**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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**(MarkOne)**

 

| **x**      | ** ** | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|-----------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                          |
| ** ** | ** ** | **For the fiscal year ended December 31,  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 File Number 1-16017**

 

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**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant as specified in its charter)

 

| **Bermuda**

(State or other jurisdiction of   incorporation or organization) |   | **98-0223493**

(I.R.S. Employer   Identification No.) |
|-------------------------------------------------------------------------------|--------|--------------------------------------------------------|

 

**22 Victoria Street,**

**Hamilton HM 12, Bermuda**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:   **(441) 295-2244**

 

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OFTHE ACT:

 

| **Title of  each class**                           | ** ** | **Name of  each exchange   on which registered** |
|----------------------------------------------------|------------|--------------------------------------------------|
|                                               |       |                                             |
| Class A Common Shares, $0.01 par   value each |       | New York Stock Exchange                          |
| Preferred Share Purchase Rights                    |       | New York Stock Exchange                          |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OFTHE ACT: **None.**

 

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

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Act during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. (Not applicable. See third paragraph under Item 1–Businesson page 4.)

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

 

The aggregatemarket value of the Class A common shares held by non-affiliates of theregistrant computed by reference to the closing price on June 29, 2007(the last business day of the registrant’s second fiscal quarter in 2007) wasapproximately $2,263,000,000.

 

As of February 20, 2008, 42,456,000 Class Acommon shares and 18,044,478 Class B common shares of the registrant wereoutstanding.  All of the Class Bshares are owned by a subsidiary of the registrant (see Note 13(d) tothe Financial Statements (Item 8)).

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DOCUMENTS INCORPORATED BY REFERENCE:  **None**

 

 

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**TABLE OF CONTENTS**

** **
|          |     |                                                                                                                | **Page   Number** |
|---------------|----------|---------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I   | Item 1.  | Business                                                                                                            | 4                 |
|          | Item 1A. | Risk Factors                                                                                                        | 23                |
|          | Item 1B. | Unresolved  Staff Comments                                                                                          | 37                |
|          | Item  2. | Properties                                                                                                          | 37                |
|          | Item 3.  | Legal Proceedings                                                                                                   | 37                |
|          | Item 4.  | Submission  of Matters to a Vote of Security  Holders                                                               | 38                |
|          |     |                                                                                                                |              |
| PART II  | Item 5.  | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 39                |
|          | Item 6.  | Selected Financial  Data                                                                                            | 40                |
|          | Item 7.  | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                        | 41                |
|          | Item 7A. | Quantitative  and Qualitative Disclosures About  Market Risk                                                        | 62                |
|          | Item 8.  | Financial  Statements and Supplementary Data                                                                        | 65                |
|          | Item 9.  | Changes in  and Disagreements with Accountants  on Accounting and Financial Disclosure                              | 116               |
|          | Item 9A. | Controls and  Procedures                                                                                            | 116               |
|          | Item 9B. | Other Information                                                                                                   | 117               |
|          |     |                                                                                                                |              |
| PART III | Item 10. | Directors, Executive Officers and Corporate Governance                                                              | 118               |
|          | Item 11. | Executive  Compensation                                                                                             | 123               |
|          | Item 12. | Security  Ownership of Certain Beneficial Owners  and Management and Related Stockholder  Matters                   | 128               |
|          | Item 13. | Certain  Relationships and Related Transactions,  and Director Independence                                         | 133               |
|          | Item 14. | Principal  Accountant Fees and Services .                                                                           | 135               |
|          |     |                                                                                                                |              |
| PART IV  | Item 15. | Exhibits and  Financial Statement Schedules                                                                         | 137               |
|          |     | Signatures                                                                                                          | 139               |
|          |     | Exhibit Index                                                                                                  | 141               |

 

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**Preliminary Note:**  Forward-looking statements concerning theoperations, performance, financial condition, plans and prospects ofOrient-Express Hotels Ltd. and its subsidiaries are based on management’scurrent assessments and assumptions, are not historical facts, and are subjectto various risks and uncertainties. Forward-looking statements can be identified by the fact that they donot relate only to historic or current facts, and often use words such as “anticipate”,“target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or otherwords of similar meaning.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements due to a number of factors, including those described in Item 1–Business,Item 1A–Risk Factors, Item 7–Management’s Discussion and Analysis, Item 7A–Quantitativeand Qualitative Disclosures about Market Risk, and Item 12–Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Mattersbelow.  Investors are cautioned not toplace undue reliance on these forward-looking statements which are notguarantees of future performance. Orient-Express Hotels Ltd. undertakes no obligation to update or revisepublicly any forward-looking statement, whether as a result of new information,future events or otherwise.

 

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**PART I**

 

**ITEM1.  Business**

 

Orient-ExpressHotels Ltd. (the “Company” and, together with its subsidiaries, “OEH”) isincorporated in the Islands of Bermuda and is a “foreign private issuer” asdefined in Rule 3b-4 of the U.S. Securities and Exchange Commission (“SEC”)under the U.S. Securities Exchange Act of 1934 (the “1934 Act”) and in SEC Rule 405under the U.S. Securities Act of 1933. As a result, it is eligible to file its annual reports pursuant to Section 13of the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file itsinterim reports on Form 6-K (in lieu of Forms 10-Q and 8-K).  However, the Company elects to file itsannual and interim reports on Forms 10-K, 10-Q and 8-K, including anyinstructions therein that relate specifically to foreign private issuers.

 

Thesereports and amendments to them are available free of charge on the internetwebsite of the Company as soon as reasonably practicable after they are filedelectronically with the SEC.  Theinternet website address is http://www.orient-express.com.  Unless specifically noted, information on theOEH website is not incorporated by reference into this Form 10-K annualreport.

 

Pursuantto SEC Rule 3a12-3 under the 1934 Act regarding foreign private issuers,the proxy solicitations of the Company are not subject to the disclosure andprocedural requirements of SEC Regulation 14A under the 1934 Act, andtransactions in the Company’s equity securities by its officers, directors andsignificant shareholders are exempt from the reporting and liability provisionsof Section 16 of the 1934 Act.

 

**Restatement of prior yearfinancial statements**

 

The Company filed its annual report on Form 10-Kfor the year ended December 31, 2006 (the “2006 Form 10-K”) on March 1,2007.  As more fully discussed in Item 8–FinancialStatements and Supplementary Data under Note 2–Restatement to the consolidatedfinancial statements in the 2006 Form 10-K, the Company restated itsconsolidated balance sheet, its statement of consolidated operations, itsstatement of consolidated shareholders’ equity and its statement ofconsolidated cash flows as of December 31, 2005 and for the year ended December 31,2005.  In addition, the Company restatedselected financial data as of December 31, 2005, 2004 and 2003 and for theyears ended December 31, 2005, 2004 and 2003 in Item 6–Selected FinancialData in the 2006 Form 10-K and beginning shareholders’ equity for theimpact of the 

 

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restatement for periods prior to 2004. The impact ofthe restated financial results for the first, second and third quarterlyperiods of 2006 was also presented in the summary of quarterly earnings(unaudited) in Item 8–Financial Statements and Supplementary Data in the 2006 Form 10-K.  The restatement corrected for errors made inthe application of U.S. generally accepted accounting principles, includingdeferred tax and foreign currency accounting.

 

**Introduction**

 

OEH isa hotel and leisure group focused on the luxury end of the leisure market.  Organized in 1995, it currently owns and/orinvests in 51 properties (all of which it manages) consisting of 41 highlyindividual deluxe hotels, two restaurants, six tourist trains and two river/canalcruise businesses.  These are located in25 countries worldwide.  OEH acquires ormanages only very distinctive properties in areas of outstanding cultural,historic or recreational interest in order to provide luxury lifestyleexperiences for the discerning traveller. OEH is also developing two other hotels not yet open.

 

Thelocations of OEH’s 51 properties are shown in the map on page 3, wherethey number 47 because the Hotel Cipriani and Palazzo Vendramin are contiguousin Venice, the Hotel Splendido and Splendido Mare are both in Portofino, andthree separate safari lodges operate as a unit in Botswana.  These seven properties bring the total to 51.

 

Hotelsand restaurants represent the largest segment of OEH’s business, contributing83% of revenue in 2007, 84% in 2006 and 85% in 2005.  Tourist trains and cruises accounted for 14%of revenue in 2007, 13% in 2006 and 14% in 2005.  Property development activities accounted forthe remaining revenue in each year.  OEH’sworldwide portfolio of hotels currently consists of 3,889 individual guestrooms and multiple-room suites, each known as a “key”.  Hotels owned by OEH in 2007 achieved anaverage daily room rate (“ADR”) of $428 (2006–$382) and a revenue per availableroom (“RevPAR”) of $263 (2006–$242). Approximately 70% of OEH’s customers are leisure travellers, withapproximately 46% of customers in 2007 originating from North America, 40% fromEurope and the remaining 14% from elsewhere in the world.

 

Revenue,earnings and identifiable assets of OEH in 2005, 2006 and 2007 for its businesssegments and geographic areas are presented in Note 19 to the FinancialStatements (Item 8 below).

 

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**OwnedHotels–Europe**

 

*Italy*

 

The **Hotel Cipriani** and **Palazzo Vendramin**–98keys–in Venice were built for the most part in the 1950s and are located onthree acres on Giudecca Island across from the Piazza San Marco which isaccessed by a free private boat service. Most of the rooms have views over the Venetian lagoon.  Features include fine cuisine in three indoorand outdoor restaurants, gardens and terraces encompassing an Olympic-sizedswimming pool, a tennis court, and a large banquet and meeting facilitysituated in an historic refurbished warehouse.

 

The **Hotel Splendido** and **Splendido Mare**–80keys–overlook picturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was builtin 1901 and is surrounded by gardens and terraces which include a swimming pooland tennis court.  There are two open-airand enclosed restaurants as well as banquet/meeting rooms, and a shuttle buslinking the main hotel with Splendido Mare on the harbor below.

 

The **Villa San Michele**–46 keys–is located in Fiesole, a shortdistance from Florence.  Originally builtas a monastery in the 15th century with a façade attributed to Michelangelo, ithas stunning views over historic Florence and the Arno River Valley.  OEH has remodelled and expanded the guestaccommodation to luxury standards, including the addition of a swimmingpool.  A shuttle bus service is providedinto Florence.  The property occupies tenacres.  The Villa San Michele alsooperates for hotel guests the five-bedroom main house of the **Capannelle** wine estate in the Chianti region owned by JamesSherwood.  See Item 13–CertainRelationships and Related Transactions, and Director Independence below.

 

The **Hotel Caruso Belvedere**–50 keys–in Ravello is located onthree hill-top acres overlooking the Amalfi coast near Naples and ancient Romanand Greek archaeological sites such as Pompeii and Paestum.  Once a nobleman’s palace, parts of thebuildings date back to the 11th century. Operated as a hotel for many years, OEH rebuilt the property afteracquiring it and reopened in 2005. Amenities include two restaurants, an outdoor swimming pool, spa andextensive gardens.

 

All ofthese Italian properties operate seasonally, closing for varying periods duringthe winter.

 

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*Portugal*

 

**Reid’sPalace**–163keys–is the most famous hotel on the island of Madeira, situated on ten acresof semitropical gardens on a cliff top above the sea and the bay of Funchal,the main port city.  Opened in 1891, thehotel has four restaurants and banquet/meeting facilities.  Leisure and sports amenities include twofresh water swimming pools, a third tide-filled pool, tennis courts, oceanwater sports, a spa and access to two championship golf courses.  It has year-round appeal to European leisuretravellers, serving both winter escapes to the sun and regular summerholidays.  OEH is considering developmentof for-sale residential units on the grounds of the hotel.

 

The **Lapa Palace**–109 keys–is in the embassy district of Lisbon,near the city center and overlooking the Tagus River. The historic part of thehotel was originally built in the 1870s as the palace of a Portuguese noblefamily.  It opened as a luxury hotel in1992 after extensive conversion and expansion, including the addition ofconference facilities and underground car parking.  The hotel is set amid gardens with ornamentalfountains and both indoor and outdoor swimming pools, occupying a total ofthree acres.  OEH owns an adjoiningparcel of land suitable for building guest rooms or for-sale residentialapartments.

 

*Elsewherein Europe*

 

**Hôtelde la Cité**–61 keys–is located in the central square of the beautiful walledmedieval town of Carcassonne, France near Toulouse.  Opened in 1909, the hotel incorporates one ofthe 50 watch towers in Carcassonne’s ancient fortifications and features tworestaurants, gardens, a swimming pool and a nearby conference center,altogether occupying two acres.  One ofthe restaurants has been awarded one star for fine dining by the influentialMichelin Guide.  The hotel also operatesa canal barge on the Canal du Midi providing day excursions for guests.

 

OEHowns **La Residencia**–64 keys–located in thecharming village of Deià on the rugged northwest coast of the island ofMallorca, Spain in the Mediterranean. Mallorca is a popular European tourist destination throughout the year.  The core of La Residencia was originallycreated from two adjoining 16th and 17th century country houses set on ahillside site of 30 acres.  The hotelfeatures three restaurants including the gourmet El Olivio, one of the foremoston the island, as well as two large outdoor swimming pools, tennis courts and aspa with an indoor pool.

 

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**LeManoir aux Quat’Saisons**–32 keys–is located in Oxfordshire, England about anhour’s drive west of London.  The mainpart of the hotel is a 16th century manor house set in 27 acres ofgardens.  The property was developed byRaymond Blanc, one of Britain’s most famous chef-patrons, and the hotel’srestaurant has two stars in the Michelin Guide. Mr. Blanc has given a long-term commitment to remain the chef atthe hotel.

 

OEHowns a 93.5% interest in the **Grand Hotel Europe**–301keys–in St. Petersburg, Russia. Originally built in 1875, the hotel occupies one side of an entire cityblock on the fashionable Nevsky Prospect in the heart of the city near theRussian Museum, Shostakovich Philharmonia and other tourist and culturalattractions as well as the business center. There are five restaurants on the premises, popular with locals andvisitors alike, as well as a grand ballroom, meeting facilities, a health cluband spa and several retail shops.  OEH iscurrently finishing a phased refurbishment of the hotel, and plans to acquirethe minority interest owned by the City of St. Petersburg.

 

**OwnedHotels–North America**

 

*UnitedStates*

 

The **Windsor Court**–322 keys–opened in 1984 and is located in thecentral business district of New Orleans near the French Quarter and theMississippi riverfront.  Harrah’soperates the only land-based casino in Louisiana across the street.  Each guest room has panoramic views over theriver or the city.  Facilities includethree restaurants and lounges, a roof-top ballroom, several other banquet andmeeting rooms, an outdoor swimming pool and a health club.  The hotel’s interior décor features acollection of historic European art and antique furniture.  The hotel has planning permission to build aconference center on a nearby owned lot. The hotel was closed for three months in 2005 due to hurricane damage,and occupancy and ADR have gradually recovered with the New Orleans market.

 

**KeswickHall**–48keys–is located in the rolling countryside of central Virginia, nearCharlottesville.  Originally a privatehome dating from 1912, it is popular for weekend breaks and business meetingsand, with the adjacent Keswick Club, features a spa and fitness center, tenniscourts, two swimming pools and an Arnold Palmer-designed championship golfcourse.  The total site occupies 600acres including vacant land around the golf course being sold by OEH in parcelsfor private residential development.  See“Property Development” below.

 

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The **Inn at Perry Cabin**–80 keys–was built in 1812 as a countryinn located in St. Michaels, Maryland on the eastern shore of ChesapeakeBay.  Set on 25 waterfront acres thatinclude an outdoor swimming pool as well as boating and fishing on the Bay, itis an attractive conference and vacation destination, particularly for guestsfrom the Washington, D.C. area.  OEH hascompleted a major renovation and expansion of the hotel, including a newconference facility and a spa.  Vacantavailable land may be developed as residences in the future.

 

OEHowns **El Encanto**–77 keys–in Santa Barbara,California.  The hotel is located in thehills above the restored Santa Barbara Mission, with views out to the PacificOcean.  Built in 1913 on a seven-acresite, the guest rooms are in cottages and low rise buildings spread throughoutmature gardens with a swimming pool and tennis court.  OEH closed this hotel in late 2006 forsignificant renovation, including the addition of 14 keys, and expects toreopen in 2009.

 

*Caribbean*

 

**LaSamanna**–81keys–is located on the island of St. Martin in the French West Indies.  Built in 1973, the hotel consists of severalbuildings on ten acres of land along a 4,000-foot beach.  Amenities include two restaurants, twoswimming pools, a spa, tennis courts, fitness and conference centers, boatingand ocean water sports, and extensive gardens. The hotel is open most of the year, seasonally closing during the autumnmonths.

 

OEHowns about 48 acres of additional land adjoining La Samanna on both the Frenchand Dutch sides of St. Martin, which it is developing as residential villas andapartments.  See “Property Development”below.

 

*Mexico*

 

OEHowns the **Maroma Resort and Spa**–65 keys–on Mexico’sRiviera Maya on the Caribbean coast of the Yucatan Peninsula, about 30 milessouth of Cancun.  The resort opened in1995 and has 25 acres of land along a 750-foot beach with the Cozumel barrierreef offshore where guests may fish, snorkel and scuba-dive.  Important Mayan archaeological sites are alsonearby.  Rooms are arranged in low-risevillas and there are three restaurants, tennis courts and extensive spafacilities.  The hotel suffered hurricanedamage in October 2005 and reopened in February 2006.

 

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Inaddition, OEH purchased in 2007 a 28-acre tract adjacent to Maroma on which itplans to build and sell private villas. See “Property Development” below.

 

OEHowns an 80% interest in **Casa de Sierra Nevada**–33keys–a luxury resort in the colonial town of San Miguel de Allende.  Opened in 1952, the hotel consists of nineSpanish colonial buildings built in the 16th and 18th centuries.  OEH is renovating the existing buildings,including the two restaurants, and building 20 new suites and a new pool, spaand garden area.  In addition to the nineowned buildings, the hotel leases two buildings for administrative offices, atotal site of approximately two acres. OEH also owns a nearby cooking school and retail shop operated inconjunction with the hotel.

 

**OwnedHotels–Rest of the World**

 

*SouthAmerica*

 

Builtin the 1920s on a three-acre site facing Copacabana Beach near the centralbusiness district of Rio de Janeiro, Brazil, the **CopacabanaPalace**–222 keys–is one of the most famous in South America andfeatures two gourmet restaurants, spacious function and meeting rooms, a500-seat theater, a large swimming pool, spa and fitness center, and a roof-toptennis court and pool.  The old casinorooms were refurbished and reopened in 2007 as additional function and meetingspace for up to 1,200 persons.

 

In June 2007, OEH acquired a 50% interest in a company owning 46acres of beachfront land in Buzios, Brazil, a popular upmarket resort townabout 100 miles east of Rio de Janeiro. If necessary permits are issued, OEH plans to acquire the entireproperty, most of which is environmentally protected, and build a new hotel ofabout 40 keys and 17 for-sale villas. Earliest opening is expected in 2010.

 

In October 2007, OEH commenced operation of **Hotel****das Cataratas**–203 keys–directly besidethe famous Iguacu Falls in Brazil on the border with Argentina, having beenawarded a 20-year lease by the Brazilian government.  It is the only hotel in the national parksurrounding the falls, a World Heritage location.  First opened in 1958 on a site of about fouracres, the hotel has two restaurants, conference facilities, a swimming pooland tennis court, and tropical gardens looking out at the falls.  OEH plans an extensive renovation and upgradeof the property in phases during 2008 and 2009.

 

The **Miraflores Park Hotel**–82 keys–is located in an exclusiveresidential district of Lima, Peru surrounded by 

 

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parkland andlooking out at the Pacific Ocean, yet near the commercial and cultural centerof the city.  Opened in 1997, the hotelhas two restaurants, a large ballroom, rooftop outdoor pool, health and beautyfacilities and a business center for guests, and occupies about one acre ofland.

 

*SouthernAfrica*

 

The **Mount Nelson Hotel**–201 keys–in Cape Town, South Africa is afamous historic property opened in 1899. With beautiful gardens and pools, it stands just below Table Mountainand is within walking distance of the main business, civic and cultural centerof the city.  The hotel has a ballroom,two swimming pools, tennis courts, and a fitness center and spa, all situatedon ten acres of grounds.  Expansion isplanned through incorporation into the hotel of adjoining residentialproperties owned by OEH.

 

The **Westcliff Hotel**–117 keys–is the only garden hotel inJohannesburg, South Africa, opened in 1998 and situated on six hillside acreswith views over the city’s zoo and parkland. Laid out in village style, its resort amenities include two swimmingpools, tennis court and health club.  Thehotel attracts business guests because of its proximity to the citycenter.  A banquet and conference centeroccupies part of adjacent expansion land.

 

**Orient-ExpressSafaris**–39keys total–consist of three separate game-viewing lodges in Botswana called **Khwai River Lodge, Eagle Island Camp** and **Savute Elephant Camp**. Established in 1971, OEH leases the lodge sites in the Okavango Riverdelta and nearby game reserves, where some of the best wildlife in Africa canbe observed from open safari vehicles or boats. Each camp has 12 or 15 twin-bedded deluxe tents, and guests travelbetween the camps by light aircraft. Boating, fishing, hiking and swimming areoffered at the various sites.

 

*Australia*

 

The **Observatory Hotel**–96 keys–is in Sydney within walkingdistance of the central business district. This hotel opened in 1993 and has two restaurant and lounge areas,extensive meeting and banquet rooms, a spa and health club with indoor swimmingpool, and a large parking garage on a site of about one acre.  There is also access to a nearby tenniscourt.

 

The **Lilianfels Blue Mountains**–85 keys–is in the Blue MountainsNational Park west of Sydney.  It isnamed after the original estate house, dating from 1890, where the hotel’sgourmet restaurant is located.  The mainhotel, built in 1992 

 

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and recentlyrefurbished, has a second restaurant and conference facilities.  The resort’s four acres of grounds encompassindoor and outdoor swimming pools, health club and spa, tennis court andextensive gardens with views over the Blue Mountains.  There is expansion land to add keys in thefuture.

 

*FrenchPolynesia*

 

**BoraBora Lagoon Resort and Spa**–77 keys–opened in 1993 and has bungalows situatedover the lagoon water plus additional beach and garden bungalows, all built intraditional Tahitian style on a 12-acre site. Guests dine in two restaurants and enjoy extensive water sports andtennis.  A recent renovation programincluded a new swimming pool, spa and conference facility.  On some of the resort’s available vacantland, private residential villas for sale can be developed.

 

In December 2007,the Company’s Board of Directors approved of the disposal of Bora Bora LagoonResort.  Accordingly, the hotel’s assetsand liabilities have been designated as held for sale and its results have beenreflected as discontinued operations for all periods presented.  See Note 2 to the Financial Statements.

 

*Asia*

 

In July 2006, OEH acquired the Pansea groupof six deluxe hotels in Southeast Asia described below, each built anddecorated in traditional local style.

 

**Napasai**–55 keys–is located on its ownbeach on the north side of Koh Samui island of Thailand in the Gulf ofSiam.  It originally opened in 2004 andfeatures two restaurants, tennis courts, swimming pool, spa and water sportssuch as diving and snorkeling in the nearby coral reef.  The guest rooms are arranged in seaviewcottages on a total site of about 40 acres on which 14 private villas have beenbuilt with vacant land available to develop and sell additional villas.  See “Property Development” below.  Most purchasers of these villas havecontracted with Napasai to make the villas available to hotel guests on arevenue-sharing basis with the purchasers.

 

On Bali in Indonesia are two long-termleasehold properties, **Jimbaran Puri Bali**–42keys–and **Ubud Hanging Gardens**–38 keys.  Jimbaran Puri Bali originally occupied fourbeachfront acres on the south coast of the island.  Guest rooms are situated in cottages and, inaddition to ocean water sports, the hotel features two restaurants and aswimming pool.  During 2007, OEH acquireda long lease of about three 

 

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acres of vacant land beside the hotel on which OEH isbuilding 22 additional keys.

 

Ubud Hanging Gardens is located on terraceson about seven steep hillside acres above the Ayung River gorge in the interiorof Bali.  The hotel opened in 2005 andoffers two restaurants, a swimming pool and spa, and a free shuttle bus to thenearby town of Ubud, a cultural and arts center.

 

**La Résidence d’Angkor**–55 keys–opened in 2002 and issituated in walled gardens in Siem Reap, Cambodia.  The hotel occupies a site of about two acresunder long-term lease.  The ancientTemples of Angkor, the principal tourist attraction in the area, are near thehotel which has an indoor/outdoor restaurant and swimming pool.  OEH is planning to add eight keys and a spato this property.

 

Built in 1920, **TheGovernor’s Residence**–48 keys–in the embassy district of Rangoon,Burma (Myanmar) was originally the official home of one of the Burmese stategovernors.  It is a teak two-storeymansion surrounded by verandas overlooking lotus gardens, a long-term leasedsite of about two acres that opened as a hotel in 1997.  It includes a restaurant and swimmingpool.  OEH owns a 66% interest in theproperty and has reached agreement in principle with the other shareholders inthe property to increase its interest to 100%.

 

In Luang Prabang, the ancient capital ofLaos, OEH owns a 69% interest in **La Résidence Phou Vao**–34keys.  The hotel opened in 2001 andoccupies about eight hillside acres under long-term lease.  Guest rooms are in four two-storey buildingssurrounded by gardens that include a restaurant, spa and swimming pool.

 

**HotelManagement Interests**

 

Througha 50%/50% joint venture with a Spanish investment company, OEH owns and managesthe famous **Hotel Ritz**–167 keys–in centralMadrid near the financial district, Spanish parliament and many of the city’swell known tourist attractions.  Openedin 1910, the hotel has four spacious conference and banqueting suites, anindoor restaurant and the famous Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner have embarked on anextensive capital improvement program, beginning with the public areas of thehotel.

 

**CharlestonPlace**–441keys–is located in the heart of historic Charleston, South Carolina, a populardestination for tourists and business meetings. Opened in 1986, the hotel has two restaurants, extensive banqueting andconference space 

 

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including agrand ballroom, a health club with spa and swimming pool, and a shopping arcadeof 25 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historicRiviera Theater remodelled as additional conference space and retailshops.  OEH has a 19.9% ownershipinterest in this hotel, manages the property under an exclusive long-termcontract, and receives interest on partnership loans which it assumed at thetime of its original investment and on other loans made since then.

 

OEH hasa 50%/50% joint venture with local investors in Peru which, under exclusivemanagement of OEH, operates the following three hotels under long-termrenewable leases.

 

The **Hotel Monasterio**–126 keys–is located in the ancient Incacapital of Cusco, an important tourist destination in Peru.  The hotel was originally built as a Spanishmonastery in the 16th century, converted to hotel use in 1995, and upgraded byOEH since then.  The deluxe guest roomsand two restaurants are arranged around open-air cloisters.  Because of Cusco’s high altitude, speciallyoxygenated ventilation has been added to some of the refurbished rooms.  The three acre site includes a vacant conventadjoining the hotel which will be rebuilt as 55 additional keys.

 

The **Machu Picchu Sanctuary Lodge**–31 keys–is the only hotel atthe famous mountaintop Inca ruins at Machu Picchu.  All of the rooms have been refurbished to ahigh standard.  The joint venture alsohas a lease on seven acres at the foot of the ruins, close to the town wheretourists arrive by train, for possible future expansion.

 

The Peru hotel joint venture of OEH built in 2007 for opening in April 2008a small luxury bungalow hotel called **Las Casitas del Colca**–20keys–on 57 acres north of Arequipa near the 11,000 foot high rim of ColcaCanyon.  The hotel will feature anintimate dining room and a swimming pool and spa, and guests will enjoy toursof the scenic canyon famous for its giant condors.

 

**Restaurants**

 

OEHowns **‘21’ Club**, the famous landmarkrestaurant at 21 West 52nd Street in mid-town Manhattan in New York City.  Originally a speakeasy during Prohibition inthe 1920s, this restaurant is open to the public, occupies three brownstonebuildings and features gourmet American cuisine.  It serves à la carte meals in the originalbar restaurant and a separate dining room upstairs, and also has a number ofbanqueting rooms used for functions, including the famous secret wine cellar.

 

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In November 2007, OEH entered into a contract to purchase the landand building of the Donnell branch of New York Public Library on West 53rdStreet abutting ‘21’ Club on West 52nd Street. Subject to obtaining necessary permits, OEH plans to demolish thelibrary building and construct a luxury hotel of up to 150 keys to be called **‘21’ Hotel** including a restaurant, spa, a new Donnelllibrary branch, and expanded banqueting and dining space connecting to ‘21’Club, with a target opening of 2011.

 

OEH hasre-established the famous **La Cabaña** steakhouse in Buenos Aires dating from the 1930s. OEH bought the contents and name of the restaurant and, after relocatingto the Recoleta area of the city, reopened in 2003.  The main dining room features a traditionalopen fire for searing meats, and three private dining rooms have regionalArgentine themes.

 

Untilthe sale to its majority partner in June 2006, OEH owned a 49% interest in**Harry’s Bar**, a private dining club inthe Mayfair area of London.

 

**TouristTrains and Cruises**

 

OEH’sprincipal European tourist trains, called the **VeniceSimplon-Orient-Express**, operate in two parts in a regularlyscheduled overnight service between London and Venice and on short excursionsin southern England.  OEH owns 30 railwaycars originally used on historic “Orient-Express” and other famous Europeantrains.  All have been refurbished inoriginal 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuationof the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composedentirely of Pullman cars with a capacity for up to 250 passengers.  The other train is based on the EuropeanContinent made up of Compagnie Internationale des Wagons-Lits et du Tourismesleeping cars and day coaches with capacity for up to 180 passengers.  They operate once or twice weekly principallybetween London and Venice from March to November each year via Paris,Zurich and Innsbruck on a scenic route through the Alps.  Passengers travel under the English Channelby coach on the Eurotunnel shuttle train. Occasional trips are also made from time to time to Rome, Prague,Budapest and Istanbul and other European destinations.

 

The **British Pullman** cars of Venice Simplon-Orient-Expressoperate all year, originating out of London on short excursions to places ofhistoric or scenic interest in southern England, including some overnight tripswhen 

 

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passengersstay at local hotels.  Both the Britishand Continental trains are available for private charter.

 

The **Northern Belle** tourist train offers day trips and charterservice principally in the north of England. It builds on the success of OEH’s British Pullman business, whichfocuses on the south of England around London. This train consists of six dining cars elegantly decorated to bereminiscent of old British “Belle” trains of the 1930s, plus related servicecars, and can carry up to 250 passengers. Full course meals are served on board and passengers stay in localhotels on overnight itineraries.

 

OEHowns the **Royal Scotsman** luxury tourist train,having purchased in April 2007 the 50% interest it did not previouslyown.  Founded in 1985, the Royal Scotsmanis composed of nine Edwardian-style cars accommodating up to 36passengers.  Each compartment in the sixsleeping cars has a private bathroom. Operating from April to October each year, the train travelson itineraries of up to seven nights through the Scottish countryside affordingpassengers the opportunity to visit clan castles, historic battlegrounds,famous Scotch whiskey distilleries and other points of interest.

 

**PeruRail** is a 50%/50% joint venturebetween OEH and Peruvian partners formed to operate part of the state-ownedrailways in Peru under a 30-year franchise awarded in 1999 and extendable everyfive years, upon the joint venture’s application, up to 30 additionalyears.  The joint venture pays thegovernment a fee related to traffic levels which can be partially offsetagainst investment in track improvements. The 70-mile Cusco-Machu Picchu line carries mainly tourists visiting thefamous Inca ruins, the principal means of access because there is no convenientroad, as well as local passenger traffic. Beginning in 2008, other carriers will operate on this line for thefirst time in competition with PeruRail. A second rail line runs from Cusco to Matarani on the Pacific Ocean viaPuno on Lake Titicaca and Arequipa and principally serves freight traffic.  The Cusco-Machu Picchu line connects two ofOEH’s Peruvian hotels allowing inclusive tours served by OEH’s **Hiram Bingham** luxury tourist train.  OEH also operates a deluxe daytime touristtrain called the **Andean Explorer** on the Cusco-Punoroute through the High Andes mountains.

 

The **Eastern & Oriental Express** in Southeast Asiatravels up to one round trip each week between Singapore, Kuala Lumpur andBangkok.  The journey lasts between 48and 72 hours each way and includes two or three nights on board and side tripsto Penang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made fromBangkok to Chiang Mai and 

 

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elsewhere inThailand and, beginning in 2007, to Vientiane, Laos.  Originally built in 1970, the 24 cars weresubstantially rebuilt to an elegant oriental style of décor and fitted withmodern facilities such as air-conditioning and private bathrooms.  The train is made up of sleeping cars, threerestaurant cars, a bar car and an open air observation car and can carry up to125 passengers.  The Eastern &Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a25% shareholding in the owning company.

 

OEHowns and operates a deluxe river cruiseship on the Irrawaddy River in centralBurma, or Myanmar, called the **Road To Mandalay**.  The ship was a Rhine River cruiser built in 1964which OEH bought and refurbished.  It has66 air-conditioned cabins with private bathrooms, spacious restaurant andlounge areas and a canopied sun deck with swimming pool.  The ship travels between Mandalay and Paganup to eight times each month and carries 126 passengers who enjoy sightseeingalong the river and guided shore excursions to places of historicinterest.  Five to eight nightitineraries are offered, including airfare to and from the ship and hotel accommodationin Rangoon.  OEH also operates occasionalcruises to different destinations, such as to Bhamo in the north of the countryclose to the China border.  The ship doesnot operate in the hot summer season and occasionally when the water level of theIrrawaddy River falls too low due to lack of rainfall.

 

OEHowns five luxury river and canal boats operating as **Afloat inFrance** in Burgundy, Provence and other rural regions of France.  In April 2007, OEH acquired the 50%interest in this business that it did not previously own.  The boats accommodate between six and 12passengers each in double berth compartments with private bathrooms, and somehave small plunge pools on deck.  Theyoperate seasonally between April and October on three to six nightitineraries with guests dining on board or in nearby restaurants.  Side trips are organized each day.

 

**Property Development**

 

OEH ispursuing opportunities to develop the real estate it owns at its hotels.  In addition to expansion through constructionof guest rooms and other facilities at the hotels, certain of OEH’s propertieshave adjacent vacant land available for construction and sale of deluxeresidential villas and apartments, as noted above under the various “OwnedHotels” headings.

 

OEH iscurrently building at La Samanna in St. Martin the Cupecoy Yacht Club on 12acres on the Dutch side of the 

 

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island, consisting of approximately 180 condominiumapartments and 30,000 square feet of shop, restaurant and marina space.  The apartments range from 750 to 3,000 squarefeet in size.  OEH plans to build andsell the units in phases, with construction completion currently scheduled by2010, and to retain management of most of the units sold.  At December 31, 2007, 71 condominiums atCupecoy had been pre-sold.  OEH also hasplanning permission to build a further 60 units at Cupecoy.

 

On the French side of St. Martin, OEH isalso developing the Residences at La Samanna. Up to 37 private homes are planned on 36 acres to be built inphases.  A first phase of eight largehomes, each about 6,000 square feet with a private swimming pool, is currentlyunder construction.  One has been sold.

