**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

| x      | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**  |
|--------|----------------------------------------------------------------------------------------------------------|
|   |                                                                                                     |
|   | **For the quarterly period ended March 31, 2008 or**                                                |
|   |                                                                                                     |
| o      | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |

 

**For the transition periodfrom                    to                    **

 

**Commission file number   1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

| **Bermuda**                       |   | **98-0223493**      |
|-----------------------------------|--------|---------------------|
| (State or other  jurisdiction     |   | (I.R.S. Employer    |
| of incorporation or organization) |   | Identification No.) |

 

| **22 Victoria Street**                    |   |       |
|-------------------------------------------|--------|------------|
| **P.O. Box HM 1179**                 |   |       |
| **Hamilton HMEX, Bermuda**                |   |       |
| (Address of principal  executive offices) |   | (Zip Code) |

 

**441-295-2244**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

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

 
| Large Accelerated Filer | x |   | Accelerated Filer         | o |
|-------------------------|---|--------|---------------------------|---|
| Non-Accelerated Filer   | o |   | Smaller Reporting Company | o |

 

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

 

As of April 30, 2008, 42,469,500 Class A common shares and18,044,478 Class B common shares of Orient-Express Hotels Ltd. wereoutstanding. All of the Class B shares are owned by a subsidiary ofOrient-Express Hotels Ltd.

 

 

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** **

**PART I —FINANCIAL INFORMATION**

 

**ITEM 1.****                                                    ****Financial Statements**

** **

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                                   | ** ** | **March 31,  2008**   | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                   |       |                       |       |                        |       |
| Cash and cash equivalents                                                                    |       | $                          | 95,896     |                        | $          | 90,565 |   |
| Restricted cash                                                                              |       | 6,419                      |       | 3,800                       |       |
| Accounts receivable, net of allowances of$1,334 and $1,292                                   |       | 70,529                     |       | 62,847                      |       |
| Due from related parties                                                                     |       | 30,195                     |       | 30,406                      |       |
| Prepaid expenses and other                                                                   |       | 22,412                     |       | 16,115                      |       |
| Inventories                                                                                  |       | 48,688                     |       | 45,756                      |       |
| Assets of discontinued operations held for sale                                              |       | 58,662                     |       | 54,417                      |       |
| Real estate assets                                                                           |       | 67,712                     |       | 57,157                      |       |
| Total current assets                                                                         |       | 400,513                    |       | 361,063                     |       |
|                                                                                         |       |                       |       |                        |       |
| Property,  plant and equipment, net of accumulated depreciation of$260,759 and $246,240 |       | 1,317,040                  |       | 1,273,956                   |       |
| Investments                                                                                  |       | 150,286                    |       | 147,539                     |       |
| Goodwill                                                                                     |       | 137,123                    |       | 133,497                     |       |
| Other intangible assets                                                                      |       | 21,805                     |       | 21,660                      |       |
| Other assets                                                                                 |       | 49,836                     |       | 50,722                      |       |
|                                                                                         |       | $                          | 2,076,603  |                        | $          | 1,988,437 |   |
| **Liabilities and Shareholders’ Equity**                                                | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Working capital facilities                                                                   |       | $                          | 71,150     |                        | $          | 64,419 |   |
| Accounts payable                                                                             |       | 31,698                     |       | 30,132                      |       |
| Due to related parties                                                                       |       | 447                        |       | —                      |       |
| Accrued liabilities                                                                          |       | 67,102                     |       | 62,246                      |       |
| Deferred revenue                                                                             |       | 54,005                     |       | 35,545                      |       |
| Liabilities of discontinued operations held for sale                                         |       | 5,426                      |       | 5,619                       |       |
| Current portion of long-term debt and capital leases                                         |       | 171,509                    |       | 127,795                     |       |
| Total current liabilities                                                                    |       | 401,337                    |       | 325,756                     |       |
|                                                                                         |       |                       |       |                        |       |
| Long-term debt and obligations under capital leases                                          |       | 676,741                    |       | 658,615                     |       |
| Liability for pension benefit                                                                |       | 6,935                      |       | 6,935                       |       |
| Other liabilities                                                                            |       | 1,379                      |       | 3,709                       |       |
| Deferred income taxes                                                                        |       | 116,136                    |       | 119,112                     |       |
| Liability for uncertain tax positions                                                        |       | 25,678                     |       | 24,025                      |       |
|                                                                                         |       | 1,228,206                  |       | 1,138,152                   |       |
| Commitments and contingencies                                                                |       |                       |       |                        |       |
| Minority interest                                                                            |       | 1,977                      |       | 1,754                       |       |
|                                                                                         |       |                       |       |                        |       |
| Shareholders’ equity:                                                                   |       |                       |       |                        |       |
| Preferred  shares $0.01 par value (30,000,000 shares authorized, issued nil)                 |       | —                     |       | —                      |       |
| Class A  common shares $0.01 par value (120,000,000 shares authorized):                 |       |                       |       |                        |       |
| Issued  — 42,467,000 (2007 — 42,456,000)                                           |       | 424                        |       | 424                         |       |
| Class B  common shares $0.01 par value (120,000,000 shares authorized):                 |       |                       |       |                        |       |
| Issued  — 18,044,478 (2007 — 18,044,478)                                           |       | 181                        |       | 181                         |       |
| Additional paid-in capital                                                                   |       | 516,233                    |       | 515,307                     |       |
| Retained earnings                                                                            |       | 296,970                    |       | 302,369                     |       |
| Accumulated other comprehensive income                                                       |       | 32,793                     |       | 30,431                      |       |
| Less: reduction due to class B common shares owned  by a subsidiary — 18,044,478        |       | (181                       | )          | (181                        | )          |
| Total shareholders’ equity                                                              |       | 846,420                    |       | 848,531                     |       |
|                                                                                         |       | $                          | 2,076,603  |                        | $          | 1,988,437 |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

** **
| **Three months ended  March 31,**                                 | ** **                                            | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------|-------------------------------------------------------|------------|------------|------------|------------|
| ** **                                                             | **(Dollars in thousands,  except per share amounts)** | ** ** |
| ** **                                                             | ** **                                            | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                |                                                  | $          | 114,680    |       | $          | 94,169 |   |
|                                                                   |                                                  |       |       |       |       |
| Expenses:                                                              |                                                  |       |       |       |       |
| Depreciation  and amortization                                         |                                                  | 10,284     |       | 8,775      |       |
| Operating                                                              |                                                  | 59,693     |       | 48,112     |       |
| Selling,  general and administrative                                   |                                                  | 43,818     |       | 34,373     |       |
| Total expenses                                                         |                                                  | 113,795    |       | 91,260     |       |
|                                                                   |                                                  |       |       |       |       |
| Earnings from operations                                               |                                                  | 885        |       | 2,909      |       |
|                                                                   |                                                  |       |       |       |       |
| Interest expense, net                                                  |                                                  | (12,929    | )          | (10,538    | )          |
| Foreign currency, net                                                  |                                                  | 2,045      |       | 102        |       |
| Net finance costs                                                      |                                                  | (10,884    | )          | (10,436    | )          |
|                                                                   |                                                  |       |       |       |       |
| Losses before income taxes and earnings from  unconsolidated companies |                                                  | (9,999     | )          | (7,527     | )          |
|                                                                   |                                                  |       |       |       |       |
| Benefit from income taxes                                              |                                                  | 3,557      |       | 2,728      |       |
|                                                                   |                                                  |       |       |       |       |
| Losses before earnings from unconsolidated companies                   |                                                  | (6,442     | )          | (4,799     | )          |
|                                                                   |                                                  |       |       |       |       |
| Earnings from unconsolidated companies, net of tax                     |                                                  | 4,067      |       | 2,303      |       |
|                                                                   |                                                  |       |       |       |       |
| Net losses from continuing operations                                  |                                                  | (2,375     | )          | (2,496     | )          |
|                                                                   |                                                  |       |       |       |       |
| Losses from discontinued operations, net of tax                        |                                                  | (1,963     | )          | (1,185     | )          |
|                                                                   |                                                  |       |       |       |       |
| Net losses                                                             |                                                  | $          | (4,338     | )          | $          | (3,681 | ) |
| Net losses per shares, basic and diluted:                              |                                                  |       |       |       |       |
| Net  losses from continuing operations                                 |                                                  | $          | (0.06      | )          | $          | (0.06 | ) |
| Net  losses from discontinued operations                               |                                                  | (0.04      | )          | (0.03      | )          |
| Net  losses                                                            |                                                  | $          | (0.10      | )          | $          | (0.09 | ) |
|                                                                   |                                                  |       |       |       |       |
| Dividends per share                                                    |                                                  | $          | 0.025      |       | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Cash Flows (unaudited)**

