** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

----

** **

**FORM 10-Q**

 

**(MarkOne)**

 
| **x**                                                                                                                                                                                                                                                                                              | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                         | ** ** | ** **                                                                                    |
| **For the  quarterly period ended September 30, 2007 or**                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                               |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                              | ** ** | **Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
| ** **                                                                                                                                                                                                                                                                                         | ** ** | ** **                                                                                    |
| **For the  transition period  from                     to                     ** |

 

**Commission filenumber 1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name ofregistrant as specified in its charter)

 

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

 

| **22 Victoria Street**                                    |
|-----------------------------------------------------------|
| **P.O. Box HM 1179**                                      |
| **Hamilton HMEX, Bermuda**                                |
| (Address of principal executive offices) (Zip  Code) |
|                                                      |
| **441-295-2244**                                          |
| (Registrant’s telephone number, including area code) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No o

 

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

 

Large Accelerated Filer x   Accelerated Filer o   Non-Accelerated Filer 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 October 31, 2007, 42,456,000 Class A common shares and 18,044,478Class B common shares of Orient-Express Hotels Ltd. were outstanding. All of theClass B shares are owned by a subsidiary of Orient-Express Hotels Ltd.

 

 

----

 

**PART I -FINANCIAL INFORMATION**

 

**ITEM 1.  FinancialStatements**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                               | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands )**  | ** ** |
|                                                                                     |       |                         |       |
| **Assets**                                                                               |       |                         |       |                        |       |
| Cash  and cash equivalents                                                               |       | $                            | 85,222     |                        | $          | 79,318 |   |
| Accounts  receivable, net of allowances of $1,329 and $1,299                             |       | 67,521                       |       | 63,455                      |       |
| Due  from related parties                                                                |       | 29,598                       |       | 19,939                      |       |
| Prepaid  expenses                                                                        |       | 22,163                       |       | 9,485                       |       |
| Inventories                                                                              |       | 45,595                       |       | 35,789                      |       |
| Real  estate assets                                                                      |       | 46,986                       |       | 35,821                      |       |
| Total  current assets                                                                    |       | 297,085                      |       | 243,807                     |       |
|                                                                                     |       |                         |       |                        |       |
| Property,  plant and equipment, net of accumulated depreciation of $241,339 and $211,136 |       | 1,295,589                    |       | 1,183,400                   |       |
| Investments                                                                              |       | 141,733                      |       | 130,124                     |       |
| Goodwill                                                                                 |       | 139,340                      |       | 121,651                     |       |
| Other  intangible assets                                                                 |       | 22,022                       |       | 20,149                      |       |
| Other  assets                                                                            |       | 47,829                       |       | 52,532                      |       |
|                                                                                     |       | $                            | 1,943,598  |                        | $          | 1,751,663 |   |
| **Liabilities and Shareholders’ Equity**                                            |       |                         |       |                        |       |
| Working  capital facilities                                                              |       | $                            | 58,358     |                        | $          | 46,590 |   |
| Accounts  payable                                                                        |       | 28,845                       |       | 26,227                      |       |
| Due  to related parties                                                                  |       | —                       |       | 1,249                       |       |
| Accrued  liabilities                                                                     |       | 65,582                       |       | 55,916                      |       |
| Deferred  revenue                                                                        |       | 38,623                       |       | 25,501                      |       |
| Current  portion of long-term debt and capital leases                                    |       | 164,088                      |       | 83,397                      |       |
| Total  current liabilities                                                               |       | 355,496                      |       | 238,880                     |       |
|                                                                                     |       |                         |       |                        |       |
| Long-term  debt and obligations under capital leases                                     |       | 572,323                      |       | 586,300                     |       |
| Liability  for pension benefit                                                           |       | 9,026                        |       | 8,677                       |       |
| Other  liabilities                                                                       |       | 2,330                        |       | 2,330                       |       |
| Deferred  income taxes                                                                   |       | 120,181                      |       | 106,598                     |       |
| Liability  for uncertain tax positions                                                   |       | 31,841                       |       | —                      |       |
|                                                                                     |       | 1,091,197                    |       | 942,785                     |       |
| Commitments  and contingencies                                                           |       |                         |       |                        |       |
| Minority  interest                                                                       |       | 1,551                        |       | 1,882                       |       |
|                                                                                     |       |                         |       |                        |       |
| 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  - 42,446,000 (2006 - 42,196,350)                                                 |       | 424                          |       | 422                         |       |
| Class  B common shares $0.01 par value (120,000,000 shares authorized):                  |       |                         |       |                        |       |
| Issued  - 18,044,478 (2006 - 18,044,478)                                                 |       | 181                          |       | 181                         |       |
| Additional  paid-in capital                                                              |       | 514,602                      |       | 509,762                     |       |
| Retained  earnings                                                                       |       | 308,363                      |       | 301,785                     |       |
| Accumulated  other comprehensive income/(loss)                                           |       | 27,461                       |       | (4,973                      | )          |
| Less:  reduction due to class B common shares owned by a subsidiary – 18,044,478    |       | (181                         | )          | (181                        | )          |
| Total  shareholders’ equity                                                         |       | 850,850                      |       | 806,996                     |       |
|                                                                                     |       | $                            | 1,943,598  |                        | $          | 1,751,663 |   |

 

See notes tocondensed consolidated financial statements.

 

2

----

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended September 30,**                 | ** ** | **2007**                                                                           | ** ** | **2006**       | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                               | ** ** | ** **                                                                         | ** ** | **(restated)** | ** ** |
|                                                                     |       | **(Dollars in thousands, except per share amounts)** |       |
|                                                                     |       | ** **                                                                         |       |
| Revenue                                                                  |       | $                                                                                  | 182,911    |           | $          | 144,764 |   |
|                                                                     |       |                                                                               |       |           |       |
| Expenses:                                                                |       |                                                                               |       |           |       |
| Depreciation  and amortization                                           |       | 10,254                                                                             |       | 8,960          |       |
| Operating                                                                |       | 88,064                                                                             |       | 62,657         |       |
| Selling,  general and administrative                                     |       | 44,787                                                                             |       | 38,367         |       |
| Total  expenses                                                          |       | 143,105                                                                            |       | 109,984        |       |
|                                                                     |       |                                                                               |       |           |       |
| Gain  on disposal of fixed assets                                        |       | 2,312                                                                              |       | —         |       |
| Earnings  from operations                                                |       | 42,118                                                                             |       | 34,780         |       |
|                                                                     |       |                                                                               |       |           |       |
| Interest  expense, net                                                   |       | (12,642                                                                            | )          | (12,117        | )     |
| Foreign  currency, net                                                   |       | (1,474                                                                             | )          | (2,752         | )     |
| Net  finance costs                                                       |       | (14,116                                                                            | )          | (14,869        | )     |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 28,002                                                                             |       | 19,911         |       |
|                                                                     |       |                                                                               |       |           |       |
| Provision  for income taxes                                              |       | (11,079                                                                            | )          | (3,406         | )     |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  before earnings from unconsolidated companies                  |       | 16,923                                                                             |       | 16,505         |       |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  from unconsolidated companies, net of tax                      |       | 5,630                                                                              |       | 3,925          |       |
|                                                                     |       |                                                                               |       |           |       |
| Net  earnings                                                            |       | $                                                                                  | 22,553     |           | $          | 20,430 |   |
|                                                                     |       |                                                                               |       |           |       |
| Net  earnings per share:                                                 |       |                                                                               |       |           |       |
| Basic                                                                    |       | $                                                                                  | 0.53       |           | $          | 0.49 |   |
| Diluted                                                                  |       | $                                                                                  | 0.53       |           | $          | 0.48 |   |
|                                                                     |       |                                                                               |       |           |       |
| Dividends  per share                                                     |       | $                                                                                  | 0.025      |           | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

 
| **Nine months ended September 30,**                  | ** ** | **2007**                                                                           | ** ** | **2006**       | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                               | ** ** | ** **                                                                         | ** ** | **(restated)** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                     |       |                                                                               |       |           |       |
| Revenue                                                                  |       | $                                                                                  | 441,191    |           | $          | 358,720 |   |
|                                                                     |       |                                                                               |       |           |       |
| Expenses:                                                                |       |                                                                               |       |           |       |
| Depreciation  and amortization                                           |       | 29,389                                                                             |       | 26,268         |       |
| Operating                                                                |       | 211,007                                                                            |       | 165,658        |       |
| Selling,  general and administrative                                     |       | 125,227                                                                            |       | 107,180        |       |
| Total  expenses                                                          |       | 365,623                                                                            |       | 299,106        |       |
|                                                                     |       |                                                                               |       |           |       |
| Gain  on disposal of fixed assets                                        |       | 2,312                                                                              |       | —         |       |
|                                                                     |       |                                                                               |       |           |       |
| Gain  on sale of investment                                              |       | —                                                                             |       | 6,619          |       |
| Earnings  from operations                                           |       | 77,880                                                                             |       | 59,614         |       |
|                                                                     |       |                                                                               |       |           |       |
| Interest  expense, net                                                   |       | (34,141                                                                            | )          | (32,462        | )     |
| Foreign  currency, net                                                   |       | (221                                                                               | )          | (5,548         | )     |
| Net  finance costs                                                       |       | (34,362                                                                            | )          | (38,010        | )     |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 43,518                                                                             |       | 28,223         |       |
|                                                                     |       |                                                                               |       |           |       |
| Provision  for income taxes                                              |       | (17,110                                                                            | )          | (4,190         | )     |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  before earnings from unconsolidated companies                  |       | 26,408                                                                             |       | 24,033         |       |
|                                                                     |       |                                                                               |       |           |       |
| Earnings  from unconsolidated companies, net of tax                      |       | 12,167                                                                             |       | 9,077          |       |
|                                                                     |       |                                                                               |       |           |       |
| Net  earnings                                                            |       | $                                                                                  | 38,575     |           | $          | 33,110 |   |
|                                                                     |       |                                                                               |       |           |       |
| Net  earnings per share:                                                 |       |                                                                               |       |           |       |
| Basic                                                                    |       | $                                                                                  | 0.91       |           | $          | 0.82 |   |
| Diluted                                                                  |       | $                                                                                  | 0.91       |           | $          | 0.82 |   |
|                                                                     |       |                                                                               |       |           |       |
| Dividends  per share                                                     |       | $                                                                                  | 0.075      |           | $          | 0.075 |   |

 

See notes tocondensed consolidated financial statements.

