all of Windstar Cruises’ income was derived from, or incidental to, the international operation of ships, and therefore all of such income qualifies for exemption from U.S. federal income tax under Section 883 of the Code. We have reserved only for income taxes imposed by countries in which non-Section 883 income is earned, including the United States.

Pretax earnings of the Windstar Cruises, as earned in our foreign subsidiaries, are only subject to U.S. taxation when effectively repatriated. U.S. income taxes were not provided on undistributed earnings of the Windstar Cruises since we intend to reinvest, as opposed to repatriate, these earnings indefinitely. It is not practical to determine the amount of undistributed earnings or income tax payable in the event we repatriate all undistributed foreign earnings. However, if these earnings were distributed back to the Company, in the form of dividends or otherwise, we would be subject to additional U.S. income taxes

Effective January 1, 2007, we adopted FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We believe our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For uncertain tax positions where it is more likely than not that a tax benefit will be sustained, we record the greatest amount of

tax benefit that has a greater than 50.0% probability of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. For uncertain income tax positions where it is more likely than not that a tax benefit will not be sustained, no tax benefit has been recognized in the financial statements. Our policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax provision.

Results of Operations

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


	2008			2007

Revenues		100.0	%		100.0	%

Costs and operating expenses:
Cruise operating expenses		44.4			42.4
Cost of marine revenue		29.1			32.1
Selling and tour promotion		4.5			8.9
General and administrative		19.6			19.5
Impairment loss		7.7			—
Depreciation and amortization		5.3			3.8
Loss and loss adjustment expenses		0.2			0.1
Insurance acquisition costs and other operating expenses		0.1			0.2

		110.9			107.0

Operating loss		(10.9	)		(7.0	)
Other income (expense), net		(2.3	)		(1.2	)

Loss before income taxes		(13.2	)		(8.2	)
Provision (benefit) for income taxes		(0.1	)		1.0

Net loss		(13.1	)%		(9.2	)%

Business Segment Information

In January 2007, we realigned our business segments and report the following business segments: (i) cruise, (ii) marine, (iii) travel and events and (iv) corporate and other, which consists of general corporate assets (primarily cash and cash equivalents and investments), our insurance operations and other activities which are not directly related to our cruise, marine and travel and events operating segments.

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


							Travel			Corporate
	Cruise			Marine			and Events			and Other			Total

2008:
Revenues	$	150,995		$	108,655		$	14,941		$	9		$	274,600
Operating income (loss)		(12,128	)		(16,113	)		2,635			(4,442	)		(30,048	)
Depreciation and amortization expense		(12,934	)		(1,047	)		(283	)		(250	)		(14,514	)
Interest and dividend income		39			140			123			855			1,157
Interest expense		(1,759	)		(240	)		—			(4,299	)		(6,298	)
Equity in net losses and management fees received from investments accounted for by the equity method		—			(88	)		—			—			(88	)
Impairment loss		—			(21,289	)		—			—			(21,289	)
Provision (benefit) for income taxes		18			(4,808	)		1,040			3,460			(290	)
Capital expenditures for property, vessels, equipment and intangible assets		(2,664	)		(1,377	)		(89	)		(15	)		(4,145	)
Goodwill		—			—			6,275			—			6,275
Other intangibles, net		7,282			—			—			—			7,282
Total assets		155,132			27,828			8,921			19,789			211,670

2007:
Revenues	$	154,394		$	123,221		$	14,511		$	582		$	292,708
Operating income (loss)		(24,045	)		8,567			1,467			(6,421	)		(20,432	)
Depreciation and amortization expense		(9,668	)		(963	)		(265	)		(114	)		(11,010	)
Interest and dividend income		963			152			486			2,024			3,625
Interest expense		(4,044	)		(370	)		—			(2,916	)		(7,330	)
Equity in net loss and management fees received from investments accounted for by the equity method		—			(231	)		—			—			(231	)
Impairment loss in investment in affiliates		—			—			—			(165	)		(165	)
Provision (benefit) for income taxes		(2,977	)		520			3,657			1,768			2,968
Capital expenditures for property, vessels, equipment and intangible assets		(20,019	)		(1,290	)		(297	)		(872	)		(22,478	)
Goodwill		—			2,906			6,275			—			9,181
Other intangibles, net		8,431			2,721			—			—			11,152
Total assets		251,196			72,979			12,453			39,861			376,489

Results for Year Ended December 31, 2008 Compared Year Ended December 31, 2007

Revenue

Total revenue for 2008 was $274.6 million, compared to $292.7 million in 2007, a decrease of $18.1 million or 6.2%. The decrease in revenue resulted primarily from decrease in revenue from our marine operations, cruise operations and insurance operations offset by an increase in revenue from our travel and events operations. Revenue from our marine operations decreased by $14.6 million (11.8%) to $108.7 million in 2008 due to lower volume of work in 2008 as compared to 2007. Revenue from our cruise operations decreased by $3.4 million (2.2%) to $151.0 in 2008 primarily due to an increase of $12.9 million from our Windstar Cruises brand offset by a decrease of $16.3 million from our Majestic America Line brand. Revenue from our travel and events operations increased by $0.4 million (3.0%) to $14.9 million in 2008 due to the overall size of events operated during 2008. Revenue from our insurance programs decreased by $0.6 million

(98.5%) due to a decrease in premiums earned on existing insurance programs as we have not entered into any new programs since June 2005.

In 2009, if we sell our non-Windstar Cruises assets and businesses, our revenues are expected to decrease on an overall basis from the prior periods due to the decrease in reporting units. Within our Windstar Cruises operations, we expect to carry fewer passengers at lower average per diems (“APD”). APD represents average daily net ticket revenue (total cruise ticket revenues plus non-discountable amounts, less discounts, commissions and various other items) our passengers pay for their respective cruises.

As of December 31, 2008, we had a backlog of $45.4 million for marina projects under contract in 2008, which we currently anticipate to be completed within 2009. Our backlog represents an estimate of the remaining future gross revenue from existing signed contracts and contracts that have been awarded with a defined scope of work and contract value and on which we have begun work with verbal client approval. We do not believe that our backlog is fully indicative of the amount of potential future revenue that we may achieve due to the short-term nature of the contracts under which we generally provide our services compared to the long-term nature of the projects, and since our backlog is dependent upon the completion of numerous individual projects that are subject to certain factors that can alter the ultimate timing, completion and amount of backlog recognition.

Cruise Operating Expenses

Cruise operating expenses represents direct expenses incurred with owning and operating our cruise ships. Cruise operating expenses decreased $2.0 million (1.6%) to $122.0 million in 2008. In 2008, due to a decrease in number of operating days and decease in number of passengers carried by the Majestic America vessels as compared to the prior year, cruise operating expenses decreased but were offset by the increase in cruise operating expenses for Windstar Cruises due to a full year of operations of Windstar Cruises in 2008 compared to only nine months of operations in 2007.

In 2008, we experienced high costs for fuel, freight and logistics all of which negatively impacted our cruise operating expenses. We expect cruise operating expenses related to Windstar Cruises to decrease in 2009 as a result of more normalized expenses related to fuel, freight and logistics.

Cost of Marine Revenue

Cost of marine revenue decreased $14.1 million (15.0%) to $79.9 million in 2008 due to lower levels of marine revenues in 2008 compared to the prior year. As a percentage of marine revenue, cost of marine revenue was 73.5% in 2008 compared to 76.3% in 2007. In future periods, we expect cost of marine revenue to fluctuate with the changes in marine revenue generated during the period.

Selling and Tour Promotion

Selling and tour promotion expenses were $12.4 million in 2008, compared to $26.0 million in 2007. The decrease is primarily due to significant reductions in promotion and marketing expenses for the Majestic America brand in 2008 as compared to 2007. In 2007 we incurred a significant amount of promotion and marketing expenses to launch and establish the Majestic America brand and to promote the full fleet of domestic ships that operated in 2007. In 2008, upon our decision to scale back the Majestic America operations, we stopped all promotional and advertising expenditures related to the Majestic America brand resulting in a decrease of $12.5 million. This was offset by a $2.0 million increase in promotional and advertising materials related to the Windstar Cruises brand as a result of full year operations in 2008 compared to nine months’ operations in 2007.

We expect selling and tour promotion expenses to decrease in 2009 for the Windstar Cruises brand as a result of decreased promotion efforts necessary in the second full year of operations.

General and Administrative Expenses

General and administrative expenses decreased in dollar terms and as a percentage of total revenue, to $53.8 million and 19.6% of total revenue in 2008 from $57.1 million and 19.5% of total revenue in 2007. The decrease is primarily due to reduction in the general and administrative expenses incurred by the cruise segment as a result of scaling back the Majestic America operations and related administrative costs and corporate and other segments.

We expect general and administrative expenses to decrease in dollar terms in 2009 as a result of the consolidation of our Company into one segment and decrease in the number of individual operating units reported.

Impairment Loss

We recorded an impairment loss of $21.3 million due to the write-down of the assets of our marine segment. As a result of our determination that there is a more than 50% likelihood that AMG will be sold in the near term, we evaluated the ongoing value of AMG’s long-lived assets and determined that they were impaired. The carrying value of AMG and AMG’s long-lived assets including goodwill at December 31, 2008 was $32.3 million and $18.0 million, respectively. The estimated fair value of AMG was $11.0 million. Fair value was based on indications of interest received early on in the Company’s sale process, which is still ongoing. The entire carrying value of the long-lived assets, including goodwill, was written down to zero. The remaining excess carrying value of $3.3 million after the write-off of goodwill and intangible assets was allocated to property, plant and equipment, inventory, prepaid and other current assets and to accounts receivable. As a result of the current global economic weakness and our announcement subsequent to the year ended December 31, 2008, that we plan to sell our non-Windstar assets including AMG in the near term, it is reasonably possible that our estimate of fair value may change in the near term resulting in the need to adjust the recorded value.

Depreciation and Amortization

Depreciation and amortization expenses were $14.5 million in 2008, compared to $11.0 million in 2007. The increase is related to the additional depreciation expense resulting from the acquisitions completed during 2007 and 2008.

We expect depreciation expense to decrease in 2009 due to the disposal of some of the Majestic America brand vessels in 2008 and the expected disposal of the remaining Majestic America brand vessels in 2009.

Loss and Loss Adjustment Expenses

Loss and loss adjustment expenses were $0.6 million in 2008 compared to $0.4 million in 2007. The change is related to changes in loss rates based on actuarial analyses. We do not anticipate these costs to increase in 2009 as a result of us not entering into any new agreements in 2008.

Insurance Acquisition Costs and Other Operating Expenses

Insurance acquisition costs and other operating expenses decreased to $0.4 million in 2008 from $0.6 million in 2007. The decrease is related to the decrease in net insurance premiums earned in 2008 compared to 2007. We do not anticipate these costs to increase in 2009 since we did not enter into any new agreements in 2008.

Operating Income (Loss)

We reported an operating loss of $30.0 million in 2008 compared to $20.4 million in 2007.

Operating loss from our cruise segment decreased by $11.9 million to $12.1 million in 2008 from $24.0 million in 2007. The 2007 operating loss in the Majestic America Line division was due to aggressive

discounting to drive capacity, over reliance on our direct mail campaigns and increased cruise operating expenses.

Operating loss from our marine segment was $16.1 million in 2008, primarily due to the impairment loss of $21.3 million recorded in 2008, compared to operating income of $8.6 million in 2007.

Operating income from our travel and events segment increased by $1.2 million (79.6%) to $2.6 million in 2008 from $1.4 million in 2007

The change in operating income is the result of changes described above.

Other Income (Expense)

In 2008, we recorded other expense of $6.2 million compared to $3.5 million in 2007. Other expense in 2008 consisted primarily of $7.0 million in loss on disposal of the ship-related assets of the Majestic America Line offset by $0.8 million in insurance proceeds related to the Empress of the North and Queen of the West incidents in 2007 and 2006, respectively; $1.1 million in legal settlement related to the grounding of the Empress of the North in March 2006; and $2.6 million in settlement of the dispute related to the purchase of Windstar Cruises. Other expense during 2008 included $6.3 million of interest expense related to long-term debt assumed in our cruise acquisitions consummated during 2006 and 2007 and interest expense on our convertible notes issued in April 2007, offset by $1.2 million of interest and dividend income. Other expense in 2007 consisted primarily of $7.3 million of interest expense related to long-term debt assumed in our cruise acquisitions consummated during 2006 and 2007 and interest expense on our convertible notes issued in April 2007, offset by $3.6 million of interest and dividend income.

Income Taxes

We recorded income tax benefit of $0.3 million for 2008, compared to income tax expense of $3.0 million for 2007. In accordance with SFAS No. 109, we recorded a full valuation allowance on our domestic deferred tax assets commencing in the fourth quarter of 2007 through December 31, 2008. A significant factor in determining the requirement for the valuation allowance was our cumulative three-year historical loss generated as of 2007. SFAS No. 109 largely precludes us from taking into consideration future outlook or forecasted income due to our limited operating history in our domestic cruise business. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from utilizing loss carry-forwards in the future.

Net Loss

Net loss was $36.0 million in 2008 compared to $26.9 million in 2007 as a result of changes described above.

Liquidity and Capital Resources

Due to the current global downturn in the economy, specifically the decrease in vacationers’ discretionary spending and the direct impact this has on the reduction in cruise bookings, decrease in corporate spending on incentive programs and the tightening effect of the credit market on financing for construction projects, we will need additional sources of cash in the immediate future in order to fund operations in 2009. Accordingly, in February 2009, we announced our intention to sell our non-Windstar Cruises related assets, including the operations of marine, travel and events, Majestic America Line and insurance. We hired an investment banking firm who is actively marketing the non-Windstar Cruise assets for immediate sale. In addition to the sale of assets, we are also seeking additional financing sources and renegotiating existing debt obligations. Based on the terms of the asset sales or additional financing, if any, our stockholders may have additional dilution. The amount of dilution could be attributed to the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.

Windstar Cruises assets, raise additional financing and/or renegotiate existing debt obligations in order to raise funds for operations, we will be forced to extend payment terms with vendors where possible, and/or to suspend or curtail certain of our planned operations and possibly seek protection in bankruptcy. Any of these actions would harm our business, results of operations and future prospects could cause our debt-obligations to be accelerated and could result in potential damages on existing contracts within our marine and travel and events businesses.