 

At Keswick Hall in Virginia, OEH willcontinue to sell residential parcels of land surrounding and adjacent to its KeswickClub championship golf course.  Fiveplots were sold in 2007 in a minimum size of two acres.  OEH has built the roads and otherinfrastructure, including some sample homes, while most purchasers build theirown custom-designed homes subject to development guidelines.  Each sale entitles the purchaser to join thehotel’s Keswick Club.

 

When OEH acquired the Pansea hotels groupin July 2006, development of 14 private villas was already underway on the40-acre site of Napasai on Koh Samui in Thailand.  Development of up to 40 more residentialvillas is planned.

 

In 2007, OEH completed the purchase ofabout 28 acres of vacant land beside its Maroma Resort and Spa on the RivieraMaya in Mexico.  OEH management currentlyintends to build on most of this land up to 20 locally-designed privateresidential villas.  A sample unit isplanned to be constructed in 2008.

 

Also in 2007, OEH embarked on its hotel andvilla development in Buzios, Brazil.

 

Other hotels owned by OEH with availablevacant land include Reids Palace in Madeira, Lapa Palace in Lisbon, and Inn atPerry Cabin on the eastern shore of Maryland. Development will include sale of completed residences and, in manycases, ongoing management as integral parts of the adjacent hotels or, atKeswick Hall, membership in the hotel’s golf club.  The villas and apartments are being marketedand sold by local on-site sales personnel of OEH and through third-party realestate agents with listings locally and abroad.

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**Management Strategies**

 

As the foregoing indicates, OEH has a global mix ofhotel and other deluxe travel products that are geographically diverse andappeal to the high-end leisure market, reflecting an important managementstrategy.  As a result, about 70% ofannual revenue derives from leisure customers while corporate/business travelaccounts for the rest.  OEH’s propertiesare distinctive as well as luxurious and tend to attract guests prepared to payhigher rates for the travel experiences OEH offers.

 

OEH benefits from trends and developments favorablyimpacting the global hotel, travel and leisure markets, including strong demandgrowth trends over the long term in the luxury hotel market in many parts ofthe world, increased travel and leisure spending by consumers, favorabledemographic trends in relevant age and income brackets of U.S., European andother populations, and increased online travel bookings.  These trends suffered a setback beginning in2001 due to slowing national economies, the shock of terrorist attacks, thebuild-up and aftermath of the wars in Afghanistan and Iraq and the SARSepidemic.  Management believes, however,that the public’s confidence in international travel and demand for luxuryhotel and tourist products will be sustained over the long term.

 

OEH management plans to grow the business by:

 

·                                increasing RevPAR and other earnings at its established propertiesand newer acquisitions,

 

·                                expanding existing hotel and restaurant properties where land orspace is available,

 

·                                developing vacant land as residences for sale,

 

·                                increasing the utilization of its tourist trains and cruises to addtrips, and

 

·                                acquiring additional distinctive luxury properties throughout theworld.

 

Factorsin OEH’s evaluation of a potential acquisition include the uniqueness of theproperty, attractions for guests in the vicinity, acceptability of initialinvestment returns, upside potential through pricing, expansion or improvedmarketing, limitations on nearby competition, and convenient access.  Expansion at existing properties by addingrooms and facilities such as spas and conference space can provide 

 

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attractiveinvestment returns because incremental operating costs are low.

 

OEH management plans to continue owning or part-owningand managing most OEH properties, although OEH will consider contracts tomanage properties without part-ownership which meet its criteria in order tofacilitate entry into new markets or to preserve capital investment.  Ownership encourages OEH to develop thedistinctive local character of its properties and allows it to benefit from allof the current cash flow and future capital gains should it sell aproperty.  Self-management has enabledOEH to capture the economic benefits otherwise shared with a third-partymanager, to control the operations, quality and expansion of the hotels, and touse its experience with price changes, expansions and renovations to improvecash flow and enhance asset values.

 

Many of OEH’s individual properties, such as the HotelCipriani and ‘21’ Club, have distinctive local character and brandidentity.  Management believes thatdiscerning travellers will choose a famous property in preference to a chainbrand.  OEH links its properties togetherunder the umbrella “Orient-Express Hotels, Trains & Cruises” namewhich originated with the legendary luxury European train in the late 19th andearly 20th centuries and which is recognizable worldwide and synonymous withsophisticated travel and refined elegance. Management plans to extend OEH’s individual brands over time by usingthem on additional properties, but still linked by the umbrella name.  Development of ‘21’ Hotel adjacent to ‘21’Club in New York described under the “Restaurants” heading above is an exampleof this brand extension.

 

As indicated above under “Property Development”, OEHis expanding its property development activities.  Management anticipates future profits bothfrom sales of land and completed units and from ongoing management of the unitsfor the purchasers as integral parts of the adjacent hotels.

 

**Marketing, Sales and Public Relations**

 

OEH’s sales and marketing function is primarily basedupon direct sales (including through travel agents and tour operators and theinternet), cross-selling to existing customers, and public relations.  OEH has a global sales force of about 250persons in 50 locations.  These includeregional sales and reservations offices in New York, Providence (Rhode Island),Charleston (South Carolina), Sao Paulo, Lima, London, Paris, Cologne, Milan,Madrid, Moscow, Tokyo, Singapore and Sydney. OEH also has local sales representatives with 

 

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responsibilityfor the hotels where they are based.  Theresponsibilities of OEH’s sales staff include working with the travel industryand preferred distribution partners, contacting group and corporate accountrepresentatives, and conducting marketing initiatives such as direct mailingsand e-commerce.  OEH participates in anumber of international programs, such as “American Express Centurion”, andorganizations, such as “The Leading Hotels of the World”, to promote itsproperties.

 

Internet usage is an important direct sales and salesdevelopment tool.  Through OEH’sprincipal website (www.orient-express.com) and the websites of its individualproperties, OEH provides extensive descriptions of the properties, includinglocal activities for guests, and direct reservations capability in English andother languages.  OEH also provides aninternet website (www.oeh.com) for preferred travel agents and other industrypartners featuring latest news, sales assistance and marketing tools, andoperates other internet travel portals that direct customers to OEH’sproperties.  Online sales have lowertransaction costs by saving travel agent commissions and tour operatordiscounts.  The internet also broadensmarketing exposure and increases distribution.

 

Because repeat customers appreciate the consistentquality of OEH’s hotels, trains, cruises and restaurants, an important part ofmanagement’s strategy is to promote OEH properties through variouscross-selling efforts.  These includepreferred travel agent programs, direct mail to existing customers, in-housebrochures and promotions, discounted special offers, and OEH’s in-house “Orient-ExpressTraveller” directory.  OEH sells luxurysouvenir goods branded with the names of its travel products.

 

OEH’s marketing strategy also focuses on publicrelations, which management believes is a highly cost-effective marketing toolfor luxury properties.  Because of theunique nature of its properties, guests are more likely to hear about OEH’shotels and tours through word-of-mouth or published articles rather thanthrough general advertising.  OEH has anin-house public relations office in London and representatives in ten countriesworldwide, including contracts with third-party public relations firms, topromote its properties through targeted newspapers, general interest and travelmagazines, and broadcast, online and other media.

 

**Industry Awards**

 

OEH has gained a worldwide reputation for quality andservice in the luxury segment of the leisure and business 

 

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travelmarket.  Over the years, OEH’s propertieshave won numerous national and international awards given by trade or consumerpublications such as Conde Nast Traveller, Gourmet, Travel & Leisureand Tatler, or industry bodies such as the American AutomobileAssociation.  The awards are based onopinion polls of readers or the professional opinion of journalists or panelsof experts.  The awards are believed toinfluence consumer choice and are therefore highly prized.

 

**Competition**

 

Some of OEH’s properties are located in areas wherethere are numerous competitors, some of which have greater resources than OEHhas.  Competition for guests in thehospitality industry is based generally on the convenience of location, thequality of the property, room rates and menu prices, the range and quality offood services and amenities offered, types of cuisine, and name recognition.

 

OEH’s strategy is to acquire only hotels which havespecial locations and distinctive character. Many are in areas with unique local history or high entry barriersbecause of zoning restrictions.  OEHbuilds its competitive advantage by offering high quality service and cuisine,usually with a local flavor.  Typically,therefore, OEH competes by providing a special combination of location,character, cuisine, service and experiential activities rather than relying onprice competition.

 

OEH’s luxury tourist trains have no directcompetitors.  Other trains exist onsimilar routes, including new services in 2008 on the Cusco-Machu Picchu lineof PeruRail, but management believes OEH’s trains and onboard service areunique and of such superior quality that guests consider an OEH train journeymore as a luxury experience and an end in itself rather than as a means oftransport.

 

**Employees**

 

OEH currently employs about 7,400 persons, about 2,500of whom are represented by labor unions.  Approximately 6,500 persons are employed inthe hotels and restaurants, 800 in the trains and cruises business, and therest in central administration and sales. Management believes that OEH’s ongoing labor relations are satisfactory.

 

**GovernmentRegulation**

 

OEH and its properties are subject to numerous lawsand government regulations such as those relating to the preparation and saleof food and beverages, liquor service, 

 

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healthand safety of premises, employee relationships, environmental matters, andplanning and zoning rules. Management believes that OEH is in compliance in allmaterial respects with relevant laws and regulations with respect to itsbusiness.

 

**ITEM 1A.       Risk Factors**

 

OEHinvestors should carefully consider the risks described below and the otherinformation contained in or incorporated by reference in this report.  These risks are separated into three generalgroups:

 

·                       risks of OEH’s business,

 

·                       risks that relate to OEH’s financialcondition and results of operations, and

 

·                       risks of investing in Class A commonshares.

 

Describedbelow are only the risks OEH management considers to be the mostsignificant.  There may be additionalrisks that are deemed less material or not presently known to management.  If any of these risks occurs, OEH’s business,prospects, financial condition, results of operations or cash flows could bematerially adversely affected.  A riskthat might have a material adverse effect means that the risk may have one ormore of these effects.  In that case, themarket price of the Class A common shares could decline.

 

## **Risks of OEH’sBusiness**

 

***OEH’soperations are subject to adverse factors generally encountered in thehospitality and travel industries.***

 

Besidesthe specific conditions discussed in the risk factors below, these adversefactors include:

 

·                                cyclicaldownturns arising from changes in general and local economic conditions andbusiness activities, which impact levels of travel and demand for travel products,

 

·                                politicalinstability of the governments of some countries where OEH properties arelocated, resulting in depressed hotel demand,

 

·                                lessdisposable income of consumers and the travelling public,

 

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·                                dependence onvarying levels of tourism, business travel and corporate entertainment,

 

·                                changes inpopular travel patterns,

 

·                                competitionfrom other hotels and leisure time activities,

 

·                                periodiclocal oversupply of guest accommodation, which may adversely affect occupancyand actual room rates achieved,

 

·                                increases inoperating costs at OEH properties due to inflation and other factors which maynot be offset by increased revenues, and changes in costs of materials,

 

·                                regional andlocal economic and political conditions affecting market demand for travelproducts, including recessions, civil disorder, and acts or threats ofterrorism,

 

·                                expropriationor nationalization of OEH properties by foreign governments,

 

·                                foreignexchange rate movements impacting OEH’s revenues and costs,

 

·                                adverseweather conditions or destructive forces like fire or flooding that sometimesresult in closure of OEH’s properties,

 

·                                reduction indomestic or international travel and demand for OEH’s properties due to actualor threatened acts of terrorism or war, outbreak of contagious disease,travel-related accidents or industrial action, increased transportation andfuel costs, and natural disasters, and

 

·                                seasonality,in that many of OEH’s hotels and tourist trains are located in the northernhemisphere where they operate at low revenue or close during the winter months.

 

Theeffect of these factors varies among OEH’s hotels and other properties becauseof their geographic diversity.  Forexample, civil unrest in Burma in September 2007 resulted in reservationcancellations at The Governor’s Residence and Road To Mandalay at the beginningof the seasonal high demand period for those properties.  Bookings are recovering but fourth quarter2007 revenue was adversely affected.

 

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Inparticular, as a result of the terrorist attacks in the United States on September 11,2001 and the subsequent military actions in Afghanistan and Iraq,international, regional and even domestic travel was disrupted.  Demand for most of OEH’s properties declinedsubstantially in the latter part of 2001. Although the effects of the disruption have reduced in the interveningyears, further acts of terrorism or a military action, or the threat of either,could again reduce leisure and business travel.

 

***The hospitality industry is highly competitive,both for acquisitions of new hotels and restaurants and for customers at OEH’s properties***

 

OEHcompetes for hotel and restaurant acquisition opportunities with others who mayhave greater financial resources.  Thesecompetitors may be prepared to accept a higher level of financial risk than OEHcan prudently manage.  This competitionmay have the effect of reducing the number of suitable investment opportunitiesoffered to OEH and increasing OEH’s acquisition costs because the bargainingpower of property owners seeking to sell or to enter into management agreementsis increased.

 

Some ofOEH’s properties are located in areas where there are numerous competitors,particularly in city centers. Competitive factors in the hospitality industry include:

 

·                                convenience of location,

 

·                                the quality of the property,

 

·                                room rates and menu prices,

 

·                                the range andquality of food services and amenities offered,

 

·                                types ofcuisine, and

 

·                                name recognition.

 

Demographic, geographic orother changes in one or more of OEH’s markets could impact the convenience ordesirability of its hotels and restaurants, and so could adversely affect theiroperations.

 

Also,new or existing competitors could significantly lower rates or offer greaterconveniences, services or amenities, or significantly expand, improve orintroduce new facilities in the markets in which OEH operates.  For example, 

 

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new passenger rail serviceswill operate starting in 2008 on the Cusco-Machu Picchu line of PeruRail forthe first time in direct competition, which is expected to reduce PeruRail’sprofitability.  As another example,largely because of new hotel competition in Bora Bora as well as high coststructures, OEH has decided in late 2007 to dispose of Bora Bora Lagoon Resort.

 

***The hospitality industry is heavily regulated, including with respectto food and beverage sales, employee relations, construction and environmentalconcerns, and compliance with these laws could reduce revenues and profits ofproperties owned or managed by OEH.***

 

OEH andits various properties are subject to numerous laws and government regulations,including those relating to the preparation and sale of food and beverages,liquor service, and health and safety of premises.  The properties are also subject to lawsgoverning OEH’s relationship with employees in such areas as minimum wage andmaximum working hours, overtime, working conditions, hiring and firingemployees and work permits.

 

Thesuccess of expanding existing properties depends upon obtaining necessarybuilding permits or zoning variances from local authorities.  Failure to obtain or delay in obtaining thesepermits could adversely affect OEH’s strategy of increasing revenues and netearnings through expansion of existing properties.

 

OEHalso is subject to U.S. and foreign laws and regulations relating to theenvironment and the handling of hazardous substances that may impose or createsignificant potential environmental liabilities, even in situations where theenvironmental problem or violation occurred on a property before OEH acquiredit.

 

***OEH’s acquisition, expansion and development strategy may be lesssuccessful than expected and, therefore, its growth may be limited.***

 

Managementintends to increase the revenues and earnings of OEH through acquisition of newproperties and expansion of existing properties.  The ability to pursue new growthopportunities successfully will depend on OEH management’s ability to:

 

·                              identifyproperties suitable for acquisition and expansion,

 

·                              negotiate purchases orconstruction on satisfactory terms,

 

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·                              obtain the necessaryfinancing and government permits,

 

·                              build on schedule andwith minimum disruption to guests, and

 

·                              integrate new propertiesinto OEH’s operations.

 

Also, the acquisition ofproperties in new locations may present operating and marketing challenges thatare different from those encountered in OEH’s existing locations.  There can be no assurance that managementwill succeed in OEH’s growth strategy.

 

OEHmanagement plans to develop new properties in the future such as ‘21’ Hotel inNew York and OEH’s hotel/villa project in Buzios, Brazil.  New project development is subject to suchadverse factors as:

 

·                              sitedeterioration after acquisition,

 

·                  inability toobtain necessary government permits,

 

·                              inclement weather,

 

·                              labor or materialshortages,

 

·                              work stoppages,

 

·                              continued availabilityof construction and permanent financing,

 

·                              untimely opening,

 

·                              high start-up costs, and

 

·                              weak initial marketacceptance of a new property.

 

For example, El Encanto inSanta Barbara was originally closed for extensive renovations in September 2006,with an expected reopening in 2008. Because of changes in rebuilding plans, delays in obtaining governmentpermits and the pace of construction, however, reopening of the hotel is nowtargeted for late 2009.

 

***OEH may beunable to obtain the necessary additional capital to finance the growth of itsbusiness.***

 

The acquisitionand expansion of leisure properties, as well as the ongoing renovations,refurbishments and 

 

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improvements required tomaintain or upgrade OEH’s properties, are capital intensive.  Current plans of OEH call for the expenditureof substantial amounts over the next few years to add new rooms or facilitiesat existing properties and to acquire new properties, which would be financedmainly by a suitable level of mortgage debt. In addition, new-build projects can be costly, such as the planned ‘21’Hotel in New York with an estimated development cost of $220,000,000 over fouryears.

 

Theavailability of future borrowings and access to the capital markets for equityfinancing to fund these acquisitions, expansions and projects depend onprevailing market conditions and the acceptability of financing terms offeredto OEH.  There can be no assurance thatfuture borrowings or equity financing will be available to OEH, or available onacceptable terms, in an amount sufficient to fund its needs.  Future equity financings may be dilutive tothe existing holders of common shares. Future debt financings may require restrictive covenants that wouldlimit OEH’s flexibility in operating its business.

 

***Currency fluctuations may have a material adverse effect on OEH’sfinancial statements and/or its operating margins.***

 

Substantialportions of OEH’s revenues and expenses are denominated in non-U.S. currenciessuch as European euros, British pounds sterling, Russian rubles, South Africanrand, Australian dollars, Peruvian nuevos soles, Botswana pula, Brazilianreais, Mexican pesos, French Pacific francs and various Southeast Asiancurrencies.  In addition, OEH buys assetsand incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have amaterial adverse effect on OEH’s financial statements and/or operating margins.

 

OEH’sfinancial statements are presented in U.S. dollars and can be impacted byforeign exchange fluctuations through both:

 

·                              translationrisk, which is the risk that the financial statements for a particular periodor as of a certain date depend on the prevailing exchange rates of the variouscurrencies against the U.S. dollar, and

 

·                              transactionrisk, which is the risk that the currency of costs and liabilities fluctuatesin relation to the currency of revenue and assets, which fluctuations mayadversely affect OEH’s operating margins.

 

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***OEH’s operations may be adversely affected by extreme weatherconditions and the impact of natural disasters.***

 

OEHoperates properties in a variety of locales, each of which is subject to localweather patterns affecting the properties and customer travel.  As OEH’s revenues are dependent on therevenues of individual properties, extreme weather conditions can from time totime have a major adverse impact upon individual properties or particularregions.  For example, La Samanna in St.Martin suffered substantial wind and flood damage from a hurricane in November 1999.  Although the hotel was fully insured for therepair costs, it remained closed until February 2000, so that OEH missedmuch of the high season that year.  Similarly, hurricanes in August and October 2005 caused damageto the Windsor Court Hotel in New Orleans and Maroma Resort and Spa on Mexico’sYucatan Peninsula, resulting in temporary closure of the hotels forrepairs.  OEH carries property and lossof earnings insurance in amounts management deems reasonably adequate, butdamages may exceed the insurance limits or be outside the scope of coverage.

 

***If the relationships between OEH and its employees were to deteriorate,OEH may be faced with labor shortages or stoppages, which would adverselyaffect its ability to operate its facilities.***

 

OEH’srelations with its employees in various countries could deteriorate due todisputes related to, among other things, wage or benefit levels, workingconditions or management’s response to changes in government regulation ofworkers and the workplace.  Operationsrely heavily on employees’ providing a high level of personal service, and anylabor shortage or stoppage caused by poor relations with employees,including labor unions, could adversely affect the ability to provide thoseservices, which could reduce occupancy and room revenue and even tarnish OEH’sreputation.

 

***OEH’s plans to expand existing properties, develop new ones and buildresidential units for sale at its properties are subject to project cost,completion and resale risks.***

 

Successful new project development depends on timelycompletion within budget and satisfactory market conditions.  Risks that could affect a project include:

 

·                              construction delays or cost overruns that may increase projectcosts,

 

·                              delay or denial of zoning,occupancy and other required government permits and authorizations,

 

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·                              write-off of developmentcosts incurred for projects that are not pursued to completion,

 

·                              natural disasters such asearthquakes, hurricanes, floods or fires that could adversely impact a project,

 

·                              defects in design orconstruction that may result in additional costs to remedy, or that require allor a portion of a property to be closed during the period needed to rectify thesituation,

 

·                              inability to raise capitalto fund a project,

 

·                              government restrictions onthe nature or size of a project or timing of completion, or on the ownership ofcompleted units such as by foreign nationals, and

 

·                              changes in marketconditions for residences, such as credit availability and pricing terms, oroversupply that may affect OEH’s ability to sell residential units at a profitor at price levels originally anticipated.

 

***OEH’s owned hotels and restaurants are subject to risks generallyincident to the ownership of commercial real estate and often beyond itscontrol.***

 

Theseinclude:

 

·                      fluctuating demand for commercial realestate as an investment,

 

·                      changes in national, regional and localeconomic and political conditions,

 

·                      changes in interest rates and theavailability, cost and terms of financing,

 

·                      the impact of present or future governmentlegislation and regulation (including environmental laws),

 

·                      the ongoing need for capital improvements tomaintain or upgrade properties,

 

·                      changes in property taxes and operatingexpenses, and

 

·                      the potential for uninsured or underinsuredlosses.

 

30

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***Lossor infringement of OEH’s brand names could adversely affect its business.***

 

In thecompetitive hotel and leisure industry in which OEH operates, trade names andtrademarks are important in the revenue generation, marketing and promotion ofits properties.  OEH has a large numberof trade names and trademarks, and expends resources each year on theirsurveillance, registration and protection. OEH’s future growth is dependent in part on increasing and developingits brand identities.  The loss, dilutionor infringement of any of OEH’s brand identities could have an adverse effecton its business, results of operations and financial condition.

 

**Risks Relating to OEH’s Financial Conditionand Results of Operations**

 

***Covenants inOEH’s financing agreements could limit its discretion in operating itsbusinesses, causing it to make less advantageous business decisions; OEH’sindebtedness is collateralized by substantially all of its properties.***

 

OEH’sfinancing agreements with several commercial bank lenders contain covenantsthat include limits on additional debt collateralized by mortgaged properties,limits on property liens and limits on mergers and asset sales, and financialcovenants requiring maintenance of minimum net worth amounts or a minimum interestexpense coverage, or establishing a maximum debt to equity ratio or a maximumloan to collateral value ratio. Indebtedness is also collateralized by substantially all of OEH’sproperties.  Future financing agreementsmay contain similar provisions and covenants or even more restrictiveones.  If OEH fails to comply with therestrictions in its present or future financing agreements, a default mayoccur.  A default could allow thecreditors to accelerate the related debt as well as any other debt to which across-acceleration or cross-default provision applies.  A default could also allow the creditors toforeclose on the properties collateralizing the debt.

 

***Increases in prevailing interest rates may increase OEH’s interestpayment obligations.***

 

Approximately76% of OEH’s consolidated long-term debt at December 31, 2007 accruesinterest that fluctuates with prevailing interest rates, so that any rateincreases may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedgingtransactions in order to manage its floating interest rate exposure, but therecan be no assurance those hedges will be successful.  At December 31, 2007,

 

31

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approximately $176,000,000 oflong-term debt was subject to fixed interest rate swaps.

 

***The Company’s ability to pay dividends on the Class A commonshares is limited.***

 

Beginningin January 2004, the Company has been paying quarterly dividends on its Class Aand B common shares in the amount of $0.025 per share.  There can be no assurance the Company will beable to make dividend payments in the future because of debt repaymentrequirements, a downturn to OEH’s business or other reasons.

 

UnderBermuda law, the Company may not pay dividends or make other distributions onthe Class A and B common shares if there are reasonable grounds forbelieving that OEH is, or after the payment would be, unable to pay itsliabilities as they become due, or if the realizable value of OEH’s assets isless than the aggregate of its liabilities, issued share capital and “sharepremium accounts” (share premium is defined as the amount of shareholders’equity over and above the aggregate par value of issued shares).  There can be no assurance the Company willnot be restricted by Bermuda law from paying dividends.

 

***OEH’s substantial indebtedness could adversely affect its financialhealth.***

 

OEH hasa significant amount of debt and may incur additional debt from time totime.  As of December 31, 2007, itsconsolidated long-term indebtedness was $786,410,000 (including the currentportion).  This substantial indebtednesscould:

 

·                              require OEHto dedicate much of its cash flow from operations to debt service payments, andso reduce the availability of cash flow to fund working capital, capitalexpenditures, product and service development and other general corporatepurposes,

 

·                              limit OEH’sability to obtain additional financing for its business,

 

·                              increase OEH’svulnerability to adverse economic and industry conditions, including theseasonality of some of its activities, or

 

·                              limit itsflexibility in planning for, or reacting to, changes in its business andindustry as well as the economy generally.

 

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OEHmust also repay or refinance a significant amount of indebtedness in futureyears.  Although OEH may seek torefinance its indebtedness, it may be unable to obtain refinancing onsatisfactory terms.  Any failure of OEHto repay any indebtedness when due may result in a default under itsindebtedness and cause cross-defaults under other indebtedness.

 

***OEHis subject to accounting regulations and uses certain accounting estimates andjudgments that may differ significantly from actual results.***

 

Implementation of existing and future standards and rules ofthe U.S. Financial Accounting Standards Board (“FASB”) or other regulatory bodiescould affect the presentation of OEH’s financial statements and relateddisclosures.  Future regulatoryrequirements could significantly change OEH’s current accounting practices anddisclosures.  These changes in thepresentation of OEH’s financial statements and related disclosures could changean investor’s interpretation or perception of OEH’s financial position andresults of operations.  For example, OEHbecame subject to FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (“FIN 48”), in the first quarter of 2007 requiring OEH torecognize at that time a substantial initial FIN 48 liability with acorresponding adjustment to retained earnings. See Note 11 to the Financial Statements. OEH’s future income tax cost may include a tax benefit as the initialFIN 48 provision is released or a tax cost as new FIN 48 liabilities arerecognized, in addition to the tax costs or benefits that relate to OEH’strading activities and results.

 

OEH uses many methods, estimates and judgments inapplying its accounting policies (see “Critical Accounting Policies” in Item 7–Management’sDiscussion and Analysis of this report). By their nature, these are subject to substantial risks, uncertaintiesand assumptions, and factors may arise over time that lead OEH to change itsmethods, estimates and judgments which could significantly affect OEH’s resultsof operations.

 

33

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** **

**Risks of Investing in Class A CommonShares**

** **

***The Company isnot restricted from issuing additional Class A or B common shares, and anysales could negatively affect the trading price of the Class A commonshares outstanding.***

 

TheCompany may in its discretion sell newly issued Class A or B common sharesfrom time to time.  There can be noassurance that the Company will not make significant sales of Class A or Bcommon shares.  Any sales couldmaterially and adversely affect the trading price of the Class A commonshares outstanding.

 

***The price ofthe Class A common shares may fluctuate significantly, which may make itdifficult for shareholders to sell the Class A common shares when theywant or at desired prices.***

 

The price of the Class A common shares on the New York StockExchange constantly changes.  OEHmanagement expects that the market price of the Class A common shares willcontinue to fluctuate.  Holders of Class Acommon shares will be subject to the risk of volatility and depressed prices.

 

TheCompany’s share price can fluctuate as a result of a variety of factors, manyof which are beyond OEH’s control.  Thesefactors include:

 

·                              quarterlyvariations in operating results,

 

·                              operatingresults that vary from the expectations of management, securities analysts andinvestors,

 

·                              changes inexpectations as to future financial performance, including financial estimatesby securities analysts and investors,

 

·                              developmentsgenerally affecting OEH’s business,

 

·                              marketspeculation about a potential acquisition of OEH,

 

·                              announcementsby OEH or its competitors of significant contracts, acquisitions, jointventures or capital commitments,

 

·                              announcementsby third parties of significant claims or proceedings against OEH,

 

·                              the dividendpolicy for the Class A and B common shares,

 

34

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·                              future salesof equity or equity-linked securities, and

 

·                              generaldomestic and international economic conditions.

 

Inaddition, the stock market in general can experience volatility that is oftenunrelated to the operating performance of a particular company.  These broad market fluctuations may adverselyaffect the market price of the Class A common shares.

 

***The Company’s directors and officers may control the outcome of mostmatters submitted to a vote of shareholders.***

 

Awholly-owned subsidiary of the Company, Orient-Express Holdings 1 Ltd. (“Holdings”),currently holds all 18,044,478 outstanding Class B common shares in theCompany representing about 81% of the combined voting power of Class A andB common shares for most matters submitted to a vote of shareholders, and thedirectors and officers of the Company hold Class A common sharesrepresenting an additional 0.3%.  Ingeneral, holders of Class A common shares and holders of Class Bcommon shares vote together as a single class, with holders of Class Acommon shares having one-tenth of one vote per share and holders of Class Bcommon shares having one vote per share. Therefore, as long as the number of outstanding Class B sharesexceeds one-tenth the number of outstanding Class A common shares,Holdings could control the outcome of most matters submitted to a vote of theshareholders.

 

UnderBermuda law, common shares of the Company owned by Holdings are outstanding andmay be voted by Holdings.  The manner inwhich Holdings votes its shares is determined by the five directors ofHoldings, three of whom, John D. Campbell, Prudence M. Leith and James B.Sherwood, are also directors of the Company, consistently with the exercise bythose directors of their fiduciary duties to Holdings.  Those directors, should they choose to acttogether, will be able to control substantially all matters affecting theCompany, and to block a number of matters relating to any potential change ofcontrol of the Company.  See Item 12–Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.

 

***Provisions inthe Company’s charter documents, and the preferred share purchase rightscurrently attached to the Class A and B common shares, may discourage apotential acquisition of OEH, even one that the holders of a majority of the Class Acommon shares might favor.***

 

TheCompany’s memorandum of association and bye-laws contain provisions that couldmake it more difficult for a 

 

35

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third party to acquire OEHwithout the consent of the Company’s Board of Directors.  These provisions include:

 

·                              asupermajority shareholder voting provision for the removal of directors fromoffice with or without cause,

 

·                              asupermajority shareholder voting provision for “business combination”transactions with beneficial owners of shares carrying 15% or more of the voteswhich may be cast at any general meeting of the Company, and

 

·                              limitationson the voting rights of such 15% beneficial owners.

 

Also,the Company’s Board of Directors has the right under Bermuda law to issuepreferred shares without shareholder approval, which could be done to dilutethe stock ownership of a potential hostile acquirer.  Although OEH management believes theseprovisions provide the shareholders an opportunity to receive a higher price byrequiring potential acquirers to negotiate with the Company’s Board ofDirectors, these provisions apply even if the offer is favored by shareholdersholding a majority of the Company’s equity.

 

TheCompany has in place a shareholder rights agreement providing for rights topurchase series A junior participating preferred shares of theCompany.  The rights are not currentlyexercisable and they are attached to and trade together with the Class Aand B common shares on a one-to-one basis. These rights may have anti-takeover effects on a potential acquirerholding 15% or more of the outstanding Class A or B common shares.

 

These anti-takeover provisions are in addition tothe ability of Holdings and directors and officers of the Company to voteshares representing a significant majority of the total voting power of theCompany’s common shares.  See the RiskFactor immediately above.

 

***A judgment of a United States court for liabilities under U.S.securities laws might not be enforceable in Bermuda, or an original actionmight not be brought in Bermuda against OEH for liabilities under U.S.securities laws.***

 

TheCompany is incorporated in Bermuda, a majority of its directors and officersare residents of Bermuda, the United Kingdom and elsewhere in Europe, and mostof its assets and the assets of its directors and officers are located outsidethe United States.  As a result, it maybe difficult for shareholders to:

 

36

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·                              effectservice of process within the United States upon the Company or its directorsand officers, or

 

·                              enforcejudgments obtained in United States courts against the Company or its directorsand officers based upon the civil liability provisions of the United Statesfederal securities laws.

 

OEH hasbeen advised by Appleby, its Bermuda legal counsel, that there is doubt as to:

 

·                              whether ajudgment of a United States court based solely upon the civil liabilityprovisions of the United States federal securities laws would be enforceable inBermuda against the Company or its directors and officers, and

 

·                              whether anoriginal action could be brought in Bermuda against the Company or itsdirectors and officers to enforce liabilities based solely upon the UnitedStates federal securities laws.

 

**ITEM 1B.       Unresolved Staff Comments**

 

None.

 

**ITEM 2.          Properties**

 

OEH owns 36 hotels worldwide (including nine underlong-term lease), four European tourist trains, its Burmese cruiseship and fivesmall French canalboats, and two restaurants in the U.S. and Argentina, and ownsinterests of 50% or less in five hotels in Peru, Spain and the U.S., itsSoutheast Asian tourist train and PeruRail, all as described in Item 1–Businessabove.  The small regional sales,marketing and operating offices of the hotels, tourist trains and cruisebusinesses are occupied under operating leases. OEH is also developing two new hotel properties not yet open in the U.S.and Brazil as described in Item 1–Business.

 

**ITEM3.          Legal Proceedings**

 

There are no material legal proceedings, other than ordinaryroutine litigation incidental to OEH’s business, to which the Company or any ofits subsidiaries is a party or to which any of their property is subject.

 

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**ITEM4.          Submission of Matters to aVote of Security Holders**

 

The Company submitted no matter to a voteof its security holders during the fourth quarter of 2007.

 

38

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**PART II**

 

**ITEM5.****                         ****Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

 

The Class Acommon shares of the Company are traded on the New York Stock Exchange underthe symbol OEH.  All of the Class Bcommon shares of the Company are owned by a subsidiary of the Company and notlisted.  See Item 12–Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterlyhigh and low sales prices of a Class A common share in 2007 and 2006 asreported for New York Stock Exchange composite transactions:

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|            |       |     |       |     |       |   |   |   |   |
| First  quarter  |       | $        | 61.65      |     | $          | 44.92 |   | $ | 40.35 |   | $ | 30.71 |   |
| Second  quarter |       | 60.64    |       | 50.69    |       | 43.43 |   | 35.05 |   |
| Third  quarter  |       | 58.97    |       | 42.60    |       | 40.97 |   | 31.30 |   |
| Fourth  quarter |       | 65.36    |       | 50.69    |       | 48.05 |   | 36.71 |   |
|                 |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Companypaid quarterly cash dividends at the rate of $0.025 per Class A and Bcommon share in 2006 and 2007.

 

The Islands ofBermuda where the Company is incorporated have no applicable government laws,decrees or regulations which restrict the export or import of capital or affectthe payment of dividends or other distributions to non-resident holders of the Class Aand B common shares of the Company or which subject United States holders totaxes.

 

At February 20,2008, the number of record holders of the Class A common shares of theCompany was approximately 30.

 

During 2007,the Company made no offering of its Class A common shares that was notregistered in the United States.  Also,during the fourth quarter of 2007, no purchases of the Company’s common shareswere made by or on behalf of the Company or any affiliated person.