 

4

----

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

** **
| **Nine months ended September 30,**                            | ** ** | **2007**                             | ** ** | **2006 ** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                                                         | ** ** | ** **                           | ** ** | **(restated)** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                             |       |                                 |       |           |       |
| Net  earnings                                                                      |       | $                                    | 38,575     |           | $          | 33,110 |   |
| Adjustments  to reconcile net earnings to net cash used in operating activities:   |       |                                 |       |           |       |
| Depreciation  and amortization                                                     |       | 29,389                               |       | 26,268         |       |
| Amortization  and write-off of finance costs                                       |       | 2,346                                |       | 3,839          |       |
| Undistributed  earnings of affiliates                                              |       | (6,679                               | )          | (5,366         | )          |
| Stock-based  compensation                                                          |       | 884                                  |       | 660            |       |
| Change  in deferred tax                                                            |       | 8,676                                |       | (2,812         | )          |
| Gains  from disposals of fixed assets and investments                              |       | (2,856                               | )          | (6,619         | )          |
| Other  non-cash items                                                              |       | (136                                 | )          | 7,123          |       |
| Change  in assets and liabilities net of effects from acquisition of subsidiaries: |       |                                 |       |           |       |
| Increase  in receivables, prepaid expenses and other                               |       | (24,966                              | )          | (8,618         | )          |
| Increase  in inventories                                                           |       | (5,620                               | )          | (2,617         | )          |
| Increase  in real estate assets held for sale                                      |       | (9,749                               | )          | (4,217         | )          |
| Increase  in payables, accrued liabilities and deferred revenue                    |       | 22,606                               |       | 18,708         |       |
| Dividends  received from unconsolidated companies                                  |       | 1,763                                |       | —         |       |
|                                                                               |       |                                 |       |           |       |
| Total  adjustments                                                                 |       | 15,658                               |       | 26,349         |       |
|                                                                               |       |                                 |       |           |       |
| Net  cash provided by operating activities                                         |       | 54,233                               |       | 59,459         |       |
|                                                                               |       |                                 |       |           |       |
| Cash  flows from investing activities:                                             |       |                                 |       |           |       |
| Capital  expenditures                                                              |       | (77,881                              | )          | (83,489        | )          |
| Acquisitions  and investments, net of cash acquired                                |       | (18,747                              | )          | (42,908        | )          |
| Proceeds  from sale of fixed assets                                                |       | 3,683                                |       | 9,499          |       |
| Net  cash provided by investing activities                                         |       | (92,945                              | )          | (116,898       | )          |
|                                                                               |       |                                 |       |           |       |
| Cash  flows from financing activities:                                             |       |                                 |       |           |       |
| Net  proceeds from working capital facilities and redrawable loans                 |       | 47,681                               |       | (19,824        | )          |
| Issuance  of common shares                                                         |       | —                               |       | 99,350         |       |
| Stock  options exercised                                                           |       | 3,958                                |       | 3,722          |       |
| Issuance  of long-term debt                                                        |       | 27,537                               |       | 360,159        |       |
| Principal  payments under long-term debt                                           |       | (33,312                              | )          | (316,106       | )          |
| Payment  of common share dividends                                                 |       | (3,177                               | )          | (3,022         | )          |
|                                                                               |       |                                 |       |           |       |
| Net  cash provided by financing activities                                         |       | 42,687                               |       | 124,279        |       |
|                                                                               |       |                                 |       |           |       |
| Effect  of exchange rate changes on cash and cash equivalents                      |       | 1,929                                |       | 455            |       |
|                                                                               |       |                                 |       |           |       |
| Net  increase in cash and cash equivalents                                         |       | 5,904                                |       | 67,295         |       |
|                                                                               |       |                                 |       |           |       |
| Cash  and cash equivalents at beginning of period                                  |       | 79,318                               |       | 38,397         |       |
|                                                                               |       |                                 |       |           |       |
| Cash  and cash equivalents at end of period                                        |       | $                                    | 85,222     |           | $          | 105,692 |   |

 

See notes tocondensed consolidated financial statements.

 

5

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

** **

**Statementsof Condensed Consolidated 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** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
|                                                                                |       |                                 |       |                                        |       |                                        |       |                             |       | **(Restated)**         |       |                                                 |       |                                     |       | **(Restated)**                   |       |
| Balance,  January 1, 2006                                                           |       | $                                    | —     |                                        | $          | 393                                         |       | $                                | 181        |                   | $          | 404,923                                              |       | $                                        | 266,093    |                             | $          | (20,913 | ) | $ | (181 | ) |   |   |
| Stock-based  compensation                                                           |       | —                               |       | —                                      |       | —                                      |       | 660                              |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Stock  options exercised                                                            |       | —                               |       | —                                      |       | —                                      |       | 3,722                            |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Dividends  on common shares                                                         |       | —                               |       | —                                      |       | —                                      |       | —                           |       | (3,022                 | )          | —                                               |       | —                                   |       |                             |       |
| Issuance  of Class A common shares in public offering, net of issuance costs   |       | —                               |       | 25                                          |       | —                                      |       | 99,325                           |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Comprehensive  income:                                                              |       |                                 |       |                                        |       |                                        |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Net  earnings                                                                       |       | —                               |       | —                                      |       | —                                      |       | —                           |       | 33,110                 |       | —                                               |       | —                                   |       | $                                | 33,110     |   |
| Other  comprehensive income                                                         |       | —                               |       | —                                      |       | —                                      |       | —                           |       | —                 |       | 14,731                                               |       | —                                   |       | 14,731                           |       |
|                                                                                |       |                                 |       |                                        |       |                                        |       |                             |       |                   |       |                                                 |       |                                     |       | $                                | 47,841     |   |
| Balance,  September 30, 2006                                                        |       | $                                    | —     |                                        | $          | 418                                         |       | $                                | 181        |                   | $          | 508,630                                              |       | $                                        | 296,181    |                             | $          | (6,182 | ) | $ | (181 | ) |   |   |
|                                                                                |       |                                 |       |                                        |       |                                        |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Balance,  January 1, 2007                                                           |       | $                                    | —     |                                        | $          | 422                                         |       | $                                | 181        |                   | $          | 509,762                                              |       | $                                        | 301,785    |                             | $          | (4,973 | ) | $ | (181 | ) |   |   |
| FIN48  liabilities                                                                  |       | —                               |       | —                                      |       | —                                      |       | —                           |       | (28,820                | )          | —                                               |       | —                                   |       |                             |       |
| Stock-based  compensation                                                           |       | —                               |       | —                                      |       | —                                      |       | 884                              |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Stock  options exercised                                                            |       | —                               |       | 2                                           |       | —                                      |       | 3,956                            |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Dividends  on common shares                                                         |       | —                               |       | —                                      |       | —                                      |       | —                           |       | (3,177                 | )          | —                                               |       | —                                   |       |                             |       |
| Comprehensive  income:                                                              |       |                                 |       |                                        |       |                                        |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Net  earnings                                                                       |       | —                               |       | —                                      |       | —                                      |       | —                           |       | 38,575                 |       | —                                               |       | —                                   |       | $                                | 38,575     |   |
| Other  comprehensive income                                                         |       | —                               |       | —                                      |       | —                                      |       | —                           |       | —                 |       | 32,434                                               |       | —                                   |       | _32,434                          |       |
|                                                                                |       |                                 |       |                                        |       |                                        |       |                             |       |                   |       |                                                 |       |                                     |       | $                                | 71,009     |   |
| Balance,  September 30, 2007                                                        |       | $                                    | —     |                                        | $          | 424                                         |       | $                                | 181        |                   | $          | 514,602                                              |       | $                                        | 308,363    |                             | $          | 27,461 |   | $ | (181 | ) |   |   |

 

See notes tocondensed consolidated financial statements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

**1.             Basis of financial statementpresentation**

 

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 Form10-Q. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements. In the opinion of the management of the Company, alladjustments (consisting of normal recurring adjustments) necessary for a fairpresentation of financial position, operating results and cash flows have beenincluded in the statements. Interim results are not necessarily indicative ofresults that may be expected for the year ended December 31, 2007. Thesefinancial statements should be read in conjunction with the consolidatedfinancial statements and footnotes thereto included in the Company’s periodicfilings, including the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006. See Note 1 to the consolidated financial statements in the2006 Form 10-K for additional information regarding significant accountingpolicies.

 

The accountingpolicies used in preparing these financial statements are consistent with thoseapplied in the Company’s 2006 Form 10-K, except that the Company adoptedFinancial Accounting Standards Board (FASB) Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”, as of January 1, 2007, which is discussed inNote 9, changed the functional currency of the Grand Hotel Europe from U.S. dollars to Russian rubles, as discussed inNote 1(h), and started recognizing revenue for condominiums under development,as discussed in Note 1(b).

 

*(b)  Revenue recognition for condominiums underdevelopment**using thepercentage-of-completion method*

 

Revenuesrelated to the sale of condominiums are recognized in accordance with SFAS No.66, “Accounting for Sales of Real Estate”, when a minimum of 10% of thepurchase price of a condominium has been received in cash, the buyer hasdemonstrated sufficient level of continuing investment, the period ofcancellation with refund has expired, receivables are 

 

7

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deemedcollectible, and certain minimum sales and construction levels have beenattained. Revenues related to projects still under construction are recognizedunder the percentage-of- completion method. For sales that do not meet thesecriteria, revenue is deferred.

 

*(c)  Net earnings per share*

 

The number of shares used in computing basic anddiluted earnings per share was as follows (in thousands):

 
| **Three months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                    |       | 42,444     |       | 41,688     |       |
| Effect  of dilution                                      |       | 197        |       | 279        |       |
| Diluted                                                  |       | 42,641     |       | 41,967     |       |

 
| **Nine months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                   |       | 42,367     |       | 40,200     |       |
| Effect  of dilution                                     |       | 184        |       | 284        |       |
| Diluted                                                 |       | 42,551     |       | 40,484     |       |

 

For the threemonths ended September 30, 2007 and 2006, the anti-dilutive effect of stockoptions on 7,773 and 1,154 class A common shares, respectively, was excludedfrom the computation of diluted earnings per share. For the nine months endedSeptember 30, 2007 and 2006, the anti-dilutive effect of stock options on 3,491and 232 class A common shares, respectively, was excluded from the computationof diluted earnings per share.

 

*(d)  Dividends*

 

On January 5,2007, the Company declared a dividend of $0.025 per common share payableFebruary 5, 2007 to shareholders of record January 19, 2007.

 

On April 5,2007, the Company declared a dividend of $0.025 per common share payable May 4,2007 to shareholders of record April 20, 2007.

 

On July 5,2007, the Company declared a dividend of $0.025 per common share payable August6, 2007 to shareholders of record July 20, 2007.

 

8

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*(e)  Earnings from unconsolidated 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 $3,474,000 and $2,770,000 for the three monthsended September 30, 2007 and 2006, respectively, and $9,203,000 and $7,871,000for the nine months ended September 30, 2007 and 2006, respectively.

 

*(f)  Reclassification*

 

Certain itemsin 2006 have been reclassified to conform to the 2007 presentation.

 

*(g)  Restatement*

 

As reported inthe 2006 Form 10-K, subsequent to the issuance of the Company’s September 30,2006 financial statements on Form 10-Q, the Company’s management determinedthat certain deferred tax liabilities, arising principally on the fair valueadjustments made on the acquisition of subsidiaries between 1976 and 2002 aswell as on other temporary differences in respect of land and buildings, werenot recorded. As a result, the provision for income taxes for the nine monthsended September 30, 2006 was overstated by $628,000 (for three months endedSeptember 30, 2006 - $209,000), arising from the release of the deferred taxprovision as the properties are depreciated. The restatement adjustment did notimpact OEH’s statement of condensed consolidated cash flows, except forincreasing the net earnings and decreasing the change in deferred tax by$628,000.