 
| **Three months ended  March 31,**                                             | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from operating activities:                                              |       |                       |       |     |       |
| Net  losses                                                                        |       | $                          | (2,375     | )        | $          | (2,496 | ) |
| Adjustments  to reconcile net losses to net cash used in operating activities:     |       |                       |       |     |       |
| Depreciation  and amortization                                                     |       | 10,284                     |       | 8,775    |       |
| Amortization  and write-off of finance costs                                       |       | 871                        |       | 718      |       |
| Undistributed  earnings of affiliates                                              |       | (2,244                     | )          | (694     | )          |
| Stock-based  compensation                                                          |       | 838                        |       | 372      |       |
| Change  in deferred tax                                                            |       | (5,859                     | )          | (5,143   | )          |
| Losses  from disposals of fixed assets                                             |       | 54                         |       | 114      |       |
| Other  non-cash items                                                              |       | (87                        | )          | 965      |       |
| Change  in assets and liabilities net of effects from acquisition of subsidiaries: |       |                       |       |     |       |
| Increase  in receivables, prepaid expenses and other                               |       | (16,002                    | )          | (9,605   | )          |
| Increase  in inventories                                                           |       | (1,728                     | )          | (2,039   | )          |
| Increase  in real estate assets held for sale                                      |       | (8,358                     | )          | (3,875   | )          |
| Increase  in payables, accrued liabilities and deferred revenue                    |       | 21,582                     |       | 11,203   |       |
| Dividends  received from unconsolidated companies                                  |       | 3,780                      |       | —   |       |
|                                                                               |       |                       |       |     |       |
| Total  adjustments                                                                 |       | 3,131                      |       | 791      |       |
|                                                                               |       |                       |       |     |       |
| Net cash provided by/(used in) operating activities  from continuing operations    |       | 756                        |       | (1,705   | )          |
| Net cash used in operating activities from  discontinued operations                |       | (1,702                     | )          | (892     | )          |
|                                                                               |       |                       |       |     |       |
| Net cash used in operating activities                                              |       | (946                       | )          | (2,597   | )          |
|                                                                               |       |                       |       |     |       |
| Cash flows from investing activities:                                              |       |                       |       |     |       |
| Capital  expenditures                                                              |       | (20,790                    | )          | (26,658  | )          |
| Acquisitions  and investments, net of cash acquired                                |       | (2,099                     | )          | (4,466   | )          |
| Increase  in restricted cash                                                       |       | (2,619                     | )          | —   |       |
| Proceeds  from sale of fixed assets                                                |       | —                     |       | 405      |       |
|                                                                               |       |                       |       |     |       |
| Net cash used in investing activities from  continuing operations                  |       | (25,508                    | )          | (30,719  | )          |
| Net cash used in investing activities from  discontinued operations                |       | (364                       | )          | (495     | )          |
|                                                                               |       |                       |       |     |       |
| Net cash used in investing activities                                              |       | (25,872                    | )          | (31,214  | )          |
|                                                                               |       |                       |       |     |       |
| Cash flows from financing activities:                                              |       |                       |       |     |       |
| Net  proceeds from working capital facilities and redrawable loans                 |       | 42,455                     |       | 19,581   |       |
| Stock  options exercised                                                           |       | 88                         |       | 1,769    |       |
| Issuance  of long-term debt                                                        |       | 117                        |       | 123      |       |
| Principal  payments under long-term debt                                           |       | (9,229                     | )          | (6,530   | )          |
| Payment  of common share dividends                                                 |       | (1,061                     | )          | (1,056   | )          |
|                                                                               |       |                       |       |     |       |
| Net cash provided by financing activities                                          |       | 32,370                     |       | 13,887   |       |
|                                                                                    |            |                            |            |          |            |  |  |

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statements of Condensed Consolidated CashFlows (unaudited) (continued)**

 
| **Three months ended March  31,**                                                                                        | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| Effect  of exchange rate changes on cash and cash equivalents                                                            |       | (295                       | )          | 79       |       |
|                                                                                                                     |       |                       |       |     |       |
| Net  increase/(decrease) in cash and cash equivalents                                                                    |       | 5,257                      |       | (19,845  | )          |
|                                                                                                                     |       |                       |       |     |       |
| Cash  and cash equivalents at beginning of period (includes $360 (2008), $1,422  (2007) of discontinued operations cash) |       | 90,925                     |       | 79,318   |       |
|                                                                                                                     |       |                       |       |     |       |
| Cash  and cash equivalents at end of period (includes $286 (2008), $151 (2007) of  discontinued operations cash)         |       | $                          | 96,182     |     | $          | 59,473 |   |
|                                                                                                                          |            |                            |            |          |            |  |  |

 

See notes to condensed consolidated financial statements.

 

5

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**Orient-Express Hotels Ltd.and Subsidiaries**

** **

**Statements of CondensedConsolidated Shareholders’ Equity (unaudited)**

 
| **(Dollars in thousands)**    | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/(Loss)** |   |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|--------|
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                    |   |
| Balance, January 1, 2007 |       | $                                    | —     |                                            | $          | 422                                             |       | $                                | 181        |                   | $          | 509,762                                              |       | $                                        | 301,785    |                                    | $      | (4,973 | ) | $ | (181 | ) |   |   |
| FIN48 liabilities             |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (28,820                | )          | —                                               |       | —                                   |       |                                    |   |
| Stock-based compensation      |       | —                               |       | —                                          |       | —                                          |       | 372                              |       | —                 |       | —                                               |       | —                                   |       |                                    |   |
| Stock options exercised       |       | —                               |       | 1                                               |       | —                                          |       | 1,768                            |       | —                 |       | —                                               |       | —                                   |       |                                    |   |
| Dividends on common shares    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (1,056                 | )          | —                                               |       | —                                   |       |                                    |   |
| Comprehensive loss:           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                    |   |
| Net  losses                   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (3,681                 | )          | —                                               |       | —                                   |       | $                                       | (3,681 | ) |
| Other  comprehensive income   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 552                                                  |       | —                                   |       | 552                                     |   |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                       | (3,129 | ) |
| Balance, March 31, 2007  |       | $                                    | —     |                                            | $          | 423                                             |       | $                                | 181        |                   | $          | 511,902                                              |       | $                                        | 268,228    |                                    | $      | (4,421 | ) | $ | (181 | ) |   |   |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                    |   |
| Balance, January 1, 2008 |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                        | 302,369    | *                                       | $      | 30,431 |   | $ | (181 | ) |   |   |
| Stock-based compensation      |       | —                               |       | —                                          |       | —                                          |       | 838                              |       | —                 |       | —                                               |       | —                                   |       |                                    |   |
| Stock options exercised       |       | —                               |       | —                                          |       | —                                          |       | 88                               |       | —                 |       | —                                               |       | —                                   |       |                                    |   |
| Dividends on common shares    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (1,061                 | )          | —                                               |       | —                                   |       |                                    |   |
| Comprehensive loss:           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                    |   |
| Net  losses                   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (4,338                 | )          | —                                               |       | —                                   |       | $                                       | (4,338 | ) |
| Other  comprehensive income   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 2,362                                                |       | —                                   |       | 2,362                                   |   |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                       | (1,976 | ) |
| Balance, March 31, 2008  |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 516,233                                              |       | $                                        | 296,970    |                                    | $      | 32,793 |   | $ | (181 | ) |   |   |

 

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*          This amount differs from $304,412 shown in the 2007 SECForm 10-K annual report due to the correction of a typographical error.

 

See notes tocondensed consolidated financial statements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

** **

**Notesto Condensed Consolidated Financial Statements**

 

**1.****             ****Basis offinancial statement presentation**

 

In this reportOrient-Express Hotels Ltd. is referred to as the “Company”, and the Company andits subsidiaries are referred to collectively as “OEH”.

 

*(a) **Accountingpolicies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the U.S. Securities and  Exchange Commission for reporting on Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of the management of the Company, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof financial position, operating results and cash flows have been included inthe statements.  Interim results are notnecessarily indicative of results that may be expected for the year ending December 31,2008.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  See Note 1 to the consolidated financialstatements in the 2007 Form 10-K for additional information regardingsignificant accounting policies.

 

The accountingpolicies used in preparing these financial statements are the same as those appliedin the prior year except for the presentation of restricted cash and the implementationof accounting for performance share awards and SFAS No. 157 in the three monthsended March 31, 2008.

 

*Restrictedcash*

 

In thestatements of condensed consolidated cash flows for the three months endedMarch 31, 2008, changes in restricted cash balances have been reclassified fromoperating activities to investing activities. There were no changes in restricted cash balances in the three monthsended March 31, 2007. 

 

*Performanceshare awards accounting policy*

 

Under its 2007performance share plan, the Company granted share-based payment awards withperformance and market conditions to certain employees during the three monthsended March 31, 2008.

 

The fair valueof the awards at the grant date is determined using the Monte Carlo model.  For awards with market conditions, theconditions are incorporated into the calculations, and the compensation valueis not adjusted if the conditions are not met. For awards with performance conditions, compensation expense isrecognized when it becomes probable that the performance criteria specified inthe awards

 

7

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will beachieved and, accordingly, the compensation value is adjusted following thechanges in the estimates of shares likely to vest based on the performancecriteria.

 

Share-basedcompensation expense for the awards determined as described above is recognizedin earnings on a straight-line basis over the requisite service periods of theawards.  The total cost of a share-basedpayment award is reduced by estimated forfeitures expected to occur over thevesting period of the award.

 

*SFAS 157*

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements”, which (i) applies to certain assets andliabilities that are being measured and reported on a fair value basis, (ii) definesfair value, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosure about fairvalue measurements, and (iii) enables the reader of the financialstatements to assess the inputs to develop those measurements by establishing ahierarchy for ranking the quality and reliability of the information used todetermine fair values.

 

SFAS No. 157 requires that assets and liabilitiescarried at fair value be classified and disclosed in one of three categories,namely quoted market prices in active markets for identical assets orliabilities (Level 1), observable market-based inputs or unobservable inputsthat are corroborated by market data (Level 2), and unobservable inputs thatare not corroborated by market data (Level 3).

 

The Company adopted SFAS No. 157 effective January 1,2008, except as it applies to those non-financial assets and non-financialliabilities as noted in FSP FAS 157-2 described below.  The following table summarizes the valuationof OEH’s assets and liabilities by the SFAS No. 157 fair value hierarchyat March 31, 2008 (dollars in thousands):

 
| ** **                       | ** ** | **March 31, 2008** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets at fair value:            |       |                    |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                       | —     |   | $ | 764 |   | $ | — |   | $ | 764 |   |
| Total assets                     |       | $                       | —     |   | $ | 764 |   | $ | — |   | $ | 764 |   |
|                             |       |                    |       |   |   |   |   |   |   |
| Liabilities at fair value:       |       |                    |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                       | —     |   | $ | 2,141 |   | $ | — |   | $ | 2,141 |   |
| Total liabilities                |       | $                       | —     |   | $ | 2,141 |   | $ | — |   | $ | 2,141 |   |

 

The fair value of OEH’s derivative financialinstruments is computed based on a market approach using information generatedby market transactions involving comparable instruments.