 

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**ITEM 6.****                           ****SelectedFinancial Data**

 

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

 
| ** **                                                           | ** ** | **Year ended December 31,**                           | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(In thousands except per share amounts)** | ** ** |
| ** **                                                           | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                              |       | $                                                                    | 578,415    |   | $ | 479,364 |   | $ | 421,090 |   | $ | 348,310 |   | $ | 309,392 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Gain  on disposal of fixed assets/sale of investment/hotel asset (1) |       | $                                                                    | 2,312      |   | $ | 6,619 |   | $ | — |   | $ | — |   | $ | 4,250 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Earnings  from unconsolidated companies – net of tax.           |       | $                                                                    | 16,425     |   | $ | 11,970 |   | $ | 11,175 |   | $ | 9,084 |   | $ | 7,320 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net  earnings from continuing operations                             |       | $                                                                    | 50,263     |   | $ | 36,665 |   | $ | 41,293 |   | $ | 31,697 |   | $ | 27,201 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| (Loss)/earnings  from discontinued operations, net of tax (2)   |       | $                                                                    | (16,621    | ) | $ | 3,102 |   | $ | 246 |   | $ | (479 | ) | $ | (2,238 | ) |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net  earnings                                                        |       | $                                                                    | 33,642     |   | $ | 39,767 |   | $ | 41,539 |   | $ | 31,218 |   | $ | 24,963 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic  earnings per share:                                           |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net  earnings from continuing operations                             |       | $                                                                    | 1.19       |   | $ | 0.90 |   | $ | 1.08 |   | $ | 0.92 |   | $ | 0.82 |   |
| Net  (loss)/earnings from discontinued operations                    |       | (0.40                                                                | )          | 0.08 |   | 0.01 |   | (0.01 | ) | (0.06 | ) |
| Net  earnings                                                        |       | $                                                                    | 0.79       |   | $ | 0.98 |   | $ | 1.09 |   | $ | 0.91 |   | $ | 0.76 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Diluted  earnings per share:                                         |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net  earnings from continuing operations                             |       | $                                                                    | 1.19       |   | $ | 0.89 |   | $ | 1.07 |   | $ | 0.92 |   | $ | 0.82 |   |
| Net  (loss)/earnings from discontinued operations                    |       | (0.40                                                                | )          | 0.08 |   | 0.01 |   | (0.01 | ) | (0.06 | ) |
| Net  earnings                                                        |       | $                                                                    | 0.79       |   | $ | 0.97 |   | $ | 1.08 |   | $ | 0.91 |   | $ | 0.76 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Total  assets                                                        |       | $                                                                    | 1,988,437  |   | $ | 1,751,663 |   | $ | 1,452,166 |   | $ | 1,316,058 |   | $ | 1,208,383 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Long-term  obligations                                               |       | $                                                                    | 786,410    |   | $ | 669,697 |   | $ | 568,307 |   | $ | 583,706 |   | $ | 554,188 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                                           |       | $                                                                    | 848,531    |   | $ | 806,996 |   | $ | 650,496 |   | $ | 521,280 |   | $ | 488,530 |   |
|                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Dividends  per share                                                 |       | $                                                                    | 0.10       |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | — |   |

 

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(1)                                  Thegain in 2003 related to the sale of the Hotel Quinta do Lago in Portugal. Thegain in 2006 related to the sale of the investment in Harry’s Bar.  The gain in 2007 related to the gain on thesettlement of insurance proceeds for hurricane-damaged assets at Maroma Resortand Spa.

 

(2)                                  In December 2007,OEH decided to sell Bora Bora Lagoon Resort. Accordingly, the results of the hotel have been presented asdiscontinued operations.  Included in the2007 loss from discontinued operations is goodwill and fixed assets impairmentlosses of $14,000,000.

 

See notes to consolidatedfinancial statements (Item 8).

 

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**ITEM 7.          Management’s Discussion and Analysis of Financial****Conditionand Results of Operations**

 

**Overview**

 

OEH has three business segments: (1) hotels andrestaurants, (2) tourist trains and cruises, and (3) real estate andproperty development.  Hotels currentlyconsist of 41 deluxe hotels.  Thirty-sixof these hotels are wholly or majority owned, and are referred to in thisdiscussion as “owned hotels”.  The otherfive hotels, in which OEH has unconsolidated equity interests and operate undermanagement contracts, are referred to in this discussion as “hotel managementinterests”.  Of the owned hotels, 12 arelocated in Europe, seven in North America and 17 in the rest of the world.

 

In December 2007, Bora Bora Lagoon Resort was designated as held forsale, and, accordingly, the results of the hotel have been reflected asdiscontinued operations in all periods presented.

 

Also, OEHcurrently owns and operates the restaurants ‘21’ Club in New York and La Cabañain Buenos Aires.  In June 2006, OEHsold its minority interest in a third restaurant.

 

OEH’s tourist trains and cruises segment operates sixtourist trains – four of which are owned and operated by OEH, one in which OEHhas an equity interest and exclusive management contracts, and one in which OEHhas an equity investment – and a river cruiseship and five canalboats.

 

Revenue peravailable room, or RevPAR, is a performance indicator used widely within thehotel industry as it is a function of the average daily room rate, or ADR,achieved for the rooms sold and average occupancy, being the rooms sold as aproportion of the rooms available to be sold. ADR on its own gives no indication of the relative occupancy of thehotel and could be shown as increasing while the number of rooms sold hadfallen, resulting in a reduction in rooms revenue over a prior period.

 

OEH’s results in 2005 improved over those in 2004,with same store RevPAR increases of 16%, coupled with the acquisition of theGrand Hotel Europe in 2005, driving revenue increases of 21% and net earningsgrowth of 33% to $41.5 million.  In 2006,OEH saw further growth of 10% in RevPAR as performance approached 2000levels.  In 2006 average occupancy was63% with ADR $380.  In 2007, same storeRevPAR increased 15% in dollars and 11% in local currency with ADR of $428.

 

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OEH has a strategy to grow its business that includes:

 

·                  RevPAR growth:  the unique nature of OEH’s individualproperties and the avoidance of a chain brand have historically enabled OEH tocharge premium rates for rooms;

 

·                  Expansion of hotels:  the returns on investment by adding new roomsor other facilities to a hotel are high as the incremental operating costs arelow;

 

·                  Acquisitions:  OEH looks to invest in unique properties atreasonable prices with expansion potential and near-term upside potential inearnings through increasing room rates and/or reducing costs; and

 

·                  Real estate:  OEH owns land near to or surrounding itshotels which it intends to develop over time for residential real estate sales.

 

In March 2005, by selling 5,050,000 newly-issuedclass A common shares at $26 each, OEH raised $121.9 million net ofunderwriters fees and expenses.  Theproceeds of this sale were used primarily to fund the acquisition of the GrandHotel Europe.  In July 2006, OEHraised an additional $99.2 million by selling 2,500,000 newly-issued class Acommon shares at $40 each.  The proceedsof the sale were used primarily to fund the acquisition of the former Panseahotels group.

 

In 2007, 83% of OEH’s revenue was derived from thehotels and restaurants segment and 14% from the tourist trains and cruisessegment, with the remainder from real estate and property development.  In the hotels and restaurants segment, 93% ofrevenue was from owned hotels, 5% from restaurants and 2% was from hotelmanagement interests.

 

OEH derives revenue from owned hotel operationsprimarily from the sale of rooms and the provision of food and beverages.  The main factors for analyzing rooms revenueare the number of room nights sold and the ADR, and RevPAR referred to abovewhich is a measure of both these factors.

 

Revenue from restaurants is derived from food andbeverages sold to customers.  Revenuefrom hotel management interests includes fees received under managementcontracts, which are based upon a combination of a percentage of the revenuefrom operations and operating earnings calculated before specified fixedcharges.

 

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The revenue from the tourist trains and cruisessegment primarily comprises tickets sold for travel and food and beveragesales.

 

The revenue from real estate and property developmentis primarily derived from the sale of land and buildings.

 

Operating costs include labor, repairs andmaintenance, energy and the costs of food and beverages sold to customers inrespect of owned hotel operations, restaurants, tourist trains and cruises.

 

Selling, general and administrative expenses includetravel agents’ commissions, the salaries and related costs of the sales teams,advertising and public relations costs, and the salaries and related costs ofmanagement.

 

Depreciation and amortization includes depreciation ofowned hotels, restaurants, tourist trains and cruise boats.

 

When OEH discusses results for a period on a “comparable”or “same store” basis, OEH is considering only the results of hotels owned andoperating throughout the periods mentioned and excluding the effect of anyacquisitions, dispositions or major refurbishments.

 

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**Resultsof Operations**

 

OEH’s operating results for the years 2007, 2006 and2005, expressed as a percentage of revenue, are as follows:

 
| ** **                                    | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                      |       |                                      |       |   |   |   |   |
| Hotels  and restaurants                       |       | 83                                        | %          | 84 | % | 85 | % |
| Tourist  trains and cruises                   |       | 14                                        |       | 13 |   | 14 |   |
| Real  estate and property development         |       | 3                                         |       | 3 |   | 1 |   |
|                                          |       | 100                                       |       | 100 |   | 100 |   |
| Expenses:                                     |       |                                      |       |   |   |   |   |
| Depreciation  and amortization                |       | 7                                         |       | 7 |   | 8 |   |
| Operating                                     |       | 48                                        |       | 47 |   | 47 |   |
| Selling,  general and administrative          |       | 29                                        |       | 29 |   | 31 |   |
| Gain  on sale of fixed assets or investments  |       | —                                    |       | (1 | ) | — |   |
| Net finance  costs                            |       | 7                                         |       | 11 |   | 6 |   |
| Earnings  before income taxes                 |       | 9                                         |       | 7 |   | 8 |   |
| Provision  for income taxes                   |       | (3                                        | )          | (2 | ) | (1 | ) |
| Earnings  from unconsolidated subsidiaries    |       | 3                                         |       | 3 |   | 3 |   |
| Net  earnings from continuing operations      |       | 9                                         |       | 8 |   | 10 |   |
| (Loss)/earnings  from discontinued operations |       | (3                                        | )     | — |   | — |   |
| Net earnings as a percentage of revenue       |       | 6                                         | %          | 8 | % | 10 | % |

 

Segment net earnings before interest expense (butafter interest income from unconsolidated companies), foreign currency, tax(including tax on earnings from unconsolidated companies), depreciation,amortization and gain on investment sale (“segment EBITDA”) for the years 2007,2006 and 2005 are analyzed as follows (dollars in millions):

 

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| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Segment  EBITDA:                               |       |                                       |       |   |   |   |   |
| Owned  Hotels:                                 |       |                                       |       |   |   |   |   |
| Europe                                         |       | $                                          | 71.0       |   | $ | 52.7 |   | $ | 46.6 |   |
| North  America                                 |       | 13.2                                       |       | 19.7 |   | 18.8 |   |
| Rest  of the world                             |       | 35.6                                       |       | 31.6 |   | 22.1 |   |
| Hotel  management and part-ownership interests |       | 23.8                                       |       | 19.9 |   | 17.5 |   |
| Restaurants                                    |       | 4.6                                        |       | 6.5 |   | 5.6 |   |
| Tourist  trains and cruises                    |       | 25.5                                       |       | 18.3 |   | 15.4 |   |
| Real  estate and property development          |       | 4.1                                        |       | 3.5 |   | — |   |
| Gain  on sales of fixed assets or investments  |       | 2.3                                        |       | 6.6 |   | — |   |
| Central  overheads                             |       | (26.0                                      | )          | (22.1 | ) | (19.0 | ) |
| Total                                          |       | $                                          | 154.1      |   | $ | 136.7 |   | $ | 107.0 |   |

 

The foregoing segment EBITDA reconciles to netearnings from continuing operations, as follows (dollars in millions):

 
| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                             |       |                                       |       |   |   |   |   |
| Net  earnings from continuing operations                         |       | $                                          | 50.3       |   | $ | 36.7 |   | $ | 41.3 |   |
| Add:                                                             |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                   |       | 38.9                                       |       | 34.5 |   | 33.2 |   |
| Interest  expense, net                                           |       | 45.5                                       |       | 44.4 |   | 30.0 |   |
| Foreign  currency, net                                           |       | (1.0                                       | )          | 4.6 |   | (5.1 | ) |
| Provision  for income taxes                                      |       | 15.6                                       |       | 10.8 |   | 4.2 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 4.8                                        |       | 5.7 |   | 3.4 |   |
| Total                                                            |       | $                                          | 154.1      |   | $ | 136.7 |   | $ | 107.0 |   |

 

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

 

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OEH’s abilityto meet cash needs.

 

Operatinginformation for OEH’s owned hotels for the years ended December 31, 2007and 2006 is as follows:

 
|                                  |   | **Year ended December 31,** |       |
|---------------------------------------|--------|--------------------------------------------|------------|
|                                  |   | **2007**                                   | ** ** | **2006** |   |
| Average  Daily Rate (in dollars)      |   |                                       |       |   |   |
| Europe                                |   | 686                                        |       | 584 |   |
| North  America                        |   | 371                                        |       | 325 |   |
| Rest  of World                        |   | 272                                        |       | 256 |   |
| Worldwide                             |   | 428                                        |       | 380 |   |
|                                  |   |                                       |       |   |   |
| Rooms  Available (in thousands)       |   |                                       |       |   |   |
| Europe                                |   | 325                                        |       | 298 |   |
| North  America                        |   | 222                                        |       | 212 |   |
| Rest  of World                        |   | 408                                        |       | 354 |   |
| Worldwide                             |   | 955                                        |       | 864 |   |
|                                  |   |                                       |       |   |   |
| Room Nights  Sold (in thousands) |   |                                       |       |   |   |
| Europe                                |   | 187                                        |       | 175 |   |
| North  America                        |   | 141                                        |       | 148 |   |
| Rest  of World                        |   | 259                                        |       | 222 |   |
| Worldwide                             |   | 587                                        |       | 545 |   |
|                                  |   |                                       |       |   |   |
| RevPAR  (in dollars)                  |   |                                       |       |   |   |
| Europe                           |   | 396                                        |       | 342 |   |
| North  America                   |   | 236                                        |       | 227 |   |
| Rest  of World                   |   | 173                                        |       | 161 |   |
| Worldwide                             |   | 263                                        |       | 240 |   |

 
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Comparable/Same  Store RevPAR (in dollars) |       |       |       |       |       |              |       |   |   |
| Europe                                     |       | 419        |       | 357        |       | 17                | %          | 10 | % |
| North  America                             |       | 283        |       | 272        |       | 4                 | %          | 4 | % |
| Rest  of World                             |       | 189        |       | 165        |       | 15                | %          | 14 | % |
| Worldwide                                  |       | 284        |       | 248        |       | 15                | %          | 11 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms’ revenue divided by the number of availablerooms for each night of operation.  Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, by excluding the effect of any acquisitions, dispositions or majorrefurbishments.  The same store dataexcludes the following operations: El Encanto, Maroma Resort and Spa, Casa deSierra Nevada, La Residencia, Reids Palace, Hotel de la Cité, Le Manoir auxQuat’Saisons, Grand Hotel Europe, Windsor Court and the six Asian hotels forthe periods in which they 

 

46

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wereclosed, or where the number of rooms available differed from the previous yeardue to refurbishment

 

**Year Ended December 31, 2007**

**compared to Year Ended December 31, 2006**

 

*Revenue*

 

Total revenue increased by $99.0 million,or 20.7%, from $479.4 million in 2006 to $578.4 million in 2007.  Hotels and restaurants revenue increased by$76.4 million, or 19.1%, from $399.6 million in 2006 to$476.0 million in 2007, and the revenue from tourist trains and cruisesincreased by $18.9  million, or 29.7%,from $63.6 million in 2006 to $82.5 million in 2007.  Real estate and property developmentcontributed $19.9 million of revenue in 2007, up from $16.1 million in 2006,with revenues from Keswick Hall representing $4.6 million and revenues from theCupecoy real estate development in St. Maarten representing $15.3 million.

 

The increase in hotels and restaurants revenueconsisted of the following:

 

·                  $74.9 million attributable to owned hotels, or 20.4%, from $367.8million in 2006 to $442.7 million in 2007,

 

·                  an increase in revenue from hotel management interests of$1.5 million, or 16.3%, from $9.2 million in 2006 to$10.7 million in 2007, mainly due to improved results of Charleston Placeand the Hotel Ritz, Madrid, investments.

 

The increase in owned hotels revenue of $74.9 millionis analyzed by region as follows:

 

*Europe.*  Revenue increased by $48.1 million from$180.4 million in 2006 to $228.5 million in 2007.  $9.6 million of this growth was attributableto the Hotel Cipriani, $7.9 million was attributable to the Grand Hotel Europeand $5.3 million of growth was due to the performance of the HotelSplendido.  All other properties in theregion also showed RevPAR growth.

 

On a same store basis, RevPAR increased by 10% in 2007over 2006 and when translated to U.S. dollars also increased by 17%.  Overall, revenue in Italy was $21.8 millionahead of revenue in 2006, an increase of 29%.

 

*North America.*  Revenue decreased by $0.1million, from $85.5 million in 2006 to $85.4 million in 2007.  The 2006 revenue includes an amount of $3.9million in respect of El 

 

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Encantowhich was closed for renovation throughout 2007 and generated no revenue in theyear.  Excluding El Encanto, NorthAmerican revenue increased by $3.8 million, or 4.6% from 2006 to 2007.  This increase was underpinned by $1.6 millionof revenue at Maroma Resort and Spa, along with revenue growth at La Samanna,Keswick Hall, Inn at Perry Cabin and Casa de Sierra Nevada.

 

On a same store basis, RevPAR in 2007 increased by 4%over 2006.

 

*Rest of the World.*  Revenue increased by $26.8million, or 26.3%, from $102.0 million in 2006 to $128.8 million in 2007.  Revenue at all properties showed good growthin 2007.  Southern African revenueincreased by 17% to $40.9 million, South American revenue increased by 8% to$48.5 million, and Australasian revenue increased by 5% to $23.3 million.  Revenue from the former Pansea Hotels group,acquired in July 2006, contributed a further $16.1 million for the fullyear 2007.

 

RevPAR increased by 14% in local currencies andincreased by 15% in U.S. dollars.

 

*Tourist Trains and Cruises. *Revenueincreased by $18.9 million, or 29.7%, from $63.6 million in 2006 to $82.5million in 2007.  $4.6 million of thisgrowth was due to the performance of the Venice Simplon-Orient-Express.  The Royal Scotsman, which was acquired in April 2007,generated revenue of $6.8 million.

 

*Real Estate. *Revenue increased by $3.8 million, or23.6%, from $16.1 million in 2006 to $19.9 million in 2007.  The Cupecoy development generated revenues of$15.3 million in 2007 for the first time, which more than made up for lowerrevenues at Keswick Hall in 2007.

 

*Depreciationand Amortization*

 

Depreciation and amortization increased by$4.4 million, or 12.7%, from $34.5 million in 2006 to$38.9 million in 2007.  The increasewas due primarily to the continued investment in existing properties.

 

*OperatingExpenses*

 

Operating expenses increased by $52.4 million, or23.1%, from $226.4 million in 2006 to $278.8 million in 2007.  This was primarily due to the improvedrevenues and volumes in OEH’s businesses in the year.  As a percentage of revenue, operatingexpenses increased by 1% to 48% of revenue in 2007.

 

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*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses increasedby $28.4 million, or 20.2%, from $140.6 million in 2006 to $169.0 millionin 2007.  As a percentage of revenue,Selling, General and Administrative Expenses remained flat at 29% of revenue in2007.

 

*Margins*

 

Segment EBITDA margins (calculated as segment EBITDAas a percentage of revenue) for 2007 were 27%, down from 28% for 2006.  The decrease was due to reduced margins inNorth America and the Rest of the World, notably at the Copacabana Palace inBrazil due to the strengthening of the real against the dollar during 2007.

 

*Earningsfrom Operations*

 

Earnings from operations increased by$16.2 million, or 21%, from $77.8 million in 2006 to$94.0 million in 2007, due to the factors referred to in the precedingparagraphs.

 

*NetFinance Costs*

 

Net finance costs decreased by $4.5 million, or 10%,from $49.0 million in 2006 to $44.5 million in 2007.  This includes foreign currency transactiongains of $1.0 million in 2007 (2006-$4.6 million loss).  Excluding foreign currency, net finance costsincreased by $1.0 million, or 2%, from $44.4 million in 2006 to $45.4 millionin 2007.  The increase was attributableto rising U.S. and U.K. interest rates during 2007.

 

*Provisionfor Income Taxes*

 

The provision for income taxes increased by $4.8million, from $10.8 million in 2006 to $15.6 million in 2007.  The 2006 provision for income taxes includeddeferred tax credits totalling $5.8 million resulting from the reduction ofvaluation allowances established in respect of tax losses in Portugal andAustralia.  There were no comparabledeferred tax credits in 2007.

 

OEH recognized a provision of $28.8 million in respectof its uncertain tax positions upon the adoption of FASB interpretation No. 48“Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1,2007.  The provision for income taxes of$15.6 million for 2007 includes a tax credit of $7.1 million that reduces theFIN 48 liability recognized at December 31, 2007.

 

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The company is incorporated in Bermuda, which does notimpose an income tax.  Accordingly, theentire income tax provision was attributable to income tax charges incurred bysubsidiaries operating in jurisdictions that impose an income tax.

 

*Earningsfrom Unconsolidated Companies*

 

Earnings from unconsolidated companies, which includeOEH’s share of the net earnings of its equity investments as well as interestincome related to loans and advances to the equity investees, increased by $4.4million, or 37%, from $12.0 million to $16.4 million, mainly due to increasedearnings from Peruvian joint ventures.

 

*Earningsfrom discontinued operations*

 

The loss from discontinued operations of Bora BoraLagoon Resort in 2007 included goodwill and fixed assets impairment loss of$14.0 million and loss from operations of $2.6 million.  Earnings from the hotel in 2006 of $3.1million included $3.0 million deferred tax credits on losses carried forward.

 

In December 2007, OEH decided to sell Bora BoraLagoon Resort.  Consequently the hotel’sresults have been presented as discontinued operations.  Due to increased competition and high coststructures in Bora Bora the results of the hotel were lower than expected sothat an impairment loss had arisen.

 

**Year Ended December 31, 2006**

**compared to Year Ended December 31,2005**

 

*Revenue*

 

Total revenue increased by $58.3 million,or 13.8%, from $421.1 million in 2005 to $479.4 million in 2006.  Hotels and restaurants revenue increased by$44.4 million, or 12.5%, from $355.2 million in 2005 to$399.6 million in 2006, and the revenue from tourist trains and cruisesincreased by $2.4 million, or 3.9%, from $61.2 million in 2005 to $63.6 millionin 2006.  Real estate and propertydevelopment contributed $16.1 million of revenue in 2006, up significantly from$4.7 million in 2005, with revenues from Keswick Hall representing $8.4million.

 

The increase in hotels and restaurants revenueconsisted of the following:

 

50

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·       $43.5million attributable to owned hotels, or 13%, from $324.3 million in 2005 to$367.8 million in 2006,

 

·                     an increase in revenue from hotel management interests of$0.5 million, or 5.7%, from $8.7 million in 2005 to $9.2 million in2006, mainly due to improved results of Charleston Place and the Peruvian hotelinvestments,

 

·                    an increase in restaurants revenue of $0.2 million, or 14%,from $22.2 million in 2005 to $22.5 million in 2006, mainly due to improvedrevenue at the ‘21’ Club of $1.1 million and La Cabana of $0.4 million, offsetby the impact of the sale of Harry’s Bar.

 

The increase in owned hotels revenue of $43.5 millionis analyzed by region as follows:

 

*Europe.*  Revenue increased by $19.2 million from$161.2 million in 2005 to $180.4 million in 2006.  $6.2 million of this growth was attributableto the Grand Hotel Europe with $6.0 million of growth due to the performance ofthe Hotel Caruso Belvedere. All other properties showed revenue growth with theexception of Reids Palace, which was closed in the first quarter.

 

On a same store basis in euros, RevPAR increased by 9%in 2006 over 2005 and when translated to U.S. dollars also increased by9%.  Overall, revenue in Italy was $12.5million ahead of revenue in 2005, an increase of 20%.

 

*North America.*  Revenue increased by $5.8million, or 7%, from $79.7 million in 2005 to $85.5 million in 2006.  The increase was underpinned by $6.1 millionof revenue at Maroma Resort and Spa, along with revenue growth at La Samanna,Keswick Hall and Inn at Perry Cabin.

 

On a same store basis, RevPAR in 2006 increased by 9%over 2005.

 

*Rest of the World.*  Revenue increased by $18.5million, or 22%, from $83.5 million in 2005 to $102.0 million in 2006.  Revenue at all properties showed good growthin 2006.  Southern African revenueincreased by 11% to $35.0 million, South American revenue increased by 21% to$40.1 million, and Australasian revenue increased by 8% to $20.0 million.  Revenue from the former Pansea Hotels group,acquired in July 2006, contributed a further $6.9 million.

 

RevPAR increased by 15% in local currencies butincreased by 12% in U.S. dollars.

 

51

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*Depreciationand Amortization*

 

Depreciation and amortization increased by$1.3 million, or 4%, from $33.2 million in 2005 to $34.5 millionin 2006.  The increase was due primarilyto the impact of the new acquisitions in Mexico and Asia, plus the impact ofthe opening of the Hotel Caruso Belvedere.

 

*OperatingExpenses*

 

Operating expenses increased by $26.9 million, or13%, from $199.5 million in 2005 to $226.4 million in 2006.  This was primarily due to the improvedrevenues and volumes in OEH’s businesses in the year.  As a percentage of revenue, operatingexpenses remained flat at 47% in 2006.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses increasedby $11.5 million, or 9%, from $129.1 million in 2005 to $140.6 millionin 2006.

 

*Margins*

 

Segment EBITDA margins (calculated as segment EBITDAas a percentage of revenue) for 2006 were 28%, up from 25% for 2005.  The increase was due to increased margins inthe Rest of the World from 25% in 2005 to 29% in 2006, helped by the impact ofthe Asian hotels acquisition.

 

*Earningsfrom Operations*

 

Earnings from operations increased by$18.6 million, or 31%, from $59.2 million in 2005 to$77.8 million in 2006, due to the factors referred to in the precedingparagraphs.

 

*NetFinance Costs*

 

Net finance costs increased by $24.1 million, or 97%,from $24.9 million in 2005 to $49.0 million in 2006.  This includes foreign currency transactionlosses of $4.6 million in 2006 (2005-$5.1 million gain) linked primarily toSouth African debt on financing transactions. The increase is attributable to the impact of the financing of the GrandHotel Europe and the Hotel Caruso Belvedere and funding of capital expenditurein 2006.  There were also increases inboth U.S. and U.K. interest rates in 2006, along with $5.6 million of deferredfinance cost write-offs in connection with debt refinancing.

 

52

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*Provisionfor Income Taxes*

 

The provision for income taxes increased by$6.6 million, or 157%, from $4.2 million in 2005 to$10.8 million in 2006.  The Companyis incorporated in Bermuda, which does not impose an income tax.  Accordingly, the entire income tax provisionwas attributable to income tax charges incurred by subsidiaries operating injurisdictions that impose an income tax. The increase was due to increased profitability of these subsidiariesand the tax associated with the gain arising on the sale of Harry’s Bar.

 

*Earningsfrom Unconsolidated Companies*

 

Earnings from unconsolidated companies, which includeOEH’s share of the net earnings of its equity investments as well as interest incomerelated to loans and advances to the equity investees, increased by $0.8million, or 7%, from $11.2 million to $12.0 million, mainly due to increasedearnings from Peruvian joint ventures.

 

*Earningsfrom discontinued operations*

 

Earnings from discontinued operations were the resultsof the Bora Bora Lagoon Resort.  Theincrease from $0.2 million to $3.1 million was due to a $3.0 million deferredtax credit recorded in 2006 for losses carried forward.

 

**Liquidityand Capital Resources**

 

*WorkingCapital*

 

OEH had cash and cash equivalents of$94.4 million at December 31, 2007, $16.5 million more than the$77.9 million at December 31, 2006. At December 31, 2007, there were undrawn amounts available to OEHunder committed short-term lines of credit of $14.1 million ($22.2 millionat December 31, 2006) and undrawn amounts available to OEH under securedrevolving credit facilities of $58.3 million, bringing total cash availabilityat December 31, 2007 to $167.1 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital balance of $35.3million, a decrease of $36.1 million from a working capital balance of$71.4 million at December 31, 2006. The main factor that contributed to the decrease in working capital wasthe decrease in net assets of Bora Bora Lagoon Resort due to an impairment lossof $14.0 million recognized in 2007. Assets and liabilities of the hotel have been included in workingcapital as assets and liabilities held for sale.  Excluding Bora Bora Lagoon Resort, 

 

53

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theother main factor that contributed to the decrease in working capital was thegreater use of short-term financing and the increase in the current portion oflong-term debt.  OEH is planning torefinance the debt that becomes due next year.

 

*CashFlow*

 

*Operating Activities.*  Net cash provided byoperating activities increased by $3.5 million to $52.9 million for theyear ended December 31, 2007, from cash provided by operating activitiesof $49.4 million for the year ended December 31, 2006.  The increase was due to better performance ofthe continuing hotels.

 

*Investing Activities.*  Cash used in investingactivities was $123.1 million for the year ended December 31, 2007,compared to $146.1 million for the year ended December 31, 2006, adecrease of $23.0 million.  Capitalexpenditure of $103.9 million included $12.0 million for refurbishment of theGrand Hotel Europe, $11.9 million for refurbishment of the Italian hotels,$10.0 million for El Encanto construction, $7.2 million for Copacabana Palace,$6.1 million for construction at Cupecoy in St. Maarten, and $4.4 million paidfor the Maroma land acquisition.

 

Proceeds from fixed asset disposals of $4.7 million in2007 included insurance compensation received for the hurricane-damaged assetsof Maroma Resort and Spa of $2.3 million. In 2006 proceeds included the sale of Harry’s Bar investment.

 

Current year acquisitions of $21.9 million includedthe acquisition of the remaining 50% of Royal Scotsman and Afloat in France,certain internet sites, 18% of the Laos hotel interest, investment in theBuzios development project and payment of final cash from the escrow accountrelating to the Grand Hotel Europe acquisition. The 2006 acquisitions included 75% of Casa de Sierra Nevada, 25% ofMaroma interests and the Pansea Hotels group.

 

*Financing Activities.*  Cash provided from financingactivities for the year ended December 31, 2007 was $83.5 million ascompared to cash provided from financing activities of $135.7 million forthe year ended December 31, 2006, a decrease of $52.2 million.

 

Last year OEH completed refinancing of the Europeanand U.S. hotels, as a result of which proceeds from borrowings under long-termdebt and cash used in long-term debt repayments were significantly highercompared to 2007.  Also 

 

54

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lastyear OEH received cash of $99.2 million from the issuance of commonshares.  In 2007, OEH used more of its workingcapital facilities to finance operations and expenditures than last year.

 

*CapitalCommitments*

 

There were $102.4 million of capital commitmentsoutstanding as of December 31, 2007 mainly on investments in owned hotelsand the purchase of land and a building adjoining ‘21’ Club.

 

*Indebtedness*

 

At December 31, 2007, OEH had $786.4 millionof consolidated long-term debt, including the current portion, collateralizedby OEH assets with a number of commercial bank lenders which is payable overperiods of one to 11 years with a weighted average interest rate of6.36%.  See Note 8 to the FinancialStatements regarding the maturity of long-term debt.

 

These financing agreements contain covenants thatinclude limits on the property owning company’s ability to raise additionaldebt collateralized by these properties, limits on liens on the properties andlimits on mergers and asset sales and, in some cases, financial covenants suchas a minimum interest coverage ratio and debt service coverage ratio and a maximumdebt to equity ratio.  Some of theCompany guarantees of these facilities contain financial covenants on OEHcovering a minimum consolidated tangible net worth and a minimum consolidatedinterest coverage ratio.  OEH is in fullcompliance with these covenants, and management believes they will notsubstantially limit OEH’s ability to finance future acquisitions or capitalexpenditure plans.

 

Approximately 51% of the outstanding principal wasdrawn in euros at December 31, 2007, and the balance primarily drawn inU.S. dollars.  At December 31, 2007,76% of borrowings of OEH were in floating interest rates.

 

*Liquidity*

 

Management plans to invest over the next few years inthe expansion of existing hotel properties consistent with its growth strategy,subject to market conditions.  Inaddition, OEH aims to acquire more properties which it expects to finance withan appropriate level of debt collateralized on the properties, and the balancethrough available cash resources.

 

Management expects to have available cash fromoperations and appropriate debt and other sources of financing sufficient 

 

55

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to fundits working capital requirements, capital expenditures, acquisitions and debtservice for 2008 and later years.

 

*ContractualObligations Summary*

 

The following table summarizes OEH’s material knowncontractual obligations, excluding accounts payable and accrued liabilities, in2008 and later years as of December 31, 2007 (dollars in thousands).

 
| ** **                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                   | ** ** | **2009-  2010** | ** ** | **2011-  2012** | ** ** | **There-  after** | ** ** | **Total** | ** ** |
| Working  capital Facilities |       | $                                          | 65,764     |   | $ | — |   | $ | — |   | $ | — |   | $ | 65,764 |   |
| Debt                        |       | 125,756                                    |       | 75,842 |   | 411,308 |   | 157,509 |   | 770,415 |   |
| Capital  leases             |       | 2,039                                      |       | 4,034 |   | 4,039 |   | 5,882 |   | 15,994 |   |
| Operating  leases           |       | 8,402                                      |       | 16,493 |   | 15,722 |   | 64,224 |   | 104,841 |   |
| Capital  commitments        |       | 102,361                                    |       | — |   | — |   | — |   | 102,361 |   |
|                        |       | $                                          | 304,322    |   | $ | 96,369 |   | $ | 431,069 |   | $ | 227,615 |   | $ | 1,059,375 |   |

 

OEH also has obligations with respect to its pensionbenefit plans (See Note 10).

 

*Off-BalanceSheet Arrangements*

 

OEH had no material off-balance sheet arrangements at December 31,2007 other than those involving its equity investees reported in Notes 1(g),3(b), 8(a) and 20 to the Financial Statements, and commitments and contingenciesand derivative financial instruments reported in Notes 1(t), 15 and 16.

 

**Critical Accounting Policies and Estimates**

 

The precedingdiscussion and analysis of OEH’s financial condition and results of operationsis based on its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires OEH management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues andexpenses.  On an ongoing basis, OEHmanagement evaluates these estimates. Management bases its estimates on historical experience and on variousother assumptions that it believes are reasonable under the circumstances, theresult of which form the basis for judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

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Critical accounting policies are those thatreflect significant judgments or uncertainties, and potentially result inmaterially different results under different assumptions and conditions.  OEH management believes the following are OEH’smost critical accounting policies and estimates.

 

*Long-lived assets and goodwill*

 

In accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, OEH management periodically evaluates therecoverability of long-lived assets whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable.  These evaluations include analyses based onthe cash flows generated by the underlying assets, profitability informationincluding estimated future operating results, trends or other determinants offair value.  If the value of the assetdetermined by these evaluations is less than its carrying amount, a loss, ifany, is recognized for the difference between the fair value and the carryingvalue of the asset.  Future adversechanges in market conditions or poor operating results of the related businessmay indicate an inability to recover the carrying value of the asset, therebypossibly requiring an impairment charge in the future.