 

The followingtables present the impact of the restatement adjustment on OEH’s statement ofcondensed consolidated operations for the three and nine months ended September30, 2006 (dollars in thousands, except per share amounts):

 

9

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| **Three months ended September 30,  2006**           | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                               | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **   | ** ** |
| Revenue                                                                  |       | $                            | 144,764    |            | $          | —       |       | $ | 144,764 |   |
|                                                                     |       |                         |       |            |       |         |       |
| Expenses                                                                 |       |                         |       |            |       |         |       |
| Depreciation  and amortization                                           |       | 8,960                        |       | —          |       | 8,960        |       |
| Operating                                                                |       | 62,657                       |       | —          |       | 62,657       |       |
| Selling,  general and administrative                                     |       | 38,367                       |       | —          |       | 38,367       |       |
| Total  expenses                                                          |       | 109,984                      |       | —          |       | 109,984      |       |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings  from operations                                                |       | 34,780                       |       | —          |       | 34,780       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Interest  expense, net                                                   |       | (12,117                      | )          | —          |       | (12,117      | )          |
| Foreign  currency, net                                                   |       | (2,752                       | )          | —          |       | (2,752       | )          |
| Net  finance costs                                                       |       | (14,869                      | )          | —          |       | (14,869      | )          |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 19,911                       |       | —          |       | 19,911       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Provision  for income taxes                                              |       | (3,615                       | )          | 209             |       | (3,406       | )          |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings  before earnings from unconsolidated companies                  |       | 16,296                       |       | 209             |       | 16,505       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings  from unconsolidated companies, net of tax                      |       | 3,925                        |       | —          |       | 3,925        |       |
|                                                                     |       |                         |       |            |       |         |       |
| Net  earnings                                                            |       | $                            | 20,221     |            | $          | 209          |       | $ | 20,430 |   |
|                                                                     |       |                         |       |            |       |         |       |
| Net  earnings per share:                                                 |       |                         |       |            |       |         |       |
| Basic                                                                    |       | $                            | 0.49       |            | $          | —       |       | $ | 0.49 |   |
| Diluted                                                                  |       | $                            | 0.48       |            | $          | 0.01         |       | $ | 0.49 |   |

 

10

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| **Nine months ended September 30,   2006**      | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                               | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **   | ** ** |
| Revenue                                                                  |       | $                            | 358,720    |            | $          | —       |       | $ | 358,720 |   |
|                                                                     |       |                         |       |            |       |         |       |
| Expenses                                                                 |       |                         |       |            |       |         |       |
| Depreciation and amortization                                            |       | 26,268                       |       | ––    |       | 26,268       |       |
| Operating                                                                |       | 165,658                      |       | ––    |       | 165,658      |       |
| Selling, general and administrative                                      |       | 107,180                      |       | —          |       | 107,180      |       |
| Total expenses                                                           |       | 299,106                      |       | —          |       | 299,106      |       |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings from operations                                                 |       | 59,614                       |       | ––    |       | 59,614       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Gain on sale of investment                                               |       | 6,619                        |       | ––    |       | 6,619        |       |
|                                                                     |       |                         |       |            |       |         |       |
| Interest expense, net                                                    |       | (32,462                      | )          | ––    |       | (32,462      | )          |
| Foreign currency, net                                                    |       | (5,548                       | )          | —          |       | (5,548       | )          |
| Net finance costs                                                        |       | (38,010                      | )          | —          |       | (38,010      | )          |
| Earnings before income taxes and earnings from unconsolidated  companies |       | 28,223                       |       |            |       | 28,223       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Provision for income taxes                                               |       | (4,818                       | )          | 628             |       | (4,190       | )          |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings before earnings from unconsolidated companies                   |       | 23,405                       |       | 628             |       | 24,033       |       |
|                                                                     |       |                         |       |            |       |         |       |
| Earnings from unconsolidated companies, net of tax                       |       | 9,077                        |       | —          |       | 9,077        |       |
|                                                                     |       |                         |       |            |       |         |       |
| Net earnings                                                             |       | $                            | 32,482     |            | $          | 628          |       | $ | 33,110 |   |
|                                                                     |       |                         |       |            |       |         |       |
| Net earnings per share:                                                  |       |                         |       |            |       |         |       |
| Basic                                                                    |       | $                            | 0.81       |            | $          | 0.01         |       | $ | 0.82 |   |
| Diluted                                                                  |       | $                            | 0.80       |            | $          | 0.02         |       | $ | 0.82 |   |

 

*(h)  Change of the functionalcurrency of the Grand Hotel Europe*

 

Dueto the changes in the currency in which Grand Hotel Europe primarily expendsand generates cash, OEH management has reconsidered the functional currencyindicators described in SFAS No. 52, “Foreign Currency Translation” and hasdecided to change the functional currency of the hotel from U.S. dollars toRussian rubles. The change was recorded with effect from January 1, 2007 andhas resulted in revaluation of goodwill (increase of $3,558,000), fixed assets(increase of $11,429,000), and foreign exchange loss/gain recorded in theprofit and loss account ($1,560,000 increase in net earnings for the ninemonths ended September 30, 2007) with the corresponding

 

11

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revaluationgain being recorded within other comprehensive income accounts as at September30, 2007.

 

**2.         Acquisitions**

 

*Afloat inFrance acquisition*

 

OnApril 12, 2007, OEH exercised its option to acquire the remaining 50% it didnot own in the company operating the Afloat in France canal and river cruisebusiness, for a cash consideration of $2,700,000, bringing OEH’s investment to100% ownership.

 

Thefollowing table summarizes the estimated fair values of the 50% share of theassets acquired and liabilities assumed at the date of acquisition (dollars inthousands):

 
| ** **                           | ** ** | **April 12, 2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
|                                 |       |                         |       |
| Goodwill and other intangible assets |       | $                            | 3,946      |   |
| Total assets acquired                |       | 3,946                        |       |
|                                 |       |                         |       |
| Current liabilities                  |       | (1,246                       | )          |
| Total liabilities assumed            |       | (1,246                       | )          |
| Net assets acquired                  |       | $                            | 2,700      |   |
|                                 |       |                         |       |
| Cash consideration                   |       | $                            | 2,700      |   |

 

OEH’scombined investments in the Afloat in France business result in total goodwillas follows (dollars in thousands):

 
| ** **                                                       | ** ** | **April 12, 2007** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|
|                                                             |       |                         |       |
| Purchase price paid for the initial 50%, less accumulated losses |       | $                            | 96         |   |
| Purchase price of the second 50% interest                        |       | 2,700                        |       |
|                                                             |       | 2,796                        |       |
| Add:                                                             |       |                         |       |
| Fair value of liabilities assumed                                |       | 2,491                        |       |
| Less:                                                            |       |                         |       |
| Fair value of assets acquired                                    |       | —                       |       |
| Total goodwill                                                   |       | $                            | 5,287      |   |

 

Thecanalboats operated by the acquired company had been purchased by OEH in 2004and leased to the operating company. Goodwill and other intangible assets of$5,287,000 has been recorded, of which $nil will be deductible as operatingexpenses for tax purposes. This acquisition enabled OEH to take full control ofthe Afloat in France operation and to

 

12

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receive100% of operating revenues that the business is expected to generate in futureyears, which contributed to the purchase price and resulted in goodwill.

 

Theacquisition of Afloat in France has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”. The results of theoperation have been included in the consolidated financial statements of OEHfrom April 12, 2007.

 

Theproforma results of operations data presented below assume that the Afloat inFrance acquisition had been made at the beginning of 2006. The proforma dataare presented for informational purposes only and are not necessarilyindicative of the results of future operations, nor of the actual results thatwould have been achieved had the acquisition taken place at the beginning of2006 (dollars in thousands, except per share amounts):

 
| **Nine months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | $          | 442,391    |       | $          | 360,972 |   |
| Net earnings                                            |       | $          | 38,551     |       | $          | 33,040 |   |
| Earnings per share:                                     |       |       |       |       |       |
| Basic                                                   |       | $          | 0.91       |       | $          | 0.82 |   |
| Diluted                                                 |       | $          | 0.91       |       | $          | 0.82 |   |

 

*RoyalScotsman acquisition*

 

OnApril 25, 2007, OEH exercised its option to acquire the remaining 50% it didnot own in the company owning and operating the Royal Scotsman tourist train,for a cash consideration of £1,375,000 (equivalent of $2,750,000), bringing OEH’sinvestment to 100% ownership.

 

Thefollowing table summarizes the estimated fair values of the 50% share of theassets acquired and liabilities assumed at the date of acquisition (dollars inthousands):

 

13

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| ** **                           | ** ** | **April 25, 2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
|                                 |       |                         |       |
| Goodwill and other intangible assets |       | $                            | 1,770      |   |
| Property, plant and equipment        |       | 3,311                        |       |
| Current assets                       |       | 47                           |       |
| Total assets acquired                |       | 5,128                        |       |
|                                 |       |                         |       |
| Current liabilities                  |       | (746                         | )          |
| Deferred tax liabilities             |       | (610                         | )          |
| Long-term debt                       |       | (1,022                       | )          |
| Total liabilities assumed            |       | (2,378                       | )          |
| Net assets acquired                  |       | $                            | 2,750      |   |
|                                 |       |                         |       |
| Cash consideration                   |       | $                            | 2,750      |   |

 

OEH’scombined investments in the Royal Scotsman business result in total goodwill asfollows (dollars in thousands):

 
| ** **                                                        | ** ** | **April 25, 2007** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
|                                                              |       |                         |       |
| Purchase price paid for the initial 50%, plus accumulated profits |       | $                            | 1,450      |   |
| Purchase price of the second 50% interest                         |       | 2,750                        |       |
|                                                              |       | 4,200                        |       |
| Add:                                                              |       |                         |       |
| Fair value of liabilities assumed                                 |       | 4,756                        |       |
| Less:                                                             |       |                         |       |
| Fair value of assets acquired                                     |       | (6,716                       | )          |
| Total goodwill                                                    |       | $                            | 2,240      |   |

 

Property,plant and equipment of the Royal Scotsman have been fair valued based on theestimated replacement cost of the train. Goodwill of $2,240,000 has beenrecorded of which $nil will be deductible as operating expenses for taxpurposes. This acquisition enabled OEH to take full control of the RoyalScotsman operation and receive 100% of operating revenues that the business isexpected to generate in future years, which contributed to the purchase priceand resulted in goodwill.

 

Theacquisition of the Royal Scotsman has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”. The results of theoperation have been included in the consolidated financial statements of OEHfrom April 25, 2007.

 

 

 

14

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Theproforma results of operations data presented below assume that the RoyalScotsman acquisition had been made at the beginning of 2006. The proforma dataare presented for informational purposes only and are not necessarilyindicative of the results of future operations, nor of the actual results thatwould have been achieved had the acquisition taken place at the beginning of2006 (dollars in thousands, except per share amounts):

 

 
| **Nine months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | $          | 443,153    |       | $          | 363,694 |   |
| Net earnings                                            |       | $          | 38,467     |       | $          | 33,727 |   |
| Earnings per share:                                     |       |       |       |       |       |
| Basic                                                   |       | $          | 0.91       |       | $          | 0.84 |   |
| Diluted                                                 |       | $          | 0.91       |       | $          | 0.84 |   |

 

*LaRésidence Phou Vao minority interests acquisition*

 

EffectiveMarch 10, 2007, OEH purchased an additional 18% interest in La Résidence PhouVao**in Luang Prabang, Laos for a cashconsideration of $376,000 bringing its interest to 69%. A deferred taxliability of $83,000 has been recorded on the acquisition arising mainly on thefair value adjustment to assets of $236,000. Goodwill has been reduced by$52,000 due to elimination of minority interest losses brought forward recordedin the goodwill arising on the original acquisition of the Pansea hotels groupin Asia.

 

*Finalretention payment relating to Grand Hotel Europe acquisition*

 

InMarch 2007, a final retention payment of $2,850,000 plus accrued interest of$218,000 has been made in accordance with the original agreement for theacquisition of Grand Hotel Europe in St. Petersburg completed in February 2005.

 

**3.         Investments**

 

*Buzios investment*

 

On June 7, 2007, OEH acquired50% of a company holding real estate in Buzios, Brazil, for a cashconsideration of $5,000,000. OEH intends to build a hotel and villas on theacquired land. The remaining 50% of the property holding company is expected tobe sold to OEH for a cash consideration of $5,000,000 when the building permitsare obtained from the local authorities. In accordance with the sale andpurchase agreement with the owners of the other 50%, if permits are notreceived, the owners have an option to repurchase OEH’s 50%

 

15

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share for the amount ofinvestment made to date, or if the owners do not exercise this option, OEH hasan option to sell 100% of the company to a third party at the market price inorder to realize its investment.