As a result of our need for additional financing and other factors, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended December 31, 2008 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. If we cease to continue as a going concern, due to lack of available capital or otherwise, you may lose your entire investment in our company.

Net cash provided by (used in) operations for the years ended December 31, 2008 and 2007 was ($18.6) million and $4.7 million, respectively. The decrease in cash flows from operations in 2008 compared to 2007 is due to the timing differences in the collection of current assets and the payment of current liabilities offset by the increase in net loss adjusted for non-cash related charges incurred during the period.

Net cash provided by (used in) investing activities for the years ended December 31, 2008 and 2007 was $10.4 million and ($18.0) million, respectively. Cash provided by investing activities in 2008 was due to the cash received in the reduction of the restriction requirements and proceeds from sale of available-for-sale securities partially offset by purchases of property and equipment, consisting mainly of ship improvements conducted during lay-up and drydock periods, and cash paid for the acquisition of Windstar Cruises. These uses of cash were partially offset by sales of available-for-sale securities net of increases in invested restricted cash.

In 2009, we will incur capital expenditures and costs for improvements to and maintenance of our ships. In 2009, planned capital expenditures and drydock projects are expected to be approximately $4.3 million for AMG and Windstar Cruises. We do not have any material commitments of capital expenditures in our travel and events or insurance businesses in 2009.

On January 13, 2006, we acquired American West. Under the terms of the agreement, we acquired the membership interests of American West for $1.00, repaid debt of $4.3 million and assumed $41.5 million in fixed-rate, 4.63% debt payable through 2028 and guaranteed by U.S. Maritime Administration (“MARAD”). In addition, the transaction consideration consisted of 250,000 shares of our restricted common stock, which was forfeited because the required financial targets were not met. EN Boat, a subsidiary of the Company and owner of the Empress of the North, was unable to make its semi-annual payment on the note due July 17, 2008 and was unable to cure the payment default within the 30 day cure period. On August 15, 2008, we returned the Empress of the North to MARAD’s custodial control following its last sailing on August 9, 2008. As a result of the disposal of the Empress of the North, we wrote off $34.2 million in assets (primarily vessels) and $37.3 million in liabilities (primarily loans payable) and recorded a $3.1 million gain on disposal for the year ended December 31, 2008. The default under the note will have a limited financial impact because recourse on the default is limited to the Empress of the North.

On April 25, 2006, we acquired the cruise-related assets of Delta Queen for $2.75 million in cash, the assumption of $9.0 million of passenger deposits and the assumption of $35.0 million of fixed-rate, 6.50% debt payable through 2020 and guaranteed by the U.S. Maritime Administration. In addition, the transaction included contingent consideration of 100,000 shares of our common stock to be granted to Delta Queen if certain future financial targets were met in any of the three years following the close of the transaction. AQ Boat, LLC, a subsidiary of the Company and owner of the American Queen^®, was unable to make its semiannual principal payments on the note. On November 15, 2008, we returned the American Queen^® to MARAD’s custodial control following its last sailing on November 15, 2008. Under the Trust Indenture, we, as the ultimate parent of AQ Boat, LLC, had guaranteed principal payments on the debt assumed by AQ Boat, LLC and we were required to make principal payments on the debt or additional note amounting to $7.3 million by February 23, 2009, in the event of default by AQ Boat, LLC. Through November 15, 2008, AQ Boat, LLC had paid $6.3 million towards principal payments. At December 31, 2008, we accrued the

remaining guaranteed principal payment of $0.9 million. As a result of the disposal of the American Queen^®, we wrote off $38.3 million in assets (primarily vessels) and $28.3 million in liabilities (primarily loans payable) and recorded a $10.0 million loss on disposal for the year ended December 31, 2008.

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

On April 25, 2006, we acquired the $9.0 million first preferred ship mortgage on a ship, the 150-passenger Columbia Queen, from the U.S. Maritime Administration for $5.0 million. In August 2006, we acquired the $5.0 million second preferred ship mortgage on the Columbia Queen, from the mortgage holder for $3.5 million. On October 13, 2006, we purchased the Columbia Queen during a foreclosure auction for additional consideration of $1,000 and now own the ship outright and operated her in 2007 and 2008.

On June 12, 2006, we acquired the 48-passenger Executive Explorer for $2.5 million from the U.S. Federal Marshal. We renamed the ship Contessa and operated her in 2007.

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. This option was terminated upon agreement by both parties in August 2008.

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 that was subsequently repaid with a protion of the proceeds from our convertible debt offering.

Net cash used in financing activities during 2008 totaled $3.7 million primarily relating to the payment of cruise-related debt. Net cash provided by financing activities in 2007 totaled $27.0 million and primarily relates to $97.0 million from our convertible debt offering offset by $64.4 million used to repay the seller financing debt incurred in the acquisition of Windstar Cruises and payments on existing debt acquired during the 2006 acquisitions within the cruise segment. In 2007, we also paid $3.3 million of convertible debt offering costs, two cash dividends totaling $0.20 per share paid to common stockholders and $1.6 million for the purchase and retirement of 51,150 shares of our common stock. These payments were partially offset by the proceeds received from the exercise of employee stock options during the period.

In January 2008, BellPort purchased certain assets related to Anacapa Marine Services, a shipyard business located in Channel Islands Harbor in Oxnard, California, for $0.5 million. We completed the acquisition in order to further expand our shipyard operations. The acquisition was not deemed to be material.

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. We and our board of directors intend to continually review our dividend policy to evaluate conditions that may affect our desire or ability to pay dividends, which are declared at the discretion of the board of directors. Subsequent to the dividend declared in May 2007, our board of directors has not approved any additional dividends.

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


Record Date	Payment Date		Dividend Amount

2007:
March 12, 2007		March 19, 2007	$	1,084
May 21, 2007		May 31, 2007		1,084

In the ordinary course of business we may, from time to time, be required to enter into letters of credit related to our insurance operations and travel related programs with airlines, travel providers and travel reporting agencies. As of December 31, 2008, we had outstanding $5.9 million in letters of credit related to property and casualty insurance programs which expire at various dates through 2009. As of December 31, 2008, we had no outstanding letters of credit related to cruise business operations and $0.1 million in letters of credit related to travel and events business operations which expire at various dates through 2009. We have a $6.0 million line of credit to support the outstanding letters of credit which is secured by a certificate of deposit in the same amount and is classified as restricted cash as of December 31, 2008.

In November 1998, our board of directors authorized the repurchase of our common stock in the open market or through private transactions up to $20.0 million. 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 transactions, providing for an aggregate of $30.0 million. In 2007, we repurchased 51,150 shares for approximately $1.6 million. In 2008 we made no share repurchases. We do not believe that any future repurchases will have a significant impact on our liquidity.

Our cruise passenger deposits are primarily received through credit card transactions. As of December 31, 2008, we had $10.6 million of restricted cash held by a bank in cash equivalents and a certificate of deposit as additional amounts required for secure processing of passenger deposits through credit cards. The restricted amounts were negotiated between us and the bank based on a percentage of the expected future volume of credit card transactions within a standard twelve-month period. Due to reductions in the insurance contract liabilities associated with our reinsurance business, we were able to reduce certain letters of credit requirements. During 2008, this reduction made available $6.5 million of cash that was previously restricted. Accordingly this reduction allowed us to reduce our bank facility that secured the letters of credit to $6.0 million as of December 31, 2008.

Events of Default Under Debt Agreements

At December 31, 2008, we were in violation of certain financial covenants under a working line of credit with Bank of the Pacific. We received a letter from Bank of the Pacific on March 23, 2009, notifying us of non-compliance and a demand for payment was made. Upon negotiations with the bank, we were able to obtain a waiver of the violation of the covenants until April 9, 2009. On April 13, 2009, we received a notice of payoff pursuant to which Bank of the Pacific exercised its right of setoff whereby the outstanding debt of approximately $1.0 million under the working line of credit was fully repaid utilizing funds in our account maintained at the bank.

We also have a $1.6 million note payable with Bank of Pacific with a maturity date of May 10, 2010 secured by property. Due to the default under the working line of credit with Bank of the Pacific described above, we are subject to a cross default under the note payable. Accordingly, the full amount of the obligation has been presented as a current maturity in the accompanying financial statements.

We did not make a $1.8 million scheduled interest payment due and payable on April 15, 2009 on our 3.75% senior convertible notes. We have until May 15, 2009, to cure this default on our 3.75% senior convertible notes, at which time an event of default will occur and the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding notes may declare the principal and accrued and unpaid interest on all the outstanding notes to be due and payable immediately. Although there can be no assurances that we will satisfy the scheduled interest obligation prior to May 15, 2009, it is our current intent to cure the default prior to that date.

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 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:


	•	our ability to effectively complete our planned sale of assets;

	•	our ability to obtain additional financing at reasonable rates;

	•	our ability to renegotiate our debt;

	•	our ability to continue to operate as a going concern;

	•	our ability to effectively and efficiently operate our cruise operations;

	•	customer cancellation rates;

	•	competitive conditions in the industries in which we operate;

	•	marketing expenses;

	•	extreme weather conditions;

	•	timing of and costs related to acquisitions;

	•	the impact of new laws and regulations affecting our business;

	•	negative incidents involving cruise ships, including those involving the health and safety of passengers;

	•	cruise ship maintenance problems;

	•	reduced consumer demand for vacations and cruise vacations;

	•	changes in fuel, food, payroll, insurance and security costs;

	•	the availability of raw materials;

	•	our ability to enter into profitable marina construction contracts;

	•	changes in relationships with certain travel providers;

	•	changes in vacation industry capacity;

	•	the mix of programs and events, program destinations and event locations;

	•	the introduction and acceptance of new programs and program and event enhancements by us and our competitors;

	•	other economic factors and other considerations affecting the travel industry;


	•	changes in U.S. maritime tax laws;

	•	potential claims related to our reinsurance business;

	•	the potentially volatile nature of the reinsurance business; and

	•	other factors discussed in this Annual Report on Form 10-K.

A more complete discussion of these risks and uncertainties, as well as other factors, may be identified from time to time in our filings with the Securities and Exchange Commission, including elsewhere in this Annual Report on Form 10-K, or in our 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

Not applicable.


Item 8.	*Financial Statements and Supplementary Data*

The Consolidated Financial Statements are listed in Item 15, “Exhibits and Financial Statement Schedules” and are included herein on pages 41 through 80.

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

None.

Item 9A. Controls and Procedures

Not applicable.

Item 9(T). Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our 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 our management, including our 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. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

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

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

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not

subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

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 13(a)-15(f) and 15(d)-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.

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, 2008 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 Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2008.


Item 9B.	*Other Information*

Events of Default Under Debt Agreements

PART III


Item 10.	*Directors, Executive Officers and Corporate Governance*

The information under the captions “Information about our Board of Directors, Board Committees and Related Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance,” appearing in the Proxy Statement, is hereby incorporated by reference.


Item 11.	*Executive Compensation*

The information under the caption “Executive Compensation and Related Information,” appearing in the Proxy Statement, is hereby incorporated by reference.


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

The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference.

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, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended December 31, 2008. Our audits also included the financial statement schedule: Schedule II — Consolidated Valuation and Qualifying Accounts for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits 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 the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion the related financial statement schedule, when considered in relation to the basis financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that Ambassadors International, Inc. will continue as a going concern. The current economic environment is negatively impacting the Company. The Company has incurred recurring operating losses and is not in compliance with certain debt covenants at December 31, 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As more fully described in Note 1, the Company has announced plans to be a cruise only company and has initiated a plan to sell all non-Windstar assets. The 2008 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ ERNST & YOUNG

Irvine, California

April 14, 2009

Ambassadors International, Inc.

Consolidated Balance Sheets


	December 31,
	2008			2007
	(In thousands, except share data)

ASSETS:
Current assets:
Cash and cash equivalents	$	10,105		$	21,998
Restricted cash		16,625			31,084
Available-for-sale securities		185			2,514
Accounts and other receivables, net of allowance of $4,414 and $2,332 in 2008 and 2007, respectively		17,678			40,798
Costs in excess of billings on construction contracts		5,283			8,410
Premiums receivable		6,313			10,188
Reinsurance recoverable		532			1,148
Inventory		1,839			5,751
Deferred income taxes		1,661			1,262
Prepaid costs and other current assets		6,891			8,530

Total current assets		67,112			131,683
Property, vessels and equipment, net		130,461			219,793
Goodwill		6,275			9,181
Other intangibles, net		7,282			11,152
Other assets		540			4,680

Total assets	$	211,670		$	376,489


LIABILITIES:
Current liabilities:
Accounts payable	$	22,086		$	36,564
Passenger and participant deposits		17,221			47,067
Accrued expenses		12,245			16,175
Billings in excess of costs on construction contracts		4,253			13,108
Loss and loss adjustment expense reserves		3,998			6,674
Current portion of long term debt		2,760			5,479

Total current liabilities		62,563			125,067
Long term passenger and participant deposits		—			35
Long term deferred tax liabilities		1,354			1,676
Long term debt, net of current portion and net of discount of $1,902 in 2008 and $2,479 in 2007, respectively		95,213			161,584

Total liabilities		159,130			288,362
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 40,000,000 shares authorized; 11,318,067 and 10,888,655 shares issued and outstanding in 2008 and 2007, respectively		108			108
Additional paid-in capital		99,121			97,634
Accumulated deficit		(47,142	)		(11,170	)
Accumulated other comprehensive income		453			1,555

Total stockholders’ equity		52,540			88,127

Total liabilities and stockholders’ equity	$	211,670		$	376,489

See Notes to Consolidated Financial Statements.

Ambassadors International, Inc.

Consolidated Statements of Operations


	Year Ended December 31,
	2008			2007
	(In thousands, except per share data)

Revenues:
Passenger ticket revenue	$	126,248		$	131,796
Onboard and other cruise revenue		24,747			22,598
Marine revenue		108,655			123,221
Travel and event related		14,941			14,511
Net insurance premiums earned		9			582

		274,600			292,708

Costs and operating expenses:
Cruise operating expenses:
Compensation and benefits		26,040			27,696
Passenger expenses		10,579			13,420
Materials and services		59,601			52,281
Repairs and maintenance		12,309			17,310
Commissions and other cruise operating expenses		13,438			13,248

		121,967			123,955
Cost of marine revenue		79,884			94,029
Selling and tour promotion		12,355			25,980
General and administrative		53,750			57,140
Impairment loss		21,289			—
Depreciation and amortization		14,514			11,010
Loss and loss adjustment expenses		560			387
Insurance acquisition costs and other operating expenses		329			639

		304,648			313,140

Operating loss		(30,048	)		(20,432	)

Other income (expense):
Interest and dividend income		1,157			3,625
Realized gain (loss) on sale of available-for-sale securities		—			(48	)
Interest expense		(6,298	)		(7,330	)
Other income(expense), net (Note 10)		(1,073	)		274

		(6,214	)		(3,479	)

Loss before income taxes		(36,262	)		(23,911	)
Provision (benefit) for income taxes		(290	)		2,968

Net loss	$	(35,972	)	$	(26,879	)

Loss per share:
Basic and diluted	$	(3.29	)	$	(2.48	)

Weighted-average common shares outstanding:
Basic and diluted		10,926			10,838

See Notes to Consolidated Financial Statements.