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”, goodwill must be evaluated annually forimpairment.  The impairmenttesting under SFAS No. 142 is performed in two steps, first, thedetermination of impairment based upon the fair value of a reporting unit ascompared with its carrying value and, second, if there is an impairment, themeasurement of the amount of impairment loss by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill.  To determine fair value, OEH relies on commonindustry valuation models, including multiples of earnings.

 

Other intangible assets with indefinite useful lives are also reviewedfor impairment in accordance with SFAS No. 142.

 

*Depreciation*

 

Real estate and other fixed assets are recorded at cost and are depreciated over their estimated useful lives by the straight-line method.  The depreciation rates on freehold buildings are 60 years with a 10% residual value, on trains are up to 75 years, and on machinery and other remaining assets range from 5 to 25 years.  Leasehold improvements are depreciated over the shorter of the estimated useful life or 

 

57

 

the respective lease terms including lease extensions that are reasonably assured.

 

*Pensions*

 

OEH’sprimary defined benefit pension plan is accounted for using actuarialvaluations required by SFAS No. 87, “Employers’ Accounting for Pensions”and SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension andOther Post-retirement Plans – An Amendment of FASB Statements No. 87, 88,106 and 132(R)”.  Management considersaccounting for pensions critical to all of OEH’s operating segments becausemanagement is required to make significant subjective judgments about a numberof actuarial assumptions, which include discount rates, long-term return onplan assets and mortality rates.  On May 31,2006, the plan was closed to future benefit accrual.

 

Management believes that a 7.5% long-termreturn on plan assets in 2007 is reasonable despite the recent marketvolatility.  In determining the expectedlong-term rate of return on assets, management has reviewed anticipated futurelong-term performance of individual asset classes and the consideration of theappropriate asset allocation strategy given the anticipated requirements of theplan to determine the average rate of earnings expected on the fundsinvested.  The projected returns arebased on broad equity and bond indices, including fixed interest rate gilts(U.K. Government issued long-term securities) of long-term duration since theplan is in the U.K.

 

Management regularly reviews OEH’s actualasset allocation and periodically rebalances investments to targetedallocations when considered appropriate. While the analysis considers recent fund performance and historicalreturns, the assumption is primarily a long-term, prospective rate.  Management will continue to evaluate theexpected rate of return at least annually, and will adjust as necessary.

 

Depending on the assumptions and estimatesused, pension expense could vary within a range of outcomes and have a materialeffect on OEH’s consolidated financial statements.  Management is currently monitoring andevaluating the level of pension contributions based on various factors thatinclude investment performance, actuarial valuation and tax deductibility.  Management will evaluate the need foradditional contributions in 2008 based on these factors.  Management believes that the cash flows fromOEH’s operations will be sufficient to fund additional contributions, if any,to the plan.

 

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*Foreign currency*

 

The functional currency for each of theCompany’s foreign subsidiaries is the applicable local currency, except forFrench West Indies, Brazil, Peru and one property in Mexico where thefunctional currency is U.S. dollars.

 

Forforeign subsidiaries with a functional currency other than the U.S. dollar,income and expenses are translated into U.S. dollars, the reporting currency ofthe Company, at the average rates of exchange prevailing during the year.  The assets and liabilities are translatedinto U.S. dollars at the rates of exchange on the balance sheet date and therelated translation adjustments are included in accumulated other comprehensiveincome/(loss).  Translation adjustmentsarising from intercompany financing that is long-term in nature is accountedfor similarly.  Foreign currencytransaction gains and losses are recognized in earnings as they occur.

 

The functional currency of Grand HotelEurope has been changed from U.S. dollars to Russian rubles effective from January 1,2007 due to the changes in the currency in which the hotel primarily expendsand generates cash.

 

##### *Taxassets*

##### * *

OEH maintains a valuation allowance toreduce its gross deferred tax assets to reflect the amount, based upon OEH’sestimates of income that would likely be realized.  If OEH’s future operations differed fromthose in the estimates, OEH may need to increase or decrease the valuationallowance, which could affect its reported operations.

 

*Real estate development accounting*

 

Revenuefrom real estate activities is accounted for under SFAS No. 66, “Accountingfor Sales of Real Estate”, and represents the proceeds from sales of undevelopedlands and developed properties that OEH is holding for sale, as well as revenuerecognized for condominiums under the percentage-of-completion method.  Profit from sales of land and developedproperties is recognized upon closing using the full accrual method ofaccounting, provided that all the requirements prescribed by SFAS No. 66have been met.  Revenues related to thesale of condominiums are recognized in accordance with SFAS No. 66 when aminimum of 10% of the purchase price of a condominium has been received incash, the buyer has demonstrated sufficient level of continuing investment, theperiod of cancellation with refund has expired, receivables are deemedcollectible, and certain minimum sales and construction levels have beenattained.  Revenues related to 

 

59

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projects stillunder construction are recognized under the percentage-of-completionmethod.  For sales that do not meet thesecriteria, revenue is deferred.

 

The process of real estate revenuerecognition involves significant estimates of total project revenue andcosts.  Actual results may differ fromthese estimates.

 

**Recent AccountingPronouncements**

 

*FIN 48*

 

In July 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifiesthe accounting for uncertainty in tax positions.  The evaluation of a tax position under FIN 48is a two-step process.  The first step isrecognition, under which tax positions taken or expected to be taken in a taxreturn should be recognized only if those positions are more likely than not ofbeing sustained upon examination, based on the technical merits of theposition.  In evaluating whether a taxposition has met the more likely than not recognition threshold, it should bepresumed that the position will be examined by the relevant taxing authoritythat would have full knowledge of all relevant information.  The second step is measurement, under whichtax positions that meet the recognition criteria are measured at the largestamount of benefit that is greater than 50% likely of being recognized uponultimate settlement.  FIN 48 alsoprovides guidance on de-recognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 was effective for fiscal yearsbeginning after December 15, 2006 and was adopted by the Company in thefirst quarter 2007.  See Note 11 to theFinancial Statements.

 

*****SFAS 15*********7****

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”, which addressesthe need for increased consistency in fair value measurements, defining fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.  It also establishes aframework for measuring fair value and expands disclosure requirements.  SFAS No. 157 is effective for theCompany’s fiscal year ending December 31, 2008.  The Company is in the process of evaluatingthe effects of adoption of SFAS No. 157. FASB Staff Position FAS 157-2 defers the effective date of SFAS No. 157to fiscal years beginning after November 17, 2008 for certainnon-financial assets and liabilities.

 

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*****SFAS 158*****

 

In September 2006, the FASB issuedSFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPost-retirement Plans — an amendment of FASB Statements No. 87, 88, 106,and 132(R)”.  This statement requires anemployer to recognize the over-funded or under-funded status of defined benefitpension plans and post-retirement plans (other than a multi-employer plan) asan asset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income.  SFAS No. 158also requires an employer to measure the funded status of a plan as of the dateof its year-end statement of financial position and requires disclosure in thenotes to financial statements of certain additional information related to netperiodic benefit cost for the next fiscal year. SFAS No. 158 defines the funded status of a defined benefit plan asits assets less its projected benefit obligation and defines the funded statusof a post-retirement plan as its assets less its accumulated post-retirementbenefit obligation.  Calendar year-endcompanies, such as OEH, were required to adopt the recognition and disclosureprovisions of SFAS No. 158 as of December 31, 2006.  The measurement date provisions are notrequired to be adopted until 2008.  TheCompany adopted the recognition and disclosure provisions of SFAS No. 158with effect from December 31, 2006. See Note 10 to the Financial Statements.

 

*SFAS 159*

 

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities — Including an Amendment of FASB Statement No. 115”.  This statement permits an entity to choose tomeasure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159are elective; however, the amendment to SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measureeligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  The fair value option (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method, (b) is irrevocable (unless a newelection date occurs) and (c) is applied only to entire instruments andnot to portions of instruments.  SFAS No. 159is effective as of the 

 

61

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beginning of an entity’s first fiscal year that beginsafter November 15, 2007.  Theadoption of SFAS No. 159 is not expected to have any impact on OEH’sconsolidated financial statements.

 

*SFAS 141(R)*

 

In December 2007, the FASB issued SFASNo. 141(R), “Business Combinations”. This revised statement requires assets and liabilities, includingcontingent liabilities, acquired in a business combination in addition tocontingent consideration to be measured at their fair values as of the date ofthe acquisition.  SFAS No. 141(R) requiresthat any adjustments to an acquired entity’s deferred tax asset and liabilitybalances that occur after the measurement period be recorded as a component ofincome tax expense.  Under transitionprovisions of SFAS No. 141(R), the new requirement applies to all businesscombinations, regardless of the consummation date.  This statement also changes the treatment ofrestructuring charges, in-process research and development costs, and acquisitionrelated costs.  SFAS No. 141(R) iseffective for all companies with fiscal periods beginning on or after December 15,2008 and will be effective for the Company for acquisitions consummated after January 1,2009.  The Company is in the process ofevaluating the effects of the adoption of SFAS No. 141(R).

 

*SFAS 160*

 

In December 2007, the FASB issued SFASNo. 160 “Non-controlling Interests in Consolidated Financial Statements —an amendment of ARB No. 51”.  Thisstatement clarifies the accounting and reporting for non-controlling interests,currently referred to as minority interests. Under SFAS No. 160, non-controlling interests will be classified asa component of equity.  SFAS No. 160is effective for fiscal years beginning after December 15, 2008.  The Company is in the process of evaluatingthe effects of the adoption of SFAS No. 160.

 

**ITEM7A.****  ****Quantitativeand Qualitative Disclosures About Market Risk**

 

OEH isexposed to market risk from changes in interest rates and foreign currencyexchange rates.  These exposures aremonitored and managed as part of its overall risk management program, whichrecognizes the unpredictability of financial markets and seeks to mitigatematerial adverse effects on consolidated earnings and cash flow.  OEH does not hold market rate sensitivefinancial instruments for trading purposes.

 

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Themarket risk relating to interest rates arises mainly from the financingactivities of OEH.  Earnings are affectedby changes in interest rates on floating rate borrowings, principally based onU.S. dollar LIBOR and EURIBOR, and on short-term cash investments.  OEH management assesses market risk based onchanges in interest rates using a sensitivity analysis.  If interest rates increased by 10% with allother variables held constant, annual net finance costs of OEH would haveincreased by approximately $4,300,000 based on borrowings outstanding at December 31,2007.

 

Themarket risk relating to foreign currencies arises from holding assets, buying,selling and financing in currencies other than the U.S. dollar, principally theEuropean euro, British pound, South African rand, Brazilian real and Australiandollar.  Some non-U.S. subsidiaries ofthe Company borrow in local currencies, and OEH may in the future enter intoforward exchange contracts relating to purchases denominated in foreigncurrencies.

 

Nine of OEH’s owned hotels in 2007 operatedwith currencies linked to the euro, two operated in South African rand, two inAustralian dollars, one in British pounds sterling, one in Botswanan pula, onein Peruvian nuevo soles, one in Thai bahts, one in Lao kips, and two inIndonesian rupees.  The VeniceSimplon-Orient-Express, British Pullman, Northern Belle and Royal Scotsman tourist trains operate primarily inBritish pounds sterling and currencies linked to the euro.  OEH faces exposure arising from the impact oftranslating its global foreign currency earnings into U.S. dollars, andanticipates this foreign exchange rate risk will remain a market exposure forthe foreseeable future.

 

OEH’s properties match foreign currencyearnings and costs to provide a natural hedge against currency movements.  In addition, a significant proportion of theguests at OEH hotels located outside of the United States originate from theUnited States.  When a foreign currencyin which OEH operates devalues against the U.S. dollar, OEH has considerableflexibility to increase prices in local currency, or vice versa.  Management believes that when these factorsare combined, OEH does not face a material exposure to its net earnings fromcurrency movements, although the reporting of OEH’s revenues and coststranslated into U.S. dollars can, from period to period, be materiallyaffected.

 

OEHmanagement uses a sensitivity analysis to assess the potential impact on netearnings of changes in foreign currency financial instruments from hypotheticalchanges in the foreign currency exchange rates. The primary assumption used in this model is a hypothetical 10% weakeningor 

 

63

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strengtheningof the foreign currencies against the U.S. dollar.  At December 31, 2007, as a result ofthis analysis, OEH management determined that the impact on foreign currencyfinancial instruments of a 10% change in foreign currency exchange rates inrelation to the U.S. dollar would be approximately $3,600,000 on OEH’s netearnings.

 

64

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**ITEM 8.**** ****Financial Statements andSupplementary Data**

 

*Report of IndependentRegistered Public Accounting Firm*

 

Board ofDirectors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

 

We have audited the accompanyingconsolidated balance sheets of Orient-Express Hotels Ltd. and subsidiaries (the“Company”) as of December 31, 2007 and 2006, and the related consolidatedstatements of operations, shareholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2007.  Our audits also included the financialstatement schedule listed in Item 15. These financial statements and the financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and the financial statementschedule based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofOrient-Express Hotels Ltd. and subsidiaries as of December 31, 2007 and2006, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2007, in conformity with accountingprinciples generally accepted in the United States of America.  Also in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

65

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We havealso audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the Company’s internal control over financialreporting as of December 31, 2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 29,2008 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 
| /s/ Deloitte & Touche LLP |
|------------------------------------|
|                               |
| London,  England.                  |
| February 29, 2008             |

 

66

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*Report of Independent Registered PublicAccounting Firm*

 

Board ofDirectors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

 

We have audited the internal control overfinancial reporting of Orient-Express Hotels Ltd. and subsidiaries (the “Company”)as of December 31, 2007, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in Item 9A—Controls and Procedures.  Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company 

 

67

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are being made only in accordance with authorizationsof management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements.

 

Because of the inherent limitations ofinternal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatementsdue to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internalcontrol over financial reporting to future periods are subject to the risk thatthe controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, inall material respects, effective internal control over financial reporting asof December 31, 2007, based on the criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance withthe standards of the Public Company Accounting Oversight Board (United States),the consolidated financial statements and financial statement schedule listedin Item 15 as of and for the year ended December 31, 2007 of the Companyand our report dated February 29, 2008 expressed an unqualified opinion onthose consolidated financial statements and financial statement schedule.

 

 
| /s/  Deloitte &  Touche LLP |
|-------------------------------------------|
|                                      |
| London,  England                          |
| February 29, 2008                    |

 

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

**ConsolidatedBalance Sheets**

** **
| ** **                                                                                                            | ** ** | **December 31,**                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                  |       |                                 |       |   |   |
| **Assets**                                                                                                            |       |                                 |       |   |   |
| Cash  and cash equivalents                                                                                            |       | $                                    | 94,365     |   | $ | 77,896 |   |
| Accounts  receivable, net of allowances of $1,292 and $1,071                                                          |       | 62,847                               |       | 71,694 |   |
| Due  from related parties                                                                                             |       | 30,406                               |       | 19,939 |   |
| Prepaid  expenses and other                                                                                           |       | 16,115                               |       | 9,485 |   |
| Inventories                                                                                                           |       | 45,756                               |       | 34,618 |   |
| Assets  of discontinued operations held for sale                                                                      |       | 54,417                               |       | 60,854 |   |
| Real  estate assets                                                                                                   |       | 57,157                               |       | 35,821 |   |
| Total  current assets                                                                                                 |       | 361,063                              |       | 310,307 |   |
|                                                                                                                  |       |                                 |       |   |   |
| Property,  plant and equipment, net of accumulated depreciation of $246,240 and  $205,909                        |       | 1,273,956                            |       | 1,134,811 |   |
| Investments                                                                                                           |       | 147,539                              |       | 130,042 |   |
| Goodwill                                                                                                              |       | 133,497                              |       | 117,760 |   |
| Other  intangible assets                                                                                              |       | 21,660                               |       | 20,149 |   |
| Other  assets                                                                                                         |       | 50,722                               |       | 38,594 |   |
|                                                                                                                  |       | $                                    | 1,988,437  |   | $ | 1,751,663 |   |
| **Liabilities and Shareholders’ Equity**                                                                         |       |                                 |       |   |   |
| Working  capital facilities                                                                                           |       | $                                    | 64,419     |   | $ | 45,107 |   |
| Accounts  payable                                                                                                     |       | 30,132                               |       | 25,017 |   |
| Due  to related parties                                                                                               |       | —                               |       | 1,249 |   |
| Accrued  liabilities                                                                                                  |       | 62,246                               |       | 54,285 |   |
| Deferred  revenue                                                                                                     |       | 35,545                               |       | 25,448 |   |
| Liabilities  of discontinued operations held for sale                                                                 |       | 5,619                                |       | 4,377 |   |
| Current  portion of long-term debt and capital leases                                                                 |       | 127,795                              |       | 83,397 |   |
| Total  current liabilities                                                                                            |       | 325,756                              |       | 238,880 |   |
|                                                                                                                  |       |                                 |       |   |   |
| Long-term  debt and obligations under capital leases                                                                  |       | 658,615                              |       | 586,300 |   |
| Liability  for pension benefit                                                                                        |       | 6,935                                |       | 8,677 |   |
| Other  liabilities                                                                                                    |       | 3,709                                |       | 2,330 |   |
| Deferred  income taxes                                                                                                |       | 119,112                              |       | 106,598 |   |
| Liability  for uncertain tax positions                                                                                |       | 24,025                               |       | — |   |
|                                                                                                                  |       | 1,138,152                            |       | 942,785 |   |
| Commitments  and contingencies                                                                                        |       |                                 |       |   |   |
| Minority  interest                                                                                                    |       | 1,754                                |       | 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 -  42,456,000 (2006 - 42,196,250) |       | 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                                                                                           |       | 515,307                              |       | 509,762 |   |
| Retained  earnings                                                                                                    |       | 302,369                              |       | 301,785 |   |
| Accumulated  other comprehensive income/(loss)                                                                        |       | 30,431                               |       | (4,973 | ) |
| Less:  reduction due to class B common shares owned by a subsidiary - 18,044,478                                      |       | (181                                 | )          | (181 | ) |
| Total  shareholders’ equity                                                                                      |       | 848,531                              |       | 806,996 |   |
|                                                                                                                  |       | $                                    | 1,988,437  |   | $ | 1,751,663 |   |

 

See notes toconsolidated financial statements.

 

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statementsof Consolidated Operations**

 
| **Year ended December 31,**                                  | ** ** | **2007**                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                  | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Revenue                                                                     |       | $                                                                                  | 578,415    |     | $          | 479,364  |       | $ | 421,090 |   |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Expenses:                                                                   |       |                                                                               |       |     |       |     |       |
| Depreciation  and amortization                                              |       | 38,947                                                                             |       | 34,503   |       | 33,211   |       |
| Operating                                                                   |       | 278,778                                                                            |       | 226,437  |       | 199,555  |       |
| Selling,  general and administrative                                        |       | 169,018                                                                            |       | 140,580  |       | 129,091  |       |
| Total  expenses                                                             |       | 486,743                                                                            |       | 401,520  |       | 361,857  |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Gain  on disposal of fixed assets                                           |       | 2,312                                                                              |       | —   |       | —   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  from operations                                                   |       | 93,984                                                                             |       | 77,844   |       | 59,233   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Gain  on sale of investment                                                 |       | —                                                                             |       | 6,619    |       | —   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Interest  expense, net                                                      |       | (45,436                                                                            | )          | (44,367  | )          | (29,971  | )          |
| Foreign  currency, net                                                      |       | 917                                                                                |       | (4,610   | )          | 5,065    |       |
| Net  finance costs                                                          |       | (44,519                                                                            | )          | (48,977  | )          | (24,906  | )          |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  before income taxes and earnings from unconsolidated subsidiaries |       | 49,465                                                                             |       | 35,486   |       | 34,327   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Provision  for income taxes                                                 |       | 15,627                                                                             |       | 10,791   |       | 4,209    |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  before earnings from unconsolidated companies                     |       | 33,838                                                                             |       | 24,695   |       | 30,118   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax                         |       | 16,425                                                                             |       | 11,970   |       | 11,175   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Net  earnings from continuing operations                                    |       | 50,263                                                                             |       | 36,665   |       | 41,293   |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| (Loss)/earnings  from discontinued operations, net of tax                   |       | (16,621                                                                            | )          | 3,102    |       | 246      |       |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Net  earnings                                                               |       | $                                                                                  | 33,642     |     | $          | 39,767   |       | $ | 41,539 |   |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Basic  earnings per share:                                                  |       |                                                                               |       |     |       |     |       |
| Net  earnings from continuing operations                                    |       | $                                                                                  | 1.19       |     | $          | 0.90     |       | $ | 1.08 |   |
| Net  (loss)/earnings from discontinued operations                           |       | (0.40                                                                              | )          | 0.08     |       | 0.01     |       |
| Net  earnings                                                               |       | $                                                                                  | 0.79       |     | $          | 0.98     |       | $ | 1.09 |   |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Diluted  earnings per share:                                                |       |                                                                               |       |     |       |     |       |
| Net  earnings from continuing operations                                    |       | $                                                                                  | 1.19       |     | $          | 0.89     |       | $ | 1.07 |   |
| Net  (loss)/earnings from discontinued operations                           |       | (0.40                                                                              | )          | 0.08     |       | 0.01     |       |
| Net  earnings                                                               |       | $                                                                                  | 0.79       |     | $          | 0.97     |       | $ | 1.08 |   |
|                                                                        |       |                                                                               |       |     |       |     |       |
| Dividends  per share                                                        |       | $                                                                                  | 0.10       |     | $          | 0.10     |       | $ | 0.10 |   |

 

See notes to consolidated financial statements

 

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statementsof Consolidated Cash Flows**

 
| ** **                                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                         | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  flows from operating activities:                                                                                             |       |                                       |       |   |   |   |   |
| Net  earnings from continuing operations                                                                                           |       | $                                          | 50,263     |   | $ | 36,665 |   | $ | 41,293 |   |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Adjustment  to reconcile net earnings from continuing operations to net cash provided by  operating activities:                    |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                                                                                     |       | 38,947                                     |       | 34,503 |   | 30,209 |   |
| Amortization  and write-off of finance costs                                                                                       |       | 3,243                                      |       | 5,579 |   | 3,002 |   |
| Undistributed  earnings of unconsolidated companies                                                                                |       | (9,390                                     | )          | (7,011 | ) | (2,830 | ) |
| (Gain)/loss  from sale of investments and fixed assets                                                                             |       | (3,018                                     | )          | (7,920 | ) | 268 |   |
| Stock-based  compensation                                                                                                          |       | 1,442                                      |       | 1,179 |   | 1,249 |   |
| Other  non-cash items                                                                                                              |       | 114                                        |       | 1,875 |   | (1,146 | ) |
| Change  in deferred tax                                                                                                            |       | 1,699                                      |       | 813 |   | (5,584 | ) |
| Change  in FIN 48 liability                                                                                                        |       | (7,091                                     | )          | — |   | — |   |
| Change  in assets and liabilities, net of effects from acquisition of subsidiaries:                                                |       |                                       |       |   |   |   |   |
| Increase  in accounts receivable, prepaid expenses and other                                                                       |       | (20,248                                    | )          | (10,835 | ) | (29,039 | ) |
| Increase  in inventories                                                                                                           |       | (5,509                                     | )          | (4,075 | ) | (2,605 | ) |
| Increase  in real estate assets held for sale                                                                                      |       | (19,048                                    | )          | (12,821 | ) | (7,330 | ) |
| Increase  in accounts payable, accrued liabilities, deferred revenue and other  liabilities                                        |       | 19,483                                     |       | 10,211 |   | 7,562 |   |
| Dividends  received from unconsolidated companies                                                                                  |       | 1,763                                      |       | — |   | 624 |   |
| Total  adjustments                                                                                                                 |       | 2,387                                      |       | 11,498 |   | (5,620 | ) |
| Net  cash provided by operating activities from continuing operations                                                              |       | 52,650                                     |       | 48,163 |   | 35,673 |   |
| Net  cash flow provided by operating activities from discontinued operations                                                       |       | 283                                        |       | 1,275 |   | 1,122 |   |
| Net  cash provided by operating activities                                                                                         |       | 52,933                                     |       | 49,438 |   | 36,795 |   |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Cash  flows from investing activities:                                                                                             |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                                                                              |       | (103,876                                   | )          | (108,618 | ) | (112,231 | ) |
| Acquisitions  and investments, net of cash acquired                                                                                |       | (21,877                                    | )          | (47,350 | ) | (103,453 | ) |
| Proceeds  from sale of investments and fixed assets                                                                                |       | 4,723                                      |       | 12,999 |   | — |   |
| Net  cash used in investing activities from continuing operations                                                                  |       | (121,030                                   | )          | (142,969 | ) | (215,684 | ) |
| Net  cash used in investing activities from discontinued operations                                                                |       | (2,119                                     | )          | (3,176 | ) | (2,667 | ) |
| Net  cash used in investing activities                                                                                             |       | (123,149                                   | )          | (146,145 | ) | (218,351 | ) |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Cash  flows from financing activities:                                                                                             |       |                                       |       |   |   |   |   |
| Net  proceeds from/(repayments of) working capital facilities and redrawable loans                                                 |       | 53,838                                     |       | (3,558 | ) | (87,596 | ) |
| Issuance  of common shares (net)                                                                                                   |       | —                                     |       | 99,220 |   | 121,889 |   |
| Stock  options exercised                                                                                                           |       | 4,105                                      |       | 4,469 |   | 1,623 |   |
| Proceeds  from long-term debt                                                                                                      |       | 177,500                                    |       | 423,003 |   | 143,040 |   |
| Principal  payments under long-term debt                                                                                           |       | (147,391                                   | )          | (383,401 | ) | (39,552 | ) |
| Payment  of common share dividends                                                                                                 |       | (4,238                                     | )          | (4,075 | ) | (3,807 | ) |
| Net  cash provided by financing activities from continuing operations                                                              |       | 83,814                                     |       | 135,658 |   | 135,597 |   |
| Net  cash provided by financing activities from discontinued operations                                                            |       | —                                     |       | — |   | — |   |
| Net  cash provided by financing activities                                                                                         |       | 83,814                                     |       | 135,658 |   | 135,597 |   |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Effect  of exchange rate changes on cash                                                                                           |       | 1,809                                      |       | 1,970 |   | (1,254 | ) |
| Net  increase/(decrease) in cash and cash equivalents                                                                              |       | 15,407                                     |       | 40,921 |   | (47,213 | ) |
| Cash  and cash equivalents at beginning of year (includes $1,422 (2007), $82  (2006), $102 (2005) of discontinued operations cash) |       | 79,318                                     |       | 38,397 |   | 85,610 |   |
| Cash  and cash equivalents at end of year (includes $360 (2007), $1,422 (2006), $82  (2005) of discontinued operations cash)       |       | $                                          | 94,725     |   | $ | 79,318 |   | $ | 38,397 |   |

 

Seenotes to consolidated financial statements.

 

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** **

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

**Statements of Consolidated Shareholders’ Equity**

 
| **(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  Held By A  Subsidiary** | ** ** | **Total  Comprehensive  Income** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|
| Balance,  January 1, 2005                                               |       | $                                         | —     |                                                 | $          | 318                                                  |       | $                                | 205        |                   | $          | 280,212                                              |       | $                                                   | 228,361    |                             | $          | 12,365 |   | $ | (181 | ) |   |   |
|                                                                         |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       |                             |       |
| Issuance  of class A common shares in public offering, net of issuance costs |       | —                                    |       | 50                                                   |       | —                                               |       | 121,839                          |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Stock  based compensation                                                    |       | —                                    |       | —                                               |       | —                                               |       | 1,249                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Stock  options exercised                                                     |       | —                                    |       | 1                                                    |       | —                                               |       | 1,623                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Conversion  of class B to class A shares                                     |       | —                                    |       | 24                                                   |       | (24                                                  | )          | —                           |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Dividends  on common shares                                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (3,807                 | )          | —                                               |       | —                                              |       |                             |       |
| Comprehensive  income:                                                       |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       |                             |       |
| Net  earnings on common shares for the year                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | 41,539                 |       | —                                               |       | —                                              |       | $                                | 41,539     |   |
| Other  comprehensive loss                                                    |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | —                 |       | (33,278                                              | )          | —                                              |       | (33,278                          | )          |
|                                                                         |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       | $                                | 8,261      |   |
| Balance,  December 31, 2005                                             |       | —                                    |       | 393                                                  |       | 181                                                  |       | 404,923                          |       | 266,093                |       | (20,913                                              | )          | (181                                                | )          |                             |       |
| Issuance  of class A common shares in public offering, net of issuance costs |       | —                                    |       | 25                                                   |       | —                                               |       | 99,195                           |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Stock  based compensation                                                    |       | —                                    |       | —                                               |       | —                                               |       | 1,179                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Stock  options exercised                                                     |       | —                                    |       | 4                                                    |       | —                                               |       | 4,465                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Dividends  on common shares                                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (4,075                 | )          | —                                               |       | —                                              |       |                             |       |
| Comprehensive  income:                                                       |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       |                             |       |
| Net  earnings on common shares for the year                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | 39,767                 |       | —                                               |       | —                                              |       | $                                | 39,767     |   |
| Other  comprehensive income                                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | —                 |       | 15,940                                               |       | —                                              |       | 15,940                           |       |
|                                                                         |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       | $                                | 55,707     |   |
| Balance,  December 31, 2006                                             |       | —                                    |       | 422                                                  |       | 181                                                  |       | 509,762                          |       | 301,785                |       | (4,973                                               | )          | (181                                                | )          |                             |       |
|                                                                         |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       |                             |       |
| FIN 48  liabilities                                                          |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (28,820                | )          | —                                               |       | —                                              |       |                             |       |
| Stock  based compensation                                                    |       | —                                    |       | —                                               |       | —                                               |       | 1,442                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Stock  options exercised                                                     |       | —                                    |       | 2                                                    |       | —                                               |       | 4,103                            |       | —                 |       | —                                               |       | —                                              |       |                             |       |
| Dividends  on common shares                                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (4,238                 | )          | —                                               |       | —                                              |       |                             |       |
| Comprehensive  income:                                                       |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       |                             |       |
| Net  earnings on common shares for the year                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | 33,642                 |       | —                                               |       | —                                              |       | $                                | 33,642     |   |
| Other  comprehensive income                                                  |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | —                 |       | 35,404                                               |       | —                                              |       | 35,404                           |       |
|                                                                         |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                                 |       |                                                |       | $                                | 69,046     |   |
| Balance,  December 31, 2007                                             |       | $                                         | —     |                                                 | $          | 424                                                  |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                                   | 304,412    |                             | $          | 30,431 |   | $ | (181 | ) |   |   |   |
|                                                                              |            |                                           |            |                                                      |            |                                                      |            |                                  |            |                        |            |                                                      |            |                                                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

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** **

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

**Notesto Consolidated Financial Statements**

 

**1.****                                     ****Summaryof significant accounting policies and basis of presentation**

 

*(a)          Business*

 

In thisreport Orient-Express Hotels Ltd. is referred to as the “Company”, and theCompany and its subsidiaries are referred to collectively as “OEH”.

 

At December 31,2007, OEH owned or invested in 41 deluxe hotels and resorts located in theUnited States, Mexico, Caribbean, Europe, southern Africa, South America,Southeast Asia, Australia and South Pacific, two restaurants in New York andBuenos Aires, six tourist trains in Europe, Southeast Asia and Peru, and ariver cruiseship in Burma and five canalboats in France.

 

*(b)          Basis of presentation*

 

Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand reflect the results of operations, financial position and cash flows of theCompany and all its majority-owned subsidiaries.  The consolidated financial statements havebeen prepared using the historical basis in the assets and liabilities and thehistorical results of operations directly attributable to OEH, and allintercompany accounts and transactions between the Company and its subsidiarieshave been eliminated.  Unconsolidatedcompanies that are 20% to 50% owned are accounted for on an equity basis.

 

In December 2007,OEH decided to sell Bora Bora Lagoon Resort. Accordingly, the results of the hotel have been reflected as discontinuedoperations for all periods presented.

 

Cashand cash equivalents include all cash balances and highly-liquid investmentshaving original maturities of three months or less.

 

“FASB”means Financial Accounting Standards Board and “APB” means AccountingPrinciples Board, the FASB’s predecessor. “SFAS” means Statement of Financial Accounting Standards of the FASB,and “FIN” or “EITF” means an accounting interpretation of the FASB.

 

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*(c)           Foreign currency*

 

Thefunctional currency for each of the Company’s foreign subsidiaries is theapplicable local currency, except for French West Indies, Brazil, Peru and oneproperty in Mexico, where the functional currency is U.S. dollars.

 

Forforeign subsidiaries with a functional currency other than the U.S. dollar,income and expenses are translated into U.S. dollars, the reporting currency ofthe Company, at the average rates of exchange prevailing during the year.  The assets and liabilities are translated intoU.S. dollars at the rates of exchange on the balance sheet date and the relatedtranslation adjustments are included in accumulated other comprehensiveincome/(loss).  Translation adjustmentsarising from intercompany financing that is long-term investment in nature areaccounted for similarly.  Foreigncurrency transaction gains and losses are recognized in earnings as they occur.

 

Due tothe changes in the currency in which Grand Hotel Europe in Russia primarilyexpends and generates cash, OEH management has reconsidered the functionalcurrency indicators described in SFAS No. 52, “Foreign CurrencyTranslation”, and has decided that the functional currency of the hotel haschanged from U.S. dollars to Russian rubles. The change was recorded with effect from January 1, 2007 and hasresulted in revaluation of goodwill (increase of $4,075,000), fixed assets(increase of $12,190,000), and foreign exchange loss/gain recorded in earnings($1,690,000 increase in net earnings for the year ended December 31, 2007)with the corresponding revaluation gain being recorded within othercomprehensive income accounts as at December 31, 2007.

 

*(d)          Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Estimatesinclude, among others, the allowance for doubtful accounts, depreciation andamortization, carrying value of assets including intangible assets, employee benefits,taxes including FIN 48, and contingencies, projected revenue and costs for realestate revenue recognition.  Actualresults may differ from those estimates.

 

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*(e)           Stock-based compensation*

 

Stock-basedcompensation expense for OEH’s share-based payment awards is recognized inearnings on a straight-line basis over the requisite service period of theaward.  Compensation expense forperformance share awards is recognized when it becomes probable that theperformance criteria specified in the awards will be achieved.  The total cost of a share-based payment awardis reduced by estimated forfeitures expected to occur over the vesting periodof the award.  The grant-date fair valueof share-based payment awards is determined using the Black-Scholes model.  See Note 14.

 

*(f)            Revenue recognition*

 

Hoteland restaurant revenues are recognized when the rooms are occupied and theservices are performed.  Tourist trainand cruise revenues are recognized upon commencement of the journey.  Deferred revenue consisting of deposits paidin advance is recognized as revenue when the services are performed for hotelsand restaurants and upon commencement of tourist train and cruisejourneys.  Revenues under management contractsare recognized based upon the attainment of certain financial results,primarily revenue and operating earnings, in each contract as defined.