 

*Unconsolidated companies*

 

Summarized financial data forOEH’s unconsolidated companies for the periods during which the investmentswere held by OEH are as follows (dollars in thousands):

 
| ** **                                      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets                                  |       | $                            | 54,369     |                        | $          | 50,782 |   |
| Property, plant and equipment, net              |       | 349,503                      |       | 347,772                     |       |
| Other assets                                    |       | 51,141                       |       | 46,022                      |       |
| Total assets                                    |       | $                            | 455,013    |                        | $          | 444,576 |   |
|                                            |       |                         |       |                        |       |
| Current liabilities                             |       | $                            | 50,313     |                        | $          | 59,621 |   |
| Long-term debt                                  |       | 240,578                      |       | 224,477                     |       |
| Other liabilities                               |       | 92,515                       |       | 86,637                      |       |
| Total shareholders’ equity                 |       | 71,607                       |       | 70,841                      |       |
| Total liabilities and shareholders’ equity |       | $                            | 455,013    |                        | $          | 444,576 |   |

 
| **Three months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Revenue                                                  |       | $        | 47,941     |     | $          | 43,702 |   |
| Earnings from operations                                 |       | $        | 10,672     |     | $          | 8,760 |   |
| Net earnings                                             |       | $        | 1,948      |     | $          | 5,090 |   |

** **
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Revenue                                                 |       | $        | 141,328    |     | $          | 127,279 |   |
| Earnings from operations                                |       | $        | 29,787     |     | $          | 21,223 |   |
| Net earnings                                            |       | $        | 4,704      |     | $          | 2,010 |   |

 

**4.         Property, plant and equipment**

 

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

 

16

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| ** **                               | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | ** **                   | ** ** | ** **             | ** ** |
| Land and buildings                       |       | $                            | 1,100,892  |                   | $          | 998,227 |   |
| Machinery and equipment                  |       | 205,728                      |       | 191,050                |       |
| Fixtures, fittings and  office equipment |       | 210,934                      |       | 186,075                |       |
| River cruiseship and  canalboats         |       | 19,374                       |       | 19,184                 |       |
|                                     |       | 1,536,928                    |       | 1,394,536              |       |
| Less: accumulated  depreciation          |       | (241,339                     | )          | (211,136               | )          |
|                                     |       | $                            | 1,295,589  |                   | $          | 1,183,400 |   |

 

Themajor classes of assets under capital leases included above are as follows(dollars in thousands):

 
| ** **                              | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | ** **              | ** ** | ** **             | ** ** |
| Freehold and leased land and buildings  |       | $                       | 17,454     |                   | $          | 16,006 |   |
| Machinery and equipment                 |       | 2,516                   |       | 2,205                  |       |
| Fixtures, fittings and office equipment |       | 1,624                   |       | 1,678                  |       |
|                                    |       | 21,594                  |       | 19,889                 |       |
| Less: accumulated depreciation          |       | (2,752                  | )          | (2,241                 | )          |
|                                    |       | $                       | 18,842     |                   | $          | 17,648 |   |

 

**5.         Goodwill**

 

OEH’sgoodwill consists of $9,102,000 related to the trains and cruises reportingsegment and $130,238,000 related to the hotels and restaurants reportingsegment.

 

**6.         Other intangible assets**

 

Other intangible assetsconsist of the value of the Grand Hotel Europe tradename of $7,100,000 (2006 -$7,100,000), the purchase price allocation of $260,000 (2006 - $260,000) for theCasa de Sierra Nevada tradename, the value attributed to certain internet sitesacquired of $2,066,000 (2006 - $nil), and the favorable lease intangible assetsacquired as part of the acquisition of the Pansea hotels group of $12,596,000(2006 - $12,789,000). The amortization expense relating to the favorable Pansealeases was approximately $87,000 for the three months ended September 30, 2007(2006 - $nil) and $325,000 for the nine months ended September 30, 2007 (2006 -$nil).

 

17

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**7.         Long-term debt and obligations under capital lease**

 

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

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Loans from banks collateralized by property, plant and equipment  payable over periods of 1 to 8 years, with a weighted average interest rate  of 5.82% and 5.80%, respectively, primarily based on LIBOR |       | $                            | 717,815    |                        | $          | 649,513 |   |
| Loan secured by river cruiseship, payable over 3 years, with a  weighted interest rate of 7.48% and 5.65%, respectively, based on LIBOR                                                                   |       | 2,500                        |       | 3,500                       |       |
| Obligations under capital lease                                                                                                                                                                           |       | 16,096                       |       | 16,684                      |       |
|                                                                                                                                                                                                      |       | 736,411                      |       | 669,697                     |       |
| Less: current portion                                                                                                                                                                                     |       | 164,088                      |       | 83,397                      |       |
|                                                                                                                                                                                                      |       | $                            | 572,323    |                        | $          | 586,300 |   |

 

Thecarrying value of the debt is equal to its fair value.

 

Certaincredit agreements of OEH have restrictive covenants. At September 30, 2007, OEHwas in compliance with these covenants, including a minimum consolidated networth test and a minimum consolidated interest coverage test as defined under abank-syndicated $241,000,000 loan facility. OEH does not currently have anycovenants in its loan agreements which limit the payment of dividends.

 

The following is a summary ofthe aggregate maturities of long-term debt, including obligations under capitallease, at September 30, 2007 (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2008                                        |       | $          | 11,681     |   |
| 2009                                        |       | 29,711     |       |
| 2010                                        |       | 51,145     |       |
| 2011                                        |       | 384,871    |       |
| 2012 and thereafter                         |       | 94,915     |       |
|                                        |       | $          | 572,323    |   |

 

18

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**8.         Other liabilities**

 

Other liabilities consist of$2,330,000 of deferred consideration arising on the Casa de Sierra Nevadaacquisition.

 

**9.         Income taxes**

 

The Company is incorporated in Bermuda, which does notimpose an income tax. OEH’s effective tax rate is entirely due to the incometaxes imposed by jurisdictions in which OEH conducts business other thanBermuda.

 

OEHrecorded a tax provision for the three months ended September 30, 2007 of$11,079,000 compared to a provision of $3,406,000 for the corresponding periodin 2006, an increase of $7,673,000. The 2006 provision included deferred taxbenefits totalling $5,829,000 that arose on the reduction of valuationallowances established in respect of tax losses in Portugal and Australia,after OEH concluded that it was more likely than not that these tax losseswould be utilized in the future. There are no comparable benefits included inthe 2007 provision.

 

Cumulatively,OEH recorded a tax provision for the nine months ended September, 30, 2007 of$17,110,000 compared to a provision of $4,190,000 for the corresponding ninemonths in 2006, an increase of $12,920,000. The 2006 provision includeddeferred tax benefits totalling $8,829,000 that arose on the reduction ofvaluation allowances established in respect of tax losses in Bora Bora,Portugal and Australia. There are no comparable benefits included in the 2007provision.

 

OEH’scurrent tax cost for the nine months ended September 30, 2007 is $9,629,000,compared to a cost of $8,246,000 in 2006, due to the increased profitability ofmany of the Company’s subsidiaries in tax paying jurisdictions.

 

TheCompany adopted the provisions of FASB interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) on January 1, 2007, and recognized a$28,820,000 provision in respect of its uncertain tax positions which wasaccounted for as a decrease to January 1, 2007 retained earnings. OEHrecognizes accrued interest and penalties related to uncertain tax positions inincome tax expense. The opening FIN 48 provision included an amount of$1,828,000 in respect of potential interest liabilities and a further$9,947,000 of potential fines and penalties.

 

OEH’stax provision of $17,110,000 for the nine months ended September 30, 2007 alsoincludes a tax charge of $954,000 in respect of the FIN 48 provision, includinga charge of

 

19

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$629,000that relates to the potential interest and penalty costs associated with theuncertain tax positions.

 

AtSeptember 30, 2007, OEH recognized a $31,841,000 provision in respect of itsuncertain tax positions. OEH believes that it is reasonably possible thatwithin the next 12 months the FIN 48 provision will decrease by between$6,000,000 to $8,000,000 as a result of the resolution of tax positions incertain jurisdictions in which OEH operates.

 

Earningsfrom unconsolidated subsidiaries are reported net of tax in the statements ofcondensed consolidated operations. The tax provision applicable to theseunconsolidated subsidiaries in the three months ended September 30, 2007 was$1,152,000 compared to a provision of $1,827,000 in the corresponding period in2006. The cumulative tax provision applicable to unconsolidated subsidiaries inthe nine months ended September 30, 2007 was $3,715,000 compared to a provisionof $4,164,000 in the corresponding period in 2006.

 

**10.       Pensions**

 

Componentsof net periodic pension benefit cost were as follows (dollars in thousands):

 
| **Three months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                            |       | $          | —     |       | $          | 295 |   |
| Interest  cost                                           |       | 296        |       | 238        |       |
| Expected  return on plan assets                          |       | (273       | )          | (222       | )          |
| Amortization  of net loss                                |       | 143        |       | 130        |       |
| Net  periodic benefit cost                               |       | $          | 166        |       | $          | 441 |   |

 
| **Nine months ended September 30,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                           |       | $          | —     |       | $          | 842 |   |
| Interest  cost                                          |       | 870        |       | 681        |       |
| Expected  return on plan assets                         |       | (803       | )          | (635       | )          |
| Amortization  of net loss                               |       | 419        |       | 370        |       |
| Net  periodic benefit cost                              |       | $          | 486        |       | $          | 1,258 |   |

 

Asreported in Note 10 to the financial statements in the Company’s 2006 Form 10-Kannual report, OEH expected to contribute $940,000 to its defined benefitpension plan in 2007. As of September 30, 2007, $557,000 of contributions hadbeen made. OEH anticipates contributing an additional $383,000 to fund itsdefined benefit pension plan in 2007 for a total of $940,000.

 

20

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** **

**11.          Supplementalcash flow information**

(Dollars in thousands):

 
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Cash  paid for:                                         |       |     |       |     |       |
| Interest                                                |       | $        | 35,415     |     | $          | 29,789 |   |
| Income  taxes                                           |       | $        | 7,494      |     | $          | 6,949 |   |

 

In conjunction with acquisitions (see Note 2)liabilities were assumed as follows (dollars in thousands):

 
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Fair  value of assets acquired                          |       | $        | 19,661     |     | $          | 72,846 |   |
| Cash  paid                                              |       | (18,747  | )          | (43,862  | )          |
| Liabilities  assumed                                    |       | $        | 914        |     | $          | 28,984 |   |

 

**12.          Accumulatedother comprehensive income**

 

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

 
| ** **                                        | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Foreign  currency translation adjustments         |       | $                            | 34,744     |                        | $          | 3,545 |   |
| Derivative  financial instruments                 |       | 1,593                        |       | —                      |       |
| Additional  minimum pension liability, net of tax |       | (8,876                       | )          | (8,518                      | )          |
|                                              |       | $                            | 27,461     |                        | $          | (4,973 | ) |

 

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

 
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Net  earnings on common shares                          |       | $        | 38,575     |     | $          | 33,110 |   |
| Foreign  currency translation adjustments               |       | 30,841   |       | 14,663   |       |
| Change  in fair value of derivatives                    |       | 1,593    |       | 68       |       |
| Comprehensive  income                                   |       | $        | 71,009     |     | $          | 47,841 |   |

 

21

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**13.          Commitments**

 

Outstanding contracts to purchase fixed assets wereapproximately $42,770,000 at September 30, 2007 (December 31, 2006 -$21,839,000).

 

**14.          Othersignificant events**

* *

*Hotel das Cataratas*

 

On September 25, 2007, OEH entered into a 20-yearlease of Hotel das Cataratas from the Brazilian government. The monthly leasepayments are Brazilian real 868,000 ($470,000). OEH is committed to perform amajor refurbishment of the hotel within two years. Total investment over theperiod of the refurbishment is estimated at $20,000,000.

 

*Maroma insurance proceeds*

 

In the three months ended September 30, 2007, MaromaResort and Spa recorded a gain of $2,300,000 relating to the settlement ofinsurance proceeds for damaged assets.

 

*Maroma land acquisition*

 

On July 27, 2007, OEH acquired 100% of the shares of aMexican company that owns land adjacent to Maroma Resort and Spa for a cashconsideration of $5,609,000 including transaction costs and remaining cashconsideration of $1,553,000 to be paid within three years.