 

In February 2008, the FASB issued proposed FSPFAS 157-2, which delayed the effective date of SFAS No. 157 for allnon-financial assets and non-financial liabilities, except for those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  FSPFAS 157-2 partially defers the effective date of SFAS No. 157 to fiscalyears beginning after November 15, 2008, and interim periods within thosefiscal years for items within the scope of the FSP.

 

*(b) Netlosses per share*

 

The number of shares used in computingbasic and diluted losses per share was as follows (in thousands):

 
| **Three months ended March 31,** | ** ** | **2008** | ** ** | **2007** |   |
|---------------------------------------|------------|----------|------------|----------|--------|
|                                  |       |     |       |     |   |
| Basic                                 |       | 42,466   |       | 42,256   |   |
| Effect of dilution                    |       | 164      |       | 279      |   |
| Diluted                               |       | 42,630   |       | 42,535   |   |

 

For thethree months ended March 31, 2008 and 2007, the anti-dilutive effect ofstock options on 13,343 and 942 class A common shares, respectively, wasexcluded from the computation of diluted losses per share.

 

*(c)  Dividends*

 

On January 4,2008, the Company declared a dividend of $0.025 per common share payable February 5,2008 to shareholders of record January 22, 2008.

 

*(d)  Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $3,004,000 and $2,794,000 for the three monthsended March 31, 2008 and 2007, respectively.

 

****2.********             ********Discontinuedoperations****

 

****During the fourthquarter of 2007, OEH decided to sell its investment in Bora Bora LagoonResort.  Accordingly, the results of thehotel have been presented as a discontinued operation for all the interimperiods presented.****

 

8

----

 

****Summarized operatingresults of the hotel are as follows (dollars in thousands):****

**** ****
| ****Three months ended March 31,****                  | **** **** | ****2008****   | **** **** | ****2007****   | **** **** |
|------------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                             | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                            | **** **** | ****$****      | ****1,611****  | **** **** | ****$****      | ****1,757**** | **** **** |
| ****(Loss) from discontinued************operations****     | **** **** | ****$****      | ****(1,963**** | ****)****      | ****$****      | ****(1,185**** | ****)**** |
| ****Impairment loss****                                    | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Net (loss) from************discontinued operations**** | **** **** | ****$****      | ****(1,963**** | ****)****      | ****$****      | ****(1,185**** | ****)**** |

 

****Due to an increase incompetition and other market factors, operating profits and cash flows of theBora Bora Lagoon Resort were lower than expected in 2007 and previous years,which gave rise to an impairment of goodwill and long-lived assets in theamount of $3,891,000 and $10,101,000, respectively recorded in the quarterended December 31, 2007.  The fairvalue of the investment was estimated by management using a bid price offeredfor the business and considering other market factors.  The impaired book value remained the same asat March 31, 2008.****

 

****Assets and liabilitiesof the hotel have been classified as held for sale and consisted of thefollowing (dollars in thousands):****

**** ****
| **** ****                                                        | **** **** | ****March 31,********2008**** | **** **** | ****December 31,********2007**** | **** **** |
|-----------------------------------------------------------------------|----------------|------------------------------------|----------------|---------------------------------------|----------------|
| **** ****                                                        | **** **** | **** ****                     | **** **** | **** ****                        | **** **** |
| ****Current assets****                                                | **** **** | ****$****                          | ****2,979****  | **** ****                        | ****$****      | ****3,686**** | **** **** |
| ****Other assets****                                                  | **** **** | ****3,118****                      | **** **** | ****3,121****                         | **** **** |
| ****Property, plant and equipment,************net of depreciation**** | **** **** | ****49,586****                     | **** **** | ****45,091****                        | **** **** |
| ****Goodwill****                                                      | **** **** | ****2,979****                      | **** **** | ****2,519****                         | **** **** |
| ****Total assets held for sale****                                    | **** **** | ****$****                          | ****58,662**** | **** ****                        | ****$****      | ****54,417**** | **** **** |
| ****Liabilities held for sale****                                     | **** **** | ****$****                          | ****(5,426**** | ****)****                             | ****$****      | ****(5,619**** | ****)**** |

 

**3.****    ****Acquisitions**

 

*Casa de Sierra Nevada minority interest*

 

On March 7, 2008, OEH agreed to accelerate the purchase of the 20%minority interest in Casa de Sierra Nevada it did not own for a cashconsideration of $2,329,000.  Followingguidance in SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, and EITF 00-4, “Majorityowner’s accounting for a transaction in the shares of a consolidated subsidiaryand a derivative indexed 

 

9

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to the minority interest in that subsidiary”, deferred consideration of$2,330,000, which had been recorded on the original acquisition of 80% wascleared and the difference of $1,000 between the final settlement and originalforward contract value was recorded in earnings as interest income.

 

*LaSamanna spa*

 

On March 14, 2008, the subsidiary of OEH that owns La Samannaagreed to terminate the existing lease with the third party operator of the spaon the hotel’s premises and to transfer the employees, equipment and otherassets of the spa to La Samanna effective April 1, 2008 for a cashconsideration of $650,000.

 

The following table summarizes the preliminary fair values of theassets acquired at the date of acquisition (dollars in thousands):

 
| ** **                    | ** ** | **April 1,  2008** | ** ** |
|-------------------------------|------------|-------------------------|------------|
|                          |       |                    |       |
| Inventory                     |       | $                       | 10         |   |
| Property, plant and equipment |       | 10                      |       |
| Goodwill                      |       | 630                     |       |
| Other intangible assets       |       | —                  |       |
| Total assets acquired         |       | 650                     |       |
| Total liabilities assumed     |       | —                  |       |
| Net assets acquired           |       | $                       | 650        |   |
|                          |       |                    |       |
| Cash consideration            |       | $                       | 650        |   |

 

Equipment of the spa has been fair valued based on the estimatedreplacement cost.  Goodwill of $630,000has been recorded of which $nil will be deductible as operating expenses fortax purposes.  This acquisition enabledOEH to take control of the spa operation and receive 100% of operating revenuesthat the business is expected to generate in future years, which contributed tothe purchase price and resulted in goodwill.

 

The acquisition of the spa has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from March 14,2008.

 

The proforma results of operations data presented below assume that thespa acquisition had been made at the beginning of 2007.  The proforma data are presented forinformational 

 

10

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purposes only and are not necessarily indicative of the results of futureoperations, nor of the actual results that would have been achieved had theacquisition taken place at the beginning of 2007 (dollars in thousands, exceptper share amounts):

 
| **Three months ended  March 31,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                |       | $          | 114,912    |       | $          | 94,394 |   |
| Net losses                             |       | $          | (4,340     | )          | (3,682     | ) |
| Earnings per share:                    |       |       |       |       |       |
| Basic                                  |       | $          | 0.10       |       | $          | 0.09 |   |
| Diluted                                |       | $          | 0.10       |       | $          | 0.09 |   |

 

**4.****             ****Investments**

 

Summarized financial data for OEH’s unconsolidatedcompanies for the periods during which the investments were held by OEH are asfollows (dollars in thousands):

 
| ** **                                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets                                  |       | $                        | 54,758     |                        | $          | 60,890 |   |
| Property, plant and equipment, net              |       | 373,074                  |       | 358,708                     |       |
| Other assets                                    |       | 54,358                   |       | 51,376                      |       |
| Total assets                                    |       | $                        | 482,190    |                        | $          | 470,974 |   |
|                                            |       |                     |       |                        |       |
| Current liabilities                             |       | $                        | 50,377     |                        | $          | 48,710 |   |
| Long-term debt                                  |       | 253,434                  |       | 246,420                     |       |
| Other liabilities                               |       | 100,827                  |       | 97,663                      |       |
| Total shareholders’ equity                 |       | 77,552                   |       | 78,181                      |       |
| Total liabilities and shareholders’ equity |       | $                        | 482,190    |                        | $          | 470,974 |   |

 
| **Three months ended March 31,**             | ** ** | **2008** | ** ** | **2007** |   |
|---------------------------------------------------|------------|----------|------------|----------|--------|
|                                              |       |     |       |     |   |
| Revenue                                           |       | $        | 50,080     |     | $      | 41,837 |   |
| Earnings from operations before net finance costs |       | $        | 10,386     |     | $      | 6,725 |   |
| Net earnings/(losses)                             |       | $        | 2,369      |     | $      | (514 | ) |

 

**5.****             ****Property,plant and equipment**

 

The major classes of property, plant andequipment are as follows (dollars in thousands):

 

11

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| ** **                              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land and buildings                      |       | $                        | 1,115,365  |                        | $          | 1,074,059 |   |
| Machinery and equipment                 |       | 214,037                  |       | 205,873                     |       |
| Fixtures, fittings and office equipment |       | 228,654                  |       | 220,664                     |       |
| River cruiseship and canalboats         |       | 19,743                   |       | 19,600                      |       |
|                                    |       | 1,577,799                |       | 1,520,196                   |       |
| Less: accumulated depreciation          |       | (260,759                 | )          | (246,240                    | )          |
|                                    |       | $                        | 1,317,040  |                        | $          | 1,273,956 |   |

 

The majorclasses of assets under capital leases included above are as follows (dollarsin thousands):

 
| ** **                              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Freehold and leased land and buildings  |       | $                        | 19,098     |                        | $          | 17,948 |   |
| Machinery and equipment                 |       | 2,670                    |       | 2,573                       |       |
| Fixtures, fittings and office equipment |       | 1,747                    |       | 1,654                       |       |
|                                    |       | 23,515                   |       | 22,175                      |       |
| Less: accumulated depreciation          |       | (3,225                   | )          | (2,953                      | )          |
| ** **                              |       | $                        | 20,290     |                        | $          | 19,222 |   |

 

**6.****             ****Goodwill**

 