Ambassadors International, Inc.

Consolidated Statements of Changes in Stockholders’ Equity


									Retained			Accumulated
						Additional			Earnings			Other
	Common Stock					Paid-In			(Accumulated			Comprehensive
	Shares			Amount		Capital			Deficit)			Income (Loss)			Total
	(In thousands, except share data)

Balance at December 31, 2006		10,838,179			107		97,050			17,877			703		$	115,737
Comprehensive income (loss):
Net loss		—			—		—			(26,879	)		—			(26,879	)
Other comprehensive loss:
Foreign currency translation, net of tax of $0		—			—		—			—			780			780
Marketable securities, net of tax benefit of $45		—			—		—			—			72			72

Comprehensive loss							—			—						(26,027	)
Stock options exercised		60,626			1		648			—			—			649
Issuance of restricted stock		95,000			—		—			—			—			—
Cancellation of restricted stock		(54,000	)		—		(372	)		—			—			(372	)
Shares repurchased and cancelled		(51,150	)		—		(1,576	)		—			—			(1,576	)
Restricted stock compensation		—			—		1,158			—			—			1,158
Amortization of stock options and restricted stock expense		—			—		726			—			—			726
Dividends ($0.20 per share)		—			—		—			(2,168	)		—			(2,168	)

Balance at December 31, 2007		10,888,655			108		97,634			(11,170	)		1,555		$	88,127

Comprehensive income (loss):
Net loss		—			—		—			(35,972	)		—			(35,972	)
Other comprehensive loss:
Foreign currency translation, net of tax of $0		—			—		—			—			(1,111	)		(1,111	)
Marketable securities, net of tax benefit of $0		—			—		—			—			9			9

Comprehensive loss										—						(37,074	)
Stock options exercised		2,412			—		20			—			—			20
Issuance of restricted stock		450,000			—		—			—			—			—
Cancellation of restricted stock		(23,000	)		—		(132	)		—			—			(132	)
Restricted stock compensation		—			—		813			—			—			813
Amortization of stock options and restricted stock expense		—			—		786			—			—			786

Balance at December 31, 2008		11,318,067		$	108	$	99,121		$	(47,142	)	$	453		$	52,540

See Notes to Consolidated Financial Statements.

Ambassadors International, Inc.

Consolidated Statements of Cash Flows


	Year Ended December 31,
	2008			2007
	(In thousands)

Cash flows from operating activities:
Net loss		(35,972	)	$	(26,879	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		14,514			11,010
Provision for losses from uncollectible receivables		2,842			1,438
Foreign currency translation		(686	)		780
Undistributed losses from equity investments		88			231
Share-based compensation		1,467			1,512
Amortization of debt discount and deferred offering costs		656			496
Write-off of intangible assets		—			143
Impairment loss		21,289			—
Impairment loss in investment		—			165
Deferred income taxes		(1,710	)		2,667
Loss on sale of available-for-sale securities		—			48
Loss on disposal of property, vessels and equipment		7,008			66
Change in assets and liabilities, net of effects of business acquisitions and dispositions:
Accounts and other receivables		19,759			(17,154	)
Costs in excess of billings on construction contracts		3,127			(1,349	)
Premiums receivable		3,875			4,361
Deferred policy acquisition costs		—			330
Reinsurance recoverable		616			1,004
Prepaid insurance premiums		—			252
Inventory		1,451			(1,403	)
Prepaid costs and other current assets		1,561			1,964
Other assets		1,010			(1,199	)
Accounts payable and accrued and other expenses		(18,068	)		17,381
Passenger and participant deposits		(29,881	)		6,474
Billings in excess of costs on construction contracts		(8,855	)		8,774
Loss and loss adjustment expense reserves		(2,676	)		(5,152	)
Unearned premiums		—			(1,220	)
Deferred gain on retroactive reinsurance		—			(19	)

Net cash provided by (used in) operating activities		(18,585	)		4,721

Cash flows from investing activities:
Proceeds from sale of available-for-sale securities		2,377			35,668
Purchase of available-for-sale securities		(39	)		(306	)
Restricted cash		12,975			(20,000	)
Cash paid for acquisitions of subsidiaries, net of cash received		(808	)		(10,927	)
Purchase of property and equipment		(4,146	)		(22,478	)
Proceeds from disposal of assets		—			34

Net cash provided by (used in) investing activities		10,359			(18,009	)

(continued on next page)

Ambassadors International, Inc.

Consolidated Statements of Cash Flows — (Continued from previous page)


	Year Ended December 31,
	2008			2007
	(In thousands)

Cash flows from financing activities:
Proceeds from exercise of stock options		20			649
Proceeds from issuance of convertible note, net of offering costs of $3,299		—			93,701
Proceeds from line of credit		667			877
Dividends paid on common stock		—			(2,168	)
Purchase and retirement of common stock		—			(1,576	)
Payment of long term debt		(4,354	)		(64,443	)

Net cash provided by (used in) financing activities		(3,667	)		27,040

Net increase (decrease) in cash and cash equivalents	$	(11,893	)	$	13,752
Cash and cash equivalents, beginning of year		21,998			8,246

Cash and cash equivalents, end of year	$	10,105		$	21,998

Supplemental disclosure of cash flow information:
Cash paid for interest	$	5,611		$	5,552
Cash paid for income taxes		622			356
See Notes 1 and 9 for non-cash investing and financing activities.

See Notes to Consolidated Financial Statements.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements


1.	Description of the Company and Summary of Significant Accounting Policies

The Company

Ambassadors International, Inc. (the “Company”) was founded in 1967 as a travel services company incorporated in Washington and reincorporated in Delaware in 1995. The Company operates through four wholly-owned subsidiaries: (i) Ambassadors, LLC (“Ambassadors”) which commenced operations in 1996, (ii) Cypress Reinsurance, Ltd (“Cypress Re”) which commenced operations in 2004, (iii) Ambassadors Marine Group, LLC (“AMG”) which was formed in 2006 and (iv) Ambassadors Cruise Group, LLC (“ACG”) which commenced operations in 2006.

In January 2007, the Company realigned its business segments into the following four business segments: (i) cruise, which includes the operations of ACG; (ii) marine, which includes the operations of AMG; (iii) travel and events, which includes the operations of Ambassadors; and (iv) corporate and other, which consists of general corporate assets (primarily cash and cash equivalents and investments), the insurance operations of Cypress Re and other activities that are not directly related to the Company’s cruise, marine and travel and events operating segments.

As of December 31, 2008, the following further describes the operations of the Company’s business segments:


	•	Cruise — this segment operates the Majestic America Line and Windstar Cruises. Majestic America Line consists of a North American river and coastal cruise company, American West Steamboat Company (“American West”). ACG acquired American West on January 13, 2006 and the cruise-related assets of Delta Queen Steamboat Company, Inc. (“Delta Queen”) on April 25, 2006. Through the second quarter of 2008 American West operated a seven-ship fleet which includes the 223-passenger Empress of the North, the 142-passenger Queen of the West, the 436-passenger American Queen^®, the 412-passenger Mississippi Queen^® and the 176-passenger Delta Queen^®. On June 12, 2006, ACG acquired the 48-passenger Executive Explorer, renamed Contessa, and on October 13, 2006, ACG acquired the 150-passenger Columbia Queen. On April 2, 2007, ACG, through its wholly-owned subsidiary, Ambassadors International Cruise Group (“AICG”), acquired Windstar Sail Cruises Limited (“Windstar Cruises”), an international-flagged small ship cruise line that operates a three-ship fleet that includes the 312-passenger Wind Surf, 148-passenger Wind Spirit, and 148-passenger Wind Star.

The 2008 cruise schedule included cruises through Alaska’s Inside Passage onboard the Empress of the North, and on the Columbia and Snake Rivers onboard the Empress of the North, Columbia Queen and Queen of the West. The Company also offered historical cruises onboard the American Queen^®, Delta Queen^® and Mississippi Queen^® on many American rivers, including the Mississippi, Ohio, Tennessee, Cumberland and Arkansas Rivers, with stops at many American historic cities, battle grounds and estates, including New Orleans, Memphis and St. Louis. Each of the Company’s cruises offered an onboard historian and naturalist and shore excursions to enhance passengers’ understanding of the wildlife, history and cultures of the areas traveled.

The Contessa did not operate in 2008, and 2008 was also the farewell season for the Delta Queen^®. The Empress of the North and the American Queen^® were returned to MARAD’s custodial control in September 2008 and November 2008, respectively. On January 27, 2009, DQ Boat LLC, a wholly owned subsidiary of the Company and owner of Delta Queen^® entered into a Bareboat Charter Agreement with Delta Queen, LLC to lease Delta Queen^® for use as a fixed location boutique hotel/restaurant/bar at Chattanooga, Tennessee. The Company has announced its intention to sell the Majestic America Line fleet and that it does not intend to sail the Majestic America vessels in 2009.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Since April 2007, the Company, through Windstar Cruises, offers cruise schedules to destinations in the Greek Isles, Caribbean Islands and Costa Rica and cruises on the Mediterranean, the Adriatic, and the Panama Canal on one of its three Windstar Cruises ships.


	•	Marine — this segment includes marina design, management and development. It also includes BellPort Group, Inc. (“BellPort), acquired in February 2005, which offers shipyard operations, marina consulting and marina construction services. On July 21, 2006, the Company acquired Bellingham Marine, a marina design and construction company that operates throughout the world.

	•	Travel and Events — this segment develops, markets and manages meetings and incentive programs for a nationwide roster of corporate clients utilizing incentive travel, merchandise award programs and corporate meeting services. It provides comprehensive hotel reservation, registration and travel services for meetings, conventions, expositions and trade shows. It also develops, markets, and distributes event portfolio management technology solutions for corporations and large associations.

	•	Corporate and Other — This segment consists of general corporate assets (primarily cash and cash equivalents and investments), the operations of Cypress Re and other activities which are not directly related to the Company’s cruise, marine or travel and events segments. Cypress Re reinsures property and casualty risks written by licensed United States insurers. The lines of business that are currently 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.

Going Concern

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Due to the current global downturn in the economy, specifically the decrease in vacationers’ discretionary spending and the direct impact this has on the reduction in cruise bookings, the Company is anticipating that it will need additional sources of cash flow in order to fund operations in 2009. Accordingly, in February 2009, the Company announced its intention to sell its non-Windstar Cruises related assets, including the operations of marine, travel and events and insurance. This announcement is in addition to the April 2008 announcement of the Company’s intention to sell Majestic America Line. The Company hired an investment banking firm who is actively marketing the non-Windstar Cruise assets for immediate sale. In addition to the sale of assets, the Company is also seeking additional financing sources, including renegotiating existing debt obligations. As of December 31, 2008, the Company was not in compliance with certain debt covenants. Based on the terms of the asset sales or additional financing available, the Company’s stockholders may have additional dilution. The amount of dilution could be attributed to the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.

Although the Company is in discussions with potential buyers and other prospects for additional funds, the Company currently does not have any completed funding commitments or sale transactions. If the Company is not able to sell non-Windstar Cruises assets, raise additional financing and/or renegotiating existing debt obligations in order to raise funds for operations, the Company will be forced to extend payment terms with vendors where possible, and/or to suspend or curtail certain of its planned operations. Any of these actions could harm the business, results of operations and future prospects. These circumstances raise substantial doubt Company’s ability to continue as a going concern.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated upon consolidation. The equity method of accounting is used for investment ownership ranging from 20% to 50% where the Company is

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

deemed to have significant influence, but not control. Investment ownership of less than 20 percent is accounted for using the cost method.

Estimates

The preparation of these consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Reclassifications

Certain reclassifications have been made to amounts in 2007 to conform to the 2008 financial statement presentation.

Credit Risk

The majority of the Company’s accounts receivable are derived from its marine and travel and events business lines. These accounts receivable represent funds owed from clients and customers, primarily comprised of individuals, corporations and government agencies, for services or products delivered.

In the Company’s marine business, receivables represent amounts owed under contracts related to the manufacture and installation of concrete dock systems and are based on contracted prices and payment schedules. The Company usually requires a prepayment on a contract prior to commencing work, the Company makes progress billings during a project and ultimately receives the final retention payment which is due 30 days after a project is completed and accepted by its clients. Each billing represents an account receivable until collected. Most of the Company’s travel and events programs are billed in advance and are routinely collected prior to the commencement of a program.

The Company generally does not require collateral due to its ability to collect a significant portion of funds in advance along with progress billings. However, the Company is exposed to credit risk in the event that its clients or customers cannot meet their obligations. The Company believes that it maintains adequate reserves for potential credit losses and such losses have been minimal and within management’s estimates.

Premiums receivable consist of funds held in trust by the ceding company, and deferred and not yet due premiums from the ceding company. These amounts represent the Company’s earnings and premiums due on its reinsurance business. Such funds are held in trust and are primarily invested in investment grade corporate bonds, government bonds and money market funds. These premiums receivable will be paid to the Company as its reinsurance programs conclude over time. The Company currently conducts all of its quota share reinsurance activity through one ceding company. The Company believes that it maintains adequate reserves for potential credit losses.

Fair Value Measurements

Effective January 1, 2008, the Company implemented the requirements of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) for its financial assets and liabilities. SFAS No. 157 refines the definition of fair value, expands disclosure requirements about fair value measurements and establishes specific requirements as well as guidelines for a consistent framework to measure fair value. SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Further, SFAS No. 157 requires the Company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:


	•	Level 1 — quoted prices for identical instruments in active markets;

	•	Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

	•	Level 3 — valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company measures fair value using a set of standardized procedures that are outlined herein for all financial assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third party source to determine fair value and classifies such items in Level 1. In some instances where a market price may be available, but in an inactive or over-the-counter market where significant fluctuations in pricing could occur, the Company would consistently choose the dealer (market maker) pricing estimate and classify the financial asset or liability in Level 2.