 

**15.          Informationconcerning financial reporting for segments and operations in differentgeographical areas**

 

As reported in the Company’s 2006 Form 10-K annualreport, OEH has three reporting segments, (i) hotels and restaurants, (ii)tourist trains and cruises, and (iii) real estate and property development. Segmentperformance is evaluated based upon segment net earnings before interest, tax(including tax on earnings from unconsolidated companies), depreciation andamortization (“segment EBITDA”). Financial information regarding these businesssegments is as follows, with net finance costs appearing net of capitalizedinterest and interest and related income (dollars in thousands):

 
| **Three months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                                 |       |     |       |     |       |
| Hotels  and restaurants                                  |       |     |       |     |       |
| Owned  hotels – Europe                              |       | $        | 86,728     |     | $          | 72,569 |   |
| – North  America                                    |       | 17,908   |       | 21,158   |       |
| – Rest of  world                                    |       | 32,320   |       | 26,308   |       |
| Hotel  management/part ownership interests               |       | 2,279    |       | 2,130    |       |
| Restaurants                                              |       | 3,439    |       | 3,511    |       |
|                                                     |       | 142,674  |       | 125,676  |       |
| Tourist  trains and cruises                              |       | 26,164   |       | 18,701   |       |
| Real  estate                                             |       | 14,073   |       | 387      |       |
|                                                     |       | $        | 182,911    |     | $          | 144,764 |   |

 

22

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| **Three months ended September 30,**         | ** ** | **2007** | ** **   | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|--------------|----------|------------|
|                                                             |       |     |         |     |       |
| Segment  EBITDA:                                                 |       |     |         |     |       |
| Owned  hotels – Europe                                      |       | $        | 38,254       |     | $          | 32,484 |   |
| – North  America                                            |       | 944      |         | 3,862    |       |
| – Rest of  world                                            |       | 7,078    |         | 7,201    |       |
| Hotel  management/part ownership interests                       |       | 5,757    |         | 4,721    |       |
| Restaurants                                                      |       | (237     | )            | (128     | )          |
| Tourist  trains and cruises                                      |       | 9,555    |         | 7,001    |       |
| Real  estate                                                     |       | 3,160    |         | (583     | )          |
| Central  overheads                                               |       | (7,669   | )            | (5,066   | )          |
| Gain  on disposal of fixed assets                                |       | 2,312    |         | —   |       |
|                                                             |       | $        |  59,154 |     | $          |  49,492 |   |
|                                                             |       |     |         |     |       |
| Segment  EBITDA/net earnings reconciliation:                     |       |     |         |     |       |
| Segment  EBITDA                                                  |       | $        | 59,154       |     | $          | 49,492 |   |
| Less:                                                            |       |     |         |     |       |
| Depreciation  and amortization                                   |       | 10,254   |         | 8,960    |       |
| Interest  expense, net                                           |       | 12,642   |         | 12,117   |       |
| Foreign  currency, net                                           |       | 1,474    |         | 2,752    |       |
| Provision  for income taxes                                      |       | 11,079   |         | 3,406    |       |
| Share  of provision for income taxes of unconsolidated companies |       | 1,152    |         | 1,827    |       |
| Net  earnings                                                    |       | $        |  22,553 |     | $          |  20,430 |   |

 

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

 
| **Three months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Revenue:                                                 |       |     |       |     |       |
| Europe                                                   |       | $        | 111,330    |     | $          | 90,155 |   |
| North  America                                           |       | 36,064   |       | 25,628   |       |
| Rest  of world                                           |       | 35,517   |       | 28,981   |       |
|                                                     |       | $        | 182,911    |     | $          | 144,764 |   |

** **
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006**       | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------------|------------|
|                                                    |       |     |       | **(restated)** |       |
| Revenue:                                                |       |     |       |           |       |
| Hotels  and restaurants                                 |       |     |       |           |       |
| Owned  hotels – Europe                             |       | $        | 184,842    |           | $          | 146,146 |   |
| – North  America                                   |       | 63,032   |       | 62,893         |       |
| – Rest of  world                                   |       | 95,671   |       | 78,519         |       |
| Hotel  management/part ownership interests              |       | 7,577    |       | 6,901          |       |
| Restaurants                                             |       | 14,377   |       | 14,350         |       |
|                                                    |       | 365,499  |       | 308,809        |       |
| Tourist  trains and cruises                             |       | 60,772   |       | 45,373         |       |
| Real  estate                                            |       | 14,920   |       | 4,538          |       |
|                                                    |       | $        | 441,191    |           | $          | 358,720 |   |

 

23

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| **Nine months ended September 30,**          | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Depreciation  and amortization:                                  |       |     |       |     |       |
| Hotels  and restaurants                                          |       |     |       |     |       |
| Owned  hotels – Europe                                      |       | $        | 11,923     |     | $          | 10,631 |   |
| – North  America                                            |       | 5,519    |       | 5,315    |       |
| – Rest of  world                                            |       | 8,159    |       | 6,929    |       |
| Restaurants                                                      |       | 743      |       | 705      |       |
|                                                             |       | 26,344   |       | 23,580   |       |
| Tourist  trains and cruises                                      |       | 3,045    |       | 2,688    |       |
|                                                             |       | $        | 29,389     |     | $          | 26,268 |   |
|                                                             |       |     |       |     |       |
| Segment  EBITDA:                                                 |       |     |       |     |       |
| Owned  hotels – Europe                                      |       | $        | 66,477     |     | $          | 49,585 |   |
| – North  America                                            |       | 10,379   |       | 13,504   |       |
| – Rest of  world                                            |       | 23,223   |       | 20,342   |       |
| Hotel  management/part ownership interests                       |       | 17,433   |       | 14,365   |       |
| Restaurants                                                      |       | 1,919    |       | 2,461    |       |
| Tourist  trains and cruises                                      |       | 19,415   |       | 12,529   |       |
| Real  estate                                                     |       | 2,678    |       | 1,290    |       |
| Central  overheads                                               |       | (20,685  | )          | (14,953  | )          |
| Gain  on sale of investment                                      |       | —   |       | 6,619    |       |
| Gain  on disposal of fixed assets                                |       | 2,312    |       | —   |       |
|                                                             |       | $        | 123,151    |     | $          | 105,742 |   |
|                                                             |       |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                     |       |     |       |     |       |
| Segment  EBITDA                                                  |       | $        | 123,151    |     | $          | 105,742 |   |
| Less:                                                            |       |     |       |     |       |
| Depreciation  and amortization                                   |       | 29,389   |       | 26,268   |       |
| Interest  expense, net                                           |       | 34,141   |       | 32,462   |       |
| Foreign  currency, net                                           |       | 221      |       | 5,548    |       |
| Provision  for income taxes                                      |       | 17,110   |       | 4,190    |       |
| Share  of provision for income taxes of unconsolidated companies |       | 3,715    |       | 4,164    |       |
| Net  earnings                                                    |       | $        | 38,575     |     | $          | 33,110 |   |
|                                                             |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax:             |       |     |       |     |       |
| Hotels  and restaurants                                          |       |     |       |     |       |
| Hotel  management/part ownership interests                       |       | $        | 7,550      |     | $          | 5,116 |   |
| Restaurants                                                      |       | —   |       | 191      |       |
|                                                             |       | 7,550    |       | 5,307    |       |
| Tourist  trains and cruises                                      |       | 4,617    |       | 3,770    |       |
|                                                             |       | $        | 12,167     |     | $          | 9,077 |   |
|                                                             |       |     |       |     |       |
| Capital  expenditure:                                            |       |     |       |     |       |
| Owned  hotels – Europe                                      |       | $        | 27,896     |     | $          | 44,813 |   |
| – North America                                             |       | 29,127   |       | 15,149   |       |
| – Rest of  world                                            |       | 13,191   |       | 11,433   |       |
| Restaurants                                                      |       | 723      |       | 1,208    |       |
| Tourist  trains and cruises                                      |       | 2,967    |       | 6,903    |       |
| Real  estate                                                     |       | 3,977    |       | 3,983    |       |
|                                                             |       | $        | 77,881     |     | $          | 83,489 |   |

 

24

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

 
| **Nine months ended September 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Revenue:                                                |       |     |       |     |       |
| Europe                                                  |       | $        | 240,806    |     | $          | 187,799 |   |
| North  America                                          |       | 95,143   |       | 84,157   |       |
| Rest  of world                                          |       | 105,242  |       | 82,764   |       |
|                                                    |       | $        | 441,191    |     | $          | 358,720 |   |

 

**16.          Derivativefinancial 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 and €24,700,000 that limit the exposure to a fixed rate level. Althoughthe interest rate swap for €24,700,000 economically hedges the interest raterisk, it has not qualified as a cash flow hedge and, therefore, changes in thefair value of this swap were recorded to interest expense in earnings. Theinterest rate swap for €75,000,000 has been designated and has qualified as acash flow hedge of the floating rate debt effective since December 31, 2006. Thisswap is expected to be and has been highly effective. The $1,593,000 of themovement in the fair value of the swap has, therefore, been recorded in othercomprehensive income with only the amount deemed ineffective, of $23,000, beingrecognized in earnings.

 

At September30, 2007 and December 31, 2006, the fair values of the outstanding interestrate swaps were accounted for as other non-current assets at $2,685,000 and$687,000, respectively.

 

**17.          Relatedparty transactions and balances**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest. Thisguarantee was in place before December 31, 2002. The amount due to OEH fromEastern and Oriental Express Ltd. at September 30, 2007 was $2,262,000(December 31, 2006 - $805,000).

 

25

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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 threemonths ended September 30, 2007, OEH earned $958,000 (2006 - $955,000) inmanagement fees which are recorded in revenue, and $3,474,000 (2006 -$2,777,000) in interest income on partnership and other loans, which arerecorded in earnings from unconsolidated companies. For the nine months endedSeptember 30, 2007, OEH earned $3,850,000 (2006 - $3,592,000) in managementfees which are recorded in revenue, and $9,203,000 (2006 - $7,871,000) ininterest income on partnership and other loans, which are recorded in earningsfrom unconsolidated companies. The amount due to OEH from Charleston PlaceHotel at September 30, 2007 was $18,647,000 (December 31, 2006 - $15,499,000.)

 

OEH manages under long-termcontracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned byits 50/50 joint venture with local Peruvian interests, as well as the50/50-owned PeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the three months ended September 30,2007, OEH earned management and guarantee fees of $1,898,000 (2006 -$1,469,000) and loan interest of $16,000 (2006 - $15,000) which are recorded inrevenue. In the nine months ended September 30, 2007, OEH earned management andguarantee fees of $4,846,000 (2006 - $3,889,000) and loan interest of $47,000(2006 - $71,000) which are recorded in revenue. At September 30, 2007, OEH hada $750,000 subordinated loan to the PeruRail operation with an indefinitematurity date and interest at a spread over LIBOR. All of the guaranteesrelating to the Company’s investments in Peru were in place prior to December31, 2002. The amount due to OEH from its joint venture Peruvian operations atSeptember 30, 2007 was $6,278,000. At December 31, 2006 the amount due from OEHto its joint venture Peruvian operations was $1,249,000.

 

OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50%interest and which is accounted for under the equity method. For the threemonths ended September 30, 2007, OEH earned $343,000 (2006 - $300,000) inmanagement fees, which are included in revenue. For the nine months endedSeptember 30, 2007, OEH earned $1,028,000 (2006 - $910,000) in management fees.The amount due to OEH from the Hotel Ritz in Madrid at September 30, 2007 was$2,411,000 (December 31, 2006 - $1,961,000).

 

OEH has granted to JamesSherwood, a director of the company, a right of first refusal to purchase theHotel Cipriani in Venice, Italy, in the event OEH proposes to sell it. Thepurchase price would be the offered sale price in the case of a cash sale orthe fair market value of the hotel, as determined by an 

 

26

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independent valuer, in thecase of a non-cash sale. Mr. Sherwood has also been granted an option topurchase the hotel at fair market value if a change in control of the companyoccurs.