Thechanges in the carrying amount of goodwill for the three months ended March 31,2008 are as follows (dollars in thousands):

 
| ** **                                                         | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance as of January 1, 2008                                 |       | $                                  | 124,909    |                           | $          | 8,588     |       | $ | 133,497 |   |
| Goodwill acquired during the year/(prior year  estimates adjusted) |       | 630                                |       | —                         |       | 630       |       |
| Foreign currency translation adjustment                            |       | 3,003                              |       | (7                             | )          | 2,996     |       |
| Balance as at March 31, 2008                                  |       | $                                  | 128,542    |                           | $          | 8,581     |       | $ | 137,123 |   |

 

12

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**7.****             ****Otherintangible assets**

(Dollars inthousands)

 
|                            |   | **March 31,  2008** |       |
|---------------------------------|--------|--------------------------|------------|
| **Amortized intangible assets** |   | **Carrying  amount**     | ** ** | **Accumulated  amortization** |   |
|                            |   |                     |       |   |   |
| Favorable lease                 |   | $                        | 13,150     |   | $ | (610 | ) |
| Internet sites                  |   | 2,066                    |       | (166 | ) |
| Total                           |   | $                        | 15,216     |   | $ | (776 | ) |
|                            |   |                     |       |   |   |
| Unamortized intangible assets   |   |                     |       |   |   |
| Tradename                       |   | $                        | 7,365      |   |   |   |

 

Favorablelease intangible assets are amortized over the term of the lease, which is upto 50 years, and internet sites are amortized over ten years.

 

Amortization expense for the three monthsended March 31, 2008 was $137,000 (2007 – $70,000).  Estimated amortization expense for each ofthe years ended December 31, 2008 to December 31, 2012 is $548,000.

 

**8.****             ****Long-termdebt and obligations under capital lease**

 

Long-term debt consists of the following(dollars in thousands):

 
| ** **                                                                                                                                                                                                  | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 11 years, with a weighted average interest rate of 5.82% and  6.34%, respectively, primarily based on LIBOR |       | $                        | 832,044    |                        | $          | 767,916 |   |
| Loan  secured by river cruiseship, payable over 3 years, with a weighted interest  rate of 7.48% at December 31, 2007 based on LIBOR                                                                        |       | —                   |       | 2,500                       |       |
| Obligations under capital lease                                                                                                                                                                             |       | 16,206                   |       | 15,994                      |       |
|                                                                                                                                                                                                        |       | 848,250                  |       | 786,410                     |       |
| Less: current portion                                                                                                                                                                                       |       | 171,509                  |       | 127,795                     |       |
|                                                                                                                                                                                                        |       | $                        | 676,741    |                        | $          | 658,615 |   |

 

The carryingvalue of the debt is equal to its fair value.

 

13

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Certain creditagreements of OEH have restrictive covenants. At March 31, 2008, OEH was in compliance with these covenants,including a minimum consolidated net worth test and a minimum consolidatedinterest coverage test as defined under a bank-syndicated €190,000,000 loanfacility.  OEH does not currently haveany covenants in its loan agreements which limit the payment of dividends.

 

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at March 31,2008 (dollars in thousands):

 

 

 
| **Year ending  December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2009                               |       | $          | 22,363     |   |
| 2010                               |       | 51,976     |       |
| 2011                               |       | 418,793    |       |
| 2012                               |       | 93,187     |       |
| 2013 and thereafter                |       | 90,422     |       |
|                               |       | $          | 676,741    |   |

 

**9.****             ****Otherliabilities**

 

Other liabilities are $1,379,000 of deferred consideration in respectof the acquisition of land next to Maroma Resort and Spa after discounting topresent value.

 

**10.****      ****Incometaxes**

 

The Company is incorporated in Bermuda, which does not impose an incometax. OEH’s effective tax rate is entirely due to the income taxes imposed byjurisdictions in which OEH conducts business other than Bermuda.

 

OEH recorded a tax benefit for the three months ended March 31,2008 of $3,557,000, compared to a benefit of $2,728,000 for the correspondingperiod in 2007. OEH’s current tax cost for the three months ended March 31,2008 is $2,261,000, compared to a cost of $2,479,000 in 2007.

 

OEH’s tax benefit for the three months ended March 31, 2008included a tax charge of $286,000 in respect of the provision under FASBinterpretation No. 48, “Accounting for Uncertainty of Income Taxes” (FIN48), of which $253,000 relates to interest and penalty costs associated withthe uncertain tax positions.  OEH’s taxbenefit of $2,728,000 for the three months ended March 31, 2007 included atax charge of $232,000 in respect of the FIN 48 provision, including a chargeof $116,000 that related to the potential interest and penalty costs.

 

14

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As at March 31, 2008, OEH had recognized a $25,678,000 (December 31,2007 – $24,025,000) provision in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the FIN 48 provision will decrease by about$10,000,000 to $18,000,000 as a result of the resolution of tax positions in certainjurisdictions in which OEH operates.

 

Earnings fromunconsolidated subsidiaries are reported net of tax in the statements ofcondensed consolidated operations.  Thetax provision applicable to these unconsolidated subsidiaries in the threemonths ended March 31, 2008 is $1,181,000, compared to a provision of$1,186,000 in the corresponding period in 2007.

 

**11.****      ****Pensions**

 

Components ofnet periodic pension benefit cost were as follows (dollars in thousands)

 
| **Three months ended  March 31,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                           |       | $          | —     |       | $          | — |   |
| Interest cost                          |       | 310        |       | 284        |       |
| Expected return on plan assets         |       | (295       | )          | (262       | )          |
| Amortization of net loss               |       | 120        |       | 137        |       |
| Net periodic benefit cost              |       | $          | 135        |       | $          | 159 |   |

 

As reported inNote 10 to the financial statements in the Company’s 2007 Form 10-K annualreport, OEH expected to contribute $1,385,000 to its defined benefit pensionplan in 2008.  As of March 31, 2008,$344,000 of contributions had been made. OEH anticipates contributing an additional $1,041,000 to fund itspension plans in 2008 for a total of $1,385,000.

 

**12.****      ****Supplemental cash flow information**

                        (Dollars in thousands)

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Cash paid for:                         |       |     |       |     |       |
| Interest                               |       | $        | 12,626     |     | $          | 10,695 |   |
| Income taxes                           |       | $        | 5,070      |     | $          | 2,479 |   |

 

15

----

 

In conjunction with acquisitions (see Note 3)liabilities were assumed as follows (dollars in thousands):

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Fair value of assets acquired          |       | $        | 650        |     | $          | 459 |   |
| Cash paid                              |       | (650     | )          | (376     | )          |
| Liabilities assumed                    |       | $        | —     |     | $          | 83 |   |

 

*Restricted cash*

 

Cash received for residential condominium purchases atCupecoy Yacht Club in St. Martin is held in escrow until the next phase ofconstruction, when the cash is released into OEH’s current bank account.  At March 31, 2008, this escrow accountbalance amounted to $6,419,000 (December 31, 2007 - $3,800,000) and ispresented as restricted cash.

 

**13.****      ****Accumulated other comprehensive income**

 

The accumulated balances for each component of other comprehensiveincome are as follows (dollars in thousands):

 
| ** **                                       | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Foreign currency translation adjustments         |       | $                        | 43,296     |                        | $          | 38,191 |   |
| Derivative financial instruments                 |       | (2,013                   | )          | 730                         |       |
| Additional minimum pension liability, net of tax |       | (8,490                   | )          | (8,490                      | )          |
|                                             |       | $                        | 32,793     |                        | $          | 30,431 |   |

 

The components of comprehensive loss are asfollows (dollars in thousands):

 
| **Three months ended  March 31,**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Net losses on common shares              |       | $        | (4,338     | )        | $          | (3,681 | ) |
| Foreign currency translation adjustments |       | 5,105    |       | 59       |       |
| Change in fair value of derivatives      |       | (2,743   | )          | 493      |       |
| Comprehensive loss                       |       | $        | (1,976     | )        | $          | (3,129 | ) |

 

**14.****      ****Commitments**

 

Outstanding contracts to purchase fixed assets wereapproximately $99,452,000 at March 31, 2008 (December 31, 2007 –$102,361,000).

 

16

----

 

**15.****      ****Information concerning financial reporting forsegments and****operations in different geographical areas**

 

As reported in the Company’s 2007 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants,  (ii) tourist trainsand cruises, and (iii) real estate and property development.  Segment performance is evaluated based uponsegment net earnings before interest, tax (including tax on earnings fromunconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 
| **Three months ended  March 31,**     | ** **            | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|-----------------------|----------|------------|----------|------------|
| Revenue:                                   |                  |     |       |     |       |
| Hotels and restaurants                     |                  |     |       |     |       |
| Owned  hotels – Europe                |                  | $        | 27,139     |     | $          | 21,115 |   |
|                                       | –  North America |     | 26,670     |     | 23,138     |   |
|                                       | – Rest of world  |     | 40,767     |     | 32,888     |   |
| Hotel  management/part ownership interests |                  | 2,501    |       | 2,374    |       |
| Restaurants                                |                  | 4,866    |       | 5,295    |       |
|                                       |                  | 101,943  |       | 84,810   |       |
| Tourist trains and cruises                 |                  | 8,654    |       | 9,359    |       |
| Real estate                                |                  | 4,083    |       | —   |       |
|                                       |                  | $        | 114,680    |     | $          | 94,169 |   |
|                                       |                  |     |       |     |       |
| Depreciation and amortization:             |                  |     |       |     |       |
| Hotels and restaurants                     |                  |     |       |     |       |
| Owned  hotels – Europe                |                  | $        | 4,686      |     | $          | 3,719 |   |
|                                       | – North America  |     | 1,894      |     | 1,743      |   |
|                                       | – Rest of world  |     | 2,350      |     | 2,269      |   |
| Restaurants                                |                  | 279      |       | 229      |       |
|                                       |                  | 9,209    |       | 7,960    |       |
| Tourist trains and cruises                 |                  | 1,075    |       | 815      |       |
|                                       |                  | $        | 10,284     |     | $          | 8,775 |   |
|                                       |                  |     |       |     |       |
| Segment EBITDA:                            |                  |     |       |     |       |
| Owned  hotels – Europe                |                  | $        | (3,744     | )        | $          | (3,555 | ) |
|                                       | – North America  |     | 7,300      |     | 6,120      |   |
|                                       | – Rest of world  |     | 12,747     |     | 12,084     |   |
| Hotel  management/part ownership interests |                  | 5,218    |       | 4,647    |       |
| Restaurants                                |                  | 649      |       | 868      |       |
| Tourist  trains and cruises                |                  | 1,543    |       | 1,148    |       |
| Real  estate                               |                  | (497     | )          | (458     | )          |
| Central  overheads                         |                  | (6,799   | )          | (5,681   | )          |
|                                       |                  | $        | 16,417     |     | $          | 15,173 |   |
|                                            |                       |          |            |          |            |  |  |  |  |  |  |