If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads, etc. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, a financial asset or liability could be classified in either Level 2 or 3 even though there may be some significant inputs that are readily observable. Internal models and techniques used by the Company include discounted cash flow and Black-Scholes-Merton option valuation models. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial position or results of operations.

On February 12, 2008, the Financial Accounting Standards Board (“FASB”) amended the implementation of SFAS No. 157 related to non-financial assets and liabilities until fiscal periods beginning after November 15, 2008. As a result, the Company has not applied the above fair value procedures to its goodwill and long-lived asset impairment analyses during the current period. The Company believes that the adoption of SFAS No. 157 for non-financial assets and liabilities will not have a material impact on its consolidated financial position or results of operations upon implementation for fiscal periods beginning after November 15, 2008.

The following table illustrates the Company’s fair value measurements of its financial assets and liabilities as classified in the fair value hierarchy, associated unrealized and realized gains and losses, as well as purchases, sales, issuances, settlements (net) or transfers out of a Level 1 classification. Realized gains and losses are recorded in other income, net on the Company’s consolidated statement of operations (in thousands):


	Fair Value		Fair Value		Change in		Change in
Fair Value	December 31,		December 31,		Unrealized		Realized
Hierarchy	2008		2007		Gain (loss)(1)		Gain (loss)(1)

Level 1	$	185	$	2,514	$	25	$	—
Level 2		—		—		—		—
Level 3		—		—		—		—


(1)		Settlements (net) or transfers out of Level I during the year ended December 31, 2008 amounted to $2,354.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Cash and Cash Equivalents

The Company invests cash in excess of operating requirements in short-term time deposits, money market instruments, government mutual bond funds and other investments. Securities with remaining maturities of three months or less are classified as cash equivalents.

Restricted Cash

The Company’s restricted cash consisted of (in thousands):


	As of December 31,
	2008		2007

Restricted cash to secure credit card processing	$	10,644	$	17,100
Restricted cash to pay vessel debt		5,981		12,500
Restricted cash to secure letters of credit		—		1,484

Balance at December 31,	$	16,625	$	31,084

The Company’s cruise passenger deposits are primarily received through credit card transactions. At December 31, 2007, the Company had $17.1 million of restricted cash held by banks in cash equivalents and a certificate of deposit in order to secure its processing of passenger deposits through credit cards. The restricted amounts were negotiated between the Company and the bank based on a percentage of the expected volume of future credit card transactions within a standard twelve-month period. At December 31, 2008, the amount of restricted cash held by banks related to credit card transactions was $10.6 million.

Due to reductions in the insurance contract liabilities associated with the Company’s reinsurance business, the Company was able to reduce certain letters of credit requirements. During 2008, this reduction made available $6.5 million of cash that was previously restricted. Accordingly this reduction allowed the Company to reduce its bank facility that secured the letters of credit to $6.0 million as of December 31, 2008.

As of December 31, 2007, the Company also had $1.5 million included in restricted cash representing principal and interest payments made to a depository account which was used to pay bondholders of certain of the Company’s vessel debt in February 2008 as required under the loan agreement. At December 31, 2008, the Company’s restricted cash did not include any such amounts.

Available-for-Sale Securities

The Company classifies its marketable investments as available-for-sale securities. Available-for-sale securities consist of debt securities with maturities beyond three months at date of purchase and are carried at fair value.

Unrealized gains and losses on available-for-sale securities are excluded from operations and reported as other comprehensive income (loss), net of deferred income taxes. Realized gains and losses on the sale of available-for-sale securities are recognized on a specific identification basis in the statement of operations in the period the investments are sold.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of net unrealized gains and losses on foreign currency translation and marketable securities of $0.5 million and $1.6 million, net of taxes, at December 31, 2008 and 2007, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) refers to the aggregate of net income (loss) and certain other revenues, expenses, gains and losses recorded directly as adjustments to stockholders’ equity, net of tax.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Other Investments

The Company includes its equity investments in other operating companies as other assets in the accompanying balance sheets. The cost of these equity investments is allocated against the underlying fair value of the net assets of the investee. The Company accounts for equity investments with ownership ranging from 20% to 50% using the equity method, as it is deemed that the Company has significant influence, but not control. Equity investments with ownership of less than 20% are accounted for under the cost method. In 2008, the Company wrote down its equity investment in Deer Harbor WI, LLC (“DHWI”) to zero and recorded an impairment charge of $1.1 million, which is included in the impairment loss for the period ended December 31, 2008.

Property, Vessel and Equipment

Property, vessel and equipment are stated at cost, net of accumulated depreciation. Cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Major additions and betterments are capitalized. The 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 approximates 15%. Ship replacement parts are capitalized and are 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. Leasehold improvements are amortized using the straight-line method over the lesser of the expected useful life of the improvement or the term of the related lease.

The Company performs reviews for the impairment of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of our assets based on its estimate of their undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value. All of the Company’s property, vessels and equipment were subject to impairment testing as of December 31, 2008 and only the assets related to the marine division were deemed to be impaired. When property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in the statement of operations.

Drydocking

The Company capitalizes drydocking costs as incurred and amortizes such costs over the period to the next scheduled drydock and believes that the deferral method provides better matching of revenues and expenses. Drydocking costs are included in prepaid costs and other current assets and in long-term assets in the accompanying balance sheet and are amortized over the cruising season between scheduled drydockings.

Long-Lived Assets Including Intangibles

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. Management evaluates recoverability using both subjective and objective factors. Subjective factors include the evaluation of industry and product trends and the Company’s strategic focus. Objective factors include management’s best estimates of projected future earnings and cash flows. The Company uses a discounted cash flow model to estimate the fair market value of each of its reporting units when it tests goodwill for impairment. Assumptions used include growth rates for revenues and expenses, investment yields on deposits, any future capital expenditure requirements and appropriate discount rates. The Company established reporting units based on its 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 finite lives are tested for impairment using an undiscounted cash flow model. The Company amortizes intangible

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

assets with finite lives over their estimated useful lives and reviews them for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company amortizes its acquired intangible assets with finite lives over periods ranging from three to 20 years.

In 2008 the Company recorded an impairment loss of $21.3 million due to the write-down of the assets of its marine segment. As a result of its determination that there was a more than 50% likelihood that AMG will be sold in the near term, the Company evaluated the ongoing value of AMG’s long-lived assets and determined that they were impaired. The carrying value of AMG and AMG’s long-lived assets including goodwill at December 31, 2008 was $32.3 million and $18.0 million, respectively. The estimated fair value of AMG was $11.0 million. Fair value was based on indications of interest received early on in the Company’s sale process, which is still ongoing. In connection with our December 31, 2008 impairment testing, the trade name and goodwill associated with our marine division reporting unit were deemed to impaired and written off. The entire carrying value of the long-lived assets, including goodwill of $2.9 million, was written down to zero at December 31, 2008. The remaining excess carrying value of $3.3 million after the write-off of goodwill and intangible assets was allocated to property, plant and equipment, inventory, prepaid and other current assets and to accounts receivable. As a result of the current global economic weakness and the Company’s announcement subsequent to the year ended December 31, 2008 that it plans to sell its non-Windstar assets including AMG in the near term, it is reasonably possible that the Company’s estimate of discounted cash flows may change in the near term resulting in the need to adjust its determination of fair value.

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. Such liabilities are necessarily based on estimates and, while management believes 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.

Foreign Currency Transactions

Bellingham Marine operates internationally through its five foreign subsidiaries in Australia, New Zealand, Europe, Singapore and Southeast Asia. The financial statements of these foreign entities are denominated in their local currency and are translated into U.S. dollars for reporting purposes. Balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of stockholders’ equity. Gains or losses resulting from foreign currency transactions are included on the statement of operations in other income (expense), net (see note 10).

Revenue Recognition

The Company recognizes 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.” The Company recognizes 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

Passenger ticket revenue is recorded net of applicable discounts. Passenger ticket revenue and related costs of revenue are recognized when the cruise is completed. The Company generally receives from its customers a partially refundable deposit within one week of booking a tour, with the balance typically remitted

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

60 days prior to the departure date. When 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 the Company’s obligation has been met. Onboard and other cruise revenues are comprised of beverage and souvenir sales and optional shore excursions and are deferred and recognized as revenue when the cruise is completed.

Marine Revenue

The Company recognizes 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.

Revenues on fixed price marine construction contracts are recognized 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 the Company’s 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 management’s 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. The Company uses the completed-contract method for shipyard related contracts for which reasonably dependable estimates cannot be made.

On occasion, the Company or its 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, the Company’s 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 the Company’s 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.

The Company follows 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 the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time, or satisfy its obligations under the contracts, then profit may be significantly and negatively affected or losses on contracts may need to be recognized. Management reviews 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 revision 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. The Company considers a contract to be substantially completed upon delivery of the product, acceptance by the customer and compliance with contract performance specifications.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

The assets, “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 and Event Related

The Company bills travel participants, mainly consisting of large corporations, in advance, and the cash received recorded as a participant deposit. The Company pays for certain direct program costs such as airfare, hotel and other program costs in advance of travel, and records such costs as prepaid program costs. The Company recognizes travel revenue and related costs when travel convenes and classifies such revenue as travel and event 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 operates. Revenue from the sale of 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 the Company’s obligations are fulfilled or upon management’s estimates (based upon historical trends) that it is remote that the certificate will be redeemed. 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.

Net Insurance Premiums Earned

License Fees

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

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.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Selling and Tour Promotion Expenses

Selling and tour promotion costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes utilizing the 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.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by increasing the weighted-average number of common shares outstanding by the additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect of options outstanding is reflected in diluted earnings (loss) per share by application of the treasury stock method.

Accounting for Stock-Based Compensation Plans

The Company has certain stock-based employee compensation plans, which are more fully described in Note 14, “Stock Plans.” On January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share Based Payment” (“SFAS No. 123R”) using the modified-prospective method. SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and amends SFAS No. 95, “Statement of Cash Flows.” In 2005, the Company used the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The Company adopted SFAS No. 123R, using the modified-prospective method, beginning January 1, 2006. Based on the terms of its plans, the Company did not have a cumulative effect adjustment upon adoption. The Company also elected to continue to estimate the fair value of stock options using the Black-Scholes-Merton formula.

The adoption of SFAS 123R resulted in compensation expense of $0.8 million and $0.7 million that has been classified in general and administrative expenses related to employee stock options and restricted stock, respectively, for each of the years ended December 31, 2008 and 2007.

As of December 31, 2008, there was $0.4 million and $1.8 million, respectively, of total unrecognized compensation cost related to nonvested stock options and nonvested restricted stock granted under the Company’s plans expected in future years through 2011. This expected cost does not include the impact of any future stock-based compensation awards.

No options were granted during 2007 and 2008.

Upon the adoption of SFAS No. 123R, expected volatility was based on historical volatilities. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on historical experience and represents the time period options actually remain outstanding. The Company estimated forfeitures based on historical pre-vesting forfeitures and will revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Fair Value of Financial Instruments

The estimated fair values of the financial instruments as of December 31, 2008 and 2007 are as follows (in thousands):


	2008				2007
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	$	10,105	$	10,105	$	21,998	$	21,998
Restricted cash		16,625		16,625		31,084		31,084
Available-for-sale securities		185		185		2,514		2,514
Debt		97,973		29,100		167,063		169,542

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Potential income tax ramifications related to the realization of unrealized gains and losses that would be incurred in an actual sale and/or settlement have not been taken into consideration.

Cash and Cash Equivalents — The carrying value of cash and cash equivalents approximates fair value due to the liquid nature of the cash investments.

Restricted Cash — The fair value of the Company’s restricted cash is based on the certificate of deposit in which the funds are invested and the cash paid toward debt.

Available-for-Sale Securities — The fair value of the Company’s investment in debt and marketable equity securities is based on quoted market prices.

Debt — The carrying value of senior secured notes and mortgage debt approximate fair value since they are estimates based on rates currently prevailing for similar instruments of similar maturities. The fair value of convertible debt is based on recent marketplace transactions.

Dividends Declared

On September 2, 2003, the Company’s 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. 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. Subsequent to the dividend declared in May 2007, the Company’s board of directors did not approve any additional dividends for 2007 or 2008.

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


Record Date	Payment Date		Dividend Amount

2007:
March 12, 2007		March 19, 2007	$	1,084
May 21, 2007		May 31, 2007		1,084

Business Segments

The Company reports segment data based on the “management” approach, which designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Recent Accounting Pronouncements

On May 9, 2008, the FASB issued FSP No. APB14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” The FSP requires an issuer of certain convertible debt instruments that may be settled in cash, commonly referred to as Instruments B and C from EITF Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” and any other convertible instruments that require or permit settlement in any combination of cash and shares at the issuer’s option, such as those referred to as “Instrument X,” to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The FSP is effective for fiscal years beginning after December 15, 2008 and does not permit early application. However, the transition guidance requires retrospective application to all periods presented, and does not grandfather existing instruments. The Company has not yet completed its evaluation of the potential impact of adopting this FSP, but anticipates a material increase to interest expense related to its $97 million 3.75% convertible senior notes beginning in 2009 when it adopts the FSP.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets. The provisions of FSP No. FAS 142-3 are effective for fiscal years beginning after December 15, 2008. The Company is evaluating FSP No. FAS 142-3 and has not yet determined the impact the adoption of FSP No. FAS 142-3 will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (R) “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) on a prospective basis for business combinations that occur in fiscal years beginning after December 15, 2008. The Company is evaluating SFAS No. 141(R) and has not yet determined the impact the adoption will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company anticipates the adoption of SFAS No. 160 will not have a material impact on its consolidated financial statements.