 

Revenuefrom real estate activities is accounted for under SFAS No. 66 “Accountingfor Sales of Real Estate”, and represents the proceeds from sales ofundeveloped lands and developed properties that OEH is holding for sale, aswell as revenue recognized for condominiums under the percentage-of-completionmethod.  Profit from sales of land anddeveloped properties is recognized upon closing using the full accrual methodof accounting, provided that all the requirements prescribed by SFAS No. 66have been met.  Revenues related to thesale of condominiums are recognized in accordance with SFAS No. 66 when aminimum of 10% of the purchase price of a condominium has been received incash, the buyer has demonstrated sufficient level of continuing investment, theperiod of cancellation with refund has expired, receivables are deemedcollectible, and certain minimum sales and construction levels have beenattained.  Revenues related to projectsstill under construction are recognized under the percentage-of-completionmethod.  For sales that do not meet thesecriteria, revenue is deferred.

 

*(g)          Earnings from unconsolidated companies*

 

Earningsfrom unconsolidated companies include OEH’s share of the net earnings of itsequity investments as well as interest income related to loans and advances tothe equity 

 

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investeesamounting to $11,807,000 in 2007 (2006-$10,700,000; 2005–$9,752,000).

 

*(h)          Marketingcosts*

 

Marketing costs are expensed as incurred(except in the case of real estate projects, see Note 1(o)) and are reported inselling, general and administrative expenses. Marketing costs include costs of advertising and other marketingactivities.  These costs were $39,444,000in 2007 (2006-$34,662,000; 2005–$32,405,000).

 

*(i)           Interest expense, net*

 

OEHcapitalizes interest during the construction of assets. Interest expense, netexcludes interest which has been capitalized in the amount of $5,619,000 in2007 (2006-$1,735,000; 2005–$448,000).

 

*(j)            Foreign currency, net*

 

Foreigncurrency, net consists entirely of foreign currency exchange transaction gainsof $5,619,000 in 2007 (2006 – a loss of $4,610,000; 2005 – a gain of$5,065,000).

 

*(k)          Income taxes*

 

Deferredincome taxes result from temporary differences between the financial reportingand tax bases of assets and liabilities. Deferred taxes are recorded at enacted statutory rates and are adjustedas enacted rates change.  Classificationof deferred tax assets and liabilities corresponds with the classification ofthe underlying assets and liabilities giving rise to the temporary differencesor the period of expected reversal, as applicable.  A valuation allowance is established, whennecessary, to reduce deferred tax assets to the amount that is more likely thannot to be realized based on available evidence.

 

*(l)           Earnings per share*

 

Basicearnings per share exclude dilution and are computed by dividing net earningsavailable to common shareholders by the weighted average number of class A andB common shares outstanding for the period. The number of shares used in computing basic earnings per share was42,390,000 for the year ended December 31, 2007 (2006-40,692,000; 2005–38,214,000).  The number of shares used in computingdiluted earnings per share was 42,574,000 for the year ended December 31,2007 (2006-40,960,000; 2005–38,534,000). For the year ended December 31, 2007, the 

 

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anti-dilutiveeffect of stock options on 2,251 class A common shares (2006-nil; 2005-nil) wasexcluded from the computation of diluted earnings per share.

 

Thefollowing table is a reconciliation of the net earnings and per share amountsused in the calculation of basic earnings per share and diluted earnings pershare (in thousands, except per share amounts):

 
| ** **                          | ** ** | **Net  Earnings** | ** ** | **Number of  Shares** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------|------------|
| Year  ended December 31, 2007: |       |              |       |                       |       |                       |       |
| Basic  earnings per share           |       | $                 | 33,642     |                       | 42,390     |                       | $          | 0.79 |   |
| Effect  of dilutive stock options   |       | —            |       | 184                        |       | —                     |       |
| Diluted  earnings per share         |       | $                 | 33,642     |                       | 42,574     |                       | $          | 0.79 |   |
| Year  ended December 31, 2006: |       |              |       |                       |       |                       |       |
| Basic  earnings per share           |       | $                 | 39,767     |                       | 40,692     |                       | $          | 0.98 |   |
| Effect  of dilutive stock options   |       | —            |       | 268                        |       | (0.01                      | )          |
| Diluted  earnings per share         |       | $                 | 39,767     |                       | 40,960     |                       | $          | 0.97 |   |
| Year  ended December 31, 2005: |       |              |       |                       |       |                       |       |
| Basic  earnings per share           |       | $                 | 41,539     |                       | 38,214     |                       | $          | 1.09 |   |
| Effect  of dilutive stock options   |       | —            |       | 320                        |       | (0.01                      | )          |
| Diluted  earnings per share         |       | $                 | 41,539     |                       | 38,534     |                       | $          | 1.08 |   |

 

*(m)          Inventories*

 

Inventoriesinclude food, beverages, certain operating stocks and retail goods.  Inventories are valued at the lower of costor market value under the first-in, first-out method.

 

*(n)          Property, plant and equipment, net*

 

Property,plant and equipment, net are stated at cost less accumulated depreciation.  The cost of significant renewals andbetterments is capitalized and depreciated, while expenditures for normalmaintenance and repairs are expensed as incurred.

 

Depreciationexpense is computed using the straight-line method over the following estimateduseful lives:

 

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| **Description**                                           | ** ** | **Useful lives**                         | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                      |       |                                          |       |
| Buildings                                                 |       | Up to 60 years and 10% residual value         |       |
| Tourist  trains                                           |       | Up to 75 years                                |       |
| River  cruiseship and canalboats                          |       | 25 years                                      |       |
| Furniture,  fixtures and equipment                        |       | 5-25 years                                    |       |
| Equipment  under capital lease and leasehold improvements |       | Lesser of initial lease term or economic life |       |

 

*(o)          Real estate assets*

 

Realestate assets consist primarily of inventory costs of real estate propertydevelopments.  Expenditures directlyrelated to non-hotel real estate developments, such as real estate taxes andcapital improvements, are capitalized. Inventory costs of real estate development include construction costsand ancillary costs, which are expensed as real estate is sold.  OEH also capitalizes direct costsattributable to the sales and marketing of the properties until revenuerecognition commences.  If a salescontract is cancelled, unrecoverable direct selling costs are expensed uponcancellation.  Land property developmentcosts are accumulated by project and are allocated to individual residentialunits, principally using the relative sales value method.

 

*(p)          Impairment of long-lived assets*

 

Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets”, OEH management reviews long-lived assets whenever eventsor changes in circumstances indicate that the carrying amount of the assets maynot be recoverable.  In the event that animpairment occurs, OEH records a charge to income calculated as the excess ofthe asset’s carrying value over the estimated fair value.

 

*(q)          Investments*

 

Investmentsinclude equity interests in and advances to unconsolidated companies.

 

*(r)           Goodwill and other intangible assets*

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,goodwill must be evaluated annually to determine impairment.  Goodwill is not amortized.  The goodwill impairmenttesting under SFAS No. 142 is performed in two steps, first, thedetermination of impairment based upon the fair value of a reporting unit ascompared with its 

 

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carrying value and, second, if there is an implied impairment, themeasurement of the amount of impairment loss is determined by comparing theimplied fair value of goodwill with the carrying amount of that goodwill.  Impairment testing is performed annually atyear end.  At December 31, 2007,there was a $6,410,000 impairment loss recognized for Bora Bora LagoonResort.  Other intangible assets withindefinite useful lives are also reviewed for impairment in accordance withSFAS No. 142.

 

*(s)           Concentration of credit risk*

 

Due tothe nature of the leisure industry, concentration of credit risk with respectto trade receivables is limited.  OEH’scustomer base is comprised of numerous customers across different geographicareas.

 

*(t)           Derivative financial instruments*

 

If a derivativeinstrument is not designated as a hedge for accounting purposes, thefluctuations in the fair value of the derivative are recorded in earnings.

 

If aderivative is designated as a fair value hedge, the changes in the fair valueof the derivative and of the hedged item attributable to the hedged risk arerecognized in earnings.  If a derivativeis designated as a cash flow hedge, the effective portions of changes in thefair value of the derivative are recorded as a component of accumulated othercomprehensive income/(loss) in shareholders’ equity and are recognized in thestatement of consolidated operations when the hedged item affectsearnings.  The ineffective portion of ahedging derivative’s change in the fair value will be immediately recognized inearnings. 

 

OEH management formally documents allrelationships between hedging instruments and hedged items, as well as its riskmanagement objectives and strategies for undertaking various hedgetransactions.  OEH links all hedges thatare designated as fair value hedges to specific assets or liabilities on thebalance sheet or to specific firm commitments. OEH links all hedges that are designated as cash flow hedges toforecasted transactions or to floating rate liabilities on the balancesheet.  OEH management also assesses,both at the inception of the hedge and on an ongoing basis, whether thederivatives that are used in hedging transactions are highly effective inoffsetting changes in fair values or cash flows of hedged items.  Should it be determined that a derivative isnot highly effective as a 

 

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hedge, OEH will discontinue hedge accountingprospectively.

 

OEH isexposed to interest rate risk on its floating rate debt and management tries tomanage the impact of interest rate changes on earnings and cash flows.  OEH’s policy is to enter into interest rateswap and interest rate cap agreements from time to time to hedge thevariability in interest rate cash flows due to interest rate risk on floatingrate debt.  These swaps convert thefloating rate interest payments on a portion of the outstanding debt into fixedpayments.

 

*(u)          Recent accounting pronouncements*

 

*FIN 48*

 

See Note 11 regarding FIN 48 aninterpretation of FAS 109, “Accounting for Uncertainty in Income Taxes”.

 

*****SFAS 15*********7****

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”, which addressesthe need for increased consistency in fair value measurements, defining fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.  It also establishes aframework for measuring fair value and expands disclosure requirements.  SFAS No. 157 is effective for the Company’sfiscal year ending December 31, 2008. The Company is in the process of evaluating the effects of the adoptionof SFAS No. 157.  FASB StaffPosition FAS 157-2 defers the effective date of SFAS No. 157 to fiscalyears beginning after November 17, 2008 for certain non-financial assetsand liabilities.

 

*****SFAS 158*****

 

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Post-retirement Plans – an amendment of FASB Statements No. 87,88, 106, and 132(R)”.  This statementrequires an employer to recognize the over-funded or under-funded status ofdefined benefit pension plans and post-retirement plans (other than amulti-employer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded statusof a plan as of the date of its year-end statement of financial position andrequires disclosure in the notes to financial statements of certain additionalinformation related to net periodic benefit cost for the next fiscal year.  SFAS No. 158 defines the funded 

 

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status of a definedbenefit plan as its assets less its projected benefit obligation and definesthe funded status of a post-retirement plan as its assets less its accumulatedpost-retirement benefit obligation. Calendar year-end companies, such as OEH, were required to adopt therecognition and disclosure provisions of SFAS No. 158 as of December 31,2006.  The measurement date provisionsare not required to be adopted until 2008. The Company adopted the recognition and disclosure provisions of SFAS No. 158with effect from December 31, 2006 (see Note 10).

 

*SFAS 159*

 

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an Amendment of FASB Statement No. 115”.  This statement permits an entity to choose tomeasure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159are elective; however, the amendment to SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, applies to all entitieswith available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits allentities to choose to measure eligible items at fair value at specifiedelection dates.  A business entity willreport unrealized gains and losses on items for which the fair value option hasbeen elected in earnings (or another performance indicator if the businessentity does not report earnings) at each subsequent reporting date.  The fair value option (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method, (b) is irrevocable (unless a newelection date occurs) and (c) is applied only to entire instruments andnot to portions of instruments.  SFAS No. 159is effective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007.  Theadoption of SFAS No. 159 is not expected to have any impact on OEH’sconsolidated financial statements because OEH has elected not to use the fairvalue option.

 

*SFAS 141(R)*

 

In December 2007, the FASB issued SFASNo. 141(R), “Business Combinations”. This revised statement requires assets and liabilities, includingcontingent liabilities, acquired in a business combination in addition tocontingent consideration to be measured at their fair values as of the date ofthe acquisition.  SFAS No. 141(R) requiresthat any adjustments to an acquired entity’s deferred tax asset and liabilitybalances that occur after the measurement period be recorded as a component ofincome tax expense.  Under the 

 

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transition provisions of SFAS No. 141(R), the newrequirement applies to all business combinations, regardless of theconsummation date.  This statement alsochanges the treatment of restructuring charges, in-process research anddevelopment costs, and acquisition related costs.  SFAS No. 141(R) is effective forall companies with fiscal periods beginning on or after December 15, 2008and will be effective for the Company for acquisitions consummated after January 1,2009.  The Company is in the process ofevaluating the effects of the adoption of SFAS No. 141(R).

 

*SFAS 160*

 

In December 2007, the FASB issued SFASNo. 160 “Non-controlling Interests in Consolidated Financial Statements –an amendment of ARB No. 51”.  Thisstatement clarifies the accounting and reporting for non-controlling interests,currently referred to as minority interests. Under SFAS No. 160, non-controlling interests will be classified asa component of equity.  SFAS No. 160is effective for fiscal years beginning after December 15, 2008.  The Company is in the process of evaluatingthe effects of the adoption of SFAS No. 160.

 

*****(v)           Other significant events*****

 

****Dueto hurricanes Katrina and Rita, the Windsor Court Hotel in New Orleans suffereddamage and remained closed throughout the period from August 29 to October 31,2005.  The Maroma Resort and Spa inMexico also suffered damage as a result of hurricanes Emily and Wilma andremained closed throughout the period from July 18, 2005 (when the hotelclosed for refurbishment) through to February 20, 2006.  OEH’s insurance covers property damage andloss of earnings under business interruption for up to 12 months after theevent.  Earnings from operations includewithin revenue an insurance recovery of $nil (2006-$2,319,000; 2005-$4,900,000)for business interruption for the Windsor Court Hotel.  Earnings from operations include withinrevenue an insurance recovery of $nil (2006-$4,906,000; 2005-$2,500,000) forbusiness interruption for the Maroma Resort and Spa.  The property damage claims submitted as at December 31,2007 amounted to approximately $8,000,000 for the Windsor Court Hotel.  In 2007 the property damage claim for theMaroma Resort and Spa was settled and a gain of $2,312,000 was recorded.  The excess of the property damage claimssubmitted over the losses recorded in respect of the Windsor Court Hotelrepresents a contingent gain and will only be recognized in the financialstatements when realized.****

 

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**** ****

****2.********            ********Discontinued operations****

 

****During the fourth quarter of 2007, OEH decided tosell its investment in Bora Bora Lagoon Resort. Accordingly, the results of the hotel have been presented as adiscontinued operation for all periods presented.****

 

****Summarized operating results of the hotel are asfollows (dollars in thousands):****

**** ****
| **** ****                                                       | **** **** | ****Years ended December 31,**** | **** ****  |
|----------------------------------------------------------------------|----------------|-------------------------------------------------|-----------------|
| **** ****                                                       | **** **** | ****2007****                                    | **** ****  | ****2006**** | **** **** | ****2005**** | **** **** |
| **** ****                                                       | **** **** | **** ****                                  | **** ****  | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                                      | **** **** | ****$****                                       | ****11,582****  | **** **** | ****$**** | ****13,440**** | **** **** | ****$**** | ****12,057**** | **** **** |
| ****(Loss)/earnings  from************discontinued operations****     | **** **** | ****$****                                       | ****(2,629****  | ****)**** | ****$**** | ****102**** | **** **** | ****$**** | ****246**** | **** **** |
| ****Impairment  loss****                                             | **** **** | ****(13,992****                                 | ****)****       | ****—**** | **** **** | ****—**** | **** **** |
| **** ****                                                       | **** **** | ****(16,621)****                                | **** ****  | ****102**** | **** **** | ****246**** | **** **** |
| ****Deferred  tax benefit****                                        | **** **** | ****—****                                  | **** ****  | ****3,000**** | **** **** | ****—**** | **** **** |
| ****Net  (loss)/earnings from************discontinued operations**** | **** **** | ****$****                                       | ****(16,621**** | ****)**** | ****$**** | ****3,102**** | **** **** | ****$**** | ****246**** | **** **** |

 

****The impairment lossincludes goodwill impairment loss of $3,891,000 and fixed assets impairmentloss of $10,101,000.****

 

****Due to an increase incompetition and other market factors, operating profits and cash flows of theBora Bora Lagoon Resort were lower than expected in 2007 and previous years,which gave rise to an impairment of goodwill and long-lived assets.  The fair value of the investment wasestimated by management using a bid price offered for the business andconsidering other market factors.****

 

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

**** ****
| **** ****                                                        | **** **** | ****December 31**** | **** **** |
|-----------------------------------------------------------------------|----------------|--------------------------|----------------|
| **** ****                                                        | **** **** | ****2007****             | **** **** | ****2006**** | **** **** |
| **** ****                                                        | **** **** | **** ****           | **** **** | **** **** | **** **** |
| ****Current assets****                                                | **** **** | ****$****                | ****3,686****  | **** **** | ****$**** | ****5,226**** | **** **** |
| ****Other assets****                                                  | **** **** | ****3,121****            | **** **** | ****3,148**** | **** **** |
| ****Property, plant and equipment,************net of depreciation**** | **** **** | ****45,091****           | **** **** | ****48,589**** | **** **** |
| ****Goodwill****                                                      | **** **** | ****2,519****            | **** **** | ****3,891**** | **** **** |
| ****Total assets held for sale****                                    | **** **** | ****$****                | ****54,417**** | **** **** | ****$**** | ****60,854**** | **** **** |
| ****Liabilities held for sale****                                     | **** **** | ****$****                | ****(5,619**** | ****)**** | ****$**** | ****(4,377**** | ****)**** |

 

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**3.****            ****Significant acquisitions, dispositions****andinvestments**

 

*(a)          Acquisitions*

 

*2007 Acquisitions*

 

*Afloatin France*

 

On April 12,2007, OEH exercised its option to acquire the remaining 50% it did not own inthe company operating the Afloat in France canal and river cruise business, fora cash consideration of $2,700,000, bringing OEH’s investment 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):

 
| ** **                            | ** ** | **April 12, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
|                                  |       |                         |       |
| Goodwill  and other intangible assets |       | $                            | 3,876      |   |
| Total  assets acquired                |       | 3,876                        |       |
|                                  |       |                         |       |
| Current  liabilities                  |       | (1,176                       | )          |
| Total  liabilities assumed            |       | (1,176                       | )          |
| 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 |       | $                            | 251        |   |
| Purchase  price of the second 50% interest                        |       | 2,700                        |       |
|                                                              |       | 2,951                        |       |
| Add:                                                              |       |                         |       |
| Fair  value of liabilities assumed                                |       | 2,353                        |       |
| Less:                                                             |       |                         |       |
| Fair  value of assets acquired                                    |       | —                       |       |
| Total  goodwill                                                   |       | $                            | 5,304      |   |

 

Thecanalboats operated by the acquired company had been 

 

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purchased byOEH in 2004 and leased to the operating company.  Goodwill and other intangible assets of$5,304,000 has been recorded, of which $nil will be deductible as operatingexpenses for tax purposes.  Thisacquisition enabled OEH to take full control of the Afloat in France operationand to receive 100% of operating revenues that the business is expected togenerate in future years, which contributed to the purchase price and resultedin goodwill.

 

Theacquisition of Afloat in France has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from 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 data are presented forinformational purposes only and are not necessarily indicative of the resultsof future operations, nor of the actual results that would have been achievedhad the acquisition taken place at the beginning of 2006 (dollars in thousands,except per share amounts):

 
| **Year ended December 31,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                    |       | $          | 579,615    |       | $          | 482,031 |   |
| Net  earnings                              |       | $          | 33,618     |       | $          | 39,499 |   |
| Earnings  per share:                       |       |       |       |       |       |
| Basic                                      |       | $          | 0.79       |       | $          | 0.97 |   |
| Diluted                                    |       | $          | 0.79       |       | $          | 0.96 |   |

 

*RoyalScotsman*

 

On April 25,2007, OEH exercised its option to acquire the remaining 50% it did not own inthe company owning and operating the Royal Scotsman tourist train, for a cashconsideration of £1,375,000 (equivalent to $2,711,000), 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):

 

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| ** **                            | ** ** | **April 25, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
|                                  |       |                         |       |
| Goodwill  and other intangible assets |       | $                            | 1,656      |   |
| Property,  plant and equipment        |       | 3,327                        |       |
| Current  assets                       |       | 47                           |       |
| Total  assets acquired                |       | 5,030                        |       |
|                                  |       |                         |       |
| Current  liabilities                  |       | (921                         | )          |
| Deferred  tax liabilities             |       | (371                         | )          |
| Long-term  debt                       |       | (1,027                       | )          |
| Total  liabilities assumed            |       | (2,319                       | )          |
| Net  assets acquired                  |       | $                            | 2,711      |   |
|                                  |       |                         |       |
| Cash  consideration                   |       | $                            | 2,711      |   |

 

OEH’s combined investments in the Royal Scotsman business result intotal goodwill as follows (dollars in thousands):

 
| ** **                                                         | ** ** | **April 25, 2007** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
|                                                               |       |                         |       |
| Purchase  price paid for the initial 50%, plus accumulated profits |       | $                            | 1,409      |   |
| Purchase  price of the second 50% interest                         |       | 2,711                        |       |
|                                                               |       | 4,120                        |       |
| Add:                                                               |       |                         |       |
| Fair  value of liabilities assumed                                 |       | 4,853                        |       |
| Less:                                                              |       |                         |       |
| Fair  value of assets acquired                                     |       | (7,224                       | )          |
| Total  goodwill                                                    |       | $                            | 1,749      |   |

 

Property,plant and equipment of the Royal Scotsman have been fair valued based on theestimated replacement cost of the train. Goodwill of $1,749,000 has been recorded of which $nil will bedeductible as operating expenses for tax purposes.  This acquisition enabled OEH to take fullcontrol of the Royal Scotsman operation and receive 100% of operating revenuesthat the business is expected to generate in future years, which contributed tothe purchase price and resulted in goodwill.

 

The acquisition of the Royal Scotsman has been accounted for as apurchase in accordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from April 25,2007.

 

Theproforma results of operations data presented below 

 

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assume thatthe Royal Scotsman acquisition had been made at the beginning of 2006.  The proforma data are presented forinformational purposes only and are not necessarily indicative of the resultsof future operations, nor of the actual results that would have been achievedhad the acquisition taken place at the beginning of 2006 (dollars in thousands,except per share amounts):

 
| **Year ended December 31,** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                    |       | $          | 580,377    |       | $          | 484,903 |   |
| Net  earnings                              |       | $          | 33,534     |       | $          | 40,265 |   |
| Earnings  per share:                       |       |       |       |       |       |
| Basic                                      |       | $          | 0.79       |       | $          | 0.99 |   |
| Diluted                                    |       | $          | 0.79       |       | $          | 0.98 |   |

 

*La Résidence Phou Vao minority interests*

 

EffectiveMarch 10, 2007, OEH purchased an additional 18% interest in La RésidencePhou Vao**in Luang Prabang, Laos for a cashconsideration of $626,000, including transaction costs, bringing its interestto 69%.  A deferred tax liability of$83,000 has been recorded on the acquisition arising mainly on the fair valueadjustment to assets of $236,000. Goodwill has been increased by $178,000.

 

*Finalretention payment relating to Grand Hotel Europe*

 

In March 2007,a final retention payment of $2,850,000 plus accrued interest of $218,000 hasbeen made in accordance with the original agreement for the acquisition ofGrand Hotel Europe in St. Petersburg completed in February 2005.

 

*2006 Acquisitions*

 

*Pansea Hotels Group*

 

In June 2006, OEH acquired the 50% of the Napasaihotel-owning company shares not owned by the Pansea Hotels group for$10,500,000 cash consideration, and acquired the Pansea group itself in July 2006for a total cash consideration of $33,562,000 (including an $8,000,000 loan OEHhad previously made to Pansea group, accrued interest, other prior payments,and acquisition costs) and assumption of sundry debts owed by the Pansea Hotelsgroup to third parties of $15,524,000.

 

Thefollowing table summarizes the fair values of the assets acquired and liabilitiesassumed at the date of acquisition (dollars in thousands):

 

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| ** **                                      | ** ** | **July 21,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
|                                            |       |                    |       |
| Current  assets                                 |       | $                       | 10,447     |   |
| Property,  plant and equipment                  |       | 33,665                  |       |
| Goodwill  and other intangible assets           |       | 26,715                  |       |
| Total  assets acquired                          |       | 70,827                  |       |
|                                            |       |                    |       |
| Current  liabilities                            |       | (6,840                  | )          |
| Liabilities  to minority shareholders           |       | (7,818                  | )          |
| Third  party debt                               |       | (6,115                  | )          |
| Deferred  income taxes                          |       | (5,992                  | )          |
| Total  liabilities assumed                      |       | (26,765                 | )          |
| Net  assets acquired                            |       | $                       | 44,062     |   |
|                                            |       |                    |       |
| Loan  advanced in 2004 and other prior payments |       | $                       | 9,950      |   |
| Paid  in June 2006 for 50% of Napasai      |       | 10,500                  |       |
| Paid  in July 2006 for the rest of Pansea  |       | 23,612                  |       |
| Total  cash consideration                       |       | $                       | 44,062     |   |

 

The netassets of the Pansea Hotels group have been fair valued based on the estimatedmarket values of the freehold and leasehold properties.  After fair valuing all other assets andliabilities, goodwill of $13,815,000 has been recorded of which $nil will bedeductible as operating expenses for tax purposes.  Included in the goodwill is a debit balanceof $2,316,000 for minority interest relating to losses carried forward as atthe date of acquisition.  In the future periods,minority interest share of profits will be credited against goodwill to theextent of the previously recorded minority interest losses.

 

Theresults of the operation of the Pansea Hotels group have been included in theconsolidated financial statements of OEH from July 21, 2006.

 

In December 2006,OEH acquired an additional 34% interest in the former Pansea hotel in Cambodiafor a cash consideration of $1,290,050 increasing its share in the hotel equityfrom 65% to 99%.  The purchase price waspartly allocated to fixed assets ($918,000), resulting in a deferred taxliability of $184,000.  Goodwill of$318,000 has been recognized on this acquisition, of which $nil will bedeductible for tax purposes.

 

*Casade Sierra Nevada*

 

In February 2006,OEH acquired a 75% interest in Casa de Sierra Nevada, a 33-room deluxe hotel inSan Miguel de Allende, Mexico.   Thetotal purchase price, including 

 

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acquisitioncosts, was $8,800,000 paid in cash.  Theacquisition included adjacent buildings and land.

 

Thefollowing table summarizes the fair values of the assets acquired andliabilities assumed at the date of acquisition (dollars in thousands):

 
| ** **                                            | ** ** | **February 8,  2006** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
|                                                  |       |                       |       |
| Property,  plant and equipment                        |       | $                          | 8,600      |   |
| Goodwill  and other intangible assets                 |       | 3,831                      |       |
| Total  assets acquired                                |       | 12,431                     |       |
|                                                  |       |                       |       |
| Current  liabilities                                  |       | (861                       | )          |
| Other  long-term liabilities (deferred consideration) |       | (2,850                     | )          |
| Deferred  income taxes                                |       | (520                       | )          |
| Total  liabilities assumed                            |       | (3,631                     | )          |
| Net  assets acquired                                  |       | $                          | 8,800      |   |

 

The netassets of Casa de Sierra Nevada have been fair valued based on the estimatedmarket value of the buildings.  Afterfair valuing all other assets and liabilities, goodwill of $3,571,000 has beenrecorded of which $nil will be deductible as operating expenses for taxpurposes.

 

Theacquisition of Casa de Sierra Nevada has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from February 8,2006.

 

In December 2006,OEH acquired a further 5% interest in the hotel for a cash consideration of$520,000.  In accordance with theshareholders’ agreement, OEH will purchase a further 5% in January 2009for a cash consideration equal to a proportion of ten times the previous 12months net operating income of the hotel, less its outstanding debt, and theremaining 15% in January 2010 for a cash consideration calculated on thesame basis.  Guidance in SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”, and EITF 00-4, “Majority owner’s accounting for atransaction in the shares of a consolidated subsidiary and a derivative indexedto the minority interest in that subsidiary”, has been applied to account forthe forward contracts for acquisition of the remaining 20%.  The liability has been recorded at the fairvalue of the deferred consideration and the minority interest has been reducedaccordingly.

 

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*MaromaResort and Spa*

 

EffectiveJanuary 1, 2006, OEH purchased the remaining 25% interest in Maroma Resortand Spa for a cash consideration of $5,400,000 bringing its interest to100%.  A deferred tax liability of$1,853,000 has been recorded on the acquisition.  Goodwill of $4,728,000 has been recognized onthis acquisition.

 

*2005 Acquisition*

 

In February 2005, OEH purchased 100% of theissued equity of LLC Europe Hotel which owns a 93.5% interest in the propertyoperating as the Grand Hotel Europe, St. Petersburg, Russia.  The remaining interest in the property isowned by the City of St. Petersburg.  Inaddition, OEH acquired full management and operational control of the hotel.

 

The totalpurchase price, including acquisition costs, was $95,150,000 paid in cash ofwhich $57,500,000 was financed by a syndicate of banks led by the InternationalFinance Corporation.

 

The followingtable summarizes the fair values of the assets acquired and liabilities assumedat the date of acquisition (dollars in thousands):

 
| ** **                                 | ** ** | **February 8,  2005** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | ** **                 | ** ** |
| Current  assets                            |       | $                          | 2,740      |   |
| Property,  plant and fixtures and fittings |       | 80,500                     |       |
| Trade  name                                |       | 7,100                      |       |
| Goodwill                                   |       | 27,928                     |       |
| Total  assets acquired                     |       | 118,268                    |       |
|                                       |       |                       |       |
| Current  liabilities and lease obligations |       | 7,842                      |       |
| Deferred  income taxes                     |       | 15,276                     |       |
| Total  liabilities assumed                 |       | 23,118                     |       |
| Net  assets acquired                       |       | $                          | 95,150     |   |

 

Goodwill of$27,928,000 has been recorded of which $nil will be deductible for taxpurposes.

 

The acquired intangible assets included the trade namewhich was fair valued at $7,100,000, and has been assigned an indefinite usefullife.

 

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The results of the operation have beenincluded in the consolidated financial statements of OEH from February 8,2005.

 

*(b) Investments*

 

On June 7,2007, OEH acquired 50% of a company holding real estate in Buzios, Brazil, fora cash consideration of $5,000,000.  OEHintends to build a hotel and villas on the acquired land.  The remaining 50% of the property holdingcompany is expected to be sold to OEH for a cash consideration of $5,000,000when the building permits are obtained from the local authorities.  In accordance with the sale and purchaseagreement with the owners of the other 50%, if permits are not received, theowners have an option to repurchase OEH’s 50% 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.

 

In June 2006,OEH sold its 49% interest in Harry’s Bar in London, England, for a cashconsideration of $9,499,000.  The sale ofthe investment resulted in a gain of $6,619,000 upon which a tax charge of$3,325,000 was recorded.

 

Investmentsrepresent equity interests of 50% or less and in which OEH exerts significantinfluence.  OEH does not have effectivecontrol of these unconsolidated companies and, therefore, accounts for theseinvestments using the equity method.

 

OEH’sinvestments in and loans and advances to unconsolidated companies amounted to$147,539,000 at December 31, 2007 (2006–$130,042,000).  OEH’s earnings from unconsolidated companieswere $16,425,000 in 2007 (2006–$11,970,000; 2005-$11,175,000).  See Note 20.

 

Summarizedfinancial data for unconsolidated companies are as follows (dollars inthousands):

 

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| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Current  assets                                  |       | $                     | 60,890     |   | $ | 50,782 |   |
| Property,  plant and equipment, net              |       | 358,708               |       | 347,772 |   |
| Other  assets                                    |       | 51,376                |       | 46,022 |   |
| Total  assets                                    |       | $                     | 470,974    |   | $ | 444,576 |   |
|                                             |       |                  |       |   |   |
| Current  liabilities                             |       | $                     | 48,710     |   | $ | 59,621 |   |
| Long-term  debt                                  |       | 246,420               |       | 227,477 |   |
| Other  liabilities                               |       | 97,663                |       | 86,637 |   |
| Total  shareholders’ equity                 |       | 78,181                |       | 70,841 |   |
| Total  liabilities and shareholders’ equity |       | $                     | 470,974    |   | $ | 444,576 |   |

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                            |       | $                                          | 196,564    |   | $ | 173,858 |   | $ | 159,705 |   |
| Earnings  from operations before net finance costs |       | $                                          | 40,979     |   | $ | 34,509 |   | $ | 25,630 |   |
| Net  earnings / (loss)                             |       | $                                          | 7,472      |   | $ | 2,127 |   | $ | (2,382 | ) |

 

Included in unconsolidated companies is the CharlestonPlace Hotel to which OEH has made loans in addition to its equity investment of19.9%.  Some of these loans have aconversion feature exercisable by OEH no sooner than 2020 and in limitedcircumstances before then, under which OEH may convert its loans intoadditional capital, thereby giving OEH a majority equity interest in the hotel.

 

Also included in unconsolidated companies are the Peruhotel and PeruRail joint ventures, under which OEH and the other 50%participant must contribute equally additional equity capital needed for thebusinesses.  If the other participantdoes not meet this obligation, OEH has the right to dilute the otherparticipant and obtain a majority equity interest in the affected joint venturecompany.  OEH also has rights to purchasethe other participant’s interests, exercisable in limited circumstances such asits bankruptcy.

 

**4.****            ****Property,plant and equipment, net**

 

Themajor classes of property, plant and equipment are as follows (dollars inthousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Land  and buildings                      |       | $                     | 1,074,059  |   | $ | 944,411 |   |
| Machinery  and equipment                 |       | 205,873               |       | 191,050 |   |
| Fixtures,  fittings and office equipment |       | 220,664               |       | 186,075 |   |
| River  cruiseship and canalboats         |       | 19,600                |       | 19,184 |   |
|                                     |       | 1,520,196             |       | 1,340,720 |   |
| Less:  accumulated depreciation          |       | (246,240              | )          | (205,909 | ) |
|                                     |       | $                     | 1,273,956  |   | $ | 1,134,811 |   |

 

92

----

 

The major classes of assets under capitalleases included above are as follows (dollars in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Freehold  and leased land and buildings  |       | $                     | 17,948     |   | $ | 16,006 |   |
| Machinery  and equipment                 |       | 2,573                 |       | 2,205 |   |
| Fixtures,  fittings and office equipment |       | 1,654                 |       | 1,678 |   |
|                                     |       | 22,175                |       | 19,889 |   |
| Less:  accumulated depreciation          |       | (2,953                | )          | (2,241 | ) |
|                                     |       | $                     | 19,222     |   | $ | 17,648 |   |

 

**5.****            ****Goodwill**

 

The changes in the carrying amount of goodwill forthe year ended December 31, 2007 are as follows (dollars in thousands):

 
| ** **                                                         | ** ** | **Hotels &********Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance as of January 1, 2007                                 |       | $                                        | 116,377    |                           | $          | 1,383     |       | $ | 117,760 |   |
| Goodwill acquired during theyear / (prior  year estimatesadjusted) |       | (151                                     | )          | 7,053                          |       | 6,902     |       |
| Foreign currency translationadjustment                             |       | 9,075                                    |       | (240                           | )          | 8,835     |       |
| Balance as at December 31, 2007                               |       | $                                        | 125,301    |                           | $          | 8,196     |       | $ | 133,497 |   |

 

**6.****            ****Otherintangible assets**

(Dollarsin thousands)

 
| ** **                                | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| **Amortized intangible assets** | ** ** | **Carrying  amount**            | ** ** | **Accumulated  amortization** | ** ** |
| ** **                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Favorable lease                           |       | $                               | 12,855     |   | $ | (506 | ) |
| Internet sites                            |       | 2,066                           |       | (115 | ) |
| Total                                     |       | $                               | 14,921     |   | $ | (621 | ) |

 

Favorable lease intangible assets are amortizedover the term of the lease, which is up to 50 years, and internet sites areamortized over ten years.

 
| **Unamortized intangible assets** |   |   |   |   |   |
|-----------------------------------|--------|--------|--------|--------|--------|
|                              |   |   |   |   |   |
| Tradename                         |   | $      | 7,360  |   |   |   |
|                                   |        |        |        |        |        |  |

 

Amortization expense forthe year ended December 31, 2007 is $461,000 (2006-$160,000; 2005-$nil).