 

17

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| **Three months ended  March 31,**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Segment EBITDA/net losses  reconciliation:                       |       |     |       |     |       |
| Segment  EBITDA                                                  |       | $        | 16,417     |     | $          | 15,173 |   |
| Less:                                                            |       |     |       |     |       |
| Depreciation  and amortization                                   |       | 10,284   |       | 8,775    |       |
| Interest  expense, net                                           |       | 12,929   |       | 10,538   |       |
| Foreign  currency, net                                           |       | (2,045   | )          | (102     | )          |
| Benefit  from income taxes                                       |       | (3,557   | )          | (2,728   | )          |
| Share  of provision for income taxes of unconsolidated companies |       | 1,181    |       | 1,186    |       |
| Losses  from continuing operations                               |       | $        | (2,375     | )        | $          | (2,496 | ) |
|                                                             |       |     |       |     |       |
| Earnings from unconsolidated companies, net of tax:              |       |     |       |     |       |
| Hotels  and restaurants                                          |       |     |       |     |       |
| Hotel  management/part ownership interests                       |       | $        | 2,734      |     | $          | 1,500 |   |
| Tourist  trains and cruises                                      |       | 1,333    |       | 803      |       |
|                                                             |       | $        | 4,067      |     | $          | 2,303 |   |

 
| Capital expenditure:        |                 |   |   |   |   |
|-----------------------------|----------------------|--------|--------|--------|--------|
| Owned  hotels               | – Europe        |   | $      | 9,867  |   | $ | 10,815 |   |
|                        | – North America |   | 5,106  |   | 9,133  |   |
|                        | – Rest of world |   | 2,295  |   | 3,554  |   |
| Restaurants                 |                 | 55     |   | 152    |   |
| Tourist  trains and cruises |                 | 2,093  |   | 1,011  |   |
| Real  estate                |                 | 1,374  |   | 1,993  |   |
|                        |                 | $      | 20,790 |   | $      | 26,658 |   |

 

Financial information regarding geographic areas basedon the location of properties is as follows (dollars in thousands):

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                               |       |     |       |     |       |
| Europe                                 |       | $        | 33,234     |     | $          | 27,838 |   |
| North  America                         |       | 36,691   |       | 29,388   |       |
| Rest  of world                         |       | 44,755   |       | 36,943   |       |
|                                   |       | $        | 114,680    |     | $          | 94,169 |   |

 

**16.****      ****Share-based awards with performance/marketcriteria**

 

On March 3,2008, the Company granted to nine employees share-based awards with performanceand market conditions covering a total of 29,765 class A common shares underits 2007 performance share plan.  Theshares will be issued after three years from the grant date upon payment of anominal amount, provided performance and market criteria set forth in the awardsare met.  All of these awards wereoutstanding at March 31, 2008.

 

 

18

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Half of eachaward is subject to performance criteria based on OEH’s earnings before tax forthe year ending December 31, 2010, and the other half of each award issubject to market criteria based on OEH’s total shareholder return compared tothe average total shareholder return of a specified group of other hotel andleisure companies over the period of three years.

 

When theshares are issued under the awards, the grantees are also entitled to receive acash equivalent of the dividends, if any, that would have been paid on theclass A common shares during the period between the grant date and the shareissue date.

 

The fair valueof the awards with performance and market conditions granted in the threemonths ended March 31, 2008 was $568,000 (2007 - $nil). The weighted-averagegrant date fair value of the performance-based part of the awards was $51.95per share and of the market-based part of the awards $31.60 per share.  The assumptions used in the Monte Carlovaluation model were:

 

| Expected share price volatility     |   | 33.1%   |   |
|-------------------------------------|--------|---------|--------|
| Risk-free interest rate             |   | 1.76%   |   |
| Expected annual dividends per share |   | $0.10   |   |
| Expected life of awards             |   | 3 years |   |

 

Expectedvolatility is based on historical volatility of the Company’s class A commonshare price and other factors.  The termof awards represents the period of time they are expected to be outstanding,based on historical data.  The risk-freerate for periods within the contractual life of the awards is based on the U.S.Treasury yield curve in effect at the time of grant.

 

**17.****      ****Derivative financial instruments**

 

OEH is exposedto interest rate risk on its floating rate debt, and in September 2006 itentered into interest rate swap agreements for the notional amounts of €75,000,000($95,000,000) and €24,700,000 ($31,000,000) that limit the exposure to a fixedrate level.  Although the interest rateswap for €24,700,000 economically hedges the interest rate risk, it has notqualified as a cash flow hedge and, therefore, changes in the fair value ofthis swap of $410,000 were recorded as an interest expense for the period.

 

19

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The interestrate swap for €75,000,000 has been designated and has qualified as a cash flowhedge of the floating rate debt effective December 31, 2006.  This swap is expected to be, and has been,highly effective in offsetting exposures from fluctuations in debt interestrates.  The $1,715,000 of the movement inthe fair value of the swap has, therefore, been recorded as a loss in othercomprehensive income, with an amount of $125,000 deemed ineffective, andrecognized as a loss in earnings for the period.

 

In October 2007,OEH entered into interest rate swap agreements for the notional amounts of$10,000,000 and $20,000,000 that limit the exposure from interest ratefluctuations of a U.S. dollar debt to a fixed rate level.  The swaps have been designated and havequalified as cash flow hedges of the floating rate debt effective since October 18,2007.  These swaps are expected to be,and have been, highly effective.  The$1,119,000 of the movement in the fair value of the swaps has, therefore, beenrecorded as a loss in other comprehensive income.

 

Of theexisting gains at March 31, 2008, approximately $1,300,000 will bereclassified into earnings in the next 12 months, assuming no further changesin fair value of the contracts.

 

At March 31,2008 and December 31, 2007, the fair values of the outstanding Eurointerest rate swaps were accounted for as other non-current assets at $764,000and $2,833,000, respectively, and the fair values of the outstanding U.S.dollar interest rate swaps were accounted for as accrued liabilities at$2,141,000 and $1,022,000, respectively.

 

**18.****      ****Related party transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due by OEH to Eastern and OrientalExpress Ltd. at March 31, 2008 was $447,000.  The amount due to OEH by Eastern and OrientalExpress Ltd. at December 31, 2007 was $1,330,000.

 

OEH managesunder a long-term contract the Charleston Place Hotel (accounted for under theequity method) and has made loans to the hotel-owning company.  For the three months ended March 31,2008, OEH earned $1,204,000 (2007 - $1,351,000) in management fees which arerecorded in revenue, and $3,004,000 (2007 - $2,794,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  These loans have anindefinite maturity period.  The amountdue to OEH from Charleston Place Hotel at March 31, 2008 was $17,516,000 (December 31,2007 - $19,749,000).

 

20

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OEH manages under long-term contracts the Hotel Monasterio, the MachuPicchu Sanctuary Lodge and Las Casitas del Colca owned by its 50/50 jointventure with local Peruvian interests, as well as the 50/50-owned PeruRailoperation, and provides loans, guarantees and other credit accommodation tothese joint ventures.  In the threemonths ended March 31, 2008, OEH earned management and guarantee fees of$1,712,000 (2007 - $1,329,000) and loan interest of $16,000 (2007 - $16,000)which are recorded in revenue.   At March 31,2008, OEH had a $750,000 subordinated loan to the PeruRail operation with anindefinite maturity date and interest also at a spread over LIBOR.  The amount due to OEH from its joint venturePeruvian operations at March 31, 2008 was $6,878,000 (December 31,2007 - $6,277,000).

 

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH owns a 50% interest and is accounted for under the equitymethod.  For the three months ended March 31,2008, OEH earned $346,000 (2007 - $233,000) in management fees, which areincluded in revenue.  The amount due toOEH from the Hotel Ritz, Madrid, at March 31, 2008 was $5,358,000 (December 31,2007 - $2,624,000).

 

James Sherwood, a director of the Company, has a right of first refusalto purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes tosell it.  The purchase price would be theoffered sale price in the case of a cash sale or the fair market value of thehotel, as determined by an independent valuer, in the case of a non-cashsale.  Mr. Sherwood has also beengranted an option to purchase the hotel at fair market value if a change incontrol of the Company occurs.

 

**19.****      ****Subsequent events**

 

In April 2008, OEH entered into six new interest rate swapagreements to reduce exposure to the interest rate fluctuations on its U.S.dollar floating rate indebtedness.  Theinterest rate swaps have been provided by various banks covering indebtednesssecured by the Copacabana Palace Hotel, Keswick Hall, Windsor Court Hotel,Grand Hotel Europe, La Samanna and Mount Nelson Hotel with the total nominalamount hedged of $151,283,000.  Theinterest rates were fixed at the level ranging between 3.43% and 3.95% for aterm of three to five years.