2.	Business Acquisitions and Investments

BellPort

On February 1, 2005, the Company acquired 100% of the outstanding stock of BellPort. BellPort, located in Newport Beach, California, is a marina services company operating facilities in both the United States and Mexico. In February 2006, BellPort acquired a 34% interest in BellPort Japan through the acquisition of BellJa Holding Company, Inc., a California corporation, for $0.3 million, and extended its license agreement with BellPort Japan through 2010. The Company recorded its proportional share of the loss from BellPort Japan of $0.1 million in 2007 and had incurred losses on its investment up to the original investment amount, resulting in zero investment balance as of December 31, 2007. The Company is not required to contribute any funds to support the operation of this investee. On August 20, 2007, the majority shareholder of BellPort Japan increased its capital contribution in BellPort Japan resulting in dilution of our investment in BellPort Japan from 34% to 0.9%. The Company retained an option (not obligation) to contribute capital to increase our investment to 34%. In July 2008, by mutual agreement with the majority shareholder of BellPort Japan, the Company forfeited this option.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

BellPort has a 50% ownership interest in DHWI. DHWI owns a marina facility in Deer Harbor, Orcas Island, Washington. The Company recorded its proportional share of losses from DHWI of $88,000 and $0.1 million for the years ended December 31, 2008 and 2007, respectively, which are included in other income (expense), net. In 2008, BellPort had a note receivable from DHWI for $1.9 million secured by a deed of trust on property and bearing interest at a variable rate equal to the applicable London Interbank Offered Rate plus 2.75% per year, adjusted annually. As of December 31, 2008, the interest rate was 5.52%. All unpaid principal and accrued and unpaid interest are due no later than November 30, 2011.

The Company accounts for its investment in DHWI on the equity method. At December 31, 2007, the investment in DHWI represented $1.4 million, and was included in other assets in the accompanying balance sheets.

At December 2008, the Company recorded an impairment loss on assets of the marine segment which included the entire balance of the note receivable from DHWI and the investment in DHWI (see note 13, “Impairment or Disposal of Long-Lived Assets”) reducing each of these balances to zero.

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.

Windstar Cruises

In order to expand its cruise offerings to include international cruise offerings, on April 2, 2007, the Company, through its wholly-owned subsidiary AICG, completed its acquisition of all of the issued and outstanding shares of Windstar Cruises from HAL Antillen N.V. (“HAL Antillen”), a unit of Carnival Corporation, plc. Under the terms of the purchase agreement, the Company paid $11.3 million in cash, obtained $60 million in seller financing and assumed $29.0 million in liabilities. The $60 million in seller financing was payable over ten years at 7% and was collateralized by each of the three Windstar Cruises’ ships. In addition, the Company incurred $0.8 million of acquisition costs related to the Windstar Cruises transaction.

In accordance with SFAS No. 141, “Business Combinations,” the Windstar Cruises acquisition has been accounted for under the purchase method of accounting. The estimates of fair value of the assets acquired and liabilities assumed are based on management’s estimates. The final purchase price is dependent on the final valuation of the assets acquired, which has not been completed. The following table summarizes the fair value of net assets acquired (in thousands):


Cash and cash equivalents	$	1,137
Accounts receivable		5
Prepaid and other current assets		811
Inventory		965
Vessels and equipment		89,497
Intangible assets		8,610

Total assets acquired		101,025

Passenger deposits		(22,966	)
Accounts payable and accrued and other expenses		(5,995	)
Long term debt		(60,000	)

Total liabilities assumed		(88,961	)

Net assets acquired	$	12,064

On April 18, 2007, the Company paid off $60 million in seller financing and accrued interest of $0.2 million using proceeds from its convertible senior notes offering discussed in Note 9 “Long-Term

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Obligations.” The following pro forma information of the Windstar Cruises acquisition for the year ended December 31, 2007 as if the acquisition had occurred as of the beginning of the year instead of April 2, 2007 (in thousands, except per share data):


				Pro Forma
				Windstar			Pro Forma
	As Reported			Cruises			Combined

Revenues	$	287,005		$	17,463		$	304,468

Net income (loss)	$	(26,879	)	$	(1,080	)	$	(27,959	)

Earnings per share — basic	$	(2.48	)				$	(2.58	)

Earnings per share — diluted	$	(2.48	)				$	(2.58	)


3.	Reinsurance

In December 2003, the Company formed 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.

The Company reinsures property and casualty risks written by licensed U.S. insurers through Cypress Re. The lines of business that are being reinsured include commercial auto liability, commercial physical damage, commercial property, general liability 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 as part of the underwriting review by a third party.

The assumed reinsurance transactions are typically reinsured through a quota share agreement in which Cypress Re agrees to accept a certain fixed percentage of premiums written from the ceding company and in general assumes the same percentage of purchased reinsurance, direct acquisition costs and ultimate incurred claims.

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 varies 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.

In 2004, the Company transferred its investment interest in two insurance programs to its wholly-owned subsidiary, Cypress Re. On March 29, 2004, Cypress Re entered into a reinsurance agreement which incorporated the terms and conditions of the above interest of these programs. The quota share reinsurance agreement covered a retroactive period from July 1, 2002 through March 29, 2004, as well as a prospective period from March 29, 2004 to June 30, 2004. The reinsurance agreement meets the requirements of SFAS No. 113 “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” and has both prospective and retroactive elements.

During 2005 and 2004, Cypress Re entered into additional quota share reinsurance agreements. These reinsurance agreements represent participation in selective property and casualty programs. The reinsurance agreements meet the requirements of SFAS No. 113. One of the quota share reinsurance agreements entered into in 2005 covers a retroactive period from May 7, 2004 through May 31, 2005 and a prospective period from June 1, 2005 through June 7, 2006. One of the quota share reinsurance agreements entered into in 2004 covers a retroactive period from January 1, 2003 through May 31, 2004 and a prospective period from June 1,

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

2004 through December 31, 2004. The other agreements entered into in 2005 and 2004 contain only prospective components.

Accounting for prospective reinsurance transactions results in premiums and related acquisition costs being recognized over the remaining period of the insurance contracts reinsured. As of December 31, 2008 and 2007, there were no balances in unearned premium reserves, deferred policy acquisition costs or ceded prepaid reinsurance premiums.

Accounting for retroactive reinsurance transactions results in the reinsurer reimbursing the ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. Loss and loss adjustment expenses are initially recorded at the estimated ultimate payout amount and any gain from any such transaction is deferred and amortized into income. Loss and loss adjustment expense reserves are adjusted for changes in the estimated ultimate payout and the original deferred gain is recalculated and reamortized to the balance that would have existed had the changes in estimated ultimate payout been available at the inception of the transaction, resulting in a corresponding charge or credit to income in the period that the changes in estimated ultimate payout are made. There was no unrecognized deferred gain on retroactive reinsurance as of December 31, 2008 and 2007. During 2008 and 2007 Cypress Re recognized in income $0 and $19,000, respectively, of previously deferred gain.

As of December 31, 2008 and 2007, premiums receivable, reinsurance recoverable and loss and loss adjustment expense reserves of $2.0 million, $34,000 and $2.4 million; and $1.2 million, $0.3 million, and $1.1 million, respectively, related to retroactive reinsurance were recorded on the Company’s balance sheet. The December 31, 2008 and 2007 loss and loss adjustment expense reserve balances include reserves for both prospective and retroactive reinsurance as well as $3.3 million and $1.0 million, respectively, for incurred but not reported claims related to retroactive reinsurance.

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

Premiums receivable at December 31, 2008 and 2007 is comprised of funds held in trust by the ceding company, of $6.3 million and $9.7 million, respectively. In 2008, premium due from the ceding company was $0.3 million and in 2007, deferred and not yet due premiums from the ceding company was $0.3 million. The funds held in trust primarily consist of high grade corporate bonds, government bonds and money market funds.

As of December 31, 2008 and 2007, reinsurance recoverable and prepaid reinsurance premiums of $0.5 million and $0 million and $1.2 million and $0 million, respectively, relate to a single reinsurer. Cypress Re’s exposure to credit loss in the event of non-payment or nonperformance is limited to these amounts.

The effect of reinsurance on premiums written and earned as of December 31, 2008 and 2007 was as follows (in thousands):


	2008				2007
	Written		Earned		Written			Earned

Assumed	$	9	$	9	$	(468	)	$	752
Ceded		—		—		83			(170	)

Net premiums	$	9	$	9	$	(385	)	$	582

As of December 31, 2008 and 2007, the Company had issued $5.9 million and $10.7 million, respectively, in letters of credit related to property and casualty insurance programs. The letters of credit expire at various dates through 2009.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

The activity in the liability for unpaid loss and loss adjustment expenses is summarized as follows:


	2008			2007

Balance at January 1,	$	6,674		$	11,826
Less reinsurance recoverables		(1,148	)		(2,152	)

Net balance at January 1,		5,526			9,674
Incurred related to:
Amortization of deferred gain on retroactive reinsurance		—			(19	)
Current year		116			568
Prior years		444			(162	)

Total incurred		560			387
Paid related to:
Current year		2,429			191
Prior years		191			4,344

Total paid		2,620			4,535
Net balance at December 31,		3,466			5,526
Plus reinsurance recoverable		532			1,148

Balance at December 31,	$	3,998		$	6,674


4.	Available-for-Sale Securities

At December 31, 2008 and 2007, the cost and estimated fair values of the Company’s investments in corporate bonds and U.S. and other government and agency obligations were as follows (in thousands):


			Gross		Gross			Fair Value/
			Unrealized		Unrealized			Carrying
	Cost		Gains		Losses			Value

December 31, 2008:
Debt securities:
U.S. government and agency obligations	$	—	$	25	$	—		$	25
Corporate bonds		118		1		(1	)		118

		118		26		(1	)		143
Interest receivable		42		—		—			42

Total	$	160	$	26	$	(1	)	$	185

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


			Gross		Gross			Fair Value/
			Unrealized		Unrealized			Carrying
	Cost		Gains		Losses			Value

December 31, 2007:
Debt securities:
U.S. government and agency obligations	$	1,129	$	20	$	(10	)	$	1,139
Corporate bonds		1,260		12		(25	)		1,247

		2,389		32		(35	)		2,386
Interest receivable		128		—		—			128

Total debt securities	$	2,517	$	32	$	(35	)	$	2,514

The following table represents the gross unrealized loss by date acquired as of December 31, 2008 (in thousands):


	Less than			Greater than
	12 Months			12 Months		Total

Gross unrealized loss:
Corporate bonds	$	(1	)	$	—	$	(1	)

	$	(1	)	$	—	$	(1	)

The Company reviews its available-for-sale debt securities to determine if any unrealized losses incurred are considered to be other than temporary and therefore are impaired. In its evaluation of unrealized losses for impairment and the classification of such losses as temporary or other-than-temporary, management considers a number of factors. These factors include the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and the intent and ability of the Company to retain its investment to allow for the market to recover.

For the year ended December 31, 2008, the Company recorded no realized losses on sale of available-for-sale securities based on specific identification of the cost of securities sold during the year. For the year ended December 31, 2007, the Company recorded realized losses on sale of available-for-sale securities of $(48,000), based on specific identification of the cost of securities sold during the year.

The following table represents principal cash flows from available-for-sale debt securities outstanding as of December 31, 2008 by contractual maturity date and average interest rate (in thousands, except interest rates):


	Year Ending December 31,
	2009			2010

Debt securities:
U.S. government and agency obligations	$	25		$	—
Corporate bonds		43			74

		68			74
Interest receivable		2			44

Total debt securities	$	70		$	118

Interest rate on debt securities		3.5	%		5.2	%

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


5.	Accounts Receivable

Accounts receivable at December 31, 2008 and 2007 (in thousands) consisted of:


	2008			2007

Cruise	$	454		$	817
Travel and events		1,904			4,149
Marine		19,705			37,969
Other		29			195

		22,092			43,130
Less allowance for doubtful accounts		(4,414	)		(2,332	)

Total accounts receivable	$	17,678		$	40,798

In 2008, the Company allocated an impairment charge of $0.5 million related to excess carrying value of AMG over its fair value as reduction to the value of Marine accounts receivable. Total contract retentions were $2.9 million and $5.8 million at December 31, 2008 and 2007, respectively. Contract retentions are billable upon final acceptance by the customers. Based on the Company’s experience, the majority of the retention balance is expected to be collected within a year, and is therefore included in accounts receivable.


6.	Inventory

The Company maintains inventories of marine construction materials, fuel, supplies, souvenirs and food and beverage products. Inventories are stated at the lower of cost or market, using weighted average costs. The components of inventory as of December 31, 2008 and 2007 are as follows (in thousands):


	2008		2007

Marine construction materials	$	—	$	2,630
Food, souvenirs and supplies		1,519		2,390
Fuel		320		731

	$	1,839	$	5,751

In 2008, the Company allocated an impairment charge of $2.6 million related to excess carrying value of AMG over its fair value as a reduction to the value of inventory, resulting in zero value for AMG’s ending inventory.

7. Property, Vessels and Equipment

Property, vessels and equipment consisted of the following at December 31, 2008 and 2007 (in thousands):


	2008			2007

Ships and vehicles	$	146,095		$	221,790
Office furniture, fixtures and equipment		2,329			8,447
Computer software and equipment		5,034			5,831
Land		—			1,765
Leasehold improvements		657			897
Ship work in process		102			70

		154,217			238,800
Less accumulated depreciation and amortization		(23,756	)		(19,007	)

	$	130,461		$	219,793

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

In 2008, the Company returned the Empress of the North and the American Queen to MARAD and wrote off $34.2 million and $38.3 million, respectively, in assets, primarily vessels. In 2008, the Company allocated an impairment charge of $8.1 million related to excess carrying value of AMG over its fair value as a reduction to the value of property and equipment, resulting in zero value for AMG’s ending property and equipment.

Depreciation and amortization expense related to property and equipment was $14.5 million and $10.7 million for the years ended December 31, 2008 and 2007, respectively.