 

**18.          Subsequent events**

 

*'21' Hotel*

 

On November 7, 2007, theCompany announced that it has signed an agreement to acquire the land andbuilding of the Donnell branch of the New York Public Library, located at 24West 53rd Street, New York City. On this site OEH plans to build a150-room luxury hotel, including a rebuilt Donnell Library located within it. Thehotel will house contemporary dining, spa and wellness facilities, as well asexpanded banqueting and dining space for OEH’s existing restaurant andbanqueting business, ‘21’ Club, which is adjacent to the Library premises inits location at 21 West 52nd Street. The property will be marketedunder a new ‘21’ Hotel brand name. The original ‘21’ Club will be preserved atits current location, with enhanced facilities. The overall project isestimated at $220,000,000 inclusive of the purchase of the Library. Subject tonecessary permits, construction is scheduled to start in 2009 and the hotel isplanned to be in operation by early 2011.

 

*Bank loan refinancing*

* *

On October 18, 2007, OEH borrowed $60,000,000 under abank-syndicated loan facility totaling up to $120,000,000 secured by OEH'sBrazilian properties. The initial drawdown was used to refinance an existing$44,800,000 loan facility secured by the Copacabana Palace Hotel.

 

27

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# **ITEM 2.**                              Management’s Discussion and Analysis of Financial Condition andResults of Operations

# ** **

**Restatementof prior quarter’s financial statements**

 

As disclosedin the 2006 Form 10-K, OEH has restated its condensed consolidated 2006quarterly financial statements. As more fully discussed in Note 1 to thefinancial statements in this report, OEH restated its statements of condensedconsolidated operations and its statements of condensed consolidated cash flowsfor the three and nine months periods ended September 30, 2006. The restatementcorrects for errors made in the application of U.S. generally acceptedaccounting principles for deferred tax accounting. All comparisons in this Item2 reflect restatements of OEH’s quarterly financial results for 2006.

 

**Resultsof Operations**

 

**Three Months Ended September 30, 2007compared to Three Months Ended September 30, 2006**

 

OEH’s operating results for the three months endedSeptember 30, 2007 and 2006, expressed as a percentage of revenue, were asfollows:

 
| ** **                                     | ** ** | **Three months  ended  September 30** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **%**                                           | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                            |       |   |   |
| Hotels  and restaurants                        |       | 78                                              |       | 87 |   |
| Tourist  trains and cruises                    |       | 14                                              |       | 13 |   |
| Real  estate                                   |       | 8                                               |       | — |   |
|                                           |       | 100                                             |       | 100 |   |
| Expenses:                                      |       |                                            |       |   |   |
| Depreciation  and amortization                 |       | 6                                               |       | 6 |   |
| Operating                                      |       | 48                                              |       | 43 |   |
| Selling,  general and administrative           |       | 24                                              |       | 27 |   |
| Gain  on disposal of assets                    |       | (1                                              | )          | — |   |
| Net  finance costs                             |       | 8                                               |       | 10 |   |
| Earnings  before income taxes                  |       | 15                                              |       | 14 |   |
| Provision  for income taxes                    |       | (6                                              | )          | (2 | ) |
| Earnings  from unconsolidated companies        |       | 3                                               |       | 3 |   |
| Net  earnings as a percentage of total revenue |       | 12                                              |       | 15 |   |

 

Segment net earnings before interest, tax (including taxon unconsolidated companies), depreciation and amortization (“segment EBITDA”)of OEH’s operations for the three months ended September 30, 2007 and 2006 areanalyzed as follows (dollars in millions):

 

28

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| ** **                  | ** ** | **Three months ended  September 30** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Segment  EBITDA:            |       |                                                |       |   |   |
| Owned  hotels:              |       |                                                |       |   |   |
| Europe                      |       | $                                                   | 38.3       |   | $ | 32.5 |   |
| North  America              |       | 0.9                                                 |       | 3.9 |   |
| Rest  of the world          |       | 7.1                                                 |       | 7.2 |   |
| Hotel  management interests |       | 5.7                                                 |       | 4.7 |   |
| Restaurants                 |       | (0.2                                                | )          | (0.1 | ) |
| Tourist  trains and cruises |       | 9.6                                                 |       | 7.0 |   |
| Real  estate                |       | 3.2                                                 |       | (0.6 | ) |
| Gain  on disposal of assets |       | 2.3                                                 |       | — |   |
| Central  overheads          |       | (7.7                                                | )          | (5.1 | ) |
| Total  segment EBITDA       |       | $                                                   | 59.2       |   | $ | 49.5 |   |

 

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

 
| ** **                                                       | ** ** | **Three months ended  September 30** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                            | ** ** | **2006 ** | ** ** |
| ** **                                                       | ** ** | ** **                                          | ** ** | **(restated)** | ** ** |
|                                                             |       |                                                |       |   |   |
| Net  earnings                                                    |       | $                                                   | 22.6       |   | $ | 20.4 |   |
| Add:                                                             |       |                                                |       |   |   |
| Depreciation  and amortization                                   |       | 10.3                                                |       | 9.0 |   |
| Interest                                                         |       | 12.6                                                |       | 12.1 |   |
| Foreign  currency, net                                           |       | 1.5                                                 |       | 2.8 |   |
| Provision  for income taxes                                      |       | 11.1                                                |       | 3.4 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 1.1                                                 |       | 1.8 |   |
| Segment  EBITDA                                                  |       | $                                                   | 59.2       |   | $ | 49.5 |   |

 

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 measurecommonly used in OEH’s industry. OEH’s segment EBITDA, however, may not becomparable in all instances to EBITDA as disclosed by other companies. SegmentEBITDA should not be considered as an alternative to earnings from operationsor net earnings (as determined in accordance with U.S. generally acceptedaccounting principles) as a measure of OEH’s operating performance, or as analternative to net cash provided by operating, investing and financingactivities (as determined in accordance with U.S. generally accepted accountingprinciples) as a measure of OEH’s ability to meet cash needs.

 

29

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Operating information for OEH’s owned hotels for thethree months ended September 30, 2007 and 2006 is as follows:

 
|                             |   | **Three months  ended  September 30** |       |
|----------------------------------|--------|-------------------------------------------------|------------|
|                             |   | **2007**                                        | ** ** | **2006** |   |
|                             |   |                                            |       |   |   |
| Average  Daily Rate (in dollars) |   |                                            |       |   |   |
| Europe                           |   | 815                                             |       | 670 |   |
| North  America                   |   | 302                                             |       | 284 |   |
| Rest  of the world               |   | 262                                             |       | 245 |   |
| Worldwide                        |   | 481                                             |       | 427 |   |
|                             |   |                                            |       |   |   |
| Rooms  Available (in thousands)  |   |                                            |       |   |   |
| Europe                           |   | 92                                              |       | 92 |   |
| North  America                   |   | 55                                              |       | 53 |   |
| Rest  of the world               |   | 108                                             |       | 100 |   |
| Worldwide                        |   | 255                                             |       | 245 |   |
|                             |   |                                            |       |   |   |
| Rooms  Sold (in thousands)       |   |                                            |       |   |   |
| Europe                           |   | 63                                              |       | 65 |   |
| North  America                   |   | 34                                              |       | 36 |   |
| Rest  of the world               |   | 68                                              |       | 59 |   |
| Worldwide                        |   | 165                                             |       | 160 |   |
|                             |   |                                            |       |   |   |
| RevPAR  (in dollars)             |   |                                            |       |   |   |
| Europe                           |   | 557                                             |       | 478 |   |
| North  America                   |   | 189                                             |       | 193 |   |
| Rest  of the world               |   | 166                                             |       | 145 |   |
| Worldwide                        |   | 313                                             |       | 280 |   |

 
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Europe             |       | 532        |       | 464        |       | 15                | %          | 8 | % |
| North  America     |       | 313        |       | 282        |       | 11                | %          | 11 | % |
| Rest  of the world |       | 185        |       | 156        |       | 18                | %          | 13 | % |
| Worldwide          |       | 359        |       | 311        |       | 15                | %          | 7 | % |

 

Average daily rate is the average amount achieved forthe rooms sold. RevPAR is revenue per available room, that is the rooms revenuedivided by the number of available rooms for each night of operation. Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, such as by excluding the effect of any acquisitions or majorrefurbishments.

 

30

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*Overview*

 

The net earnings for the period was $22.6 million($0.53 per common share) on revenue of $182.9 million, compared with a netearnings of $20.4 million ($0.49 per common share) on revenue of $144.8 millionin the prior year third quarter, due to the factors described in the sectionsbelow.

 

*Revenue*

 

Total revenue increased by $38.1 million, or 26%, from$144.8 million in the three months ended September 30, 2006 to $182.9 millionin the three months ended September 30, 2007. Hotels and restaurants revenueincreased by $17.0 million, or 14%, from $125.7 million in the three monthsended September 30, 2006 to $142.7 million in the three months ended September30, 2007, and tourist trains and cruises increased by $7.5 million, or 40%,from $18.7 million for the three months ended September 30, 2006 to $26.2million for the three months ended September 30, 2007. Real estate revenues forthe three months ended September 30, 2007 were $14.1 million, compared with$0.4 million for the three months ended September 30, 2006, including revenueof $10.7 million in respect of the Cupecoy Village development which can now berecognized for the first time.

 

The performance of the European hotels andparticularly the trains and cruises portfolio, and a strong performance inSouthern Africa and South America, underpinned the revenue growth of 26% forthe three months ended September 30, 2007, compared to the same period in theprior year.

 

For owned hotels overall, same store RevPAR in U.S.dollars increased by 15% in the three months ended September 30, 2007 comparedto the three months ended September 30, 2006. Measured in local currencies thisincrease was 7%, primarily due to higher achieved daily rate.

 

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

 

*Europe*. Revenueincreased by $14.2 million, or 19%, from $72.6 million for the three monthsended September 30, 2006 to $86.8 million for the three months ended September30, 2007. Revenues from the Italian portfolio grew 26% from $37.0 million inthe three months ended September 30, 2006 to $46.7 million in the three monthsended September 30, 2007. All other European properties also saw a growth inrevenue in the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006.

 

On a same store basis, RevPAR in local currency grew8%. In U.S. dollars, this translated into an increase of 15%.

 

31

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*North America*. Revenue decreased by $3.2 million, or 15%, from $21.1 million inthe three months ended September 30, 2006 to $17.9 million in the three monthsended September 30, 2007. The 2006 result included business interruptioninsurance proceeds of $3.4 million in respect of the Windsor Court Hotel andMaroma Resort and Spa. El Encanto continues to be closed for refurbishment,with the property recording no revenue for the three months ended September 30,2007 as compared with $1.2 million in the same period in 2006.

 

On a same store basis, RevPAR increased by 11% whichwas driven entirely by rate.

 

*Rest of the World*. Revenue increased by $6.0 million, or 23%, from $26.3 million inthe three months ended September 30, 2006 to $32.3 million in the three monthsended September 30, 2007. The impact of the acquisition of the Asian hotels(former Pansea hotels group) added revenues of $1.6 million, or 59%, from $2.7million in the three months ended September 30, 2006, to $4.3 million in thethree months ended September 30, 2007. Southern Africa revenues increased by $2.1million, or 31%, from $6.6 million in the three months ended September 30, 2006to $8.7 million in the three months ended September 30, 2007. South Americarevenues increased by $1.5 million, or 19%, from $7.9 million in the threemonths ended September 30, 2006 to $9.4 million in the three months endedSeptember 30, 2007.

 

The RevPAR on a same store basis for the Rest of theWorld region increased by 13% in local currencies in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. ThisRevPAR increase in local currencies translated to an 18% increase whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests.*Revenue increased by $0.2million, or 7%, from $2.1 million in the three months ended September 30, 2006to $2.3 million in the three months ended September 30, 2007.

 

*Trains and Cruises.*Revenue increased by $7.5 million, or 40%, from $18.7 million in thethree months ended September 30, 2006 to $26.2 million in the three monthsended September 30, 2007, due primarily to the performance of VeniceSimplon-Orient-Express ($1.7 million increase in revenue) and the addition ofthe Royal Scotsman, which generated revenue of $3.2 million in the three monthsended September 30, 2007, and Afloat in France which generated revenue of $1.7million in the same period.