 

Also in April 2008, the Company renewed a $47,000,000 term loansecured on the Windsor Court Hotel for a further five years.

 

21

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**ITEM 2.****                                                    ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Resultsof Operations**

 

**Threemonths Ended March 31, 2008 Compared to**

**Threemonths Ended March 31, 2007**

 

OEH’s operating results for the three months ended March 31,2008 and 2007, expressed as a percentage of revenue, were as follows:

 
| **Three months ended  March 31,**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **%**    | ** ** | **%**    | ** ** |
| Revenue                                             |       |     |       |     |       |
| Hotels  and restaurants                             |       | 89       |       | 90       |       |
| Tourist  trains and cruises                         |       | 7        |       | 10       |       |
| Real  estate                                        |       | 4        |       | 0        |       |
|                                                |       | 100      |       | 100      |       |
| Expenses                                            |       |     |       |     |       |
| Depreciation  and amortization                      |       | 9        |       | 9        |       |
| Operating                                           |       | 52       |       | 51       |       |
| Selling,  general and administrative                |       | 38       |       | 37       |       |
| Net finance costs                                   |       | 9        |       | 11       |       |
| Losses before income taxes                          |       | (8       | )          | (8       | )          |
| Benefit from income taxes                           |       | 3        |       | 3        |       |
| Earnings from unconsolidated companies              |       | 3        |       | 2        |       |
| Net losses from continuing operations               |       | (2       | )          | (3       | )          |
| Net Losses from discontinued operations, net of tax |       | (2       | )          | (1       | )          |
| Net losses as a percentage of revenue               |       | (4       | )          | (4       | )          |

 

Segment net earnings before interest, tax(including tax on unconsolidated companies), depreciation and amortization (“segmentEBITDA”) of OEH’s operations for the three months ended March 31, 2008 and2007 are analyzed as follows (dollars in millions):

 

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| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Segment EBITDA:                        |       |     |       |     |       |
| Owned hotels:                          |       |     |       |     |       |
| Europe                                 |       | $        | (3.7       | )        | $          | (3.6 | ) |
| North  America                         |       | 7.3      |       | 6.1      |       |
| Rest  of the World                     |       | 12.7     |       | 12.1     |       |
| Hotel management interests             |       | 5.2      |       | 4.6      |       |
| Restaurants                            |       | 0.6      |       | 0.9      |       |
| Tourist trains and cruises             |       | 1.5      |       | 1.1      |       |
| Real estate                            |       | (0.4     | )          | (0.4     | )          |
| Central overheads                      |       | (6.8     | )          | (5.6     | )          |
| Total segment EBITDA                   |       | $        | 16.4       |     | $          | 15.2 |   |

 

The foregoingsegment EBITDA reconciles to net losses as follows (dollars in millions):

 
| **Three months ended  March 31,**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net losses                                                       |       | $        | (4.3       | )        | $          | (3.7 | ) |
| Add:                                                             |       |     |       |     |       |
| Depreciation and amortization                                    |       | 10.3     |       | 8.8      |       |
| Net finance costs                                                |       | 10.9     |       | 10.4     |       |
| Benefit from income taxes                                        |       | (3.6     | )          | (2.7     | )          |
| Loss from discontinued operations, net of tax                    |       | 1.9      |       | 1.2      |       |
| Share of provision for income taxes of  unconsolidated companies |       | 1.2      |       | 1.2      |       |
| Segment EBITDA                                                   |       | $        | 16.4       |     | $          | 15.2 |   |

 

Managementevaluates the operating performance of OEH’s segments on the basis of segmentEBITDA and believes that segment EBITDA is a useful measure of operatingperformance because segment EBITDA is not affected by non-operating factorssuch as leverage and the historic cost of assets.  EBITDA is a financial measure commonly usedin OEH’s industry.  OEH’s segment EBITDA,however, may not be comparable in all instances to EBITDA as disclosed by othercompanies.  Segment EBITDA should not beconsidered as an alternative to earnings from operations or net earnings (asdetermined in accordance with U.S. generally accepted accounting principles) asa measure of OEH’s operating performance, or as an alternative to net cashprovided by operating, investing and financing activities (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s ability to meet cash needs.

 

23

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Operating information for OEH’s owned hotels for thethree months ended March 31, 2008 and 2007 is as follows:

 
| ** **                      | ** ** | **Three  months  ended March 31,** | ** ** | ** ** | ** ** | ** **    | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|------------|------------|---------------|------------|
| ** **                      | ** ** | **2008**                                | ** ** | **2007**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|                            |       |                                    |       |       |       |          |       |   |   |
| Average Daily Rate (in dollars) |       |                                    |       |       |       |          |       |   |   |
| Europe                          |       | 464                                     |       | 398        |       |          |       |   |   |
| North  America                  |       | 470                                     |       | 438        |       |          |       |   |   |
| Rest  of the world              |       | 296                                     |       | 280        |       |          |       |   |   |
| Worldwide                       |       | 372                                     |       | 345        |       |          |       |   |   |
|                            |       |                                    |       |       |       |          |       |   |   |
| Rooms Available (in thousands)  |       |                                    |       |       |       |          |       |   |   |
| Europe                          |       | 64                                      |       | 63         |       |          |       |   |   |
| North  America                  |       | 57                                      |       | 55         |       |          |       |   |   |
| Rest  of the world              |       | 123                                     |       | 104        |       |          |       |   |   |
| Worldwide                       |       | 244                                     |       | 222        |       |          |       |   |   |
|                            |       |                                    |       |       |       |          |       |   |   |
| Rooms Sold (in thousands)       |       |                                    |       |       |       |          |       |   |   |
| Europe                          |       | 27                                      |       | 26         |       |          |       |   |   |
| North  America                  |       | 38                                      |       | 36         |       |          |       |   |   |
| Rest  of the world              |       | 82                                      |       | 71         |       |          |       |   |   |
| Worldwide                       |       | 147                                     |       | 133        |       |          |       |   |   |
|                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Occupancy (percentage)          |       |                                    |       |       |       |          |       |   |   |
| Europe                          |       | 43                                      |       | 30         |       |          |       |   |   |
| North  America                  |       | 67                                      |       | 64         |       |          |       |   |   |
| Rest  of the world              |       | 67                                      |       | 68         |       |          |       |   |   |
| Worldwide                       |       | 61                                      |       | 59         |       |          |       |   |   |
|                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| RevPAR (in dollars)             |       |                                    |       |       |       |          |       |   |   |
| Europe                          |       | 201                                     |       | 157        |       |          |       |   |   |
| North  America                  |       | 314                                     |       | 280        |       |          |       |   |   |
| Rest  of the world              |       | 198                                     |       | 191        |       |          |       |   |   |
| Worldwide                       |       | 226                                     |       | 204        |       |          |       |   |   |
|                            |       |                                    |       |       |       | **Change  %** |       |
| Same Store RevPAR (in dollars)  |       |                                    |       |       |       | **Dollars**   | ** ** | **Local  Currency** |   |
| Europe                          |       | 178                                     |       | 137        |       | 30            | %          | 16 | % |
| North  America                  |       | 319                                     |       | 285        |       | 12            | %          | 12 | % |
| Rest  of the world              |       | 212                                     |       | 191        |       | 11            | %          | 10 | % |
| Worldwide                       |       | 231                                     |       | 202        |       | 14            | %          | 12 | % |

 

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Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation. Occupancy is the number of rooms sold divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, such as by excludingthe effect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 
|   | Hotel  Cipriani            |   | Hotel  Splendido                |
|--------|----------------------------|--------|---------------------------------|
|   | Villa  San Michele         |   | Hotel  Caruso Belvedere         |
|   | Hôtel de la Cité |   | La Residencia                   |
|   | El Encanto                 |   | Le Manoir aux Quat’Saisons |
|   | Casa de Sierra Nevada      |   | Hotel das Cataratas             |

 

*Overview*

 

The net loss for the period was $4.3 million ($0.10per common share) on revenue of $114.7 million, compared with a net loss of$3.7 million ($0.09 per common share) on revenue of $94.2 million in the prioryear first quarter.  The first quarter isa traditional loss-making period because a number of OEH’s properties areclosed for the winter, the Venice Simplon-Orient-Express train does not operatefor most of the quarter and tourist arrivals are low in locations with poorwinter weather.

 

*Revenue*

** **
| **Three months ended  March 31,**     | ** ** | **2008**                   | ** ** | **2007**   | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                   | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Hotels and restaurants                     |       |                       |       |       |       |
| Owned  hotels                              |       |                       |       |       |       |
| Europe                                     |       | $                          | 27,139     |       | $          | 21,115 |   |
| North  America                             |       | 26,670                     |       | 23,138     |       |
| Rest  of the world                         |       | 40,767                     |       | 32,888     |       |
| Hotel  management/part ownership interests |       | 2,501                      |       | 2,374      |       |
| Restaurants                                |       | 4,866                      |       | 5,295      |       |
|                                       |       | 101,943                    |       | 84,810     |       |
| Tourist trains and cruises                 |       | 8,654                      |       | 9,359      |       |
| Real estate                                |       | 4,083                      |       | —     |       |
|                                       |       | $                          | 114,680    |       | $          | 94,169 |   |

 

Total revenue increased by $20.5 million, or 22%, from$94.2 million in the three months ended March 31, 2007 to $114.7 millionin the three months ended March 31, 2008. Hotels and restaurants revenue increased by $17.1 million, or 20%, from$84.8 million in the three months ended March 31, 2007 to $101.9 millionin the three months ended March 31, 2008. Tourist trains and cruises revenue decreased by $0.7 million, or 7%,

 

25

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from $9.4 million for the three months ended March 31,2007 to $8.7 million for the three months ended March 31, 2008.  Real estate revenues for the three monthsended March 31, 2008 were $4.1 million. There were no real estate revenues for the three months ended March 31,2007.