8.	Goodwill and Other Intangibles

Goodwill and other intangibles consisted of the following at December 31, 2008 and 2007 (in thousands):


	2008			2007

Goodwill, beginning of year	$	9,181		$	9,181
Anacapa acquisition		10			—
Goodwill impairment		(2,916	)		—

Goodwill, end of year	$	6,275		$	9,181

Other Intangibles:
Trade name	$	7,282		$	9,980
Management contracts		—			853
Customer list		—			717

		7,282			11,550
Less accumulated amortization		—			(398	)

Total other intangibles	$	7,282		$	11,152

In 2008, as a result of the final purchase price allocation of the Windstar Cruises acquisition, $0.7 million of customer list was reclassified to trade name and the associated amortization expense of $0.2 million recorded in 2007 was reversed in 2008. The Company determined that as of December 31, 2008, the Windstar trade name was not impaired. The Company also determined that as of December 31, 2008, the $2.9 million in goodwill and $3.4 million in trade name related to the Company’s marine operations were no longer recoverable and wrote them off as loss on impairment. These amounts are included in the impairment loss, a component of the operating loss of the marine segment. For the years ended December 31, 2008 and 2007, the Company recorded amortization expense of the management contracts of $0.1 million and $0.1 million, respectively. Trade name is an indefinite lived asset.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


9.	Long term Obligations

Long-term obligations as of December 31, 2008 and December 31, 2007 were as follows (in thousands):


	2008		2007

Guaranteed principal payment to U.S. Maritime Administration	$	948	$	69,743
Secured note payable to bank at a fixed interest rate of 8.245%, due May 2010		1,601		1,656
Amounts outstanding under $8.0 million asset-based business loan secured line of credit with a U.S. bank		186		—
Amounts outstanding under $2.1 million secured lines of credit with an Australian bank		—		876
Loans outstanding with New Zealand banks		3		50
3.75% Convertible Senior Notes, net of unamortized discount and offering costs of $1,902 and $2,479, respectively		95,098		94,521
Equipment leases		137		217

		97,973		167,063
Less: current portion		2,760		5,479

Non-current portion	$	95,213	$	161,584

At December 31, 2008 and 2007, the Company’s cash-secured revolving credit facility with a bank in the amount of $6.0 million and $12.5 million, respectively, had no balances outstanding at the end of each of the respective periods.

Loans Secured by Ship Mortgages

In conjunction with ACG’s acquisition of American West, the Company assumed $41.5 million in fixed-rate, 4.63% debt payable through 2028 and guaranteed by the United States Government through MARAD under Title XI, Merchant Marine Act, 1936, as amended, and was secured by a First Preferred Ship Mortgage on the Empress of the North. Annual principal payments of $1.8 million plus accrued interest were required through July 18, 2028. EN Boat, a subsidiary of the Company and owner of the Empress of the North, was unable to make its semi-annual payment on the note due July 17, 2008 and was unable to cure the payment default within the 30 day cure period. On August 15, 2008, the Company returned the Empress of the North to MARAD’s custodial control following its last sailing on August 9, 2008. As a result of the disposal of the Empress of the North, the Company wrote off $34.2 million in assets (primarily vessels) and $37.3 million in liabilities (primarily loans payable) and recorded a $3.1 million gain on disposal for the year ended December 31, 2008. The default under the note will have a limited financial impact because recourse on the default is limited to the Empress of the North.

In conjunction with ACG’s acquisition of the cruise-related assets of Delta Queen, the Company assumed $35.0 million of fixed-rate, 6.5% debt payable through 2020 and guaranteed by MARAD under Title XI, Merchant Marine Act, 1936, as amended, and secured by a First Preferred Ship Mortgage on the American Queen^®. Semi-annual principal payments accumulating to $2.4 million annually plus accrued interest were required through June 2020. AQ Boat, LLC, a subsidiary of the Company and owner of the American Queen^®, was unable to make its semiannual principal payments on the note. On November 15, 2008, the Company returned the American Queen^® to MARAD’s custodial control following its last sailing in November 2008. Under the Trust Indenture, the Company, as ultimate parent of AQ Boat, LLC, had guaranteed principal payments on the debt assumed by AQ Boat, LLC and the Company was required to make principal payments on the debt or additional note amounting to $7.3 million by February 23, 2009, in the event of default by AQ Boat, LLC. Through November 15, 2008, AQ Boat, LLC had paid $6.3 million towards principal payments. At December 31, 2008, the Company accrued the remaining guaranteed principal payment of $0.9 million. As a result of the disposal of the American Queen^®, the Company wrote off $38.3 million in assets (primarily

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

vessels) and $28.3 million in liabilities (primarily loans payable) and recorded a $10.0 million loss on disposal for the year ended December 31, 2008. The default under the note will have a limited financial impact because recourse on the default is limited to the American Queen^®.

Bellingham Marine Debt

Bellingham Marine has a note payable to a bank with a balance of $1.6 million at December 31, 2008, secured by property, payable in monthly installments of $16,000 including interest at a fixed rate of 8.245%, subject to certain limitations and various financial covenants, due May 10, 2010.

Bellingham Marine’s U.S. operations have an asset-based business loan including an $8.0 million secured line of credit with its bank secured by all of Bellingham Marine’s U.S. accounts receivable and inventory and subject to certain financial covenants such as current ratio, minimum capital base, maximum leverage and coverage as required by the agreements. The credit line expires on June 2009 and carries an annual rate of prime minus 0.5%, and is payable monthly. At December 31, 2008, the annual interest rate on this line of credit was 2.75%. At December 31, 2008, there were $0.2 million in borrowings against this credit line. As of December 31, 2008, the Company was not in compliance with the financial covenant to meet minimum capital base requirements. As such, the entire balance of this note payable has been classified as current portion of long-term obligations on the balance sheet. Subsequent to December 31, 2008, the Company received a notification of non compliance from its bank and a notice of pay off pursuant to which the bank exercised its right of setoff and repaid the loan fully utilizing funds in the Company’s account maintained at the bank (see note 20, “Subsequent Events”).

In 2007, Bellingham Marine’s international operations had a $2.1 million line of credit for its Australian subsidiary with National Australia Bank Limited. Interest was payable monthly at an annual adjustable rate that was adjusted quarterly and was collateralized by substantially all of the subsidiary’s assets, including any uncalled or unpaid capital. As of December 31, 2008, there were no borrowings on his line of credit and the credit facility was terminated. Bellingham Marine’s New Zealand operations have two bank loans at an average interest rate of 11.3% and outstanding amounts totaling $3,000. In addition, the international operations have equipment contracts secured by the respective equipment payable in monthly installments aggregating $4,000, including interest, through July 2013.

3.75% Convertible Senior Notes

On April 3, 2007, the Company closed the sale of $97.0 million of 3.75% Convertible Senior Notes due 2027 (“Notes”) to Thomas Weisel Partners LLC (“Initial Purchaser”), in a private offering, pursuant to a purchase agreement dated March 28, 2007. A portion of the proceeds from the sale of the Notes was used to retire the $60 million in seller financing incurred in connection with the acquisition of Windstar Cruises as discussed in Note 2 “Business Acquisitions and Investments.” The remaining proceeds were to be used for general corporate purposes and future growth of the Company.

The Notes are convertible into shares of the Company’s common stock 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. Interest on the Notes is payable semi-annually in arrears on April 15 and on October 15 in each year, commencing October 15, 2007. The Company may redeem the Notes in whole or in part after April 15, 2012. After April 20, 2010 and prior to April 15, 2012, the Company may redeem all or a portion of the Notes only if the price of the Company’s common stock reaches certain thresholds for a specified period of time. Holders of the Notes may require the Company 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, the Company will in certain circumstances increase the conversion rate by a specified number of additional shares (see note 20, “Subsequent Events”).

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

In connection with the issuance of the Notes, the Initial Purchaser withheld $2.9 million in fees from the proceeds of the offering which amount is classified as debt discount and amortized over a five-year period, the earliest term when the note holders have an option to require the Company to redeem the Notes. The Company also incurred debt offering costs of $0.5 million. Both the debt discount and debt offering costs are being amortized over the five-year period using the effective interest rate method. The unamortized debt discount is included as a component of long-term debt. The unamortized offering costs are included as a component of prepaid costs and other current assets or other assets, respectively, depending on whether the unamortized balance is of a short-term or long-term nature.

Principal payments on the Company’s debt are scheduled to be paid as follows (in thousands):


Year Ended December 31,

2009	$	2,760
2010		40
2011		22
2012		97,022
2013		22
Thereafter		9

	$	99,875


10.	Other Income (expense), net

Other income (expense), net includes the following at December 31, 2008 and 2007 (in thousands):


	Year Ended December 31,
	2008			2007

Insurance proceeds received (Note 12)	$	755		$	1,012
Loss on disposal of assets (Note 13)		(7,008	)		—
Proceeds from legal settlements (Note 12)		4,322			—
Foreign currency translation gains (losses)		559			(228	)
Equity in loss from unconsolidated entities and management fees		(88	)		(231	)
Impairment loss on investment in affiliates		—			(165	)
Other income (expense), net		387			(114	)

	$	(1,073	)	$	274


11.	Income Taxes

Pretax income (loss) summarized by region is as follows (in thousands):


	Year Ended December 31,
	2008			2007

Domestic	$	(36,449	)	$	(34,708	)
Foreign		187			10,797

Total pretax income (loss)	$	(36,262	)	$	(23,911	)

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

The income tax provision (benefit) included in the consolidated statements of operations is as follows (in thousands):


	Year Ended December 31,
	2008			2007

Current:
Federal	$	(277	)	$	(316	)
State		126			253
Foreign		583			712

Total current		432			649

Deferred:
Federal		(427	)		1,653
State		(346	)		820
Foreign		51			(154	)

Total deferred		(722	)		2,319

Total income tax (benefit) provision	$	(290	)	$	2,968

The reconciliation of U.S. statutory federal income tax expense to income tax provision (benefit) on income (loss) before income taxes is as follows (in thousands):


	2008						2007
	Amount			%			Amount			%

Provision (benefit) at the federal statutory rate	$	(12,330	)		34.0	%	$	(8,130	)		34.0	%
Change in valuation allowance		11,880			(32.8	)		14,448			(60.4	)
State income tax, net of federal benefit		(930	)		2.6			(982	)		4.1
Rate adjustment		149			(0.4	)		123			(0.5	)
Reserve adjustment		104			(0.3	)		250			(1.1	)
Impairment of goodwill		992			(2.7	)		—			—
Impairment of other long-lived assets		(773	)		2.1			—			—
Foreign rate differential		570			(1.6	)		(3,113	)		13.0
Other permanent and return to provision items		48			(0.1	)		372			(1.5	)

	$	(290	)		0.8	%	$	2,968			(12.4	)%

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

Components of the net deferred tax assets and liabilities are as follows (in thousands):


	2008			2007

Deferred tax assets:
Accrued vacation and compensation	$	2,243		$	2,169
Intangible assets		1,625			1,645
Allowance for billing reserve		2,104			967
Loss and loss adjustment expense reserves		134			199
Net operating loss carryforward		20,100			19,909
Other		1,642			384

Total deferred tax assets		27,848			25,273
Valuation allowance for deferred tax assets		(26,968	)		(15,509	)

Total deferred tax assets, net of valuation allowance		880			9,764

Deferred tax liabilities:
Intangibles		—			(773	)
Property and equipment		(1,434	)		(9,128	)
Other		861			(278	)

Total deferred tax liabilities		(573	)		(10,179	)

Net deferred tax assets (liabilities)	$	307		$	(415	)

At December 31, 2008, the Company has federal, state and foreign net operating loss (“NOL”) carryforwards of $57.7 million, $37.3 million and, $3.6 million, respectively. The federal and state NOL carryforwards begin to expire in 2011 and 2009, respectively. The foreign NOL carryforwards do not expire. Utilization of these losses may be subject to an annual limitation due to ownership change constraints set forth in the Internal Revenue Code of 1986 and similar state tax provisions.

The Company has recorded valuation allowances of $27.0 million and $15.5 million at December 31, 2008 and 2007, respectively, due to uncertainty related to the future utilization of certain deferred tax assets. In 2008, the Company increased its valuation allowance related to deferred tax assets by $11.4 million. Based on all available positive and negative evidence at December 31, 2008, the Company has concluded that the realizability of the net domestic deferred tax assets does not meet the more likely than not threshold under SFAS 109.

Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. U.S. income taxes and foreign withholding taxes were not provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. It is not practical to determine the amount of undistributed earnings or income tax payable in the event the Company repatriated all undistributed foreign earnings. However, if these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes and foreign withholding taxes, offset by an adjustment for foreign tax credits.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes the changes to unrecognized tax benefits for the year ended December 31, 2008:


Balance at January 1, 2007	$	551
Additions based on tax positions related to the current year		91
Reductions for tax positions of prior years		(18	)
Other		(47	)

Balance at December 31, 2007		577
Additions based on tax positions related to the current year		33
Reduction as a result of lapse of applicable statute of limitations		(43	)
Other		46

Balance at December 31, 2008	$	613

The Company expects a $0.1 million decrease to its unrecognized tax benefits within the next 12 months due to the lapse of applicable statute of limitations.

The Company is subject to United States federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2005; state and local income tax examinations before 2004; and foreign income tax examinations before 2004.

Currently the Company is not under Internal Revenue Service, state, local or foreign jurisdiction tax examinations.

The Company’s continuing practice is to recognize potential accrued interest and penalties related to unrecognized tax benefits within its global operations in its provision for income taxes. During 2008, an adjustment of ($0.1) million was made to interest and penalties due to the lapse of applicable statute of limitations. To the extent interest and penalties are not assessed with respect to the uncertain tax positions, amounts accrued will be reduced and $0.1 million will be reflected as a reduction of the overall income tax provision.

Utilization of the federal and state NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of the NOL and tax credit carryforwards that can be utilized annually to offset future taxable income. The Company has not completed a study to assess whether a change of control has occurred due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. If the Company has experienced a change of control, utilization of the Company’s NOL and tax credit carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the carryforwards before utilization. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


12.	Commitments and Contingencies

Leases

The Company leases office facilities and office equipment under non-cancelable operating leases. Certain of the Company’s leases have escalation clauses. The Company’s obligations under non-cancelable lease commitments end in 2011 and are as follows (in thousands):


Year Ending December 31,

2009	$	2,417
2010		1,525
2011		874
2012		550
2013		401

	$	5,767

Total rent expense for the years ended December 31, 2008 and 2007 was $3.2 million and $2.9 million, respectively.

The Company entered into agreements to sublease office facilities in Newport Beach, California to a related party. Sublease rental income for the years ended December 31, 2008 and 2007 was $60,000 and $60,000, respectively.

Letters of Credit

In the ordinary course of business the Company may from time to time be required to enter into letters of credit related to its insurance programs and for its travel related programs with airlines, travel providers and travel reporting agencies. As of December 31, 2008, the Company has issued $5.9 million in letters of credit related to property and casualty insurance programs which expire at various dates through 2009. As of December 31, 2008, the Company has issued the Company also has issued $0.1 million in letters of credit related to travel and event business operations which expire at various dates through 2009. The Company has a $6.0 million line of credit to support the outstanding letters of credit which is secured by a certificate of deposit in the same amount and is classified as restricted cash as of December 31, 2008.