 

93

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Estimated amortizationexpense for each of the years ended from 2008 to 2012 is $461,000.

 

**7.****            ****Workingcapital facilities**

 

Workingcapital facilities are composed of the following, all repayable within one year(dollars in thousands):

 
| ** **                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Unsecured  working capital facilities, with a weighted average interest rate of 6.51%  and 5.55%, respectively |       | $                     | 64,419     |   | $ | 45,107 |   |
|                                                                                                                |            |                       |            |  |  |  |  |

 

OEH hadapproximately $65,000,000 of working capital lines of credit at December 31,2007 (2006-$64,000,000) issued by various financial institutions and havingvarious expiration dates, of which $14,121,000 was undrawn (2006-$22,208,000).  One of the lines of credit in the amount of$10,000,000 is determined as the net amount of all balances with the bank.  At December 31, 2007, OEH held cash balancesof $22,519,000 and working capital facilities of the equivalent of $23,412,000in a number of currencies with the bank.

 

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

 

*(a)***         ***Long-term debt*

 

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

 
| ** **                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 11 years, with a weighted average interest rate of 6.36% and  5.80%, respectively, primarily based on LIBOR |       | $                     | 767,916    |   | $ | 649,513 |   |
| Loan  secured by river cruiseship payable over 3 years, with a weighted interest  rate of 7.48% and 6.54%, respectively, based on LIBOR                                                                     |       | 2,500                 |       | 3,500 |   |
| Obligations  under capital lease (see Note 8(b))                                                                                                                                                            |       | 15,994                |       | 16,684 |   |
|                                                                                                                                                                                                        |       | 786,410               |       | 669,697 |   |
| Less:  current portion                                                                                                                                                                                      |       | 127,795               |       | 83,397 |   |
|                                                                                                                                                                                                        |       | $                     | 658,615    |   | $ | 586,300 |   |

 

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

 

Certaincredit agreements of OEH have restrictive covenants.  At December 31, 2007, OEH was incompliance with these covenants, including a minimum consolidated net worthtest and a minimum consolidated interest coverage test as defined under abank-syndicated €190,000,000 loan facility. OEH does not currently have any covenants in its loan agreements whichlimit the payment of dividends.

 

94

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In October 2007, OEH borrowed $60,000,000 under abank-syndicated loan facility totalling up to $120,000,000 secured by OEH’sBrazilian properties.  The initialdrawdown was used to refinance an existing $44,800,000 loan facility secured onthe Copacabana Palace Hotel.

 

The following is a summary of the aggregate maturitiesof consolidated long-term debt excluding obligations under capital leases at December 31,2007 (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2008                                        |       | $          | 125,477    |   |
| 2009                                        |       | 27,506     |       |
| 2010                                        |       | 48,641     |       |
| 2011                                        |       | 391,471    |       |
| 2012                                        |       | 20,504     |       |
| 2013  and thereafter                        |       | 156,817    |       |
|                                        |       | $          | 770,416    |   |

 

TheCompany has guaranteed $566,000,000 of the long-term debt of its subsidiarycompanies as at December 31, 2007.

 

TheCompany has guaranteed, through 2011, $7,847,000 of the debt obligations of thePeruRail operations, an unconsolidated joint venture in which OEH has a 50%investment and, through 2008, $5,938,000 of PeruRail contingent obligationsrelating to the performance of its governmental rail concessions.  OEH has guaranteed, through 2008, $2,800,000of the debt obligations of Charleston Center LLC, owner of the Charleston PlaceHotel in which OEH has a 19.9% equity investment.  The Company has guaranteed, through 2008, a$3,000,000 bank loan to Eastern and Oriental Express Ltd. in which OEH has a25% equity investment.

 

*(b)***         ***Obligations under capital leases*

 

Thefollowing is a summary of future minimum lease payments under capital leasestogether with the present value of the minimum lease payments at December 31,2007 (dollars in thousands):

 

95

----

 
| **Year ending December 31,**           | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
|                                                  |       |       |       |
| 2008                                                  |       | $          | 3,001      |   |
| 2009                                                  |       | 2,666      |       |
| 2010                                                  |       | 2,651      |       |
| 2011                                                  |       | 4,225      |       |
| 2012                                                  |       | 642        |       |
| 2013  and thereafter                                  |       | 26,338     |       |
| Minimum  lease payments                               |       | 39,523     |       |
| Less:  amount of interest contained in above payments |       | 23,529     |       |
| Present  value of minimum lease payments              |       | 15,994     |       |
| Less:  current portion                                |       | 2,039      |       |
|                                                  |       | $          | 13,955     |   |

 

The amount ofinterest deducted from minimum lease payments to arrive at the present value isthe interest contained in each of the leases.

 

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

 

Otherliabilities consist of $2,330,000 of deferred consideration arising on the Casade Sierra Nevada acquisition (see Note 3(a)) and $1,379,000of deferred consideration on acquisition of land next to Maroma Resort and Spaafter discounting to present value.

 

**10.****         ****Pension plans**

 

From January 1,2003, a number of non-U.S. OEH employees participated in a defined benefitpension plan in the U.K. called Orient-Express Services 2003 PensionScheme.  On May 31, 2006, the planwas closed for future benefit accruals.

 

The significant weighted-average assumptions used todetermine net periodic costs of the plan during the year are as follows:

 
| ** **                                        | ** ** | **Year ended  December 31** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       |                                  |       |   |   |   |   |
| Discount  rate                                    |       | 5.70                                  | %          | 5.10 | % | 5.00 | % |
| Assumed  rates of compensation increases          |       | —                                |       | — |   | 3.25 | % |
| Expected  long-term rate of return on plan assets |       | 7.50                                  | %          | 7.50 | % | 7.50 | % |

 

Thesignificant weighted-average assumptions used to determine benefit obligationsof the plan at year end are as follows:

 

96

----

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Discount  rate                          |       | 5.70                  | %          | 5.10 | % |
| Assumed  rate of compensation increases |       | —                |       | — |   |

 

The discount rate essentially represents the rate ofreturn on high quality corporate bonds at the end of the year in the country inwhich the assets are held.

 

In determining the expected long-term rate of returnon plan assets, management has reviewed anticipated future long-termperformance of individual asset classes and the asset allocation strategy giventhe anticipated requirements of the plan to determine the average rate ofearnings expected on the funds invested.

 

The weighted-average asset allocation of OEH’s definedbenefit pension plan as of December 31, 2007 and 2006 by asset category asa percentage of plan assets is as follows:

 
| ** **                | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Asset  Category           |       |                                   |       |   |   |
| Equity  securities        |       | 100                                    | %          | 99 | % |
| Fixed  income investments |       | —                                 |       | — |   |
| Other                     |       | —                                 |       | 1 | % |
| Total                     |       | 100                                    | %          | 100 | % |

 

Thechanges in the benefit obligation, the plan assets and the funded status forthe plan were as follows (dollars in thousands):

 
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Change  in benefit obligation:           |       |                                   |       |   |   |
| Benefit  obligation at beginning of year |       | $                                      | 22,377     |   | $ | 17,597 |   |
| Service  cost                            |       | —                                 |       | 459 |   |
| Interest  cost                           |       | 1,164                                  |       | 877 |   |
| Plan  participants’ contributions   |       | —                                 |       | 128 |   |
| Net  transfer in                         |       | —                                 |       | 851 |   |
| Actuarial  (gain) / loss                 |       | (1,894                                 | )          | 1,435 |   |
| Benefits  paid                           |       | (74                                    | )          | (270 | ) |
| Curtailment  gain                        |       | —                                 |       | (1,139 | ) |
| Settlement                               |       | (32                                    | )          | — |   |
| Foreign  currency translation            |       | 381                                    |       | 2,439 |   |
| Benefit  obligation at end of year       |       | 21,922                                 |       | 22,377 |   |
|                                          |            |                                        |            |  |  |  |  |

 

97

----

 
| ** **                                      | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** |
|                                            |       |                                   |       |   |   |
| Change  in plan assets:                         |       |                                   |       |   |   |
| Fair  value of plan assets at beginning of year |       | 13,700                                 |       | 9,806 |   |
| Actual  return on plan assets                   |       | 574                                    |       | 1,334 |   |
| Employer  contributions                         |       | 800                                    |       | 813 |   |
| Plan  participants’ contributions          |       | —                                 |       | 128 |   |
| Net  transfer in                                |       | —                                 |       | 378 |   |
| Benefits  paid                                  |       | (74                                    | )          | (270 | ) |
| Settlement                                      |       | (24                                    | )          | — |   |
| Foreign  currency translation                   |       | 224                                    |       | 1,511 |   |
| Fair  value of plan assets at end of year       |       | 15,200                                 |       | 13,700 |   |
| Funded  status at end of year                   |       | (6,722                                 | )          | (8,677 | ) |
| Unrecognized  net actuarial loss                |       | 10,714                                 |       | 12,101 |   |
| Net  amount recognized in retained earnings     |       | $                                      | 3,992      |   | $ | 3,424 |   |
|                                                 |            |                                        |            |  |  |  |  |

 

At December 31, 2006, OEH adopted SFAS No. 158,“Employer’s Accounting for Defined Benefit Pensions and Other Post-retirement Plans– An Amendment of FASB Statements No. 87, 88, 106 and 132(R)”.  The implementation of SFAS No. 158 didnot have a material impact on OEH’s financial statements.

 

The following table details certain information withrespect to OEH’s defined benefit pension plan (dollars in thousands):

 
| ** **                      | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                      | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Projected  benefit obligation   |       | $                                      | 21,922     |   | $ | 22,377 |   |
| Accumulated  benefit obligation |       | $                                      | 21,922     |   | $ | 22,377 |   |
| Fair  value of plan assets      |       | $                                      | 15,200     |   | $ | 13,700 |   |

 

Thecomponents of net periodic benefit cost for the OEH employees covered under theplan consisted of the following (dollars in thousands):

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                           |       |                                       |       |   |   |   |   |
| Service  cost                                  |       | $                                          | —     |   | $ | 459 |   | $ | 885 |   |
| Interest  cost on projected benefit obligation |       | 1,164                                      |       | 877 |   | 699 |   |
| Expected  return on assets                     |       | (1,076                                     | )          | (824 | ) | (546 | ) |
| Net  amortization and deferrals                |       | 554                                        |       | 484 |   | 417 |   |
| Net  periodic benefit cost                     |       | $                                          | 642        |   | $ | 996 |   | $ | 1,455 |   |

 

Additionalinformation about OEH’s pension plan is as follows (dollars in thousands):

 

98

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** **
| ** **                                                                                      | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| (Decrease)  / Increase in minimum pension liability (net of tax) in other comprehensive  income |       | $                                      | (28        | ) | $ | 8,518 |   |
|                                                                                                 |            |                                        |            |  |  |  |  |

 

OEH expects to contribute $1,385,000 to its definedbenefit pension plan in 2008.  Thefollowing benefit payments, which reflect assumed future service, are expectedto be paid (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2008                                        |       | $          | 80         |   |
| 2009                                        |       | 94         |       |
| 2010                                        |       | 111        |       |
| 2011                                        |       | 177        |       |
| 2012                                        |       | 271        |       |
| Next  five years                            |       | $          | 2,366      |   |

 

Included in the liability for pension benefit on theconsolidated balance sheet at December 31, 2007 is an amount of $213,000(2006-$nil) relating to deferred benefit pension obligations at the hotels inBali, Indonesia.  The accrual was madebased on actuarial valuation as at December 31, 2007.  There are no assets to be disclosed.

 

OEH has another defined benefit pension plan in SouthAfrica for certain employees of the Mount Nelson Hotel.  The total number of active members is three,and the remaining members are retired pensioners.  The latest actuarial valuation performed asat December 31, 2007 showed a net pension plan surplus of approximately$84,000 based on fair value of plan assets of $1,446,000 and projected benefitobligation of $1,362,000.  The surplushas not been recognized in the financial statements as it is deemed notrecoverable.

 

Certain employees of OEH are members of the BritishRail pension plan, which is a governmental multi-employer defined benefitpension plan.  Total OEH contributionsinto the plan for 2007 and 2006 were $78,000 and $92,000, respectively.

 

Certain employees of OEH were members of definedcontribution pension plans.  Totalcontributions to the plans were as follows (dollars in thousands):

 
| ** **                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Employer’s  contributions |       | $                                         | 1,692      |   |   | $ | 1,460 |   |
|                                |            |                                           |            |  |  |  |  |  |

 

99

----

 

**11.****                              ****Incometaxes**

 

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

 

The provision for income taxes consists of thefollowing (dollars in thousands):

 
| ** **         | ** ** | **Year ended December 31, 2007** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **Current**                                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                                 |       |   |   |   |   |
| Bermuda            |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| United  States     |       |                                                 | 1,357      |   |   | (465 | ) |   | 892 |   |
| Rest  of the world |       | 14,960                                               |       | (225 | ) | 14,735 |   |
|               |       |                                                 |       |   |   |   |   |
|               |       | $                                                    | 16,317     |   | $ | (690 | ) | $ | 15,627 |   |
|                    |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **Current**                                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                                 |       |   |   |   |   |
| Bermuda            |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| United  States     |       | 4,016                                                |       | 2,608 |   | 6,624 |   |
| Rest  of the world |       | 7,662                                                |       | (3,495 | ) | 4,167 |   |
|               |       |                                                 |       |   |   |   |   |
|               |       | $                                                    | 11,678     |   | $ | (887 | ) | $ | 10,791 |   |

 
| ** **         | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **Current**                                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                                 |       |   |   |   |   |
| Bermuda       |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| United  States     |       | 824                                                  |       | (1,509 | ) | (685 | ) |
| Rest  of the world |       | 8,969                                                |       | (4,075 | ) | 4,894 |   |
|               |       |                                                 |       |   |   |   |   |
|               |       | $                                                    | 9,793      |   | $ | (5,584 | ) | $ | 4,209 |   |

 

The 2006 cost included a current tax cost of $2,213,000 arising on thesale of Harry’s Bar, with no equivalent cost in either 2007 or 2005.

 

Earnings from unconsolidated companies are reported net of tax. The taxprovision applicable to these unconsolidated companies in the year ended December 31,2007 was $4,772,000 (2006-$5,741,000; 2005-$3,333,000).

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets 

 

100

----

 

and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The following represents OEH’s net deferred tax liabilities (dollars inthousands):

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Gross  deferred tax assets (primarily operating loss carryforwards) |       | $                     | 54,770     |   | $ | 51,668 |   |
| Less:  valuation allowance                                          |       | (4,378                | )          | (4,293 | ) |
| Net  deferred tax assets                                            |       | 50,392                |       | 47,375 |   |
| Deferred  tax liabilities                                           |       | (151,004              | )          | (133,733 | ) |
| Net  deferred tax liabilities                                       |       | $                     | (100,612   | ) | $ | (86,358 | ) |

 

The deferred tax assets consist primarily of tax losscarryforwards. The gross amount of tax loss carryforwards is $158,403,000. Ofthis amount, $57,442,000 will expire in the five years ending December 31,2012 and a further $14,060,000 will expire in the five years ending December 31,2017. The remaining losses of $86,900,000 will expire after December 31,2017 or have no expiry date. A valuation allowance has been provided againstgross deferred tax assets where it is thought more likely than not that thebenefits associated with these assets will not be realized. The 2006 incometaxes provision includes deferred tax benefits totalling $5,829,000 that aroseon the reduction of valuation allowances established in respect of tax lossesin Portugal and Australia, after OEH concluded that it was more likely than notthat these tax losses would be utilized in the future. There are no comparablebenefits in 2007 or 2005.

 

The deferred tax liabilities consist primarily ofdifferences between the tax basis of depreciable assets and the adjusted basisas reflected in the financial statements.

 

Exceptfor earnings that are currently distributed, no additional material provisionhas been made for income taxes on the undistributed earnings of subsidiaries orfor unrecognized deferred tax liabilities for temporary differences related toinvestments in subsidiaries, as such earnings are expected to be permanentlyreinvested, the investments are essentially permanent in duration, or OEH hasconcluded that no additional tax liability will arise as a result ofdistribution of such earnings.  A liabilitycould arise if amounts are distributed by such subsidiaries or if thesubsidiaries are ultimately disposed of. It is not practicable to estimate the additional income taxes related topermanently reinvested earnings or the temporary differences related toinvestments in subsidiaries.

 

101

----

 

The Companyadopted the provisions of FASB interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”) on January 1, 2007, and recognizeda $28,820,000 provision in respect of its uncertain tax positions which wasaccounted for as a decrease to January 1, 2007 retained earnings.  OEH recognizes accrued interest and penaltiesrelated to uncertain tax positions in income tax expense.  The opening FIN 48 provision included anamount of $1,828,000 in respect of potential interest liabilities and a further$9,947,000 of potential fines and penalties.

 

OEH’s 2007 taxprovision of $15,627,000 includes a charge of $1,984,000 in respect of the FIN48 provision, including a charge of $1,042,000 that relates to the potentialinterest and penalty costs associated with the uncertain tax positions.  OEH’s 2007 tax provision also includes taxbenefit of $9,075,000 in respect of the FIN 48 provision, following the closureof a number of uncertain tax positions in certain jurisdictions in which OEHoperates for which a FIN 48 provision was recognized upon adoption on January 1,2007. The tax benefit includes a benefit of $4,574,000 that relates to thepotential interest and penalty costs that had been included in the FIN 48provision in respect of these uncertain tax positions.

 

At December 31,2007, OEH recognized a $24,025,000 liability in respect of its uncertain taxpositions. All of this FIN 48 provision arises in jurisdictions inwhich OEH conducts business other than Bermuda.

 

**12.****                              ****Supplementalcash flow information**

** **
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  paid for: |       |                                       |       |   |   |   |   |
| Interest        |       | $                                          | 49,820     |   | $ | 40,979 |   | $ | 29,461 |   |
| Income  taxes   |       | $                                          | 13,477     |   | $ | 14,719 |   | $ | 10,124 |   |

 

Non-cashinvesting and financing activities:

 

Inconjunction with certain acquisitions in 2007, 2006 and 2005 (see Note 3(a))liabilities were assumed as follows (dollars in thousands):

 
| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                                       |       |   |   |   |   |
| Fair  value of assets acquired                  |       | $                                          | 22,605     |   | $ | 89,551 |   | $ | 118,618 |   |
| Cash  paid                                      |       | (21,877                                    | )          | (50,122 | ) | (95,150 | ) |
| Loan  advanced in 2004 and other prior payments |       | —                                     |       | (9,950 | ) | — |   |
| Liabilities  assumed                            |       | $                                          | 728        |   | $ | 29,479 |   | $ | 23,468 |   |

 

102

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Cashreceived for residential purchases at Cupecoy Yacht Club in St. Maarten is heldin escrow until the next phase of construction, when the cash is released intoOEH’s current bank account.  At December 31,2007, this escrow account balance amounted to $3,800,000.

 

**13.****                              ****Shareholders’equity**

 

*(a)**                              **Publicoffering*

 

In March 2005,the Company issued and sold through underwriters 5,050,000 class A commonshares in a public offering registered in the United States.  Net proceeds amounted to $121,889,000.

 

In July 2006,the Company issued and sold through underwriters 2,500,000 class A commonshares in a public offering registered in the United States.  Net proceeds amounted to $99,220,000.

 

*(b)**                              **Dualcommon share capitalization*

 

TheCompany has been capitalized with class A common shares, of which thereare 120,000,000 authorized, and class B common shares, of which there are120,000,000 authorized, each convertible at any time into one class Acommon share.  In general, holders ofclass A and class B common shares vote together as a single class,with holders of class B shares having one vote per share and holders ofclass A shares having one-tenth of one vote per share.  In all other substantial respects, theclass A and class B common shares are the same.

 

*(c)**                               **Shareholderrights agreement*

 

TheCompany has in place a shareholder rights agreement which will be implementednot earlier than the tenth day following the first to occur of (i) thepublic announcement of the acquisition by a person (other than a subsidiary ofthe Company) of 15% or more of the outstanding class A common shares or 15% ormore of the outstanding class B common shares, and (ii) the commencementor announcement of a tender offer or exchange offer by a person for 30% or moreof the outstanding class A common shares or 30% or more of the outstandingclass B common shares.  At that time, therights will detach from the class A and class B common shares, andthe holders of the rights will be entitled to purchase, for each right held,one one-hundredth of a series A junior participating preferred share ofthe Company at an exercise 

 

103

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priceof $142 (the “Purchase Price”) for each one one-hundredth of such juniorpreferred share, subject to adjustment in certain events.  From and after the date on which any personacquires beneficial ownership of 15% or more of the outstanding class A commonshares or 15% or more of the outstanding class B common shares, each holder ofa right (other than the acquiring person) will be entitled upon exercise toreceive, at the then current Purchase Price and in lieu of the junior preferredshares, that number of class A or class B common shares (depending onwhether the right was previously attached to a class A or B share) havinga market value of twice the Purchase Price. If the Company is acquired or 50% or more of its consolidated assets orearning power is sold, each holder of a right will be entitled to receive, uponexercise at the then current Purchase Price, that amount of common equity ofthe acquiring company which at the time of such transaction would have a marketvalue of two times the Purchase Price.  Also,the Company’s board of directors may exchange all or some of the rights forclass A and class B common shares (depending on whether the right waspreviously attached to a class A or B share) if any person acquires 15%beneficial ownership as described above, but less than 50% beneficial ownership.  The rights will expire on June 1, 2010but may be redeemed at a price of $0.05 per right at any time prior to thetenth day following the date on which a person acquires beneficial ownership of15% or more of the outstanding class A common shares or 15% of more of theoutstanding class B common shares.

 

*(d)**                               **Acquiredshares*

 

Includedin shareholders’ equity is a reduction for 18,044,478 class B commonshares of the Company that a subsidiary of the Company acquired in 2002.  Under applicable Bermuda law, these sharesare outstanding and may be voted although in computing earnings per share theseshares are treated as a reduction to outstanding shares.

 

*(e)**                                **Preferredshares*

 

TheCompany has 30,000,000 authorized preferred shares, par value $0.01 each, 500,000of which have been reserved for issuance as series A junior participatingpreferred shares upon exercise of preferred share purchase rights held byclass A and B common shareholders in connection with the shareholderrights agreement.  See Note 13(c).

 

**14.***                              ***Employee stock option plans and performance shareplan**

 

On December 31,2007, OEH had three share-based compensation plans, which are describedbelow.  The 

 

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compensationcost that has been charged against earnings for these plans is $1,442,000 forthe year ended December 31, 2007 (2006-$1,179,000; 2005-$1,249,000).

 

*(a)**                              **2000 and 2004 stock option plans*

 

Underthe Company’s 2000 and 2004 stock option plans, options to purchase up to750,000 and 1,000,000, respectively, class A and B common shares may beawarded to employees of OEH at fair market value at the date of grant.  Options are exercisable three years afteraward and must be exercised ten years from the date of grant.  At December 31, 2007, 115,500class A common shares were reserved under the 2000 plan for issuancepursuant to options awarded to 24 persons, and 447,450 class A common shareswere reserved under the 2004 plan for issuance pursuant to options awarded to97 persons.

 

The total compensation cost related to unexercisedoptions at December 31, 2007 to be recognized over the period January 1,2008 to December 31, 2010, is $5,386,000. The fair value of grants issued in the year to December 31, 2007was $5,005,000 (2006-$2,211,000; 2005—$899,000).  The fair value of options which vested in theyear to December 31, 2007 was $352,000. Transactions under the plans have been as follows:

 
| ** **                             | ** ** | **Shares** | ** ** | **Option Price** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------|------------|
| Outstanding  at January 1, 2007   |       | 631,600    |       | $13.00-$36.50         |       |
| Granted                                |       | 241,500    |       | $45.69-$59.23         |       |
| Forfeited                              |       | (50,500    | )          | $14.70-$52.59         |       |
| Exercised                              |       | (259,650   | )          | $13.00-$19.00         |       |
| Outstanding  at December 31, 2007 |       | 562,950    |       | $13.06-$59.23         |       |
| Exercisable  at December 31, 2007 |       | 153,000    |       | $13.06-$19.00         |       |

 

105

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Theoptions outstanding at December 31, 2007, were as follows:

 
| ** **           | ** ** | **Number of Shares**      | ** ** | **Weighted Average of** | ** ** |
|----------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **Exercise  Prices** | ** ** | **Outstanding**

**at  12/31/2007** | ** ** | **Exercisable  at  12/31/2007**   | ** ** | **Remaining  Contractual  Lives** | ** ** | **Exercise  Prices for  Outstanding  Options** | ** ** | **Exercise  Prices for  Exercisable  Options** | ** ** |
| $                    | 13.06      |                                | 16,000     |                              | 16,000     |   | 4.8 |   | $ | 13.06 |   | $ | 13.06 |   |
| $                    | 13.40      |                                | 31,000     |                              | 31,000     |   | 5.4 |   | $ | 13.40 |   | $ | 13.40 |   |
| $                    | 14.70      |                                | 78,500     |                              | 78,500     |   | 6.6 |   | $ | 14.70 |   | $ | 14.70 |   |
| $                    | 19.00      |                                | 27,500     |                              | 27,500     |   | 3.2 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 21.40      |                                | 2,000      |                              | —     |   | 7.1 |   | $ | 21.40 |   | — |   |
| $                    | 28.40      |                                | 33,000     |                              | —     |   | 7.7 |   | $ | 28.40 |   | — |   |
| $                    | 28.50      |                                | 31,000     |                              | —     |   | 7.5 |   | $ | 28.50 |   | — |   |
| $                    | 34.88      |                                | 14,500     |                              | —     |   | 8.2 |   | $ | 34.88 |   | — |   |
| $                    | 34.90      |                                | 19,600     |                              | —     |   | 8.6 |   | $ | 34.90 |   | — |   |
| $                    | 36.45      |                                | 11,000     |                              | —     |   | 8.7 |   | $ | 36.45 |   | — |   |
| $                    | 36.50      |                                | 45,850     |                              | —     |   | 8.5 |   | $ | 36.50 |   | — |   |
| $                    | 39.25      |                                | 3,000      |                              | —     |   | 8.8 |   | $ | 39.25 |   | — |   |
| $                    | 42.87      |                                | 19,300     |                              | —     |   | 8.9 |   | $ | 42.87 |   | — |   |
| $                    | 45.69      |                                | 25,000     |                              | —     |   | 9.6 |   | $ | 45.69 |   | — |   |
| $                    | 52.51      |                                | 15,550     |                              | —     |   | 9.2 |   | $ | 52.51 |   | — |   |
| $                    | 52.51      |                                | 151,100    |                              | —     |   | 9.7 |   | $ | 52.51 |   | — |   |
| $                    | 52.59      |                                | 18,450     |                              | —     |   | 9.5 |   | $ | 52.59 |   | — |   |
| $                    | 59.23      |                                | 20,600     |                              | —     |   | 9.9 |   | $ | 59.23 |   | — |   |
|                 |       | 562,950                             |       | 153,000                           |       |   |   |   |   |   |   |

 
| ** **                   | ** ** | **For options granted  during the  year ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                                                                                       |       |   |   |   |   |
| Weighted  average fair value |       | $                                                                                          | 20.72      |   | $ | 15.36 |   | $ | 11.98 |   |
|                              |            |                                                                                            |            |  |  |  |  |  |  |  |

 

Estimatesof fair values of stock options on the grant dates using the Black–Scholesoption pricing model are based on the following assumptions:

 
| ** **                           | ** ** | **For years  ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Expected  share price volatility     |       | 38.68%-39.30                                     | %          | 40.45 | % | 41.71 | % |
| Risk-free  interest rate             |       | 3.28%-5.05                                       | %          | 4.95 | % | 4.24 | % |
| Expected  annual dividends per share |       | $0.10                                            |       | $ | 0.10 |   | $ | 0.10 |   |
| Expected  life of stock options      |       | 5 years                                          |       | 5 years |   | 5 years |   |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

Expectedvolatilities are based on historical volatility of the Company’s class A commonshare price and other factors.  Theexpected term of options granted is based on historical data and represents theperiod of time that options are expected to be outstanding.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant.

 

106

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*(b)          2007 performance share plan*

 

In 2007, OEH adopted the 2007 performance shareplan.  Under this plan, awards of up to500,000 class A common shares may be granted to employees.  The shares covered by the awards will beissued after three years from the grant date, subject to meeting performancecriteria set forth in the awards.  Theperformance criteria will be based on objective performance goals over theperformance period as established by the Company’s Board.  These goals may be based on one or morebusiness criteria that apply to the grantee, a business unit of OEH, or OEH asa whole, including, but not limited to, share price, market share, sales,earnings per share, earnings before tax, return on equity, total shareholderreturn, or costs.  Awards may also begranted under the plan without any specified performance criteria. When theshares are issued under the awards, the grantees are also entitled to receive acash equivalent of the dividends, if any, that would have been paid on theshares in respect of dividend record dates occurring during the period betweenthe award grant date and the share issue date.

 

At December 31, 2007, 30,200 class A commonshares were reserved under the plan for issuance pursuant to awards made tonine persons.  These awards do notspecify any performance criteria and will vest as long as the grantees stay inemployment after three years from the grant date.

 

The total compensation cost related to non-vestedawards granted under the plan at December 31, 2007 to be recognized overthe period January 1, 2008 to December 31, 2010, is $1,219,000.  The fair value of grants awarded in the yearto December 31, 2007 was $1,415,000 (2006-$nil; 2005-$nil).

 

The summary of the status of the non-vestedawards as of December 31, 2007 and changes during the year ended December 31,2007 is presented as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant date fair value** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
|                                  |       |       |       |                                                       |       |   |
| Non-vested  at January 1, 2007   |       | —     |       | $                                                          | —     |   |
| Granted                               |       | 30,200     |       | $                                                          | 46.85      |   |
| Non-vested  at December 31, 2007 |       | 30,200     |       | $                                                          | 46.85      |   |

 

Estimates of fair values of the awards under the planwere made using the Black-Scholes pricing model based on the followingassumptions:

 

107

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| ** **                           | ** ** | **For years  ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Expected  share price volatility     |       | 38.68%-  38.73%                                  |       | — |   | — |   |
| Risk-free  interest rate             |       | 4.07%-4.59%                                      |       | — |   | — |   |
| Expected  annual dividends per share |       | $0.10                                            |       | — |   | — |   |
| Expected  life of awards             |       | 3 years                                          |       | — |   | — |   |

 

The basis ofassumptions was similar to that used for the 2000 and 2004 stock option plans.

 

**15.          Commitments and contingencies**

 

Outstandingcontracts to purchase fixed assets were approximately $102,361,000 at December 31,2007 (2006-$21,839,000; 2005-$24,341,000), including the ‘21’ Club contractreferred to in the next paragraph.

 

OnNovember 7, 2007, OEH entered into an agreement with the New York PublicLibrary to purchase the land and building occupied by the library’s Donnellbranch located directly behind and adjacent to OEH’s ‘21’ Club in New YorkCity.  OEH plans to demolish the existing building and build a hotel onthe Donnell site connecting to ‘21’ Club.  OEH paid $3,000,000 uponsigning the agreement, and must pay an additional $46,000,000 when the existingbuilding is vacated (but not earlier than September 2008) and a final$10,000,000 thirty months later or, if sooner, upon the issue to OEH of acertificate of occupancy for its new hotel.  The agreement also obligatesOEH to incorporate a new Donnell branch library in the hotel’s design.

 

Futurerental payments under operating leases in respect of equipment rentals andleased premises are payable as follows (dollars in thousands):

 
| ** **           | ** ** | **Year ended  December 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
|                 |       |                                   |       |
| 2008                 |       | $                                      | 8,402      |   |
| 2009                 |       | 8,265                                  |       |
| 2010                 |       | 8,228                                  |       |
| 2011                 |       | 7,890                                  |       |
| 2012                 |       | 7,832                                  |       |
| 2013  and thereafter |       | 64,224                                 |       |
|                 |       | $                                      | 104,841    |   |

 

Rentalexpense for the year ended December 31, 2007 amounted to $4,267,000(2006-$2,077,000; 2005-$1,911,000).

 

**16.          Derivative financial instruments**

 

OEH is exposedto interest rate risk on its floating rate debt, and in September 2006 itentered into interest rate swap agreements for the notional amounts of€75,000,000 ($95,000,000) and €24,700,000 ($31,000,000) that limit the exposureto a fixed rate level.  Although theinterest rate swap for €24,700,000 economically hedges the interest rate risk,it has not qualified as a cash flow hedge and, therefore, changes in fair valueof this swap were recorded to interest expense in earnings.

 

The interestrate swap for €75,000,000 has been 

 

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designated andhas qualified as a cash flow hedge of the floating interest rate debt effectivesince December 31, 2006.  This swapis expected to be, and has been, highly effective in offsetting exposures fromfluctuations in debt interest rates.  The$1,701,000 of the movement in the fair value of the swap has, therefore, beenrecorded as a gain in other comprehensive income, with only the amount of$23,000 deemed ineffective, and recognized as a loss in earnings.

 

In October 2007,OEH entered into interest rate swap agreements for the notional amounts of$10,000,000 and $20,000,000 that limit the exposure from interest ratefluctuations of a U.S. dollar debt to a fixed rate level.  The swaps have been designated and havequalified as cash flow hedges of the floating rate debt effective since October 18,2007.  These swaps are expected to be,and have been, highly effective.  The$971,000 of the movement in the fair value of the swaps has, therefore, beenrecorded as a loss in other comprehensive income with only the amount of$50,000 deemed ineffective and recognized as a loss in earnings.

 

Of theexisting gains at December 31, 2007, approximately $1,500,000 will bereclassified into earnings in the next 12 months, assuming no further changesin fair value of the contracts.

 

At December 31,2007 and 2006, the fair values of the outstanding Euro interest rate swaps wereaccounted for as other non-current assets at $2,833,000 and $687,000,respectively, and the fair values of the outstanding U.S. dollar interest rateswaps were accounted for as accrued liabilities at $1,022,000 and $nil,respectively.