 

The increase in hotel revenue was due primarily toincreased room rates across the group, and additional occupancy, particularlyin March as a result of Easter falling in the month, rather than in April,as in the prior year.  The increase inhotel revenue also reflects the impact of foreign currency appreciation inEurope and the Rest of the World region and an increase in non-rooms revenue.

 

The revenue from restaurants decreased by $0.4million, or 8%, from $5.3 million in the three months ended March 31, 2007to $4.9 million for the three months ended March 31, 2008.

 

For owned hotels overall, same store RevPAR in U.S.dollars increased by 14% in the three months ended March 31, 2008 comparedto the three months ended March 31, 2007. Measured in local currencies this increase was 12%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

*Europe*

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Average daily rate (in dollars)        |       | 464      |       | 398      |       |
| Rooms available (in thousands)         |       | 64       |       | 63       |       |
| Rooms sold (in thousands)              |       | 27       |       | 26       |       |
| Occupancy (percentage)                 |       | 43       |       | 39       |       |
| RevPAR (in dollars)                    |       | 201      |       | 157      |       |
| Same store RevPAR (in dollars)         |       | 178      |       | 137      |       |

 

Revenue increased by $6.0 million, or 28%, from $21.1million for the three months ended March 31, 2007 to $27.1 million for thethree months ended March 31, 2008. The Grand Hotel Europe revenues grew by $3.2 million, or 53%, to $9.5million, driven by average rate improvements of 13% coupled with an increase inoccupancy of 32% compared with the prior year. Revenue at Reids Palace Hotel, Madeira, grew by $1.4 million, or 27%, to$6.5 million, due to an increase in room rates. Revenue at La Residencia, Mallorca, increased by $0.6 million.  Revenue at La Manoir aux Quat’ Saisons grewby $0.4 million, or 9%, to $4.9 million. Revenue improvement at the remaining European hotels was due to acombination of average rate and occupancy improvements.

 

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The continued strengthening of the Euro wasresponsible for 40% of the revenue growth. Had exchange rates in the three months ended March 31, 2008 beenthe same as in the prior year period, average rate and occupancy improvementswould have caused revenue to increase by $3.6 million, to $24.7 million in2008.  Exchange rate movements wereresponsible for the other $2.4 million of the revenue growth in the threemonths ended March 31, 2008.

 

On a same store basis, RevPAR in local currencyincreased by 16%, and in U.S. dollars this translated into an increase of 30%.

 

*North America*

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Average daily rate (in dollars)        |       | 470      |       | 398      |       |
| Rooms available (in thousands)         |       | 57       |       | 55       |       |
| Rooms sold (in thousands)              |       | 38       |       | 36       |       |
| Occupancy (percentage)                 |       | 67       |       | 65       |       |
| RevPAR (in dollars)                    |       | 314      |       | 280      |       |
| Same store RevPAR (in dollars)         |       | 319      |       | 285      |       |

 

Revenue increased by $3.5 million, or 15%, from $23.2million in the three months ended March 31, 2007 to $26.7 million in thethree months ended March 31, 2008. Revenues at La Samanna, St Martin and Maroma Resort and Spa, Mexico,increased by $1.0 million and $1.3 million, to $9.0 million and $6.2 million,respectively, due to average room rate improvements and additional occupancy atboth hotels.  Revenue at the Inn at PerryCabin, Maryland, increased by $0.4 million, or 33%, following the opening ofthe hotel’s Linden Spa in July 2007 together with additionaloccupancy.  Revenue at Casa de SierraNevada, Mexico, increased by $0.4 million, to $0.8 million.  Part of the hotel was closed forrenovation during the period ended March 31, 2007.

 

On a same store basis, RevPAR increased by 12% whichwas driven mostly by rate.  Averageoccupancy across all of the North American properties was 67% compared to 64%in the same period in 2007.

 

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*Rest of the World*

 
| **Three months ended  March 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Average daily rate (in dollars)        |       | 296      |       | 280      |       |
| Rooms available (in thousands)         |       | 123      |       | 104      |       |
| Rooms sold (in thousands)              |       | 82       |       | 71       |       |
| Occupancy (percentage)                 |       | 67       |       | 67       |       |
| RevPAR (in dollars)                    |       | 198      |       | 191      |       |
| Same store RevPAR (in dollars)         |       | 212      |       | 191      |       |

 

Revenue increased by $7.9 million, or 24%, from $32.9million in the three months ended March 31, 2007 to $40.8 million in thethree months ended March 31, 2008. Revenues at the Copacabana Palace, Brazil increased by $1.3 million, to$12.2 million primarily because of the effect of exchange rate movements.  Exchange rate movements across the regionwere responsible for $2.9 million of the revenue improvements and average rategrowth generated additional revenue of $1.7 million.  Revenues at Hotel das Cataratas, Brazil,which OEH started to operate on October 1, 2007, were $3.3 million.  OEH’s six Asian hotels collectively increasedrevenues by $1.2 million, or 28%, to $5.3 million, due to higher occupancy andaverage rate improvements.  SouthernAfrica revenues increased by $1.1 million, or 10%, of which $1.5 million wasdue to average rate increases and increased occupancy, was offset by a negativeexchange rate impact of $0.4 million. Revenues at OEH’s two Australian properties increased by $0.7 million,or 13%, to $6.2 million, primarily as a result of exchange rate.

 

The RevPAR on a same store basis for the Rest of theWorld region increased by 10% in local currencies in the three months ended March 31,2008 compared to the three months ended March 31, 2007.  This translates to an 11% increase whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests. *Revenue increased by $0.1million, or 5%, from $2.4 million in the three months ended March 31, 2007to $2.5 million in the three months ended March 31, 2008, primarily due toincreased revenues earned from the managed hotels in Peru, up by $0.1 million.

 

*Restaurants: *Revenuedecreased by $0.4 million, or 8%, from $5.3 million in the three months ended March 31,2007 to $4.9 million in the three months ended March 31, 2008.  Revenues at ‘21’ Club fell by $0.4 milliondue to a reduced volume of corporate customers, although the average check wasalmost in line with the prior year.

 

28

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*Trains and Cruises. *Revenue decreased by $0.7 million, or 7%,from $9.4 million in the three months ended March 31, 2007 to $8.7 millionin the three months ended March 31, 2008. Revenues for the Road toMandalay river cruiseship, in Myanmar, fell by $0.6 million, from $2.3 millionto $1.7 million, following the civil unrest in that country in 2007.  In the three months ended March 31,2007, management fees of $0.5 million were derived from the Afloat in Francejoint venture that was subsequently acquired by OEH later in 2007.  There is no equivalent management fee incomein the current year.  Venice Simplon-Orient-Expressrevenues increased by $0.8 million from $1.1 million in the three months ended March 31,2007 to $1.9 million in the three months ended March 31, 2008, as a resultof running two additional services in the current year.  Fewer day train services were operated in theUnited Kingdom in the three months ended March 31, 2008, resulting in arevenue decrease of $0.6 million compared with the same period in the prioryear.

 

*Real Estate: *Revenuein the three months ended March 31, 2008 was $4.1 million, including $3.7million in respect of the Cupecoy Yacht Club development and $0.4 million ofsales recorded at Keswick Hall.  Therewere no revenues in the same period in the previous year.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $1.5million, or 17%, from $8.8 million in the three months ended March 31,2007 to $10.3 million in the three months ended March 31, 2008, primarilydue to the effect of capital expenditures incurred during 2007, and the impactof exchange rate movements, particularly in respect of the operations of hotelsand trains and cruises outside North America where the functional currency iseither Euros or British pounds.

 

*Operating expenses*

 

Operating expenses increased by $11.6 million, or 24%,from $48.1 million in the three months ended March 31, 2007 to $59.7million in the three months ended March 31, 2008.  As a percentage of revenue, operatingexpenses increased from 51% of revenue for the three months ended March 31,2007 to 52% of revenue for the three months ended march 31, 2008.  Exchange rate movements (in particular theyear on year devaluation of the U.S. dollar against the Euro of approximately14%) and local wage inflation caused operating costs across Europe to risecompared to the prior year when translated into U.S. dollars.

 

29

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*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $9.4 million, or 27%, from $34.4 million in the three months ended March 31,2007 to $43.8 million in the three months ended March 31, 2008.  The selling, general and administrativeexpenses incurred in the three months ended March 31, 2008 included costsof $2.2 million incurred at the Hotel das Cataratas, Brazil, which OEH began tooperate in October 2007.  Excludingthese costs, as a percentage of revenue, selling, general and administrativeexpenses remained at 36% in the current period compared to the three monthsended March 31, 2007.  As notedabove, the movement of the Euro in particular, but also the British pound andthe Brazilian real exchange rates had a significant impact on the selling,general and administrative costs incurred during the quarter.

 

*Segment EBITDA margins*

 
| **Three months ended  March 31,**     | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Segment EBITDA:                            |       |                       |       |     |       |
| Owned hotels                               |       |                       |       |     |       |
| Hotels and restaurants                     |       |                       |       |     |       |
| Owned  hotels                              |       |                       |       |     |       |
| Europe                                     |       | $                          | (3,744     | )        | $          | (3,555 | ) |
| North  America                             |       | 7,300                      |       | 6,120    |       |
| Rest  of the world                         |       | 12,747                     |       | 12,084   |       |
| Hotel  management/part ownership interests |       | 5,218                      |       | 4,647    |       |
| Restaurants                                |       | 649                        |       | 868      |       |
|                                       |       | 22,170                     |       | 20,164   |       |
| Tourist trains and cruises                 |       | 1,543                      |       | 1,148    |       |
| Real estate                                |       | (497                       | )          | (458     | )          |
| Central overheads                          |       | (6,799                     | )          | (5,681   | )          |
|                                       |       | $                          | 16,417     |     | $          | 15,173 |   |

 

Although segment EBITDA for the quarter increased by8% from $15.2 million in 2007 to $16.4 million in 2008, segment EBITDA margins(calculated as segment EBITDA as a percentage of revenue) decreased by 2% from16% for the three months ended March 31, 2007, to 14% for the three monthsended March 31, 2008.