General Claims

The Company is subject to claims, suits and complaints, which have arisen in the ordinary course of business. In the opinion of management and its legal counsel, all matters are without merit or are of such a nature, or involve such amounts as would not have a material effect on the financial position, cash flows or results of operations of the Company.

Surety Bonds

The Company is often required to provide surety bonds to secure its performance under construction contracts, development agreements and other arrangements. The Company’s ability to obtain surety bonds primarily depends upon its capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market. As of December 31, 2008, the Company maintained $16.3 million in surety bonds related to its marine segment.

The Federal Maritime Commission regulates passenger ships with 50 or more passenger berths departing from U.S. ports and requires that operators post surety bonds to be used in the event the operator fails to

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

provide cruise services, or otherwise satisfy certain financial standards. The Company has secured a $8.7 million surety bond as security under the Federal Maritime Commission.

Ship Incidents

In April 2008, a fire occurred in the engine room of the Queen of the West, while the vessel was cruising between The Dalles and John Day Locks in Oregon. The fire was extinguished with no injuries to guests. The Columbia Queen was brought into service in April, earlier than originally scheduled, in order to accommodate guests while the Queen of the West was undergoing repairs. The incident sailing and eight additional sailings were cancelled. As of December 31, 2008, the Company incurred costs related to relocating passengers and crew, vessel repair costs and refund passenger deposits totaling $0.4 million which have been recorded in operations. In addition, the Company lost revenue of $2.4 million as a result of the cancellations of the nine sailings. During the third quarter of 2008, the Company received $0.4 million in insurance recoveries which was recorded as a reduction to the cruise operating expenses. The Company is in the process of seeking additional insurance related recoveries with respect to this incident but has recorded no receivables related to the estimated recoveries as of December 31, 2008.

On May 14, 2007, the Empress of the North ran aground in Southeast Alaska. No passengers or crew were injured during the incident. The ship was in drydock for damage inspection and repairs for approximately seven initial weeks. In September 2007, the ship re-entered drydock for additional repairs for a total of four additional non-consecutive weeks. The ship ended her season on October 27, 2007 to enter her scheduled drydock layup period early in order to complete work on her propulsion system. The Queen of the West assumed operation of the remaining published itineraries of the Empress of the North. As of December 31, 2007, the Company recorded in cruise operating expenses $6.1 million in costs associated with additional ship repairs, passenger relocation and crew expenses incurred as a result of the incident. These expenses were offset by estimated insurance recoveries of $4.1 million. As of December 31, 2007, the estimated impact of this incident was $5.3 million which includes estimated lost revenues. The Company is in the process of seeking additional insurance related recoveries from the grounding; however, due to the uncertainty regarding the claims no additional amounts were recorded as expected to be received as of December 31, 2008.

On March 24, 2006, the Empress of the North ran aground near the Washougal Upper Range on the Columbia River in Washington in order to avoid collision with a tug boat. No passengers or crew were injured during the grounding. The ship was in drydock for damage inspection and repairs for approximately four weeks. The ship was released and began operations on April 16, 2006. As of December 31, 2006, the Company recorded in cruise operating expenses $2.7 million in costs associated with ship repairs, passenger relocation and crew expenses incurred as a result of the grounding. These expenses were partially offset by insurance recoveries of $1.7 million received in the second quarter of 2006. In addition, the Company received $0.5 million related to insurance recoveries under its business interruption insurance which is recorded in other income for the year ended December 31, 2006. The Company filed a claim against the tug boat operator and was awarded $1.1 million as a settlement of the case which amount has been recorded in other income in the third quarter of 2008.

Legal Proceedings

On February 26, 2008, the Company and several of its subsidiaries were named in a complaint by David Giersdorf, the former President of ACG in the Superior Court of Washington for King County. Mr. Giersdorf has alleged he was improperly terminated and has claimed damages which appear to be in excess of $70.0 million. Mr. Giersdorf’s claims, based on verbal agreements, include the following: (i) he left a tenured position with Holland America Line (HAL), which well-positioned him to be the President of HAL earning a multi-million dollar annual salary until retirement; (ii) he was denied the opportunity to vest in 87,500 option shares and 30,000 restricted stock grants, which should be valued at a $47 per share stock price; (iii) his

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

assistance in acquiring Windstar Cruises and his work in the transition of its vendors and employees entitles him to approximately $54.0 million; (iv) he is owed compensation for future acquisitions; and (v) he is owed sums for reputation and emotional damage. We believe all of Mr. Giersdorf’s claims lack merit and will defend them vigorously, but are not able at this time to estimate the outcome of this proceeding.

On October 28, 2008, the Company entered into a settlement agreement with HAL Antillen N.V., whereby the Company received on October 31, 2008, approximately $2.6 million related to a dispute that arose from the purchase of Windstar Cruises, which amount has been recorded as “Other income” in the fourth quarter ended December 31, 2008.


13.	Impairment or Disposal of Long-Lived Assets

EN Boat, a subsidiary of the Company and owner of the Empress of the North, was unable to make its semi-annual payment on the note due July 17, 2008 and was unable to cure the payment default within the 30 day cure period. On August 15, 2008, the Company returned the Empress of the North to MARAD’s custodial control following its last sailing on August 9, 2008. As a result of the disposal of the Empress of the North, the Company wrote off $34.2 million in assets (primarily vessels) and $37.3 million in liabilities (primarily loans payable) and recorded a $3.1 million in gain on disposal for the quarter ended September 30, 2008. The default under the note will have a limited financial impact because recourse on the default is limited to the Empress of the North.

AQ Boat, LLC, a subsidiary of the Company and owner of the American Queen, surrendered the American Queen to MARAD’s custodial control on November 15, 2008. As a result of the disposal of the American Queen, the Company wrote off $38.3 million in assets (primarily vessels) and $28.3 million in liabilities (primarily loans payable) and recorded a $10.0 million in loss on disposal for the quarter ended December 31, 2008. The Company, as the ultimate parent of AQ Boat, LLC, had guaranteed principal and interest payments on the debt assumed by AQ Boat, LLC. The Company’s limited guarantee required it to make principal payments on the debt or additional note amounting to approximately $7.3 million by February 23, 2009, in the event of default by AQ Boat, LLC. As of December 31, 2008, AQ Boat LLC had made $6.3 million in payments and the Company has accrued the remaining guaranteed payment of $0.9 million.

In April 2008, the Company announced its intention to sell the Majestic America Line. As of December 31, 2008, the net assets of the Majestic America Line did not qualify for “held-for-sale” treatment under SFAS No. 144. The Company also determined that there was no impairment of the remaining assets of Majestic America Line as of December 31, 2008.

In 2008 the Company recorded an impairment loss of $21.3 million due to the write-down of the assets of its marine segment. As a result of its determination that there was a more than 50% likelihood that AMG will be sold in the near term, the Company evaluated the ongoing value of AMG’s long-lived assets and determined that they were impaired. The carrying value of AMG and AMG’s long-lived assets, including goodwill, at December 31, 2008 was $32.3 million and $18.0 million respectively. The estimated fair value of AMG was $11.0 million. Fair value was based on indications of interest received early on in the Company’s sale process, which is still ongoing. The entire carrying value of the long-lived assets, including goodwill of $2.9 million, was written down to zero at December 31, 2008. The remaining excess carrying value of $3.3 million after the write-off of goodwill and intangible assets was allocated to property, plant and equipment, inventory, prepaid and other current assets and to accounts receivable. As a result of the current global economic weakness and the Company’s announcement subsequent to the year ended December 31, 2008 that it plans to sell its non-Windstar assets including AMG in the near term, it is reasonably possible that the Company’s estimate of fair value may change in the near term resulting in the need to adjust its recorded value.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


14.	Stock Plans

The Company adopted the 1995 Equity Participation Plan (the “1995 Plan”) during 1995 and amended and restated the 1995 Plan in 1998, 1999 and 2002. In 2005, the Company adopted the 2005 Incentive Award Plan (the “2005 Plan”) and amended and restated the 2005 Plan in 2007. Both the 1995 Plan and the 2005 Plan provide for the grant of stock options, awards of restricted stock, performance or other awards or stock appreciation rights to directors, employees and consultants of the Company. The maximum number of shares which may be awarded under the 1995 Plan is 2,200,000 shares. The maximum number of shares which may be awarded under the 2005 Plan is 1,200,000 shares. Under the terms of both the 1995 Plan and the 2005 Plan, options to purchase shares of the Company’s common stock are granted at a price set by the Compensation Committee of the Board of Directors, not to be less than the par value of a share of common stock and if granted as performance-based compensation or as incentive stock options, no less than the fair market value of the stock on the date of grant. The Compensation Committee establishes the vesting period of the awards. Vested options may be exercised for a period up to ten years from the grant date, as long as option holders remain employed by the Company. As of December 31, 2008, the Company had 338,735 shares available for grant under its equity option plans.

Stock option transactions are summarized as follows:


				Weighted-
	Number of			Average
	Shares			Exercise Price

Balance, December 31, 2006		1,131,759			14.12
Granted		278,000			14.86
Forfeited		(150,075	)		17.76
Exercised		(60,626	)		10.71

Balance, December 31, 2007		1,199,058			14.01
Granted		—			—
Forfeited		(164,853	)		14.31
Exercised		(2,412	)		8.45

Balance, December 31, 2008		1,031,793			13.98

The total pretax intrinsic value of options exercised in 2008 was $11,000. This intrinsic value represents the difference between the fair market value of our common stock on the date of exercise and the exercise price of each option. Based on the closing price of our common stock of $0.65 on December 31, 2008, the total pretax intrinsic value of all outstanding options was $(13.8) million. The total pretax intrinsic value of exercisable options at December 31, 2008 was $(9.5) million.


			Weighted-
	Number of		Average
	Shares		Exercise Price

Options exercisable at:
December 31, 2007		711,308		12.31
December 31, 2008		776,043		12.90

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2008:


	Number						Number
	Outstanding		Wtd. Avg.				Exercisable		Wtd. Avg.
	as of		Remaining		Wtd. Avg.		as of		Exercise Price
Range of	December 31,		Contractual		Exercise		December 31,		of Exercisable
Exercise Price	2008		Life		Price		2008		Options

$2.93 - $5.85		13,694		1.0	$	5.39		13,694	$	5.39
5.85 - 8.78		51,607		0.6		7.66		51,607		7.66
8.78 - 11.70		121,242		0.8		9.24		121,242		9.24
11.70 - 14.63		472,250		4.5		12.74		452,000		12.70
14.63 - 17.55		255,000		8.4		14.89		78,500		14.91
17.55 - 20.48		28,000		7.3		17.97		14,000		17.97
26.33 - 29.25		90,000		7.6		27.94		45,000		27.94

		1,031,793		5.1		13.98		776,043		12.90

In addition to the stock options above, in 2007, the Company granted restricted stock awards to certain members of executive management aggregating 95,000 shares, at $14.86 per share, representing the closing price of the shares on the date of grant. The restricted stock fully vests on the fourth anniversary of the date of grant. In 2008, the Company granted restricted stock awards to certain members of executive management aggregating 200,000 shares at $1.25 per share fully vesting on the second anniversary of the date of grant and 250,000 shares $0.79 per share fully vesting on the first anniversary of the date of grant. The per share prices of the restricted stock awards represent the closing price of the shares on the dates of grant. The Company recorded compensation expense of $0.8 million and $0.8 million related to the restricted stock grants for the year ended December 31, 2008 and 2007, respectively.


15.	Employee Benefit Plan

The Company has a 401(k) Profit-Sharing Plan (the “401(k) Plan”) that employees are eligible to participate in upon six months of service and 21 years of age. Employees may contribute up to 92% of their salary, subject to the maximum contribution allowed by the Internal Revenue Service. The Company’s matching contribution is discretionary based upon approval by management. Employees are 100% vested in their contributions and vest in Company matching contributions equally over four years. During the years ended December 31, 2008 and 2007, the Company contributed $71,000 and $11,000, respectively, to the 401(k) Plan.


16.	Common Stock Repurchase Plan

In November 1998, the board of directors of the Company authorized the repurchase of the Company’s common stock in the open market or through private transactions, up to $20.0 million in the aggregate. In August 2006, the Company’s board of directors authorized an additional $10.0 million for the repurchase of the Company’s common stock in the open market or through private transactions, providing for an aggregate of $30.0 million. This repurchase program is ongoing and as of December 31, 2007, the Company had repurchased 1,102,650 shares for approximately $14.0 million. In 2008, the Company made no share repurchases. In 2007, the Company repurchased 51,150 shares for $1.6 million.

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)


17.	Accumulated Other Comprehensive Income (Loss)

The table below details the components of the accumulated other comprehensive income (in thousands):


	2008		2007

Unrealized gains (losses) on available-for-sale securities		17		8
Foreign currency translation gains		436		1,547

Total accumulated other comprehensive income	$	453	$	1,555


18.	Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) by the weighted average common shares outstanding. Diluted EPS includes the effect of any potential shares outstanding, which for the Company consists of dilutive stock options and shares issuable under convertible notes (“Notes”). The dilutive effect of stock options is calculated using the treasury stock method with an offset from expected proceeds upon exercise of the stock options and unrecognized compensation expense. The dilutive effect of the Notes is calculated by adding back interest expense and amortization of offering costs, net of taxes, which would not have been incurred assuming conversion. Diluted EPS for the years ended December 31, 2008 and 2007 do not include the dilutive effect of conversion of the Notes into the Company’s common shares since it would be anti-dilutive.

The table below details the components of the basic and diluted EPS calculations (in thousands, except per share amounts):


	2008			2007

Numerator:
Net (loss) income for basic and diluted earnings per share	$	(35,972	)	$	(26,879	)

Denominator:
Weighted-average shares outstanding — basic		10,926			10,838
Effect of dilutive securities:
Stock options Notes		—			—

Weighted-average shares outstanding — diluted		10,926			10,838

Earnings (loss) per share:
Basic	$	(3.29	)	$	(2.48	)

Diluted	$	(3.29	)	$	(2.48	)

At December 31, 2008 there were 1,028,292 common shares issuable under stock options whose exercise price exceeded the Company’s average common stock price of $5.0613. At December 31, 2007 there were no stock options outstanding, whereby the exercise price exceeded the Company’s average common stock price. For the years ended December 31, 2008 and 2007, the effects of the common stock equivalent shares have been excluded from the calculation of diluted loss per share because they are anti-dilutive.