 

**17.          Other comprehensive income/ (loss)**

 

Theaccumulated balances for each component of other comprehensive income/(loss)are as follows (dollars in thousands):

 
| ** **                                        | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Foreign  currency translation adjustments         |       | $                                      | 38,191     |   | $ | 3,545 |   |
| Derivative  financial instruments                 |       | 730                                    |       | — |   |
| Additional  minimum pension liability, net of tax |       | (8,490                                 | )          | (8,518 | ) |
|                                              |       | $                                      | 30,431     |   | $ | (4,973 | ) |

 

The componentsof comprehensive income/ (loss) are as follows (dollars in thousands):

 

109

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| ** **                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  earnings on common shares                    |       | $                                     | 33,642     |   | $ | 39,767 |   | $ | 41,539 |   |
| Foreign  currency translation adjustments         |       | 34,646                                |       | 24,390 |   | (33,419 | ) |
| Change  in fair value of derivatives              |       | 730                                   |       | 68 |   | 141 |   |
| Additional  minimum pension liability, net of tax |       | 28                                    |       | (8,518 | ) | — |   |
| Comprehensive  income                             |       | $                                     | 69,046     |   | $ | 55,707 |   | $ | 8,261 |   |

 

**18.          Other significant events**

 

*Hotel das Cataratas*

 

On September 25,2007, OEH entered into a 20-year lease of Hotel das Cataratas from theBrazilian government.  The monthly leasepayments are Brazilian real 868,000 ($470,000). OEH is committed to perform a major refurbishment of the hotel within twoyears.  The total investment over theperiod of the refurbishment is estimated at $20,000,000.

 

*Maroma insurance proceeds*

 

In thethree months ended September 30, 2007, Maroma Resort and Spa recorded again of $2,312,000 relating to the settlement of insurance proceeds for damagedassets.

 

*Maroma land acquisition*

 

On July 27,2007, OEH acquired 100% of the shares of a Mexican company that owns landadjacent to Maroma Resort and Spa for a cash consideration of $5,609,000,including transaction costs and remaining cash consideration of $1,379,000 tobe paid within three years.

 

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

 

OEH’s segmentinformation has been prepared in accordance with SFAS No. 131, ****“****Disclosures about Segments of an Enterpriseand Related Information****”****.  OEH has three reporting segments, (i) hotelsand restaurants, (ii) tourist trains and cruises, and (iii) realestate and property development, which are grouped into various geographicalregions.  Real estate and propertydevelopment was disclosed as a new segment in 2006 and disclosures for 2005have been changed to conform to the new segment presentation.  Hotels at December 31, 2007 are 

 

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located in theUnited States, Caribbean, Mexico, Europe, southern Africa, South America,Southeast Asia, Australia and South Pacific, restaurants are located in NewYork and Buenos Aires, tourist trains operate in Europe, Southeast Asia andPeru, a river cruise-ship operates in Burma and five canalboats in France, andreal estate developments are located in the U.S., Caribbean, Mexico, Europe,Southeast Asia and South Pacific. Segment performance is evaluated based upon segment net earnings beforeinterest expense, foreign currency, tax (including tax on earnings fromunconsolidated companies), depreciation, amortization and gain on asset sales(“segment EBITDA”).  Segment informationis presented in accordance with the accounting policies described inNote 1.

 

Financialinformation regarding these business segments is as follows (dollars inthousands):

 
| ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                      |       |                                  |       |   |   |   |   |
| Hotels  and restaurants                       |       |                                  |       |   |   |   |   |
| Owned  hotels – Europe                   |       | $                                     | 228,522    |   | $ | 180,365 |   | $ | 161,188 |   |
| – North  America                         |       | 85,411                                |       | 85,492 |   | 79,706 |   |
| – Rest of  World                         |       | 128,771                               |       | 101,979 |   | 83,459 |   |
| Hotel  management/part ownership interests    |       | 10,683                                |       | 9,212 |   | 8,663 |   |
| Restaurants                                   |       | 22,638                                |       | 22,544 |   | 22,162 |   |
|                                          |       | 476,025                               |       | 399,592 |   | 355,178 |   |
| Tourist  trains and cruises                   |       | 82,482                                |       | 63,628 |   | 61,207 |   |
| Real  estate                                  |       | 19,908                                |       | 16,144 |   | 4,705 |   |
|                                          |       | $                                     | 578,415    |   | $ | 479,364 |   | $ | 421,090 |   |
|                                          |       |                                  |       |   |   |   |   |
| Depreciation  and amortization:               |       |                                  |       |   |   |   |   |
| Hotels  and restaurants                       |       |                                  |       |   |   |   |   |
| Owned  hotels – Europe                   |       | $                                     | 16,788     |   | $ | 14,243 |   | $ | 13,471 |   |
| – North  America                         |       | 7,514                                 |       | 7,503 |   | 7,248 |   |
| – Rest of  World                         |       | 9,422                                 |       | 8,233 |   | 7,799 |   |
| Restaurants                                   |       | 998                                   |       | 936 |   | 851 |   |
|                                          |       | 34,722                                |       | 30,915 |   | 29,369 |   |
| Tourist  trains and cruises                   |       | 4,225                                 |       | 3,588 |   | 3,842 |   |
|                                          |       | $                                     | 38,947     |   | $ | 34,503 |   | $ | 33,211 |   |
|                                          |       |                                  |       |   |   |   |   |
| Segment  EBITDA:                              |       |                                  |       |   |   |   |   |
| Owned  hotels – Europe                   |       | $                                     | 71,033     |   | $ | 52,708 |   | $ | 46,560 |   |
| – North  America                         |       | 13,238                                |       | 19,652 |   | 15,686 |   |
| – Rest of  World                         |       | 35,611                                |       | 31,615 |   | 22,077 |   |
| Hotel  management/ part ownership interests . |       | 23,840                                |       | 19,932 |   | 17,485 |   |
| Restaurants                                   |       | 4,564                                 |       | 6,530 |   | 5,625 |   |
| Tourist  trains and cruises                   |       | 25,481                                |       | 18,316 |   | 15,396 |   |
| Real  estate                                  |       | 4,121                                 |       | 3,514 |   | 3,078 |   |
| Gain  on sale of investment                   |       | —                                |       | 6,619 |   | — |   |
| Gain  on disposal of fixed assets             |       | 2,312                                 |       | — |   | — |   |
| Central  overheads                            |       | (26,072                               | )          | (22,209 | ) | (18,955 | ) |
|                                          |       | $                                     | 154,128    |   | $ | 136,677 |   | $ | 106,952 |   |
|                                               |            |                                       |            |  |  |  |  |  |  |  |  |

 

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| ** **                                                       | ** ** | **Year ended December 31,** |
|------------------------------------------------------------------|------------|---------------------------------------|
| ** **                                                       | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** |
| Segment  EBITDA/net earnings reconciliation:                     |       |                                  |   |   |   |   |   |
| Segment  EBITDA                                                  |       | $                                     | 154,128 |   | $ | 136,677 |   | $ | 106,952 |   |
| Less                                                             |       |                                  |   |   |   |   |   |
| Depreciation  and amortization                                   |       | 38,947                                |   | 34,503 |   | 33,211 |   |
| Interest  expense, net                                           |       | 45,436                                |   | 44,367 |   | 29,971 |   |
| Foreign  currency, net                                           |       | (917                                  | ) | 4,610 |   | (5,065 | ) |
| Provision  for income taxes                                      |       | 15,627                                |   | 10,791 |   | 4,209 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 4,772                                 |   | 5,741 |   | 3,333 |   |
| Earnings  from continuing operations                             |       | $                                     | 50,263 |   | $ | 36,665 |   | $ | 41,293 |   |
|                                                             |       |                                  |   |   |   |   |   |
| Earnings  from unconsolidated companies:                         |       |                                  |   |   |   |   |   |
| Hotels  and restaurants                                          |       |                                  |   |   |   |   |   |
| Hotel  management/part ownership interests                       |       | $                                     | 11,462 |   | $ | 7,875 |   | $ | 7,169 |   |
| Restaurants                                                      |       | —                                |   | 277 |   | 360 |   |
|                                                             |       | 11,462                                |   | 8,152 |   | 7,529 |   |
| Tourist  trains and cruises                                      |       | 4,963                                 |   | 3,818 |   | 3,646 |   |
|                                                             |       | $                                     | 16,425 |   | $ | 11,970 |   | $ | 11,175 |   |
|                                                             |       |                                  |   |   |   |   |   |
| Capital  expenditure:                                            |       |                                  |   |   |   |   |   |
| Hotels  and restaurants                                          |       |                                  |   |   |   |   |   |
| Owned  hotels – Europe                                      |       | $                                     | 36,039 |   | $ | 48,308 |   | $ | 60,359 |   |
| – North  America                                            |       | 38,440                                |   | 36,691 |   | 16,532 |   |
| – Rest of  World                                            |       | 18,349                                |   | 12,255 |   | 20,701 |   |
| Restaurants                                                      |       | 608                                   |   | 1,114 |   | 883 |   |
|                                                             |       | 93,436                                |   | 98,368 |   | 98,475 |   |
| Tourist  trains and cruises                                      |       | 4,380                                 |   | 9,711 |   | 6,170 |   |
| Real  estate                                                     |       | 6,060                                 |   | 539 |   | 7,586 |   |
|                                                             |       | $                                     | 103,876 |   | $ | 108,618 |   | $ | 112,231 |   |
|                                                                  |            |                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Identifiable  assets:                      |       |                  |       |   |   |
| Hotels  and restaurants                    |       |                  |       |   |   |
| Owned  Hotels – Europe                |       | $                     | 745,970    |   | $ | 660,083 |   |
| – North  America                      |       | 361,699               |       | 317,577 |   |
| – Rest of  World                      |       | 445,562               |       | 429,969 |   |
| Hotel  management/part ownership interests |       | 138,607               |       | 114,378 |   |
| Restaurants                                |       | 42,398                |       | 39,416 |   |
|                                       |       | 1,734,236             |       | 1,561,423 |   |
| Tourist  trains and cruises                |       | 150,446               |       | 140,803 |   |
| Real  estate                               |       | 88,145                |       | 49,437 |   |
|                                       |       | $                     | 1,972,827  |   | $ | 1,751,663 |   |

 

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

 
| ** **     | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:       |       |                                       |       |   |   |   |   |
| Europe         |       | $                                          | 303,261    |   | $ | 237,336 |   | $ | 217,275 |   |
| North  America |       | 133,675                                    |       | 123,725 |   | 109,019 |   |
| Rest  of World |       | 141,479                                    |       | 118,303 |   | 94,796 |   |
|           |       | $                                          | 578,415    |   | $ | 479,364 |   | $ | 421,090 |   |

 

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| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Long-lived  assets at book value: |       |                  |       |   |   |
| Europe                            |       | $                     | 759,103    |   | $ | 662,099 |   |
| North  America                    |       | 411,489               |       | 364,696 |   |
| Rest  of World                    |       | 406,060               |       | 375,967 |   |
|                              |       | $                     | 1,576,652  |   | $ | 1,402,762 |   |

 

Long-lived assets at book value constitute the following (dollars inthousands):

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Property,  plant and equipment |       | $                     | 1,273,956  |   | $ | 1,134,811 |   |
| Investments                    |       | 147,539               |       | 130,042 |   |
| Goodwill                       |       | 133,497               |       | 117,760 |   |
| Other  intangible assets       |       | 21,660                |       | 20,149 |   |
|                           |       | $                     | 1,576,652  |   | $ | 1,402,762 |   |

 

**20.          Related party transactions**

 

OEH guarantees a $3,000,000bank loan to Eastern and Oriental Express Ltd., in which OEH has a minorityshareholder interest.  This guarantee wasin place before December 31, 2004. The amount due to OEH from Eastern and Oriental Express Ltd. at December 31,2007 was $1,330,000 (2006-$805,000).

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method) and has made loans to the hotel-owningcompany.  For the year ended December 31,2007, OEH earned $5,200,000 (2006-$4,939,000; 2005-$4,587,000) in managementfees which are recorded in revenue, and $11,807,000 (2006-$10,700,000;2005-$9,752,000) in interest income on partnership and other loans, which isrecorded in earnings from unconsolidated companies.  These loans have an indefinite maturityperiod.  See Note 3(b).  The amount due to OEH from Charleston PlaceHotel at December 31, 2007 was $19,749,000 (2006-$15,499,000).

 

OEH manages under long-term contracts the Hotel Monasterio and theMachu Picchu Sanctuary Lodge owned by its 50/50 joint venture, with localPeruvian interests, as well as the 50/50 owned PeruRail operation, and providesloans, guarantees and other credit accommodation to these joint ventures.  In the year ended December 31, 2007, OEHearned management and guarantee fees of $6,547,000 (2006-$5,314,000;2005-$4,785,000) and loan interest of $63,000 (2006-$87,000; 2005-$116,000)which are recorded in revenue.  At December 31,2007, OEH had a $750,000 

 

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subordinated loan to the PeruRail operation with an indefinite maturitydate and interest at a spread over LIBOR. The amount due to OEH from its joint venture Peruvian operations at December 31,2007 was $6,277,000.  The amount due fromOEH to its joint venture Peruvian operations as at December 31, 2006 was$1,249,000.

 

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH holds a 50% interest accounted for under the equity method.  For the year ended December 31, 2007,OEH earned $1,867,000 (2006-$1,057,000; 2005-$1,139,000) in management fees,which are included in revenue.  Theamount due to OEH from the Hotel Ritz in Madrid at December 31, 2007 was $2,624,000(2006-$1,961,000.  See Note 3(b).

 

OEH has granted to James Sherwood, a director of the Company, a rightof first refusal to purchase the Hotel Cipriani in Venice, Italy in the eventOEH proposes to sell it.  The purchaseprice would be the offered sale price in the case of a cash sale or the fairmarket value of the hotel, as determined by an independent valuer, in the caseof a non-cash sale.  Mr. Sherwoodhas also been granted an option to purchase the hotel at fair market value if achange in control of the Company occurs.

 

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**Summary of quarterlyearnings (unaudited)**

 
| ** **                                                                         | ** ** | **Quarter ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **December**

**31**   | ** ** | **September**

**30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| **2007**                                                                           |       |                   |       |   |   |   |   |   |   |
| Revenue                                                                            |       | $                      | 145,914    |   | $ | 178,875 |   | $ | 159,457 |   | $ | 94,169 |   |
| Gain  on disposal of fixed assets                                                  |       | $                      | —     |   | $ | 2,312 |   | $ | — |   | $ | — |   |
| Earnings  from operations                                                          |       |                   | 14,703     |   |   | 41,847 |   |   | 34,525 |   |   | 2,909 |   |
| Net  finance costs                                                                 |       | (10,221                | )          | (14,103 | ) | (9,759 | ) | (10,436 | ) |
| Earnings/  (losses) before income taxes and earnings from unconsolidated companies |       | 4,482                  |       | 27,744 |   | 24,766 |   | (7,527 | ) |
| (Provision  for)/ benefit from income taxes                                        |       | 1,483                  |       | (11,079 | ) | (8,759 | ) | 2,728 |   |
| Earnings  from unconsolidated companies net of tax                                 |       | 4,258                  |       | 5,630 |   | 4,234 |   | 2,303 |   |
| Net  earnings/ (losses) from continuing operations                                 |       | 10,223                 |       | 22,295 |   | 20,241 |   | (2,496 | ) |
| Net  (loss)/ earnings from discontinued operations                                 |       | (15,156                | )          | 258 |   | (538 | ) | (1,185 | ) |
| Net  earnings                                                                      |       | $                      | (4,933     | ) | $ | 22,553 |   | $ | 19,703 |   | $ | (3,681 | ) |
|                                                                               |       |                   |       |   |   |   |   |   |   |
| Net  earnings/ (losses) per share:                                                 |       |                   |       |   |   |   |   |   |   |
| Basic                                                                              |       | $                      | 0.23       |   | $ | 0.53 |   | $ | 0.46 |   | $ | (0.09 | ) |
| Diluted                                                                            |       | $                      | 0.22       |   | $ | 0.53 |   | $ | 0.46 |   | $ | (0.09 | ) |
| Dividends  per share                                                               |       | $                      | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |
|                                                                                    |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                         | ** ** | **Quarter ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **December**

**31**   | ** ** | **September  30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| **2006**                                                                           |       |                   |       |   |   |   |   |   |   |
| Revenue                                                                            |       | $                      | 130,773    |   | $ | 140,602 |   | $ | 131,225 |   | $ | 76,764 |   |
| Earnings  from operations                                                          |       | $                      | 18,464     |   | $ | 34,241 |   | $ | 27,101 |   | $ | (1,962 | ) |
| Gain  on sale of investment                                                        |       | —                 |       | — |   | 6,619 |   | — |   |
| Net  finance costs                                                                 |       | (11,060                | )          | (14,822 | ) | (14,021 | ) | (9,074 | ) |
| Earnings/  (losses) before income taxes and earnings from unconsolidated companies |       | 7,404                  |       | 19,419 |   | 19,699 |   | (11,036 | ) |
| (Provision  for)/ benefit from income taxes                                        |       | (3,601                 | )          | (3,406 | ) | (5,958 | ) | 2,174 |   |
| Earnings  from unconsolidated companies net of tax                                 |       | 2,893                  |       | 3,925 |   | 3,326 |   | 1,826 |   |
| Net  earnings/ (losses) from continuing operations                                 |       | 6,696                  |       | 19,938 |   | 17,067 |   | (7,036 | ) |
| Net (loss)/  earnings from discontinued operations                                 |       | (39                    | )          | 492 |   | 3,014 |   | (365 | ) |
| Net  earnings                                                                      |       | $                      | 6,657      |   | $ | 20,430 |   | $ | 20,081 |   | $ | (7,401 | ) |
|                                                                               |       |                   |       |   |   |   |   |   |   |
| Net  earnings/ (losses) per share:                                                 |       |                   |       |   |   |   |   |   |   |
| Basic                                                                              |       | $                      | 0.16       |   | $ | 0.49 |   | $ | 0.51 |   | $ | (0.19 | ) |
| Diluted                                                                            |       | $                      | 0.16       |   | $ | 0.48 |   | $ | 0.51 |   | $ | (0.19 | ) |
| Dividends  per share                                                               |       | $                      | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

 

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| **ITEM 9.** | **Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | **Controls and Procedures** |
|--------------|-----------------------------|

 

*Disclosure Controls and Procedures*

 

The Company’s chief executive officer (and acting chieffinancial officer) has evaluated the effectiveness of OEH’s disclosure controlsand procedures (as defined in SEC Rule 13a-15(e)) as of December 31,2007 and, based on that evaluation, believes those disclosure controls andprocedures are effective as of that date.

 

*Management’s Annual**Report on**Internal Control overFinancial Reporting*

 

OEH management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined inSEC Rule 13a–15(f)).  OEH’s internalcontrol over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Management assessed the effectiveness of OEH’s internal control overfinancial reporting as of December 31, 2007.  In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control–Integrated Framework.  Based on this assessment and those criteria,management believes that OEH’s internal control over financial reporting waseffective as of December 31, 2007.

 

Deloitte &Touche LLP, OEH’s independent registered public accounting firm, issued areport on OEH’s internal control over financial reporting, which appears inItem 8–Financial Statements above.

 

*Changes in Internal Control over FinancialReporting*

 

There have been no changes in OEH’s internal controlover financial reporting during the fourth quarter of 2007 that have materiallyaffected, or are reasonably likely to materially affect, OEH’s internal controlover financial reporting.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and 

 

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not absolute, assurance that the objectives of the system are met, suchas prevention and detection of misstatements. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events.  Controls may become inadequate because ofchanges in conditions, or the degree of compliance with the policies orprocedures may deteriorate, for example. Because of these and other inherent limitations of control systems, therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions.

 

**ITEM9B.        Other Information**

 

None.

 

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**PART III**

 

**ITEM10.****              Directors,Executive Officers and Corporate Governance**

 

**Directors**

 

                Thedirectors of the Company are as follows:

 
| **Name, Age**     | ** ** | **Principal Occupation  and OtherMajor  Affiliations**                                                 | ** ** | **Year  First  Became  Director** | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
|                   |       |                                                                                                             |       |                              |       |
| John  D. Campbell, 65  |       | Senior  Counsel (retired) of Appleby (attorneys)                                                                 |       | 1994                              |       |
| James  B. Hurlock, 74  |       | Non-executive  Chairman of the Board of the Company, and Partner (retired) of  White & Case (attorneys) |       | 2000                              |       |
| Prudence  M. Leith, 67 |       | Non-executive  Director of Omega International PLC, and Consultant to Compass Group PLC                          |       | 2006                              |       |
| J.  Robert Lovejoy, 63 |       | Managing  Director of Groton Partners LLC (a private merchant banking firm)                                      |       | 2000                              |       |
| Georg  R. Rafael, 70   |       | Managing  Director of Rafael Group S.A.M. (hoteliers)                                                            |       | 2002                              |       |
| James  B. Sherwood, 74 |       | Retired  Chairman of the Board of the Company                                                                    |       | 1994                              |       |

 

Theprincipal occupation of each director during the last five years is that shownin the table supplemented by the following information.

 

Mr. Campbellwas a member of the law firm Appleby (formerly named Appleby Hunter Bailhache)until March 1999 and retired as Senior Counsel in July 2003.  Mr. Campbell is the non-executiveChairman of the Board of The Bank of Bermuda Ltd., a subsidiary of HSBCHoldings plc, as well as Chairman of the bank’s Audit Committee, and anon-executive director and Chairman of the Nominations and Governance Committeeof Argus Insurance Company Ltd., a public company listed on the Bermuda StockExchange.  Mr. Campbell is also anon-executive director of Sea Containers Ltd. (“SCL”), a leasing and 

 

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transportcompany formerly listed on the New York Stock Exchange and currently subject toChapter 11 reorganization proceedings in the United States and provisionalliquidation proceedings in Bermuda. These proceedings commenced in October 2006.

 

Mr. Hurlockacted as Chairman of the Management Committee of White & Case LLPoverseeing worldwide operations from 1980 until his retirement in 2000.  He also served as Interim CEO ofStolt-Nielsen Transportation Group Ltd., a chemical transport services company,from July 2003 until June 2004. Mr. Hurlock was appointed non-executive Chairman of the Board in June 2007.

 

Ms. Leithwas the founder, owner and Managing Director of Leith’s Group which, from 1960until its sale in 1995 to Accor, grew to encompass restaurants, a prestigiousLondon-based chef school, contract catering, and event and party catering.  She is a food writer, novelist, and televisionand radio food expert.  Ms. Leithhas served on the boards of British Railways, Whitbread PLC, Halifax PLC,Safeway PLC, Woolworths Group PLC and Nations Healthcare Ltd., and is currentlyon the board of Omega International, a supplier of kitchen furnishings andequipment.

 

Mr. Lovejoyjoined Groton Partners in January 2006. In 2000-2005, he was Senior Managing Director of Ripplewood HoldingsLLC, a private equity investment firm. Prior to that position he was a Managing Director of Lazard Freres &Co. LLC, an investment banking firm, and a General Partner of Lazard’spredecessor partnership for over 15 years. Mr. Lovejoy is also a non-executive director of One LibertyProperties Inc., a commercial and industrial real estate investment trust.

 

Mr. Rafaelwas until early 2002 the Vice Chairman of the Executive Committee of MandarinOriental Hotels, having sold to them in 2000 Rafael Hotels Ltd., a deluxe hotelowning and operating company that Mr. Rafael established in 1986.  Before Rafael Hotels, he was joint ManagingDirector of Regent International Hotels, a hotel group Mr. Rafael helpedstart in 1972.

 

Mr. JamesSherwood retired from his executive duties with the Company in December 2006(having ceased to be a co-principal executive officer in October 2006) andstepped down as Chairman of the Board in June 2007.  He resigned as a director and non-executiveChairman of SCL in March 2006 having founded its predecessor company in1965.  He also served as President of SCLduring that time until January 2006. As noted above regarding Mr. Campbell, SCL is currently 

 

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subjectto Chapter 11 reorganization proceedings in the United States and provisionalliquidation proceedings in Bermuda. These proceedings commenced in October 2006.

 

SimonM.C. Sherwood, the stepson of Mr. James Sherwood, served as a director ofthe Company from 1994 until June 2007 when he did not stand forre-election by shareholders at the Company’s 2007 annual general meeting.  He continued as President and Chief ExecutiveOfficer of the Company until August 2007 when his resignation (submittedto the Company in February 2007) became effective.

 

**ExecutiveOfficers**

 

Theexecutive officers of the Company are as follows:

 
| **Name, Age**         | ** ** | **Position**                                                            | ** ** |
|----------------------------|------------|-------------------------------------------------------------------------|------------|
|                       |       |                                                                    |       |
| Paul  M. White, 43         |       | President and Chief Executive Officer since  August 2007           |       |
| Filip  J.M. Boyen, 49      |       | Vice President–Operations since September 2007                |       |
| Roger  V. Collins, 61      |       | Vice President–Design and Technical Services since  2001           |       |
| Edwin  S. Hetherington, 58 |       | Vice President, General Counsel and Secretary since  December 2006      |       |
| Pippa  Isbell, 54          |       | Vice President–Corporate Communications since  September 2007      |       |
| Maurizio  Saccani, 57      |       | Vice President, Italy since September 2007                         |       |
| Nicholas  R. Varian, 53    |       | Vice President and Chief Development Officer since  September 2007 |       |
| David  C. Williams, 53     |       | Vice President–Sales and Marketing since 2004                      |       |

 

Theprincipal occupation of each person during the last five years is shown in thetable supplemented by the following information.

 

Mr. Whitesucceeded Mr. Simon Sherwood as President and Chief Executive Officer ofthe Company in August 2007, having served as Vice President–Finance andChief Financial Officer from September 2005.  Previously, he was Vice President–Hotels,Africa, Australia and South America from 2000 to 2005, and was Director ofHotel Operations for the same geographical region from 1998 to 2000.  He joined the Company’s predecessor,Orient-Express Hotels Inc., in 1991 from Forte Hotels initially as FinancialController.  Having qualified as 

 

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anaccountant, he is currently a member of the Chartered Institute of ManagementAccountants, and is the Company’s acting chief financial and accounting officeruntil Martin O’Grady described below assumes those duties for the Company.

 

Mr. Boyenheld positions with Marco Polo Hotels, Sun International Hotels and RamadaRenaissance until he joined OEH in 1997. Initially, he served as General Manager of Bora Bora Lagoon Resort until1999, when he became Managing Director of OEH’s hotel and tourist trainoperations in Peru.  He was appointedVice President–Hotels, Africa, Australia and South America in September 2005.

 

Mr. Collins,an engineer, has worked in the hotel industry since 1979 with GrandMetropolitan Hotels, Courage Inns and Taverns, and Trusthouse Forte Hotels,having joined Orient-Express Hotels Inc. in 1991.

 

Mr. Hetheringtonstarted with Orient-Express Hotels Inc. as Counsel and Secretary in1980.  Until the end of 2006, he was alsoVice President, General Counsel and Secretary of SCL.  As noted above under the heading “Directors”regarding Mr. Campbell, SCL is currently subject to Chapter 11reorganization proceedings in the United States and provisional liquidation proceedingsin Bermuda.  These proceedings commencedin October 2006.

 

Ms. Isbelljoined the Company in 1998 after selling the public relations consultancy shefounded in 1987.  Her work in thehospitality industry included representation of Intercontinental Hotels, Forte,Hilton International, Jarvis Hotels, and Millennium and Copthorne.  From 2000 to September 2007, she servedas Vice President–Public Relations of the Company.

 

Mr. Saccanijoined Orient-Express Hotels Inc. in 1978 as Food and Beverage Manager of theHotel Cipriani.  After serving as Managerin Italy of the Venice Simplon-Orient-Express, he became Managing Director ofthe Villa San Michele in 1985 and, by 2007, had assumed responsibility for allfour of the Company’s hotels in Italy.

 

Mr. Variantransferred to Orient-Express Hotels Inc. in 1985 from P&O SteamNavigation Company, and has worked extensively on various cruise and touristtrain projects, becoming Vice President–Trains and Cruises in 1989 and takingresponsibility for the Asian hotels in 2006.

 

Mr. Williamsjoined Orient-Express Hotels Inc. in 1981 as Sales and ReservationsManager.  He became responsible forstrategic marketing developments and business initiatives in 

 

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the Americas,Europe and Asia.  He previously workedfor Carlson Marketing Group.

 

TheCompany has chosen Martin O’Grady to become Vice President–Finance and ChiefFinancial Officer in March 2008.  Since January 2006, Mr. O’Grady, 44,has served as Chief Financial Officer of Orion Capital Managers LP, a Europeancommercial real estate investment manager including hotels.  From 1999 until 2005, he served as ChiefFinancial Officer and an executive director of Access Self Storage, a retailself-storage operator in the United Kingdom, France and Australia.  He joined Access from Security CapitalEuropean Realty where he had worked as Vice President, Finance.  From 1992 until 1998, Mr. O’Grady held anumber of finance and accounting positions with Jardine Matheson Group, anAsian-based conglomerate, including Group Financial Controller of MandarinOriental Hotels from 1992 to 1996.  Mr. O’Gradybegan his career with Pricewaterhouse Coopers and is an Associate CharteredAccountant in England and Wales.

 

Inaddition to the resignation of Mr. Simon Sherwood as President and ChiefExecutive Officer of the Company as noted under the heading “Directors” above,Adrian D. Constant resigned and Natale Rusconi retired as Vice Presidentsduring 2007, and Dean P. Andrews resigned as a Vice President in January 2008.

 

**Corporate Governance**

 

TheBoard of Directors of the Company has established corporate governance measuressubstantially in compliance with requirements of the New York Stock Exchange (“NYSE”).  These include a set of Corporate GovernanceGuidelines, Charters for each of the standing Audit Committee, CompensationCommittee and Nominating and Governance Committee of the full Board, and a Codeof Business Conduct for Directors, Officers and Employees.  The Board of Directors has also adopted aCode of Business Practices for the Company’s Principal Executive, Financial andAccounting Officers, which is filed as an exhibit to this report.  These documents are published on the Company’swebsite (www.orient-express.com) or may be obtained upon request and withoutcharge by writing to the Company’s Secretary at its registered office address(Orient–Express Hotels Ltd., 22 Victoria Street, Hamilton HM 12, Bermuda).

 

Becausethe Company is a foreign private issuer as defined in SEC rules, it is notrequired to comply with all NYSE corporate governance requirements as theyapply to U.S. domestic companies listed on the NYSE.  The Company’s corporate governance measures,however, do not differ in any significant way from those requirements.

 

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Thepresent members of the Company’s Audit Committee are Messrs. Campbell,Hurlock and Lovejoy.  The Board hasdesignated Mr. Lovejoy, an independent director, as an audit committeefinancial expert as defined by SEC rules. The present members of the Compensation Committee and the Nominating andGovernance Committee are Ms. Leith and Messrs. Campbell, Hurlock,Lovejoy and Rafael.  See Item 13–CertainRelationships and Related Transactions, and Director Independence below.

 

Thenon-executive directors of the Company meet regularly without managementpresent.  Mr. Hurlock presides atthese executive sessions of the Board.

 

Interestedpersons may communicate directly with any of the Company’s directors by writingto him or her at the Company’s registered office address (Orient-Express HotelsLtd., 22 Victoria Street, Hamilton HM 12, Bermuda).

 

**ITEM11.          ExecutiveCompensation**

 

Becausethe Company is a foreign private issuer, it is responding to this Item 11 aspermitted by Item 402(a)(1) of SEC Regulation S-K.

 

Thefollowing table shows the salary and bonus of Mr. White paid in cashduring 2007, and of all executive officers as a group (including Messrs. Andrews,Constant, Rusconi and Simon Sherwood who are no longer officers) for servicesto OEH in all capacities:

 
| **Name of Individual or Group** | ** ** | **Principal  Capacities in  Which Served**                                            | ** ** | **Cash  Compensation** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                |       |                                                                                            |       |                   |       |
| Paul  M. White                                      |       | President  and Chief  Executive Officer (previously Vice President and Chief Financial Officer) |       | $                      | 852,000    |   |
| All  executive officers as a group (12 persons)     |       |                                                                                            |       | $                      | 6,690,525  |   |

 

OEH has entered into agreements with Mr. Whiteand most of the Company’s other executive officers entitling them to terminateemployment in certain circumstances constituting a change in control of theCompany and to receive an amount equal to two times each officer’s annualcompensation.  The agreements of the U.S.tax-paying officers also require the Company to pay the excise tax on theirseverance payments imposed pursuant to section 4999 of the U.S. InternalRevenue Code.

 

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**Pensions**

 

Through May 2006, certain executive officers whoare United Kingdom citizens participated in a contributory defined benefitpension plan established by an OEH subsidiary for British employees.  The amount of contribution by the subsidiaryto the plan in respect of a specific person cannot readily be separated orindividually calculated.  Participants inthe plan are eligible to receive at their normal retirement date an annualpension based on the number of years of pensionable service and their finalpensionable compensation.

 

In May 2006,the subsidiary froze its U.K. defined benefit pension plan, thus stoppingfuture benefit accrual, so that the benefit payable to participants at theirnormal retirement date will be calculated using pensionable service and finalpensionable salary at that date.  From May 2006and for later years, the OEH subsidiary established a defined contributionpension plan for British employees, including U.K.-based officers, under whichthe subsidiary contributes to individual pension accounts established byemployees.  The subsidiary currentlycontributes for the executive officer participants in the new plan at the rateof ten percent of annual salary.

 

Underthe U.K. defined benefit plan, currently estimated accrued annual benefitspayable to participating executive officers of the Company amounted toapproximately $311,000 in the aggregate at December 31, 2007, and underthe U.K. defined contribution plan, the OEH subsidiary contributed on behalf ofparticipating executive officers a total of $238,000 during 2007.  See Note 10 to the Financial Statementsregarding pension plans.

 

CertainU.S. subsidiaries of OEH have adopted a 401(k) pension plan that permitsemployees to contribute amounts out of their compensation into individualtax-deferred pension accounts.  Themaximum contribution an employee could make was $15,500 in 2007.  Two executive officers of the Company basedin the U.S. participated in this plan in 2007, and OEH paid $2,000 into each oftheir accounts as partial matching payments under the plan in addition to theirown contributions.

 

Messrs. Andrews,Rusconi and Saccani participated in no OEH-sponsored pension plan in 2007.

 

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**2000 and 2004 Stock Option Plans**

 

Optionsto purchase Class A common shares of the Company have been granted todirectors, executive officers and selected employees under the Company’s 2000and 2004 Stock Option Plans, which are administered by the CompensationCommittee of the Board of Directors and have substantially the same terms.  The plans provide for the award of options topurchase up to 1,750,000 Class A and B common shares at market value atthe time of the award.  In general,options become exercisable three years after the date of grant and expire tenyears from date of grant.  In certaincircumstances constituting a change in control of the Company, outstandingoptions become immediately exercisable, and optionees may thereafter surrendertheir options instead of exercising them and receive directly from the Companyin cash the difference between the option exercise price and the value of theunderlying shares determined according to the plans.