 

The European hotels collectively reported a segmentEBITDA loss of $3.7 million in 2008 compared to a loss of $3.6 million in thesame period in 2007.  As a percentage ofrevenue, the European segment EBITDA margin improved from negative 17% in 2007to negative 14% in 2008.  As noted above,revenues grew in the region as a result of average room rate and occupancy improvements,particularly at Grand Hotel Europe, St Petersburg, at a faster rate thanexpenses.

 

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Segment EBITDA in the North American region increasedby 19% from $6.1 million in the three months ended March 31, 2007, to $7.3million in the three months ended March 31, 2008.  Segment EBITDA margins for the regionimproved by 1% to 27%.

 

Segment EBITDA in the Rest of the World regionincreased by 5% from $12.1 million in the three months ended March 31,2007 to $12.7 million in the three months ended March 31, 2008.  The segment EBITDA margin for the threemonths ended March 31, 2008 was 31%, compared to a margin of 37% for thesame period in 2007.  The 2008 segmentEBITDA margin includes the results of Hotel das Cataratas, Brazil, which OEHhas operated since October 2007. Excluding the results of this hotel, the EBITDA margin for the Rest ofthe World region declined by 3% in 2008.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $2.0 millionfrom a profit of $2.9 million in the three months ended March 31, 2007 toa profit of $0.9 million in the three months ended March 31, 2008, due tothe factors described above.

 

*Net finance costs*

 

Net finance costs increased by $0.5 million, or 5%,from $10.4 million for the three months ended March 31, 2007 to $10.9million for the three months ended March 31, 2008.  The three months ended March 31, 2007included a foreign exchange gain of $0.1 million compared to a foreign exchangegain of $2.0 million in the three months ended March 31, 2008.  The foreign exchange gain in the currentperiod came mainly from U.S. dollar debt at the Grand Hotel Europe, due to thestrengthening of the ruble, compared to the U.S. dollar in the quarter.  Excluding the foreign exchange items, netfinance costs increased by $2.4 million, or 23%, from $10.5 million for thethree months ended March 31, 2007 to $12.9 million for the three monthsended March 31, 2008, due to the impact of financing new investments aswell as the currency impact of non-U.S. dollar borrowings.

 

*Benefit from income taxes*

 

The benefit from income taxes increased by $0.9 million, from a benefitof $2.7 million in the three months ended March 31, 2007 to a benefit of$3.6 million in the three months ended March 31, 2008.  As a percentage of losses before income taxesand earnings from unconsolidated companies, the tax rate remained constant at36%.

 

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The benefit from income taxes of $3.6 million for the three monthsended March 31, 2008 included a tax provision of $0.3 million in respectof the FIN 48 liability, compared to a provision of $0.2 million in respect ofthe FIN 48 liability in the three months ended March 31, 2007.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxincreased by $1.8 million, or 77%, from $2.3 million in the three months ended March 31,2007 to $4.1 million in the three months ended March 31, 2008.  This was mainly due to increased earningsfrom OEH’s investments in Peru and Charleston. The tax cost associated with earnings from unconsolidated companies was$1.2 million in both years.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of theloss from Bora Bora Lagoon Resort which is being held for sale.  The hotel results continued to be belowexpectations with net loss increasing from $1.2 million for the three monthsended March 31, 2007 to $2.0 million for the three months ended March 31,2008.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $95.9 million at March 31,2008, $5.3 million more than the $90.6 million at December 31, 2007.  At March 31, 2008, there were undrawnamounts available to OEH under committed short-term lines of credit of $14.2million and undrawn amounts available to OEH under secured revolving creditfacilities of $20.7 million, bringing total cash availability at March 31,2008 to $130.8 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of$0.8 million at March 31, 2008, a decrease of $36.1 million from a balanceof $35.3 million working capital surplus at December 31, 2007.  The main factor that contributed to thedecrease in working capital was the increase in the current portion oflong-term debt which was due to the additional drawdown of €26 million ($39million) under a revolving credit facility.

 

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*Cash Flow*

 

*Operating Activities*.  Net cash used in operating activitiesdecreased by $2.5 million from $2.6 million for the three months ended March 31,2007 to $0.1 million for the three months ended March 31, 2008.  This was mainly due to the $3.8 milliondividends received from unconsolidated companies in Peru.

 

*Investing Activities*.  Cash used in investing activities decreasedby $5.3 million to $25.9 million for the three months ended March 31,2008, compared to $31.2 million for the three months ended March 31, 2007.

 

This was mainly due to lower capital expenditure (decreaseof $5.9 million).  Capital expenditure of$20.8 million included $4.6 million of Hotel Cipriani refurbishment, $2.7million of El Encanto construction costs, $1.4 million of Le Manoir aux Quat’Saisonsrefurbishments, $1.4 million on construction of assets at Cupecoy Yacht Club inSt. Martin, and $1.1 million of Copacabana Palace Hotel capital costs.

 

Current quarter acquisitions of $2.1 million includedthe acquisition of the 20% minority interest in Casa de Sierra Nevada, and theLa Samanna spa acquisition.  The 2007first quarter acquisitions included the final payment for the Grand HotelEurope and La Residence d’Angkor minority interest acquisition.

 

The $2.6 million increase in restricted cashrepresented the net movement in the escrow account used in the Cupecoy YachtClub property development.

 

*Financing Activities*.  Cash provided by financing activities for thethree months ended March 31, 2008 was $32.4 million compared to $13.9million for the three months ended March 31, 2007, an increase of $18.5million.  The main factor thatcontributed to this increase was the drawdown under a Euro revolving creditfacility in the first quarter of 2008.

 

*Capital Commitments*.  There were $99.5 million of capitalcommitments outstanding as of March 31, 2008 relating mainly toinvestments in owned hotels and the purchase of land and a building adjoining ‘21’Club, New York.

 

*Indebtedness*

 

At March 31, 2008, OEH had $848.3 million oflong-term debt secured by assets, including the current portion, which isrepayable over periods of 1 to 11 years with a weighted average maturity of 3.7years and a weighted average interest rate of 5.82%**.**  See Note 8 to the financial statementsregarding the maturity of long-term debt.

 

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Approximately 55% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars.  At March 31, 2008, 81% of borrowings ofOEH were in floating interest rates.

 

*Liquidity*

 

OEH expects to have available cash from operations andappropriate debt finance sufficient to fund its working capital requirements,capital expenditures, acquisitions and debt service for the foreseeable future.

 

**Recent Accounting Pronouncements**

 

As of March 31,2008, the Company’s adoption of recent accounting pronouncements, which aredescribed in Note 1 to the financial statements in the Company’s 2007 Form 10-Kannual report, has not changed from December 31, 2007, except for adoptionof SFAS No. 157 as described in Note 1 (a) to the financial statements in thisreport and except as follows:

 

 

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*SFAS 161*

 

In March 2008, the FASB issued SFAS No. 161 “Disclosuresabout Derivative Instruments and Hedging Activities — An Amendment of FASBStatement No. 133”.  This statementchanges the disclosure requirements for derivative instruments and hedgingactivities.  Entities are required toprovide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  SFAS No. 161 is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is in the process of evaluating the effects of the adoption of SFAS No. 161.

 

## **Critical Accounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2007 Form 10-Kannual report.

 

**ITEM3.****                                                    ****Quantitativeand Qualitative Disclosures about Market Risk**

 

OEH is exposed to market risk from changes in interestrates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flows.  OEH does not hold marketrate sensitive financial instruments for trading purposes.

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$4,300,000 on an annual basis based on borrowings at March 31, 2008. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

 

The market risk relating to foreign currencies and itseffects have not changed materially during the first three months of 2008 fromthose described in the Company’s 2007 Form 10-K annual report.

 

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**ITEM 4.****                                                    ****Controlsand Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of March 31, 2008 and, based on that evaluation,believes those disclosure controls and procedures are effective as of thatdate.  There have been no changes in theCompany’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the first quarter of 2008 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and notabsolute, assurancethat the objectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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**PART II - OTHER INFORMATION**

** **

# **ITEM 6.**                                                     Exhibits

# ** **

The index toexhibits appears below, on the page immediately following the signature page tothis report.

 

**SIGNATURES**

 

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

 
|   | ORIENT-EXPRESS HOTELS LTD. |
|--------|----------------------------|
|   |                       |   |
|   | By:                        | /s/ Martin O’Grady |
|   |                       | Martin O’Grady |
|   |                       | Vice President - Finance |
|   |                       | and Chief Financial Officer |
|   |                       | (Principal Accounting Officer) |
|        |                            |  |  |

 

Dated: May 12, 2008

 

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# **EXHIBIT INDEX**

# ** **

3.1                 –                 Memorandum of Association andCertificate of Incorporation of the Company, filed as Exhibit 3.1 to theCompany’s Form 8-K Current Report on July 9, 2007 and incorporatedherein by reference.

 

3.2                 –                 Bye-Laws of the Company, filedas Exhibit 3 to the Company’s Form 8-K Current Report on June 20,2007 and incorporated herein by reference.

 

3.3                 –                 Rights Agreement dated as of June 1,2000, and amended and restated as of April 12, 2007, between the Companyand Computershare Trust Company, N.A., as rights agent, filed as Exhibit 1to Amendment No. 1 to the Company’s Registration Statement on Form 8-Adated April 23, 2007, for the Company’s preferred share purchase rights,and incorporated herein by reference.

 

3.4                 –                 Amendment No. 1 dated December 10,2007 to amended and restated Rights Agreement (Exhibit 3.3), filed as Exhibit 4.2to the Company’s Form 8-K Current Report on December 10, 2007 andincorporated herein by reference

 

31                    –                 Rule 13a-14(a)/15d-14(a) Certifications.

 

32                    –                 Section 1350Certification.

 

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