 

*Real Estate.*Revenue totalled $14.1 million in the three months ended September30, 2007, including $10.7 million in respect of the Cupecoy Village developmentand $3.4 million of sales

 

32

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recorded at Keswick Hall. Only $0.4 million of revenuewas recognized by Keswick Hall in the comparable period in the prior year.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $1.3million, or 14%, from $9.0 million in the three months ended September 30, 2006to $10.3 million in the three months ended September 30, 2007, primarily due tothe effect of acquisitions of the Asian hotels (former Pansea hotels group).

 

*Operating expenses*

 

Operating expenses increased by $25.4 million, or 40%,from $62.7 million in the three months ended September 30, 2006 to $88.1million in the three months ended September 30, 2007. The increase was higherthan the revenue increase, with operating expenses at 48% of revenue for thethree months ended September 30, 2007, compared to 43% for the three monthsended September 30, 2006, mainly due to business interruption insurance incomerecorded last year for Maroma Resort and Spa and Windsor Court Hotel with nosimilar income in the current period.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $6.4 million, or 17%, from $38.4 million in the three months ended September30, 2006 to $44.8 million in the three months ended September 30, 2007. Thisincrease was lower than the proportionate revenue increase, with sales, generaland administrative expenses being 24% of revenue for the three months endedSeptember 30, 2007 compared to 27% for the three months ended September 30,2006, mainly due to lower expenses as a percentage of real estate revenue atCupecoy compared to hotels.

 

*Margins*

 

Segment EBITDA margins (calculated as segment EBITDAas a percentage of revenue) for the three months ended September 30, 2007 forOEH decreased by 2%, from 34% for the three months ended September 30, 2006 to32% for the three months ended September 30, 2007. The European propertiesmargins decreased from 45% in the three months ended September 30, 2006 to 44%in the three months ended September 30, 2007. Margins at the Rest of the Worldhotels decreased from 27% in the three months September 30, 2006 to 22% for thethree months ended September 30, 2007, primarily due to the impact of thestrong Brazilian real on the U.S. dollar earnings of the Copacabana PalaceHotel.

 

33

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*Earnings from operations*

 

Earnings from operations increased by $7.3 millionfrom $34.8 million in the three months ended September 30, 2006 to $42.1million in the three months ended September 30, 2007, due to the factorsdescribed above and to a $2.3 million gain from insurance recoveries relatingto assets disposed of at Maroma Resort and Spa.

 

*Net finance costs*

 

Net finance costs decreased by $0.8 million, or 5%,from $14.9 million for the three months ended September 30, 2006 to $14.1million for the three months ended September 30, 2007. The three months endedSeptember 30, 2007 included a foreign exchange loss of $1.5 million compared toa foreign exchange loss of $2.8 million in the three months ended September 30,2006. The three months ended September 30, 2006 included a write-off of $2.5million of deferred finance costs. There were no comparable write-offs in thethree months ended September 30, 2007. The other components of net financecosts increased by $3.0 million, or 30%, from $9.6 million for the three monthsended September 30, 2006 to $12.6 million for the three months ended September30, 2007, due to the impact of financing of new investments and increases inU.S. interest rates.

 

*Provision for income taxes*

 

The provision for income taxes increased by $7.7 million, from aprovision of $3.4 million in the three months ended September 30, 2006 to aprovision of $11.1 million in the three months ended September 30, 2007. The2006 provision included deferred tax credits of $5.8 million that arose on thereduction of valuation allowances established in respect of tax losses inPortugal and Australia. There were no comparable credits in 2007.

 

The Company recognized a provision of $28.8 million in respect of itsuncertain tax positions upon the adoption of FASB interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. The provision forincome taxes of $11.1 million for the three months ended September 30, 2007included a tax provision of $0.2 million in respect of the FIN 48 liability.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies increased by$1.7 million, or 43%, from $3.9 million in the three months ended September 30,2006 to $5.6 million in the three months ended September 30, 2007. This wasmainly due to increased earnings from Charleston Place and OEH’s investments inPeru.

 

34

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**Ninemonths ended September 30, 2007 compared to**

**Ninemonths ended September 30, 2006**

 

OEH’s operating results for the nine months endedSeptember 30, 2007 and 2006, expressed as a percentage of revenue, were asfollows:

 
| ** **                                     | ** ** | **Nine months ended  September 30** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **%**                                              | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                               |       |   |   |
| Hotels  and restaurants                        |       | 83                                                 |       | 87 |   |
| Tourist  trains and cruises                    |       | 14                                                 |       | 13 |   |
| Real  estate                                   |       | 3                                                  |       | –– |   |
|                                           |       | 100                                                |       | 100 |   |
| Expenses:                                      |       |                                               |       |   |   |
| Depreciation  and amortization                 |       | 7                                                  |       | 7 |   |
| Operating                                      |       | 48                                                 |       | 48 |   |
| Selling,  general and administrative           |       | 28                                                 |       | 30 |   |
| Gain on sale of investment                     |       | ––                                       |       | (2 | ) |
| Net  finance costs                             |       | 8                                                  |       | 11 |   |
| Earnings  before income taxes                  |       | 9                                                  |       | 8 |   |
| Provision  for income taxes                    |       | (4                                                 | )          | (1 | ) |
| Earnings  from unconsolidated companies        |       | 3                                                  |       | 3 |   |
| Net  earnings as a percentage of total revenue |       | 8                                                  |       | 10 |   |

 

Segment EBITDA of OEH’s operations for the nine monthsended September 30, 2007 and 2006 are analyzed as follows (dollars inmillions):

 
| ** **                  | ** ** | **Nine months ended  September 30** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Segment  EBITDA:            |       |                                               |       |   |   |
| Owned  hotels:              |       |                                               |       |   |   |
| Europe                      |       | $                                                  | 66.5       |   | $ | 49.6 |   |
| North  America              |       | 10.4                                               |       | 13.6 |   |
| Rest  of the world          |       | 23.2                                               |       | 20.3 |   |
| Hotel  management interests |       | 17.4                                               |       | 14.3 |   |
| Restaurants                 |       | 1.9                                                |       | 2.5 |   |
| Tourist  trains and cruises |       | 19.5                                               |       | 12.5 |   |
| Real  estate                |       | 2.7                                                |       | 1.2 |   |
| Central  overheads          |       | (20.7                                              | )          | (14.9 | ) |
| Gain  on disposal of assets |       | 2.3                                                |       | –– |   |
| Gain  on sale of investment |       | ––                                       |       | 6.6 |   |
| Total  segment EBITDA       |       | $                                                  | 123.2      |   | $ | 105.7 |   |

 

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

 

35

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| ** **                                                       | ** ** | **Nine months ended  September 30** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | ** **                                         | ** ** | **(Restated)** | ** ** |
| Net  earnings                                                    |       | $                                                  | 38.6       |   | $ | 33.1 |   |
| Add:                                                             |       |                                               |       |   |   |
| Depreciation  and amortization                                   |       | 29.4                                               |       | 26.3 |   |
| Interest  expense, net                                           |       | 34.1                                               |       | 32.4 |   |
| Foreign  currency, net                                           |       | 0.2                                                |       | 5.5 |   |
| Provision  for income taxes                                      |       | 17.1                                               |       | 4.2 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 3.8                                                |       | 4.2 |   |
| Segment  EBITDA                                                  |       | $                                                  | 123.2      |   | $ | 105.7 |   |

 

Operating information for OEH’s owned hotels for thenine months ended September 30, 2007 and 2006 is as follows:

 

36

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| ** **                       | ** ** | **Nine months ended  September 30** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
|                             |       |                                               |       |   |   |
| Average  Daily Rate (in dollars) |       |                                               |       |   |   |
| Europe                           |       | 713                                                |       | 611 |   |
| North  America                   |       | 366                                                |       | 318 |   |
| Rest  of the world               |       | 265                                                |       | 269 |   |
| Worldwide                        |       | 434                                                |       | 396 |   |
|                             |       |                                               |       |   |   |
| Rooms  Available (in thousands)  |       |                                               |       |   |   |
| Europe                           |       | 247                                                |       | 225 |   |
| North  America                   |       | 166                                                |       | 157 |   |
| Rest  of the world               |       | 323                                                |       | 269 |   |
| Worldwide                        |       | 736                                                |       | 651 |   |
|                             |       |                                               |       |   |   |
| Rooms  Sold (in thousands)       |       |                                               |       |   |   |
| Europe                           |       | 149                                                |       | 139 |   |
| North  America                   |       | 107                                                |       | 113 |   |
| Rest  of the world               |       | 204                                                |       | 166 |   |
| Worldwide                        |       | 460                                                |       | 418 |   |
|                             |       |                                               |       |   |   |
| RevPAR  (in dollars)             |       |                                               |       |   |   |
| Europe                           |       | 432                                                |       | 376 |   |
| North  America                   |       | 235                                                |       | 228 |   |
| Rest  of the world               |       | 168                                                |       | 166 |   |
| Worldwide                        |       | 271                                                |       | 254 |   |

 
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |              |       |   |   |
| Europe                                             |       | 485        |       | 414        |       | 17                | %          | 10 | % |
| North  America                                     |       | 340        |       | 319        |       | 7                 | %          | 7 | % |
| Rest  of the world                                 |       | 188        |       | 170        |       | 10                | %          | 9 | % |
| Worldwide                                          |       | 313        |       | 278        |       | 13                | %          | 9 | % |

 

*Revenue*

 

Total revenue increased by $82.5 million, or 23%, from$358.7 million in the nine months ended September 30, 2006 to $441.2 million inthe nine months ended September 30, 2007. Hotels and restaurants revenueincreased by $56.7 million, or 18%, from $308.8 million in the nine monthsended September 30, 2006 to $365.5 million in the nine months ended September30, 2007, and tourist trains and cruises increased by $15.4 million, or 34%,from $45.4 million for the nine months ended September 30, 2006 to $60.8million for the nine months ended September 30, 2007. The increase in totalrevenue was due primarily to the performance of the European hotels and trainsand cruises portfolios.

 

For owned hotels overall, same store RevPAR in U.S.dollars increased by 13% in the nine months ended September 30, 2007 

 

37

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compared to the nine months ended September 30, 2006. Measuredin local currencies this increase was 9%.

 

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

 

*Europe*. Revenueincreased by $38.7 million, or 26%, from $146.1 million for the nine monthsended September 30, 2006 to $184.8 million for the nine months ended September30, 2007. Increases at the Italian properties and Reids Palace Hotel (closed inthe first quarter of 2006) were the main contributors to the growth, butrevenue increased at all of the European properties.

 

On a same store basis, RevPAR in local currencyincreased by 10%. In U.S. dollars, this translated into an increase of 17%.

 

*North America*. Revenue increased by $0.1 million, or 0.2%, from $62.9 million inthe nine months ended September 30, 2006 to $63.0 million in the nine monthsended September 30, 2007. El Encanto has been closed for refurbishmentthroughout 2007, and the hotel has recorded no revenues in the current yearcompared to $3.9 million in the nine months ended September 30, 2006.

 

On a same store basis, RevPAR increased by 7%.

 

*Rest of the World*. Revenue increased by $17.2 million, or 22%, from $78.5 million inthe nine months ended September 30, 2006 to $95.7 million in the nine monthsended September 30, 2007. The impact of the acquisition of the Asian hotels(former Pansea hotels group) increased revenues by $8.9 million. SouthernAfrica revenues increased $3.8 million in the nine months ended September 30,2007 from $23.8 million to $27.6 million, or 16%. South America revenuesincreased by $3.4 million, or 12%, from $27.8 million in the nine months endedSeptember 30, 2006 to $31.2 million in the nine months ended September 30,2007.

 

The RevPAR on a same store basis for the Rest of theWorld region increased by 9% in local currencies in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. ThisRevPAR increase in local currencies translated to a 10% increase when expressedin U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests.*Revenue increased by $0.7million, or 10%, from $6.9 million in the nine months ended September 30, 2006to $7.6 million in the nine months ended September 30, 2007, due to increasedrevenues at Charleston Place and the hotels in Peru.