 

During2007, options to purchase an aggregate of 104,500 Class A shares weregranted to directors and executive officers of the Company at prices of $45.69to $59.23 per share, including options on 35,600 shares to Mr. White,5,700 shares to Mr. James Sherwood and 4,200 shares to each of the othernon-executive directors.  Options wereexercised by directors or officers during 2007 on an aggregate of 188,000 Class Ashares at an aggregate gain of $7,152,000. At December 31, 2007, options to purchase an aggregate of 308,150 Class Ashares (of which 87,500 were exercisable) were held by directors and executiveofficers at per share exercise prices ranging from $13.06 to $59.23 andexpiring between 2010 and 2017.  SeeNote 14 to the Financial Statements.

 

**2007Performance Share Plan**

 

At the2007 annual general meeting of the Company, shareholders approved the Company’s2007 Performance Share Plan, which is administered by the CompensationCommittee of the Board of Directors. Under this plan, directors, executive officers and selected employeesmay be awarded an amount of Class A shares in the Company to be issued inwhole or in part to the grantee of the award after three years, depending onwhether specified performance criteria in the individual award have been metsuch as earnings targets, total shareholder return goals or other criteriaestablished by the Compensation Committee. Shares may also be issued under the awards before the three-year periodhas elapsed if a change in control of the Company occurs or certain other earlyvesting events occur.  The plan alsopermits the Compensation Committee to make awards without any performancecriteria.  A total of 500,000 Class Ashares may be issued under the plan.

 

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During2007, the first awards were made under the plan.  The grantees were officers of the Company,and the awards did not specify performance criteria, will vest in 2010 andcover a total of 30,200 Class A shares, including 26,200 shares awarded toMr. White.  No shares were issuedunder the plan during the year.  See Note14 to the Financial Statements.

 

**DirectorFees**

 

In2007, each of Ms. Leith and Messrs. Campbell, Hurlock, Lovejoy andRafael received a Board of Directors retainer fee at the annual rate of$27,500, and a fee of $2,750 for each meeting of the Board or a committeethereof which he or she attended. Members of the Audit Committee (Messrs. Campbell, Hurlock andLovejoy) were paid a retainer fee of $5,000 per year, and members of theCompensation Committee and Nominating and Governance Committee (Ms. Leithand Messrs. Campbell, Hurlock, Lovejoy and Rafael) were paid a retainerfee of $2,500 per year for service on each of those two Committees.  Mr. Lovejoy was also paid an additionalretainer fee of $20,000 per year as chairman of the Audit and CompensationCommittees, and Mr. Hurlock an additional retainer fee of $5,000 per yearas chairman of the Nominating and Governance Committee.  All retainer fees were payable quarterly.

 

Theforegoing fee arrangement for Mr. Hurlock applied until June 2007when he became non-executive Chairman of the Board of the Company.  Since then he has received an all-inclusiveretainer fee at the rate of $500,000 per year, payable quarterly, instead ofthe retainer and attendance fees described above.

 

Inaddition, Ms. Leith and Messrs. Campbell, Hurlock, Lovejoy and Rafaelwere paid additional fees through August 2007 (June 2007 in the caseof Mr. Hurlock) for their extra time and effort in recruiting a newPresident and Chief Executive Officer of the Company, including the conduct ofa worldwide search for candidates through an executive recruitment firm, inrestructuring executive management of the Company following the retirement of Mr. JamesSherwood from his executive duties in December 2006 and the resignation ofMr. Simon Sherwood as President and Chief Executive Officer submitted tothe Company in February 2007, and in considering and responding to variousstrategic overtures to the Company.

 

In March 2007,the Company and Mr. James Sherwood entered into an agreement regarding hisretirement from executive duties with OEH in December 2006, and hiscontinuing as non-executive Chairman of the Board until the Company’s annualgeneral meeting in June 2007 and thereafter as a non-executive director ofthe Company.  The agreement covered his 

 

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compensationwhile he served as non-executive Chairman during the first six months of 2007based on a continuation of his 2006 annual salary and bonus, and confirmed thatafter Mr. Sherwood retired as Chairman, he would receive the same annualBoard retainer fee and per Board meeting attendance fees as the other directorsdescribed above.  In addition, theagreement requires the Company to provide office accommodation and secretarialservices to Mr. Sherwood in OEH’s offices, and private medical cover forhim and his wife under OEH’s employee health insurance, and to reimburse Mr. Sherwoodup to $100,000 per year for his personal business expenses while he remains anon-executive director of the Company during the three-year period ending June 2010.

 

In September 2007,the Company and Mr. James Sherwood entered into another agreement underwhich he provides consultancy services to OEH for property acquisitions andguest relations under the supervision of the Company’s President and ChiefExecutive Officer, and is compensated for those services at $200,000 per yearplus reimbursement of his reasonable business expenses incurred in providingthe services.

 

Aggregateretainer, attendance and other director fees to Ms. Leith and Messrs. Campbell,Hurlock, Lovejoy, Rafael and James Sherwood described above amounted to$2,202,000 in 2007.

 

SeeItem 13–Certain Relationships and Related Transactions, and DirectorIndependence regarding other agreements between OEH and Mr. JamesSherwood.

 

Mr. Hurlockmay stay at OEH’s properties without charge, except for third-party providedservices he uses during his visits.  Theother directors are entitled to 75% discounts off the usual room rates and foodand beverage prices for their personal visits at OEH’s properties.

 

**CompensationCommittee Interlocks and Insider Participation**

 

TheCompensation Committee of the Company’s Board of Directors is composed of fivenon-executive directors.  No CompensationCommittee member has served as an officer or employee of the Company in anexecutive capacity.  No executive officerof the Company serves on the board of directors or compensation committee ofanother company that has an executive officer serving on the Company’s Board ofDirectors or its Compensation Committee.

 

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**ITEM 12.              Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters**

 

**FivePercent Shareholders**

 

Thefollowing table contains information concerning the beneficial ownership of theCompany’s Class A common shares and Class B common shares by the onlypersons known to the Company to own beneficially more than 5% of theoutstanding shares of either class of common shares.

 

Orient-ExpressHoldings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of theCompany, which owns only Class B shares. Under Bermuda law, the shares owned by Holdings are outstanding and maybe voted.  In a strategic transactioninvolving OEH such as a takeover of the Company, this structure may assist inmaximizing the value that the Company and its shareholders receive in thetransaction.  Each Class B share isconvertible at any time into one Class A share and, therefore, the shareslisted as owned by Holdings represent Class B shares and the Class Ashares into which those shares are convertible.

 

Votingand dispositive power with respect to the Class B shares owned by Holdingsis exercised by its Board of Directors, who are Ms. Leith, Messrs. Campbelland James Sherwood, and two other persons who are not directors or officers ofthe Company.  Each of these persons maybe deemed to share beneficial ownership of the Class B shares owned byHoldings for which he or she serves as a director, as well as the Class Ashares into which those Class B shares are convertible, but is not shownin the table below.

 
| **Name and Address**                                                                                                                   | ** ** | **No. of  Class A  and Class B  Shares** | ** ** | **Percent  of  Class A  Shares (1)** | ** ** | **Percent  of  Class B  Shares** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| Orient-Express Holdings 1 Ltd.    22 Victoria Street   Hamilton HM 12   Bermuda                                                             |       | 18,044,478                                                   |       | 29.8                                      | %          | 100.0                                 | %          |
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| The Indian Hotels Co. Ltd. and   Samsara Properties Ltd. (2)    Mandlik House, Mandlik Road   Mumbai 400 001, India                         |       | 4,880,764                                                    | (7)        | 11.5                                      | %          | —                                |       |
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| Jumeirah Assets LLC et al. (3)    c/o Dubai Holding   Emirates Towers/Offices, Level 49   P.O. Box 73311   Dubai, United Arab Emirates |       | 3,911,611                                                    | (7)        | 9.2                                       | %          | —                                |       |
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| SAC Capital Advisors LLC et al (4)   72 Cummings Point Road   Stamford, Connecticut 06902                                                        |       | 3,185,400                                                    | (7)        | 7.5                                       | %          | —                                |       |
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| D.E. Shaw & Co. LP et al. (5)    120 West 45th Street   Tower 45, 39th Floor   New York, New York 10036                            |       | 2,431,218                                                    | (7)        | 5.7                                       | %          | —                                |       |
|                                                                                                                                             |       |                                                         |       |                                      |       |                                  |       |
| BlackRock Inc. (6)    40 East 52nd Street   New York, New York 10022                                                                        |       | 2,206,313                                                    | (7)        | 5.2                                       | %          | —                                |       |
|                                                                                                                                                  |            |                                                              |            |                                           |            |                                       |            |  |

 

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(1)                                  The percentage of Class A shares shown is based on 42,456,000 Class Ashares outstanding on February 20, 2008, plus the Class A sharesissuable upon conversion of the Class B shares beneficially owned by thatperson, if any.

 

(2)                                  The information with respect to The Indian Hotels Co. Ltd. (“IndianHotels”) and its subsidiary Samsara Properties Ltd. relates only to Class Ashares and is derived from their joint Schedule 13D report as amended as of December 19,2007 and filed with the SEC on that date. The report states that these companies have shared voting anddispositive power with respect to 4,880,764 Class A shares.

 

(3)                                  The information with respect to Jumeirah Assets LLC (“Jumeirah”)relates only to Class A shares and is derived from the joint Schedule 13Dreport as of October 18, 2007 and filed with the SEC on that date byJumeirah, Dubai Holding Commercial Operations Group LLC, Dubai Holding LLC, andMohammad Abdulla Ali Al Gergawi.  Thereport states that these companies and Mr. Gergawi have shared voting anddispositive power with respect to 3,911,611 Class A shares.

 

(4)                                  The information with respect to SAC Capital Advisors LLC (“SACCapital Advisors”) relates only to Class A shares and is derived from thejoint Schedule 13G report as of February 14, 2008 and filed with the SECon February 15, 2008 by SAC Capital Advisors, SAC Capital Management LLC (“SACCapital Management”), CR Intrinsic Investors LLC (“CR Intrinsic Investors”), CRIntrinsic Investments LLC 

 

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(“CR IntrinsicInvestments”) and Steven A. Cohen.  Thereport states that (a) Mr. Cohen controls SAC Capital Advisors, SACCapital Management and CR Intrinsic Investors, (b) CR IntrinsicInvestments is a subsidiary of SAC Capital Associates LLC which has investmentmanagement agreements with SAC Capital Advisors and SAC Capital Management, (c) CRIntrinsic Investors has an investment management agreement with CR IntrinsicInvestments, (d) SAC Capital Advisors and SAC Capital Management haveshared voting and dispositive power with respect to 25,000 Class A shares,(e) CR Intrinsic Investors and CR Intrinsic Investments have shared votingand dispositive power with respect to 3,160,400 Class A shares, and (f) Mr. Cohen has sharedvoting and dispositive power with respect to 3,185,400 Class A shares.

 

(5)                                    The information with respect to D.E. Shaw & Co. LP (“D.E.Shaw”)relates only to Class A shares and is derived from the joint Schedule 13Dreport as of February 12, 2008 and filed with the SEC on February 13,2008 by D.E. Shaw, D.E. Shaw Valence Portfolios LLC (“Valence”), D.E. ShawOculus Portfolios LLC (“Oculus”), D.E. Shaw & Co. LLC (“Shaw LLC”) andDavid E. Shaw.  The report states that (a) Mr. Shawis President and sole shareholder of D.E. Shaw & Co. Inc. which is thegeneral partner of D.E. Shaw which in turn is the managing member andinvestment adviser of Valence and the investment adviser of Oculus, (b) Mr. Shawis President and sole shareholder of D.E. Shaw & Co. II Inc. which isthe managing member of Shaw LLC which in turn is the managing member of Oculus,(c) D.E. Shaw and Mr. Shaw have shared voting and dispositive powerwith respect to 2,431,218 Class A shares, (d) Valence has sharedvoting and dispositive power with respect to 2,256,365 Class A shares, and(e) Oculus and Shaw LLC have shared voting and dispositive power withrespect to 174,853 Class A shares including 31 Class A sharesbeneficially owned by D.E. Shaw Synoptic Portfolios 2 LLC.

 

(6)                                  The information with respect to BlackRock Inc. (“BlackRock”) relatesonly to Class A shares and is derived from its Schedule 13G report as of February 8,2008 and filed with the SEC on that date. The report states that (a) BlackRock is a parent holding companyand an investment adviser, (b) certain subsidiaries of BlackRock (BlackRockAdvisors LLC, BlackRock Capital Management Inc., BlackRock Financial ManagementInc., BlackRock Investment Management LLC, BlackRock Japan Co. Ltd., and StateStreet Research & Management Co.) are investment advisers that hold Class Ashares, and (c) 

 

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BlackRockhas shared voting and dispositive power with respect to 2,206,313 Class Ashares.

 

(7)                                  Class A shares only.

 

**Directors and Executive Officers**

 

Thefollowing table contains information concerning the beneficial ownership of Class Acommon shares of the Company by each current director and executive officer ofthe Company and by all directors and executive officers of the Company as agroup.  Each person has sole voting anddispositive power with respect to his or her shares, except Mr. Campbellwho shares voting and dispositive power with respect to his shares, Mr. Lovejoywho shares voting and dispositive power with respect to 200 shares, and Mr. JamesSherwood who shares voting and dispositive power with respect to 10,300shares.  Each individual’s holding isless than 1% of the Class A shares outstanding, other than Mr. Sherwoodwith 1.3%.  The group total includes87,500 Class A shares covered by exercisable stock options held bydirectors and executive officers under the Company’s 2000 and 2004 Stock OptionPlans which, together with the other shares beneficially owned by directors andexecutive officers, represents 1.5% of Class A shares outstanding.

 

Asnoted above, certain of the directors of the Company may be deemed to sharebeneficial ownership of the Class B shares held by Holdings because theyare also directors of that subsidiary, but those shares are not included in thefollowing table.

 
| **Name**                                                                                                        | ** ** | **No. of Class**

**A Shares** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                                                                            |       |                                          |       |
| Filip  J.M. Boyen                                                                                               |       | —                                        |       |
| John  D. Campbell                                                                                               |       | 1,000                                         |       |
| Roger  V. Collins                                                                                               |       | —                                        |       |
| Edwin  S. Hetherington                                                                                          |       | 1,000                                         |       |
| James  B. Hurlock                                                                                               |       | 1,000                                         |       |
| Pippa  Isbell                                                                                                   |       | 650                                           |       |
| Prudence  M. Leith                                                                                              |       | —                                        |       |
| J.  Robert Lovejoy                                                                                              |       | 5,200                                         |       |
| Georg  R. Rafael                                                                                                |       | —                                        |       |
| Maurizio  Saccani                                                                                               |       | —                                        |       |
| James  B. Sherwood                                                                                              |       | 545,295                                       |       |
| Nicholas  R. Varian                                                                                             |       | 600                                           |       |
| Paul  M. White                                                                                                  |       | 1,000                                         |       |
| David  C. Williams                                                                                              |       | —                                        |       |
| All  directors and executive officers as a group (14 persons) including 87,500  exercisable stock option shares |       | 643,245                                       |       |

 

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**VotingControl of the Company**

 

Thefollowing table lists the voting power held by the known beneficial owners ofmore than 5% of the outstanding Class A or Class B common shares ofthe Company and all directors and executive officers as a group.  The directors of the Company who are deemedto be beneficial owners solely because they are directors of Holdings are notlisted individually but are included in the group.

 
| **Name**                                                                                                        | ** ** | **No. of  Class A  Shares** | ** ** | **No. of  Class B   Shares** | ** ** | **Combined  Voting  Power** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
|                                                                                                            |       |                                  |       |                                        |       |                        |       |
| Holdings                                                                                                        |       | —                                |       | 18,044,478                                  |       | 81.0                        | %          |
| Indian  Hotels et al.                                                                                           |       | 4,880,764                             |       | —                                      |       | 2.2                         | %          |
| Jumeirah  et al.                                                                                                |       | 3,911,611                             |       | —                                      |       | 1.8                         | %          |
| SAC  Capital Advisors et al.                                                                                    |       | 3,185,400                             |       | —                                      |       | 1.4                         | %          |
| D.E.  Shaw et al.                                                                                               |       | 2,431,218                             |       | —                                      |       | 1.1                         | %          |
| BlackRock                                                                                                       |       | 2,206,313                             |       | —                                      |       | 1.0                         | %          |
| All  directors and executive officers as a group (14 persons) including 87,500  exercisable stock option shares |       | 643,245                               |       | 18,044,478                                  |       | 81.2                        | %          |

 

Ingeneral the holders of Class A and B common shares of the Company votetogether as a single class on most matters submitted to general meetings ofshareholders, with holders of Class B shares having one vote per share andholders of Class A shares having one-tenth of a vote per share.  Each Class B share is convertible at anytime into one Class A share.  In allother material respects, the Class A and B shares are identical and aretreated as a single class of common shares.

 

Holdingsand the Company’s directors and executive officers hold in total approximately31% in number of the outstanding Class A and Class B shares havingapproximately 81% of the combined voting power of the outstanding common sharesof the Company for most matters submitted to a vote of the Company’sshareholders.  Other shareholders,accordingly, hold approximately 69% in number of the outstanding common shareshaving about 19% of combined voting power in the Company.

 

UnderBermuda law, the Class B shares owned by Holdings (representingapproximately 81% of the combined voting power) are outstanding and may bevoted by that subsidiary.  The investmentby Holdings in Class B shares and the manner in which Holdings votes thoseshares are determined by the Board of Directors of Holdings (three of whom arealso directors of 

 

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theCompany) consistently with the exercise by those directors of their fiduciaryduties to the subsidiary.  Holdings,therefore, has the ability to elect at least a majority of the members of theBoard of Directors of the Company and to control the outcome of most matterssubmitted to a vote of the Company’s shareholders.

 

Withrespect to a number of strategic matters which would tend to change control ofthe Company, its memorandum of association and bye-laws contain provisions thatcould make it more difficult for a third party to acquire OEH without theconsent of the Company’s Board of Directors. These provisions include supermajority shareholder voting provisions forthe removal of directors and for “business combination” transactions withbeneficial owners of shares carrying 15% or more of the votes which may be castat any general meeting of shareholders, and limitations on the voting rights ofsuch 15% beneficial owners.  Also, theCompany’s Board of Directors has the right under Bermuda law to issue preferredshares without shareholder approval, which could be done to dilute the shareownership of a potential hostile acquirer. Also, the rights to purchase series A junior participatingpreferred shares, one of which is attached to each Class A and Class Bcommon share of the Company, may have anti-takeover effects.  See Note 13(c) to the FinancialStatements.  Although OEH managementbelieves these provisions provide the Company and its shareholders with theopportunity to receive apropriate value in a strategic transaction by requiringpotential acquirers to negotiate with the Company’s Board of Directors, theseprovisions apply even if the potential transaction may be considered beneficialby many shareholders.

 

Informationresponding to Item 201(d) of SEC Regulation S-K is omitted because theCompany is a foreign private issuer.

 

**ITEM13.****                                          Certain Relationships and Related Transactions, and DirectorIndependence**

 

**RelatedParty Transactions**

 

Mr. JamesSherwood owns a private residential apartment in the Hotel Cipriani in Venice,Italy, a hotel owned by a subsidiary of the Company.  OEH has granted Mr. Sherwood a right offirst refusal to purchase the hotel in the event OEH proposes to sell it.  The purchase price would be the offered saleprice in the case of a cash sale or the fair market value of the hotel, asdetermined by an independent valuer, in the case of a non-cash sale.  Similarly, if Mr. Sherwood proposes tosell his apartment, he has granted OEH a right of first refusal to purchase itat fair market value or, at 

 

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Mr. Sherwood’soption in the case of a proposed cash sale, the offered sale price.  In addition, the Company has granted anoption to Mr. Sherwood to purchase the hotel at fair market value if achange in control of the Company occurs.

 

Mr. JamesSherwood and the subsidiary of the Company which owns the Hotel Cipriani haveentered into an agreement under which he may rent his apartment to the hotel inreturn for 50% of the amounts paid by hotel guests for use of theapartment.  In 2007, the hotel paid Mr. Sherwood$217,000 for the use of his apartment. Also, in any calendar year when the apartment is made available to thehotel for 90 days or more when the hotel is open to guests, the hotel isobligated to clean, repair and insure the apartment at its expense and provide Mr. Sherwoodand his guests with all hotel services other than food and beverages free ofcharge, including electricity, air conditioning, telephone rental, water androom services for the apartment.  To theextent that the apartment is made available to the hotel for less than90 days per year, Mr. Sherwood must pay a proportionate share ofthose expenses.

 

Mr. JamesSherwood owns Capannelle S.r.l., a wine estate in the Chianti region of Italythat produces wine, olive oil and other products principally for publicsale.  In 2007, the estate sold $55,000of products to OEH hotels at prices the same as its public prices.

 

Capannelleand the Company’s subsidiary that owns the Villa San Michele near Florence,Italy have entered into an agreement under which Capannelle makes the mainhouse and other parts of the wine estate available to short-stay guestsprovided by the hotel.  The incrementalcosts of Capannelle and Villa San Michele in servicing the guests each year arenetted against the amounts charged by the hotel for guest accommodation, food,beverage and other hotel services, and the net amount is shared equally betweenCapannelle and Villa San Michele.  In2007, Capannelle earned $9,000 from this arrangement which continues on ayear-to-year basis unless terminated by either party.

 

Seealso “Director Fees” in Item 11—Executive Compensation regarding otheragreements between OEH and Mr. James Sherwood, and Note 20 to theFinancial Statements (Item 8 above) regarding other related party transactions.

 

**DirectorIndependence**

 

The sixmembers of the Board of Directors of the Company are identified in Item 10—Directors,Executive Officers and Corporate Governance. Regarding the independence of directors 

 

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fromOEH’s management, the Board has reviewed the materiality of any relationshipthat each of the six directors of the Company has with OEH either directly orindirectly through another organization, including the fees and othercompensation described under “Director Fees” in Item 11—ExecutiveCompensation.  The criteria appliedincluded the director independence requirements set forth in the Company’sCorporate Governance Guidelines, any other managerial, familial, professional,commercial or affiliated relationship between a director and the Company, asubsidiary or another director and, with respect to the Company’s AuditCommittee, the SEC’s independence rules.  Based on this review, the Board has determinedthat Ms. Leith and Messrs. Campbell, Hurlock, Lovejoy and Rafael areindependent directors.  The Company’sCorporate Governance Guidelines are filed as a exhibit to this report and areavailable at OEH’s website www.orient-express.com.

 

**ITEM14.               Principal AccountantFees and Services**

 

Thefollowing table presents the fees of Deloitte & Touche LLP, OEH’sindependent auditor, for audit and permitted non-audit services in 2007 and2006:

 
| ** **          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit  fees         |       | $        | 2,072,000  |     | $          | 1,912,000 |   |
| Audit-related  fees |       | 244,000  |       | 437,000  |       |
| Tax  fees           |       | 487,000  |       | 467,000  |       |
| All  other fees     |       | —   |       | —   |       |
| Total               |       | $        | 2,803,000  |     | $          | 2,816,000 |   |

 

Auditservices consist of work performed in connection with the audit of financialstatements and the effectiveness of internal control over financial reportingfor each fiscal year and in the review of financial statements included inquarterly reports during the year, as well as work normally done by theindependent auditor in connection with statutory and regulatory filings, suchas statutory audits of non-U.S. subsidiaries, and consents and comfort lettersfor SEC registration statements.

 

Audit-relatedservices consist of assurance and related services that are normally performedby the independent auditor and that are reasonably related to the audit orreview of financial statements but are not reported under audit services,including due diligence reviews in potential transactions and audits of benefitplans.

 

Taxservices consist of all services performed by the independent auditor’s taxpersonnel, except those services 

 

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specificallyrelated to the audit or review of financial statements, and include fees in theareas of tax return preparation and compliance and tax planning and advice.

 

Otherservices consist of those services permitted to be provided by the independentauditor but not included in the other three categories.  There were none provided in 2006 and 2007.

 

The AuditCommittee of the Board of Directors of the Company has established a policy topre-approve all audit and permitted non-audit services provided by theindependent auditor.  Prior to engagementof the auditor for the next year’s audit, management and the auditor submit tothe Committee a description of the audit and permitted non-audit servicesexpected to be provided during that year in each of four categories of servicesdescribed above, together with a fee proposal for those services.  Prior to the engagement of the independentauditor, the Audit Committee considers with management and the auditor andapproves (or revises) both the description of audit and permitted non-auditservices proposed and the budget for those services.  If circumstances arise during the year whenit becomes necessary to engage the independent auditor for additional servicesnot contemplated in the original pre-approval, the Audit Committee at itsregularly scheduled meetings requires separate pre-approval before engaging theindependent auditor.  To ensure prompthandling of unexpected matters, the Committee may delegate pre-approvalauthority to one or more of its members who report any pre-approval decisionsto the Committee at its next scheduled meeting. For 2006 and 2007, all of the audit and permitted non-audit servicesdescribed above were pre-approved under the policy.

 

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**PART IV**

 

**ITEM 15.****                                              Exhibits and Financial Statement Schedules**

 
| ** **                                                                                                                                                                                                   | ** ** | **Page Number** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| 1.             Financial Statements                                                                                                              |       |                 |
|                                                                                                                                                                                                         |       |                 |
| Reports of  independent registered public accounting firm                                                                                                                                                    |       | 65                   |
| Consolidated  financial statements - years ended December 31, 2007, 2006 and 2005:                                                                                                                      |       |                 |
| Balance  sheets (December 31, 2007 and 2006)                                                                                                                                                            |       | 69                   |
| Statements  of operations                                                                                                                                                                                    |       | 70                   |
| Statements  of cash flows                                                                                                                                                                                    |       | 71                   |
| Statements  of shareholders’ equity                                                                                                                                                                     |       | 72                   |
| Notes to  financial statements                                                                                                                                                                               |       | 73                   |
|                                                                                                                                                                                                         |       |                 |
| 2.             Financial Statement Schedule                                                                                                      |       |                 |
|                                                                                                                                                                                                         |       |                 |
| Schedule II –  Valuation and qualifying accounts (years ended December 31, 2007, 2006  and 2005)                                                                                                   |       | 138                  |
|                                                                                                                                                                                                         |       |                 |
| 3.             Exhibits. The index to exhibits  appears below, on the pages immediately following the signature  pages to this report. |       |                 |

 

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ORIENT-EXPRESSHOTELS LTD. AND SUBSIDIARIES

 

Schedule II—Valuation and QualifyingAccounts

** **
| **Column A**                   | ** ** | **Column B**                          | ** ** | **Column C**                         | ** ** | **Column D**                    | ** ** | **Column E** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | ** **                                 | ** ** | **Additions**                             | ** ** | ** **                           | ** ** | ** **        | ** ** |
| **Description**                     | ** ** | **Balance  at  beginning  of period** | ** ** | **Charged  to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions**    | ** ** | **Balance**

**at  end  of period** | ** ** |
|                                |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year  ended December 31, 2007: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance  for doubtful accounts    |       | $                                          | 1,071,000  |                                      | $          | 291,000                              |       | $                 | 72,000     | (2) | $ | 142,000 | (1) | $ | 1,292,000 |   |
|                                |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year  ended December 31, 2006: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance  for doubtful accounts    |       | $                                          | 921,000    |                                      | $          | 107,000                              |       | $                 | 87,000     | (2) | $ | 44,000 | (1) | $ | 1,071,000 |   |
|                                |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year  ended December 31, 2005: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance  for doubtful accounts    |       | $                                          | 980,000    |                                      | $          | 126,000                              |       | $                 | (105,000   | )(2) | $ | 80,000 | (1) | $ | 921,000 |   |

 

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(1)          Baddebts written off, net of recoveries.

 

(2)          Foreigncurrency translation adjustments.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

Dated:  February 29, 2008

 
|       | ORIENT-EXPRESS  HOTELS LTD.                        |
|------------|----------------------------------------------------|
|       |                                               |
|       |                                               |
| ** ** | **By:**                                            | **             /s/  Paul M. White** |
|       | Paul M. White                                      |
|       |   President  and Chief Executive Officer |

 

139

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Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.

 

Dated: February 29, 2008

 
| **Name**               | ** ** | **Title**                                                        |
|------------------------|------------|------------------------------------------------------------------|
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  John D. Campbell  |       | Director                                                         |
| John  D. Campbell      |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  James B. Hurlock  |       | Chairman and  Director                                           |
| James  B. Hurlock      |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  Prudence M. Leith |       | Director                                                         |
| Prudence  M. Leith     |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  J. Robert Lovejoy |       | Director                                                         |
| J.  Robert Lovejoy     |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  Georg R. Rafael   |       | Director                                                         |
| Georg  R. Rafael       |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  James B. Sherwood |       | Director                                                         |
| James  B. Sherwood     |       |                                                             |
|                   |       |                                                             |
|                   |       |                                                             |
| /s/  Paul M. White     |       | President  and Chief Executive                                   |
| Paul  M. White         |       | Officer (and  acting Chief   Financial and Accounting   Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Incorporated by   Reference to**                                                                                           | ** ** | **Description**                                                                                                                                                                                                             |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                         |       |                                                                                                                                                                                                                        |
| 3.1              |       | Exhibit 3.1 to July 9, 2007 Form 8-K Current Report  (File No. 1- 16017)                                 |       | Memorandum of Association and Certificate of Incorporation of Orient-  Express Hotels Ltd.                                                                                                                                  |
| 3.2              |       | Exhibit 3.2 to June 15, 2007 Form 8-K Current Report  (File No. 1- 16017)                                |       | Bye-Laws of Orient-Express Hotels Ltd.                                                                                                                                                                                      |
| 3.3              |       | Exhibit 1 to April 23, 2007 Amendment No. 1 to  Form 8-A Registration Statement (File No. 1- 16017) |       | Rights Agreement dated June 1, 2000, and amended and restated  April 12, 2007, between Orient-Express Hotels Ltd. and Computershare  Trust Company N.A., as Rights Agent                                               |
| 3.4              |       | Exhibit 4.2 to December 10, 2007 Form 8-K Current Report  (File No. 1-16017)                                       |       | Amendment No. 1 dated December 10, 2007 to Amended and  Restated Rights Agreement (Exhibit 3.3)                                                                                                              |
| 4.1              |       | Exhibit 1.1 to July 26, 2006 Form 8-K Current Report  (File No. 1-16017)                                 |       | Secured Facility Agreement dated July 20, 2006 for  Orient-Express Hotels Ltd. arranged by Barclays Capital with Barclays Bank  PLC acting as Agent and Barclays Bank PLC acting and Security Trustee                  |
| 4.2              |       | Exhibit 1.2 to July 26, 2006 Form 8-K Current Report  (File No. 1-16017)                                 |       | Secured Facility Agreement dated July 20, 2006 for  Orient-Express Hotels Ltd. arranged by Barclays Capital with Banca Nazionale  del Lavoro S.p.A. acting as Lender and Barclays Bank PLC acting as Security  Trustee |

 

OEH has noinstrument with respect to long-term debt not listed above under which thetotal amount of securities authorized exceeds 10% of the total assets of OEH ona consolidated basis. The Company agrees to furnish to the SEC upon request acopy of each instrument with respect to long-term debt not filed as an exhibitto this report.

 

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| **Exhibit  No.** | ** ** | **Incorporated by   Reference to**                                                             | ** ** | **Description**                                                                                                                                                                                            |
|------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                           |       |                                                                                                                                                                                                       |
| 10.1             |       | Exhibit 10.1 to Form S-1 Registration Statement  No. 333-12030                  |       | Orient-Express Hotels Ltd. 2000 Stock Option Plan                                                                                                                                                          |
| 10.2             |       | Exhibit 10.1 to June 15, 2007 Form 8-K Current Report  (File No. 1- 16017) |       | Orient-Express Hotels Ltd. 2004 Stock Option Plan                                                                                                                                                          |
| 10.3             |       | Exhibit 10.2  to June 15, 2007 Form 8-K Current Report (File No. 1- 16017) |       | Orient-Express  Hotels Ltd. 2007 Performance Share Plan                                                                                                                                                    |
| 10.4             |       |                                                                                           |       | Orient-Express  Hotels Ltd. 2007 Stock Appreciation Rights Plan                                                                                                                                            |
| 10.5             |       | Exhibit 10.3  to 2004 Form 10-K Annual Report (File No. 1-16017)                     |       | Amended  and Restated Agreement Regarding Hotel Cipriani Interests dated  February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l. and  Orient- Express Hotels Ltd.                          |
| 10.6             |       | Exhibit 10.4 to 2004 Form 10-K Annual Report (File  No. 1-16017)                     |       | Amended and Restated Right of First Refusal and Option Agreement  Regarding Indirectly Held Hotel Cipriani Interests dated February 8,  2005 between James B. Sherwood and Orient-Express Hotels Ltd. |
| 10.7             |       | Exhibit 10.4 to Form S-1 Registration Statement  No. 333-12030                  |       | Agreement dated February 18, 1982 between James B. Sherwood and  Hotel Cipriani S.p.A. regarding apartment                                                                                            |
| 10.8             |       | Exhibit 10.10 to 2003 Form 10-K Annual Report (File  No. 1-16017)               |       | Contract of Special Partnership or Joint Venture dated August 1,  2002 between Alberghiera Fiesolana S.p.A. and Capannelle S.r.l.                                                                     |
| 10.9             |       | Exhibit 10 to July 25, 2007 Form 8-K Current Report  (File 1-16017)             |       | Form of Severance Agreement dated December 1, 2006, as  amended July 25, 2007, between Orient-Express Hotels Ltd. and Paul White                                                            |

 

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| **Exhibit  No.** | ** ** | **Incorporated by   Reference to**                                               | ** ** | **Description**                                                                                                                                                                                                                                           |
|------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                             |       |                                                                                                                                                                                                                                                      |
| 10.10            |       | Exhibit 10.11 to 2006 Form 10-K Annual Report (File  No. 1-16017) |       | Form of Severance Agreement dated December 1, 2006 between  Orient-Express Hotels Ltd. and each of Filip Boyen, Roger Collins, Pippa  Isbell, Nicholas Varian and Martin O’Grady (dated November 15, 2007 for  Mr. O’Grady) |
| 10.11            |       | Exhibit 10.12 to 2006 Form 10-K Annual Report (File  No. 1-16017) |       | Form of Severance Agreement dated December 1, 2006 between  Orient-Express Hotels Ltd. and each of Edwin Hetherington and David Williams                                                                                                        |
| 11               |       |                                                                             |       | Statement of computation of per share earnings                                                                                                                                                                                                            |
| 12               |       |                                                                             |       | Statement of computation of Ratios                                                                                                                                                                                                                        |
| 14               |       | Exhibit 14 to 2003 Form 10-K Annual Report (File  No. 1-16017)    |       | Code of Business Practices for Principal Executive, Financial and  Accounting Officers                                                                                                                                                                    |
| 21               |       |                                                                             |       | Subsidiaries of Orient- Express Hotels Ltd.                                                                                                                                                                                                               |
| 23               |       |                                                                             |       | Consent of Deloitte & Touche LLP relating to Form S-8 Registration  Statements No. 333-58298, No. 333- 129152 and 333-147448                                                                                                           |
| 31               |       |                                                                             |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                               |
| 32               |       |                                                                             |       | Section 1350 Certification                                                                                                                                                                                                                           |
| 99               |       | Exhibit 99 to 2004 Form 10-K Annual Report (File  No. 1-16017)         |       | Corporate Governance Guidelines of Orient- Express Hotels Ltd.                                                                                                                                                                                            |

 

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