19.	Business Segments

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

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


							Travel			Corporate
	Cruise			Marine			and Events			and Other			Total

2008:
Revenues	$	150,995		$	108,655		$	14,941		$	9		$	274,600
Operating income (loss)		(12,128	)		(16,113	)		2,635			(4,442	)		(30,048	)
Depreciation and amortization expense		(12,934	)		(1,047	)		(283	)		(250	)		(14,514	)
Interest and dividend income		39			140			123			855			1,157
Interest expense		(1,759	)		(240	)		—			(4,299	)		(6,298	)
Equity in net loss and management fees received from investments accounted for by the equity method		—			(88	)		—			—			(88	)
Impairment loss		—			(21,289	)		—			—			(21,289	)
Provision (benefit) for income taxes		18			(4,808	)		1,040			3,460			(290	)
Capital expenditures for property, vessels, equipment and intangible assets		(2,664	)		(1,377	)		(89	)		(15	)		(4,145	)
Goodwill		—			—			6,275			—			6,275
Other intangibles, net		7,282			—			—			—			7,282
Total assets		155,132			27,828			8,921			19,789			211,670

2007:
Revenues	$	154,394		$	123,221		$	14,511		$	582		$	292,708
Operating income (loss)		(24,045	)		8,567			1,467			(6,421	)		(20,432	)
Depreciation and amortization expense		(9,668	)		(963	)		(265	)		(114	)		(11,010	)
Interest and dividend income		963			152			486			2,024			3,625
Interest expense		(4,044	)		(370	)		—			(2,916	)		(7,330	)
Equity in net loss and management fees received from investments accounted for by the equity method		—			(231	)		—			—			(231	)
Impairment loss on investment in affiliates		—			—			—			(165	)		(165	)
Provision (benefit) for income taxes		(2,977	)		520			3,657			1,768			2,968
Capital expenditures for property, vessels, equipment and intangible assets		(20,019	)		(1,290	)		(297	)		(872	)		(22,478	)
Goodwill		—			2,906			6,275			—			9,181
Other intangibles, net		8,431			2,721			—			—			11,152
Total assets		251,196			72,979			12,453			39,861			376,489


20.	Subsequent Events (unaudited)

In February 2009, the Company announced its plans to sell non-Windstar assets including marine, travel and events and insurance divisions and operate solely as a cruise company through the international cruise operations of Windstar Cruises. This announcement was in addition to the company’s announcement in April 2008 that it intended to sell Majestic America Line. The Company expects to sell its non-Windstar Cruises assets within a year of the announcement. On February 11, 2009, the Company determined the “Plan of Sale” criteria in SFAS No. 144 had been met. In February 2009, the Company also announced that it plans to move its corporate headquarters from Newport Beach, California to its facility in Seattle, Washington.

At December 31, 2008, the Company was in violation of certain financial covenants under a working line of credit with Bank of the Pacific. The Company received a letter from Bank of the Pacific on March 23, 2009, notifying the Company of non-compliance and a demand for payment was made. Upon negotiations with the bank, the Company was able to obtain a waiver of the violation of the covenants until April 9, 2009. On April 13, 2009, the Company received a notice of payoff pursuant to which Bank of the Pacific exercised

Ambassadors International, Inc.

Notes to Consolidated Financial Statements — (Continued)

its right of setoff whereby the outstanding debt of approximately $1.0 million under the working line of credit was fully repaid utilizing funds in the Company’s account maintained at the bank.

The Company also has a $1.6 million note payable with Bank of Pacific with a maturity date of May 10, 2010 secured by property. Due to the default under the working line of credit with Bank of Pacific described above, the Company is subject to a cross default under the note payable. Accordingly, the full amount of the obligation has been presented as a current maturity in the accompanying financial statements.

The Company did not make a $1.8 million scheduled interest payment due and payable on April 15, 2009 on our 3.75% senior convertible notes. The Company has until May 15, 2009, to cure this default on its 3.75% senior convertible notes, at which time an event of default will occur and the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding notes may declare the principal and accrued and unpaid interest on all the outstanding notes to be due and payable immediately. Although there can be no assurances that the Company will satisfy the scheduled interest obligation prior to May 15, 2009, it is management’s current intent to cure the default prior to that date.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AMBASSADORS INTERNATIONAL, INC.

(Registrant)


	By:	/s/ Mark T. Detillion

Mark T. Detillion,

Chief Financial Officer

Date: April 15, 2009

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Arthur A. Rodney and Mark T. Detillion, or each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date


/s/ Arthur A. Rodney Arthur A. Rodney	President and Chief Executive Officer (Principal Executive Officer)	April 15, 2009

/s/ Mark T. Detillion Mark T. Detillion	Chief Financial Officer(Principal Financial Officer)	April 15, 2009

/s/ Arthur A. Rodney Arthur A. Rodney	Chairman Board of Directors	April 15, 2009

/s/ Daniel J. Englander Daniel J. Englander	Director	April 15, 2009

/s/ J. Hale Hoak J. Hale Hoak	Director	April 15, 2009

/s/ Rafer L. Johnson Rafer L. Johnson	Director	April 15, 2009

EXHIBIT INDEX


Exhibit
No.

	2	.1	Agreement and Plan of Merger, dated February 1, 2005, among Ambassadors International, Inc., BellPort Acquisition Corp. #1, BellPort Acquisition Corp. #2, BellPort Group, Inc. and Paul Penrose, as a company stockholder representative (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 3, 2005)
	2	.2	Membership Interest Purchase Agreement, dated December 27, 2005, by and among Ambassadors International, Inc., Ambassadors Cruise Group, LLC and Oregon Rail Holdings LLC (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on December 28, 2005)
	2	.3	Amendment No. 1 to Membership Interest Purchase Agreement by and among Ambassadors International, Inc., Ambassadors Cruise Group, LLC and Oregon Rail Holdings LLC dated January 13, 2006 (incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on January 13, 2006)
	2	.4	Asset Purchase Agreement, dated April 6, 2006, by and among Ambassadors Cruise Group, LLC, Delta Queen Steamboat Company, Inc., American Queen Steamboat, LLC, Delta Queen Steamboat, LLC and Mississippi Queen Steamboat, LLC (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on April 7, 2006)
	2	.5	Stock Purchase Agreement, dated July 21, 2006, by and among Ambassadors Marine Group, LLC, Nishida Tekko Corporation, Nishida Tekko America Corporation and BMI Acquisition Company (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on July 26, 2006)
	2	.6	Stock Purchase Agreement, dated February 21, 2007, by and among Ambassadors International Cruise Group, LLC and HAL Antillen N.V. and certain exhibits listed therein including: First Preferred Mortgages, Pledge Agreement, Security Agreement, Buyer Note, Deeds of Covenants, Subsidiary Guarantee and Parent Guarantee (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed April 6, 2007).
	3	.1	Certificate of Incorporation of Ambassadors International, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (Registration No. 33-93586))
	3	.2	By-Laws of Ambassadors International, Inc. (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (Registration No. 33-93586))
	3	.3	Amendment to the Certificate of Incorporation of Ambassadors International, Inc. (incorporated by reference to Appendix A of our definitive proxy statement filed on April 18, 2007
	4	.1	Registration Rights Agreement dated March 28, 2007 by and between Ambassadors International, Inc. and Thomas Weisel Partners (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on April 3, 2007)
	4	.2	Indenture dated as of April 3, 2007 between Ambassadors International, Inc. and Wells Fargo Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on April 3, 2007)
	4	.3	Form of Global Note (incorporated by reference to the Indenture dated as of April 3, 2007 between Ambassadors International, Inc. and Wells Fargo Bank National Association filed as Exhibit 4.1 to our Current Report on Form 8-K filed on April 3, 2007)
	4	.4	Purchase Agreement dated March 28, 2007 by and between Ambassadors International, Inc. and Thomas Weisel Partners (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on April 3, 2007)
	10	.1	Form of Registration Rights Agreement among the Company, John and Peter Ueberroth, and certain other stockholders (incorporated by reference to Exhibit 10.4 to our Registration Statement on Form S-1 (Registration No. 33-93586))
	10	.2	Form of Indemnification Agreement for officers and directors (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 7, 2006)
	10	.3	Lease dated December 20, 1996 between Rogal America, Inc. and Ark-Les Corp. (incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997)


Exhibit
No.

	10	.4	Industrial Lease dated 1998 between Ambassadors International, Inc. and The Irvine Company (incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997)
	10	.5	The Atlanta Merchandise Mart Lease Agreement dated April 17, 1998 by and between AMC, Inc. and Destination, Inc. (incorporated by reference to Exhibit 10.16 to our Quarterly Report on Form 10-Q for the period ended June 30, 1998)
	10	.6	Lease dated July 24, 1998 by and between the Joseph Pell and Eda Pell Revocable Trust dated August 19, 1989 and Ambassador Performance Group, Inc. (incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1998)
	10	.7	The Amended and Restated 1995 Equity Participation Plan of Ambassador International, Inc., as amended by the Company’s Shareholders at the 1999 Annual Meeting of Shareholders held on May 14, 1999 (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 (Registration No. 333-81023))
	10	.8	First Amendment to Commercial Lease dated September 7, 2004 by and between The Irvine Company and Ambassadors, LLC (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004)
	10	.9	Option Agreement, dated February 1, 2005, by and between Ambassadors International, Inc. and BellJa Holding Company, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 3, 2005)
	10	.10	Third Amendment to Lease Agreement, dated April 29, 2005, by and between Ambassadors, LLC and AmericasMart Real Estate, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 4, 2005)
	10	.11	Form of the Ambassadors International, Inc. 2005 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 (Registration No. 333-104280) filed on November 2, 2005)
	10	.12	Form of the Ambassadors International, Inc. 2005 Incentive Award Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 (Registration No. 333-104280) filed on November 2, 2005)
	10	.13	Restricted Stock Agreement, dated December 27, 2005, between Ambassadors International, Inc. and ORC Investments I, Inc., ORC Holdings, Inc. and C.G. Grefenstette, E.C. Johnson and Bruce I. Crocker, Trustees Under a Trust dated August 28, 1968 for Henry L. Hillman, Jr. (incorporated by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the period ended December 31, 2005)
	10	.14	Assumption Agreement and 2006 Supplement to Trust Indenture, dated April 25, 2006, by and among AQ Boat, LLC, the Bank of New York as indenture trustee, and the United States of America, represented by the Secretary of Transportation, acting by and through the Maritime Administrator (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 28, 2006)
	10	.15	Amended and Restated 2006 Security Agreement, dated April 25, 2006, by and between AQ Boat, LLC and the United States of America, represented by the Secretary of Transportation, acting by and through the Maritime Administrator (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 28, 2006)
	10	.16	Title XI Reserve Fund and Financial Agreement, dated April 25, 2006, by and between AQ Boat, LLC and the United States of America, represented by the Secretary of Transportation, acting by and through the Maritime Administrator (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on April 28, 2006)
	10	.17	Depository Agreement, dated April 25, 2006, by and between AQ Boat, LLC and the United States of America, represented by the Secretary of Transportation, acting by and through the Maritime Administrator (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on April 28, 2006)


Exhibit
No.

	10	.18	Restricted Stock Agreement, dated April 25, 2006, by and among Ambassadors International, Inc., Delta Queen Steamboat Company, Inc., American Queen Steamboat, LLC, Delta Queen Steamboat, LLC and Mississippi Queen Steamboat, LLC (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on April 28, 2006)
	10	.19	Option Agreement, dated July 21, 2006, by and between Ambassadors Marine Group, LLC and Nishida Tekko Corporation (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 26, 2006)
	10	.20	Loan Agreement, dated as of September 1, 2006, by and among Ambassadors International, Inc., Ambassadors Marine Group, LLC, Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress Reinsurance, Ltd and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 8, 2006)
	10	.21	Employment Agreement, dated November 2, 2006, between Ambassadors International, Inc. and Joseph J. Ueberroth (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2006)*
	10	.22	The Ambassadors International, Inc. Amended and Restated 2005 Incentive Award Plan (incorporated by reference to Appendix B to our definitive proxy statement filed on Schedule 14A on April 18, 2007)
	10	.23	Amendment No. 1, dated as of March 27, 2007, to Loan Agreement dated as of September 1, 2006 by and among Ambassadors International, Inc., Ambassadors Marine Group, LLC, Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress Reinsurance, Ltd. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on , 2007)
	10	.24	Amendment No. 2 dated as of November 16, 2007, to Loan Agreement by and among Ambassadors International, Inc., Ambassadors Marine Group, LLC, Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress Reinsurance, Ltd. and Bank of America, N.A., dated as of September 1, 2006 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 20, 2007)
	10	.25	Change in Control Agreement dated as of January 14, 2008, by and between Ambassadors International, Inc., and Blake T. Barnett (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 17, 2008)*
	21	.1	Subsidiaries of Ambassadors International, Inc. (filed herewith)
	23	.1	Consent of Independent Registered Public Accounting Firm (filed herewith)
	24	.1	Power of Attorney (contained on the signature page of this Report)
	31	.1	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	31	.2	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32	.1	Certification of Principal Executive Officer Required by 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32	.2	Certification of Principal Financial Officer Required by 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)


*		Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit.


PART I
Item 1.	Business	1
Item 1A.	Risk Factors	10
Item 1B.	Unresolved staff comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	23

PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
Item 9A.	Controls and Procedures	39
Item 9(T).	Controls and Procedures	39
Item 9B.	Other Information	40

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence	41
Item 14.	Principal Accountant Fees and Services	41

PART IV
Item 15.	Exhibits and Financial Statement Schedules	42
SIGNATURES		83
EXHIBIT INDEX		84
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Report of Independent Registered Public Accounting Firm			43
Consolidated Balance Sheets at December 31, 2008 and 2007			44
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007			45
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2008 and 2007			46
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007			47
Notes to Consolidated Financial Statements			49


Schedule II — Consolidated Valuation and Qualifying Accounts for the years ended December 31, 2008 and 2007			82


	Balance at				Deductions,			Balance at
	Beginning				Recoveries			End of
	of Year		Additions		and Write-Offs			Year

December 31, 2008:
Allowance for doubtful accounts receivable	$	2,331,987	$	2,842,406	$	(760,815	)	$	4,413,578
December 31, 2007:
Allowance for doubtful accounts receivable	$	1,046,283	$	1,438,446	$	(152,742	)	$	2,331,987


Item 15.	*Exhibits, Financial Statement Schedules*