 

*Trains and Cruises.*Revenue increased by $15.4 million, or 34%, from $45.4 million inthe nine months ended September 30, 2006

 

38

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to $60.8 million in the nine months ended September30, 2007, due primarily to the performance of Venice Simplon-Orient-Express andthe fully acquired Royal Scotsman and Afloat in France.

 

*Real Estate.*Revenues increased by $10.4 million from $4.5 million in the ninemonths ended September 30, 2006 to $14.9 million in the nine months endedSeptember 30, 2007. The increase was due to the recognition of revenue of $10.7million associated with the Cupecoy Village development in St. Maartenresulting from the application of the percentage-of-completion method wherebyapproximately 39% of the units have been sold and 25% of the contracts enteredinto have been billed.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $3.1million, or 12%, from $26.3 million in the nine months ended September 30, 2006to $29.4 million in the nine months ended September 30, 2007, primarily due tothe effect of the acquisition of the Asian hotels (former Pansea hotels group) andcapital expenditures during the nine months to September 30, 2007, includingthe refurbishment of the Copacabana Palace Hotel, Grand Hotel Europe and ReidsPalace Hotel.

 

*Operating expenses*

 

Operating expenses increased by $45.3 million, or 27%,from $165.6 million in the nine months ended September 30, 2006 to $211.0million in the nine months ended September 30, 2007. The increase was in linewith revenue increases, with operating expenses remaining at 48% of revenue forthe nine months ended September 30, 2007, the same level as for the nine monthsended September 30, 2006.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $18.0 million, or 17%, from $107.2 million in the nine months endedSeptember 30, 2006 to $125.2 million in the nine months ended September 30,2007. This increase was primarily due to revenue increases. As a percentage ofrevenue, selling, general and administrative expenses decreased by 2% to 28% inthe nine months ended September 30, 2007, from 30% of revenue in the ninemonths ended September 30, 2006.

 

*Margins*

 

Segment EBITDA margins for the nine months endedSeptember 30, 2007 for OEH decreased to 28% of revenue, from 29% of revenue forthe nine months ended September 30, 2006. The 2006 margin

 

39

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was positively impacted by the gain from the sale ofinvestment in Harry’s Bar in the second quarter of 2006. Without Harry’s Barsale impact segment EBITDA remained at 28%. The European properties marginsincreased from 34% in the nine months ended September 30, 2006 to 36% in thenine months ended September 30, 2007. Margins at the Rest of the World hotelswere down 2% in the nine months ended September 30, 2007 to 24% mainly due tothe impact of the stronger Brazilian real on the U.S. dollar earnings of theCopacabana Palace Hotel. Margins in North America were down from 21% to 20%mainly due to business interruption insurance income recorded last year with nocomparable income in the current period.

 

*Earnings from operations*

 

Earnings from operations increased by $18.3 millionfrom $59.6 million in the nine months ended September 30, 2006 to $77.9 millionin the nine months ended September 30, 2007, due to the factors described aboveand to a $2.3 million gain from insurance recoveries relating to assetsdisposed of at Maroma Resort and Spa.

 

*Net finance costs*

 

Net finance costs decreased by $3.6 million, or 10%,from $38.0 million for the nine months ended September 30, 2006 to $34.4 millionfor the nine months ended September 30, 2007. The nine months ended September30, 2007 included a foreign exchange loss of $0.2 million compared to a foreignexchange loss of $5.5 million in the nine months ended September 30, 2006. Theother components of net finance costs increased by $1.7 million, or 5%, from$32.5 million for the nine months ended September 30, 2006 to $34.2 million forthe nine months ended September 30, 2007. The increase was due to higherinterest rates and higher debt levels.

 

*Provision for income taxes*

 

The provision for income taxes increased by $12.9 million, from aprovision of $4.1 million in the nine months ended September 30, 2006 to aprovision of $17.1 million in the nine months ended September 30, 2007. The2006 provision included deferred tax credits totalling $8.8 million that aroseon the reduction of valuation allowances established in respect of tax lossesin Portugal, Bora Bora and Australia. There were no comparable credits in thecurrent year provision.

 

The Company recognized a provision of $28.8 million in respect of itsuncertain tax positions upon the adoption of FASB interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. The provision forincome taxes of $17.1 million for the nine months ended September 30, 2007included a tax provision of $1.0 million in respect of the FIN 48 liability.

 

*Earnings from unconsolidated companies*

 

40

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Earnings from unconsolidated companies increased by$3.1 million, or 34%, from $9.1 million in the nine months ended September 30,2006 to $12.2 million in the nine months ended September 30, 2007. This wasmainly due to increased earnings from OEH’s Charleston Place Hotel andinvestments in Peru.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $85.2 million atSeptember 30, 2007, $5.9 million more than the $79.3 million at December 31,2006. At September 30, 2007, there were undrawn amounts available to OEH undercommitted short-term lines of credit of $29.0 million and undrawn amountsavailable to OEH under secured revolving credit facilities of $60.5 million,bringing total cash availability at September 30, 2007 to $174.7 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of$58.4 million at September 30, 2007, a decrease in the working capital of $63.3million from a balance of $4.9 million surplus at December 31, 2006. Changes inthe following balances made the most contribution to the decrease in theworking capital:

 

•                  Current portion of long-term debt and capital leases has increasedby $80.7 million as a portion of the debt will become due in the followingyear;  OEH is planning to refinance thisportion of debt in 2008;

 

•                  Working capital facilities have increased by $11.8 million; OEH usedmore short-term financing in 2007;

 

•                  Deferred revenue has increased by $13.1 million due to a highervolume of business for the following quarter; and

 

•                  Accrued liabilities have increased by $9.7 million.

 

These have been partly offset by increases in cash of$5.9 million, prepaid expenses of $12.7 million, real estate assets of $11.2million and other working capital movements due to the higher activities in thehotel and real estate business.

 

*Cash Flow*

 

*Operating Activities*. Net cash provided by operating activities decreased by $5.3million from $59.5 million for the nine months ended September 30, 2006 to$54.2 million for the nine months

 

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ended September 30, 2007. This was due to variousmovements in the working capital balances, the largest being an increase inprepaid expenses and receivables.

 

*Investing Activities*. Cash used in investing activities decreased by $24.0 million to$92.9 million for the nine months ended September 30, 2007, compared to $116.9million for the nine months ended September 30, 2006.

 

The lower capital expenditure (decrease of $5.6million) was partly offset by lower proceeds from sale of fixed assets (adecrease of $5.8 million). The higher capital expenditure costs in 2006 weremainly due to the post-hurricane construction at Maroma as well asrefurbishments at Grand Hotel Europe and Reids Palace Hotel. Capitalexpenditure in 2007 of $77.9 million included $6.3 million for El Encantoconstruction costs, $3.6 million Casa de Sierra Nevada refurbishments, $4.0million construction of assets at Cupecoy Village in St. Maarten, $9.5 millioncapital expenditure at the Italian hotels, $8.6 million of Grand Hotel Europecosts, $4.5 million of Copacabana Palace capital costs, and $4.4 million paidfor the Maroma land acquisition.

 

Proceeds from fixed assets disposals of $3.7 millionincluded insurance compensation received for the damaged assets of Maroma Hotelof $2.3 million.

 

Current period acquisitions of $18.7 million includedthe acquisition of the remaining 50% of Royal Scotsman and Afloat in France,website assets, 18% of the Laos hotel interest, investment in Buzios andpayment of final cash from the escrow account relating to the Grand HotelEurope acquisition. The 2006 period acquisitions included 75% of Casa de SierraNevada and 25% of Maroma interests, and acquisition of Pansea hotels.

 

*Financing Activities*. Cash provided by financing activities for the nine months endedSeptember 30, 2007 was $42.7 million compared to $124.3 million for the ninemonths ended September 30, 2006, a decrease of $81.6 million.

 

Last year OEH completed refinancing of the Europeanhotels, as a result of which proceeds from borrowings under long-term debt andcash used in long-term debt repayments were significantly higher compared tothe current period. Also last year OEH received cash of $99.4 million from theissuance of common shares. In the current period OEH used more of its workingcapital facilities to finance operations than last year.

 

*Capital Commitments*. There were $42.8 million of capital commitments outstanding as ofSeptember 30, 2007 mainly on investments in owned hotels.

 

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*Indebtedness*

 

At September 30, 2007, OEH had $736.4 million oflong-term debt secured by assets ($651.2 million net of cash), including thecurrent portion, which is repayable over periods of 1 to 8 years with aweighted average interest rate of 5.82%**.**See Note 7 tothe financial statements regarding the maturity of long-term debt.

 

Approximately 52% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars. At September30, 2007, 84% of borrowings of OEH 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 ofSeptember 30, 2007, the Company’s adoption of recent accounting pronouncements,which are described in Note 1 to the financial statements in the Company’s 2006Form 10-K annual report, has not changed from December 31, 2006, except for theadoption of FIN 48 on January 1, 2007, as described in Note 9.

 

## **CriticalAccounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 - Management’s Discussion and Analysis in the Company’s 2006 Form 10-Kannual report, and the real estate revenue recognition policy as described inNote 1(b).

 

**ITEM 3.****                             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 andmanaged as part of OEH’s overall risk management program, which recognizes theunpredictability of financial markets and seeks to mitigate material adverseeffects on consolidated earnings and cash flows. OEH does not hold market ratesensitive financial instruments for trading purposes.

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by

 

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changes in interest rates on borrowings, principallybased on U.S. dollar LIBOR and EURIBOR, and on short-term cash investments. Ifinterest rates increased by 10%, with all other variables held constant, annualnet finance costs of OEH would have increased by approximately $3,700,000 on anannual basis based on borrowings at September 30, 2007. The interest rates onsubstantially all of OEH’s long-term debt are adjusted regularly to reflectcurrent 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 nine months of 2007 fromthose described in the Company’s 2006 Form 10-K annual report.

 

**ITEM 4.          Controls and Procedures**

 

The Company’s management, under the supervision of and with theparticipation of the Company’s Chief Executive Officer, who is also currentlyserving as acting Chief Financial Officer, have evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as defined in SEC Rule13a-15(e)) as of September 30, 2007 and, based on that evaluation, believethose disclosure controls and procedures are effective as of that date. Therehave been no changes in the Company’s internal control over financial reporting(as defined in SEC Rule 13a-15(f)) during the third quarter of 2007 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement. In addition, the design of any control system is based in partupon certain assumptions about the likelihood of future events. Controls maybecome inadequate because of changes in conditions, or the degree of compliancewith policies or procedures may deteriorate, for example. Because of these andother inherent limitations of control systems, there can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture 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 theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                                      | ORIENT-EXPRESS  HOTELS LTD.           |
|-------------------------------------------|---------------------------------------|
|                                      |                                  |
|                                      |                                  |
|                                      | By:                                   | /s/ P.M. White |   |
|                                      | Paul M. White                         |   |
|                                      | President and Chief Executive Officer |   |
|                                      | (acting Chief Financial Officer)      |   |
|                                      |                                  |
| Dated:   November  9, 2007 |                                  |
|                                           |                                       |  |  |  |

 

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**EXHIBIT INDEX**

 

3.1   -   Memorandum ofAssociation and Certificate of Incorporation of the Company, filed as Exhibit3.1 to the Company’s Form 8-K Current Report on July 9, 2007 and incorporatedherein by reference.

 

3.2   -   Bye-Lawsof the Company, filed as Exhibit 3 to the Company’s Form 8-K Current Report onJune 20, 2007 and incorporated herein by reference.

 

3.3   -   RightsAgreement dated as of June 1, 2000, and amended and restated as of April 12,2007, between the Company and Computershare Trust Company, N.A., as rightsagent, filed as Exhibit 1 to Amendment No. 1 to the Company’s RegistrationStatement on Form 8-A dated April 23, 2007, for the Company’s preferred sharepurchase rights, and incorporated herein by reference.

 

31   -   Rule13a-14(a)/15d-14(a) Certifications.

 

32   -   Section1350 Certification.

 

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